Arkansas Best Corporation (ARCBEST) — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. The company provides freight transportation and logistics services; ABF Freight Transportation generated 89% of first-half revenue. Figures below are in U.S. dollars; financial statement amounts are shown in millions unless noted.
Financial results and liquidity
- Q2 revenue: $510.5 million, up 2.4% from $498.6 million. Operating income was $7.2 million versus $9.0 million; net income attributable to Arkansas Best was $11.8 million versus $5.3 million. Diluted EPS was $0.44 versus $0.20.
- First-half revenue and earnings: Revenue was $951.4 million, up 1.9%. Operating loss was $15.8 million versus $13.0 million; net loss was $6.3 million versus $7.5 million. Diluted loss per share was $0.25 versus $0.30.
- Margins: Consolidated Q2 operating margin was approximately 1.4%, down from 1.8%; first-half operating margin was approximately negative 1.7%, compared with negative 1.4%. ABF’s operating ratio was 98.3% in Q2 and 101.7% for the first half, slightly improved from 101.8%.
- Cash flow: First-half operating cash flow was $14.2 million, down from $33.1 million. Investing cash outflow was $212.5 million, including $180.8 million for Panther, net of cash acquired. Financing provided $110.7 million. Cash and cash equivalents ended the period at $53.6 million.
- Liquidity and debt: Unrestricted cash, cash equivalents and short-term investments totaled $100.2 million; restricted funds were $21.0 million. Total debt was $180.1 million, including a new $100 million secured term loan. The company reported compliance with credit-agreement covenants and no borrowings under its $75 million receivables facility.
- Other: The quarterly dividend was $0.03 per share. The company’s 2012 capital expenditure plan was $80–$90 million, net of asset-sale proceeds.
Material changes and operating drivers
- On June 15, 2012, Arkansas Best acquired Panther Expedited Services for $180.8 million net of acquired cash, funded with cash and the $100 million term loan. Panther contributed $10.8 million of revenue and $0.5 million of operating income after acquisition. Purchase-price allocations, including $78.9 million of goodwill and $68.6 million of preliminary intangible assets, remained subject to valuation.
- ABF revenue fell slightly: first-half tonnage per day declined 8.4%, partly offset by a 7.9% increase in billed revenue per hundredweight, including fuel surcharges. Management attributed volume pressure to pricing and account-profitability initiatives, uneven economic conditions, and comparison with prior-year growth.
- Non-ABF results were mixed. Truck Brokerage revenue rose 56% in the first half, while Emergency and Preventative Maintenance revenue rose 15%; Household Goods Moving revenue fell 14% amid lower shipment volumes.
- First-half results included higher sales, customer-service and IT investment ($7.8 million); workers’ compensation costs ($4.2 million higher); pension and retirement expense ($3.7 million higher); and ABF depreciation ($3.5 million higher). Insurance expense declined $2.6 million.
Outlook, risks and unusual items
- Reported Q2 earnings benefited from an $8.0 million reduction in deferred-tax valuation allowances. The company’s adjusted presentation showed Q2 diluted EPS of $0.18 after excluding that tax benefit and adding back $0.05 per share of Panther transaction costs; reported EPS was $0.44.
- Management said existing liquidity, operating cash flow and available financing should fund foreseeable needs. This is not quantified earnings guidance. Management cautioned that economic weakness, competition, tonnage declines, fuel-price and surcharge movements, and cost inflation could pressure results.
- The IBT contract covering most ABF employees was due to enter a new contract period beginning April 1, 2013. Management warned that failure to agree on acceptable terms could lead to a work stoppage. Wage and benefit increases were scheduled under the existing agreement.
- ABF’s lawsuit concerning wage and benefit concessions granted to YRC was dismissed without prejudice by the trial court on August 1, 2012; ABF was evaluating options. The outcome and financial impact were undetermined. The Central States pension fund remained in critical status; its reported funded percentage was 58.9% as of January 1, 2011.
- Other stated risks include successful integration of Panther, owner-operator classification and retention, international operations, information-technology disruption and cybersecurity. Management reported no known cyber incident with a material operational effect.
Key facts for investors to verify
- Whether ABF’s tonnage and operating performance improved after quarter-end; July tonnage was down approximately 3% year over year.
- Final Panther purchase-price allocation, integration progress, and the acquisition’s ongoing contribution to revenue, earnings and cash flow.
- Cash conversion and liquidity after the acquisition, pension contributions, capital spending and term-loan repayments.
- Progress on the 2013 labor agreement and the outcome of ABF’s litigation concerning the NMFA amendments.
- Future workers’ compensation and pension costs, the Central States fund’s status, and the realization of deferred tax assets.