Arkansas Best Corporation (now ArcBest) — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Unaudited consolidated results; dollar amounts below are in millions unless noted. The company provides freight transportation and logistics services, with ABF Freight as its principal operation.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Operating revenue | $576.9 | $510.5 | $1,097.6 | $951.4 |
| Operating income (loss) | $8.4 | $7.2 | ($14.9) | ($15.8) |
| Net income (loss) | $4.9 | $11.8 | ($8.5) | ($6.3) |
| Diluted EPS | $0.18 | $0.44 | ($0.33) | ($0.25) |
| Operating margin | 1.5% | 1.4% | (1.4%) | (1.7%) |
| Operating cash flow | Not separately stated for quarter | $27.9 | $14.2 |
Revenue increased 13.0% in Q2 and 15.4% year to date, primarily because 2013 included Panther for the full periods, whereas the 2012 comparison included Panther only after its June 15 acquisition. ABF revenue rose 1.5% in Q2 and 2.1% year to date; daily tonnage increased 1.6% and 4.1%, respectively. Q2 consolidated net income was lower year over year, notably because Q2 2012 included an $8.0 million deferred-tax valuation-allowance reversal. The six-month comparison also included a $3.3 million 2012 tax benefit and $2.1 million of Panther acquisition costs in 2012.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $88.6 million; short-term investments were $29.9 million; restricted cash and investments were $1.9 million. Unrestricted cash and investments totaled $118.4 million, down from $119.8 million at year-end 2012.
- Six-month operating cash flow was $27.9 million. Investing activities used $16.2 million and financing activities used $13.9 million; cash declined $2.1 million to $88.6 million.
- Total debt, including current maturities and capital leases, was $134.0 million, down from $156.0 million at December 31, 2012. The $90.0 million term loan carried a 1.7% rate and matures in 2017. No borrowings were outstanding under the $75 million revolving commitment or the receivables securitization facility.
- Available liquidity as defined under the receivables facility was $173.7 million, compared with a $50 million minimum requirement while the new labor agreement remained incomplete. The company reported compliance with debt covenants; its fixed-charge coverage ratio was 1.6 against a 1.25 minimum.
- Management estimated 2013 net capital expenditures of $25 million to $30 million, dependent in part on labor-agreement terms and business levels. Depreciation and amortization on property and equipment was estimated at $80 million to $85 million.
Material changes, outlook and risks
- ABF labor agreement: A new five-year master agreement was ratified June 27, 2013, but some supplemental agreements were still awaiting approval. Proposed terms included a 7% wage reduction through March 31, 2014, subsequent scheduled wage increases, a shorter vacation entitlement, and greater flexibility in work rules and purchased transportation. Health, welfare and pension contribution rates were expected to rise an average 3.5%–4.5% annually. Failure to approve the remaining supplements could lead to a work stoppage, customer losses or material financial harm.
- ABF results: ABF posted a $5.5 million Q2 operating profit but a $17.1 million first-half operating loss. Its operating ratios were 98.8% for Q2 and 102.0% year to date, versus 98.3% and 101.7% in 2012. Management was evaluating terminal and network changes to reduce costs, with no assurance of material improvement.
- Recent operating trends: July 2013 ABF daily tonnage was reported 4%–5% above July 2012, and revenue per day was 5%–6% higher. This is management-reported interim data, not full-year guidance. Panther continued to face excess industry capacity and moderate demand, though Q2 improved sequentially from Q1.
- Pension change: The company froze future accruals under its nonunion defined-benefit plan effective July 1, 2013. The curtailment reduced the pension liability by $46.3 million and generated a large noncash other-comprehensive-income benefit; it did not affect Q2 or first-half net periodic benefit cost. Future lump-sum distributions could trigger pension settlement expense.
- Other developments: The company acquired a small logistics business for $4.1 million in May 2013 and formed ABF Logistics effective July 1, combining logistics and brokerage operations. The board declared a $0.03-per-share dividend payable in August; dividends remain discretionary.
- Risks and contingencies: Approximately half of ABF’s multiemployer pension contributions went to the Central States plan, reported at 53.9% funded for 2012 and in critical status for 2013. The company disclosed potential material withdrawal or termination liabilities under current law. It also warned of possible Panther goodwill or intangible impairment if forecasts weaken, covenant risk if operating results deteriorate, fuel and pricing exposure, and unresolved ABF litigation concerning the prior labor agreement. Environmental cleanup reserves were $0.9 million.
Most important facts for investors to verify
- Whether all supplemental labor agreements were approved, when the new agreement took effect, and whether expected cost savings materialized.
- Whether ABF improved its operating ratio and returned to profitability, including the results of any network restructuring.
- How much reported revenue growth reflects organic growth versus Panther’s inclusion for a full comparative period, and whether Panther’s demand and margins improved.
- Future liquidity and covenant headroom, particularly if cash generation weakens or labor disruption occurs.
- Actual capital spending, pension funding and any settlement costs, as well as developments in Central States and the ABF labor litigation.