ARCBEST CORP quarterly report, Q3 FY2011

Arkansas Best Corporation (ABF) — 2011 Q3 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2011; filed November 8, 2011. Unaudited. ABF, the motor-carrier freight business, generated approximately 92% of nine-month consolidated revenue.

Financial results

Metric	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Revenue	$510.9 million	$445.5 million	$1,444.4 million	$1,216.8 million
Operating income (loss)	$21.1 million	$(1.8) million	$8.1 million	$(47.9) million
Net income (loss) attributable to Arkansas Best	$12.3 million	$(0.7) million	$4.8 million	$(29.6) million
Diluted EPS	$0.46	$(0.03)	$0.18	$(1.18)

Consolidated operating margin was approximately 4.1% in Q3 2011 versus negative 0.4% a year earlier; for nine months it was approximately 0.6% versus negative 3.9%.
ABF operating ratio improved to 96.1% in Q3 from 100.6%; nine-month ratio improved to 99.7% from 104.5%. ABF operating income was $18.3 million for Q3 and $3.9 million year to date.
ABF revenue per day rose 13.8% in Q3 and 17.6% for the first nine months. Q3 tonnage per day fell 2.0%, while nine-month tonnage per day rose 7.8%. Billed revenue per hundredweight, including fuel surcharges, increased 15.9% and 9.3%, respectively.
Operating cash flow was $72.3 million for nine months, versus $21.9 million in 2010. Investing cash use was $21.9 million; financing cash use was $15.8 million. Cash and equivalents increased $34.5 million to $137.1 million.
At September 30, unrestricted cash, equivalents and short-term investments totaled $168.1 million; restricted funds were $52.3 million. Total debt was $67.1 million, including $21.2 million current and $45.9 million long-term. Working capital was approximately $172.6 million.
Common dividends declared were $0.03 per share in Q3, unchanged from 2010. The board declared another $0.03 dividend on October 26, payable in November.

Changes and management commentary

Revenue growth and improved operating results primarily reflected ABF’s higher pricing and stronger first-half tonnage, as well as growth at other businesses. Management attributed much of the earnings recovery to increased revenue against partly fixed operating costs and pricing initiatives.
Q3 fuel, supplies and expenses rose as a share of ABF revenue; average fuel cost per gallon, excluding taxes, increased 39.8% year over year in Q3. Some nonstandard customer arrangements capped fuel-surcharge recovery.
ABF implemented nominal general tariff increases of 6.9% effective July 25, 2011 and 5.9% effective October 1, 2010. Management reported improved negotiated pricing but cautioned that competitive pressures could impede further rate increases.
Unrestricted cash and investments increased $26.2 million from year-end. Nine-month cash uses included $10.9 million of debt repayments, $26.4 million of capital expenditures net of asset-sale proceeds, $4.1 million to acquire the remaining 25% of a logistics subsidiary, and $2.4 million of dividends. The company also financed $21.3 million of equipment through leases and notes.
The company forecast 2011 capital expenditures of approximately $65 million to $85 million, net of asset-sale proceeds. It said available liquidity and financing were expected to cover foreseeable operating and funding needs; no specific earnings guidance was provided.

Outlook, risks and contingencies

In October 2011, ABF’s average daily tonnage was approximately 5%–6% below the prior-year month, while revenue was approximately 5%–6% higher, supported by increased billed revenue per hundredweight, including fuel surcharges. Management warned that economic moderation and account-profitability initiatives could continue to affect tonnage.
Approximately 75% of ABF employees were covered by a collective bargaining agreement providing compounded annual wage and benefit increases of about 3%–4%, subject to cost-of-living adjustments. Multiemployer pension exposure is a material risk; ABF contributed to 25 plans, and withdrawal or plan termination could create material liabilities. Management reported no plan termination notice and no current intent to withdraw.
Management estimated a fourth-quarter 2011 pension settlement expense of approximately $1.1 million pretax, or $0.03 per diluted share after tax, related to expected supplemental-plan settlements.
ABF’s lawsuit challenging wage and benefit concessions granted to YRC competitors was remanded for further proceedings after an appellate reversal of the dismissal. The outcome and financial impact remain uncertain. In PODS trademark litigation, certain ABF counterclaims and defenses were dismissed; other counterclaims and defenses survived. Management said the matter was preliminary and liability could not be estimated.
Environmental cleanup reserves were $0.9 million at September 30. The company reported self-insurance collateral, letters of credit and surety-bond commitments, and noted potential variability in claims and environmental estimates. It also identified fuel-price, pricing, labor, economic, pension, tax-asset realization, cybersecurity and operating-system risks.
Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No material changes to the previously disclosed risk factors were reported.

Important facts for investors to verify

Whether ABF can sustain pricing gains and improve its operating ratio while Q3 and October tonnage weakened.
Fuel-surcharge recovery relative to fuel costs, especially for accounts with capped or nonstandard terms.
Cash generation, planned capital spending and the company’s use of equipment financing and available credit facilities.
Developments in multiemployer pension funding, collective bargaining costs, and the company’s labor-related litigation.
Actual fourth-quarter pension settlement expense and any changes in pension assumptions or deferred-tax-asset valuation allowances.
Material developments and potential financial exposure in the YRC and PODS proceedings, as well as self-insurance and environmental claims.