Arkansas Best Corporation (NASDAQ: ARCB) — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; filed November 7, 2012. Interim financial statements are unaudited. Amounts below are in millions of dollars unless otherwise noted.
Business context
Arkansas Best provides freight transportation and logistics services. Its Freight Transportation segment, principally ABF, generated 79% of consolidated third-quarter revenue. Results include Panther Expedited Services from its June 15, 2012 acquisition; prior-year reported figures do not include Panther. The company also reports truck brokerage, emergency and preventative maintenance, and household goods moving services.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $577.5 | $510.9 | $1,529.0 | $1,444.4 |
| Operating income (loss) | $12.2 | $21.1 | $(3.6) | $8.1 |
| Net income attributable to Arkansas Best | $6.5 | $12.3 | $0.2 | $4.8 |
| Diluted EPS | $0.24 | $0.46 | Less than $0.01, reported as — | $0.18 |
| Operating margin, approximate | 2.1% | 4.1% | (0.2)% | 0.6% |
- Consolidated revenue increased 13.0% in Q3 and 5.9% year to date, mainly reflecting Panther and growth in truck brokerage and emergency maintenance. Panther contributed $71.3 million in revenue and $1.3 million in operating income after acquisition.
- ABF operating results weakened: Q3 operating income was $8.4 million versus $17.7 million; nine-month operating loss was $5.9 million versus income of $2.3 million. Its operating ratio rose to 98.1% in Q3 from 96.1%, and to 100.4% year to date from 99.8%.
- ABF tonnage per day fell 1.4% in Q3 and 6.1% year to date; billed revenue per hundredweight, including fuel surcharges, rose 1.5% and 5.7%, respectively. Management cited pricing initiatives, weak economic conditions, and comparison with prior-year tonnage growth.
- Adjusted EBITDA, a non-GAAP measure, was $41.4 million in Q3 versus $41.5 million; year-to-date adjusted EBITDA was $78.6 million versus $75.1 million.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $48.1 million, down from $72.3 million. The company attributed much of the decline to $18.0 million of pension contributions, compared with none in the prior-year period.
- Investing cash outflow was $226.7 million, including $180.8 million for Panther, net of cash acquired. Financing provided $108.6 million, including $100.0 million of term-loan borrowings. Cash and equivalents decreased by $70.0 million to $71.3 million.
- At September 30, unrestricted cash, equivalents, and short-term investments totaled $119.1 million; restricted funds were $9.8 million. Current assets were $408.0 million and current liabilities $317.1 million.
- Total debt was $186.4 million, including $97.5 million outstanding on the secured term loan, compared with $71.0 million at December 31, 2011. The term loan matures in June 2017; reported interest rate was 2.0% at quarter-end. The company said it was in compliance with loan covenants.
- The accounts-receivable securitization facility provides up to $75.0 million; $14.9 million of letters of credit reduced available borrowing capacity to $60.1 million. No borrowings were outstanding. A separate credit agreement permits a request for up to $75.0 million in revolving commitments, subject to conditions.
- Capital expenditures, net of asset-sale proceeds, were estimated at approximately $75 million for 2012, revised down from $80–$90 million as ABF planned to reduce tractor replacements amid lower business levels and margin constraints.
Material changes and unusual items
- Panther was acquired for $180.8 million net of cash acquired, funded with cash and the $100.0 million term loan. Purchase-price allocations, including $75.4 million of goodwill and acquired intangible values, remained preliminary.
- The nine-month income-tax benefit was $4.9 million, including a net $3.7 million reduction in deferred-tax valuation allowances; the effective tax benefit rate was 104.2%. This significantly affected reported year-to-date earnings. Management reported net deferred tax liabilities of $18.1 million at September 30.
- Nine-month operating results included $2.1 million of Panther acquisition costs. Management also cited year-over-year increases in sales, customer-service and IT costs ($11.1 million), depreciation and amortization ($8.6 million), pension and retirement expense ($5.6 million), and workers’ compensation claims costs ($3.9 million).
- The board declared a $0.03-per-share dividend in October 2012, payable to holders of record November 6, 2012. No shares were repurchased in the first nine months; $18.2 million remained under the repurchase authorization.
Outlook, risks, and contingencies
- Management said available cash, operating cash flow, and facility capacity should be sufficient for foreseeable needs, including debt service, capital spending, dividends, and benefit-plan contributions. This is subject to economic, pricing, and operating conditions.
- ABF’s collective bargaining agreement covering approximately 75% of its employees expires March 31, 2013; negotiations were expected to begin in late December 2012. Management warned that failure to reach acceptable terms could lead to a work stoppage and materially harm operations and finances. Contractual wage and benefit increases are generally 3%–4% annually, subject to cost-of-living adjustments.
- ABF tonnage remained under pressure; October 2012 average daily tonnage was reported 3%–4% below October 2011, with Hurricane Sandy affecting late-month business. Management cautioned that pricing gains may not offset lower volumes and cost increases.
- ABF’s appeal in its National Master Freight Agreement dispute was pending after the trial court dismissed the case without prejudice; timing and financial impact were uncertain. The PODS trademark lawsuit was settled and dismissed.
- Risks include multiemployer pension funding exposure (the Central States Pension Fund reported a 58.9% funded percentage for 2011 and remained in critical status), self-insurance claims, fuel and pricing volatility, Panther integration, owner-operator classification and retention, and technology or cybersecurity disruptions. The company reported no known cyber incident with a material operational effect. It recorded a $0.9 million environmental cleanup reserve.
- Management reported disclosure controls effective as of September 30, 2012, but excluded Panther from that evaluation because of the recent acquisition.
Most important facts for investors to verify
- Whether ABF can stabilize tonnage and improve its operating ratio as pricing, labor, and other costs evolve.
- Progress and outcome of the 2013 labor negotiations, including potential effects on costs, service, and customer retention.
- Panther’s post-acquisition profitability, integration, and final purchase-price allocation, including goodwill and intangible-asset assumptions.
- Cash generation, debt repayment capacity, facility availability, and compliance with credit covenants.
- Sustainability of reported earnings given the valuation-allowance tax benefit and other unusual or nonrecurring items.
- Developments in the ABF contract litigation and multiemployer pension-plan exposure.