Business context and reporting period
Arkansas Best Corporation, a motor-carrier transportation holding company whose principal business is ABF Freight System, reported unaudited results for the quarter and six months ended June 30, 2010. ABF was its only reportable operating segment. The filing notes that freight activity is seasonal and interim results may not indicate full-year performance.
Financial and operating performance
| Metric | Q2 2010 | Six months 2010 |
|---|---|---|
| Consolidated revenue | $411.3 million, up 13.4% per day year over year | $771.2 million, up 9.4% per day |
| Operating loss | $10.8 million, versus $27.3 million | $46.1 million, versus $55.9 million |
| Net loss attributable to Arkansas Best | $7.4 million; $0.30 per share | $28.8 million; $1.15 per share |
| Operating cash flow | $19.2 million for the six months, versus $2.1 million in 2009 |
ABF revenue was $379.4 million in Q2 and $712.5 million for the six months, increasing 10.4% and 6.4% per day, respectively. ABF’s operating ratio improved to 103.3% in Q2 from 107.8%, and to 106.8% for the six months from 108.0%; it remained above break-even. Tonnage per day increased 11.9% in Q2 and 7.7% year to date. Billed revenue per hundredweight, including fuel surcharges, declined 0.9% and 1.0%, respectively.
At June 30, unrestricted cash, cash equivalents and short-term investments totaled $143.9 million; another $51.8 million was restricted, principally as collateral. Total capital-lease debt was $30.2 million, including $7.4 million current. The company had no borrowings under its $75 million receivables facility, which was fully available; it reported compliance with its covenants. Six-month investing cash flow was positive $27.4 million, primarily reflecting net proceeds from short-term investment sales. Financing activities used $5.5 million.
Material changes versus the prior comparable period
- Higher ABF tonnage and revenue helped narrow operating and net losses, although the business remained loss-making.
- Fuel, supplies and expenses rose as a share of ABF revenue; average fuel price per gallon increased 39.4% in Q2 and 44.2% year to date versus 2009. Fuel surcharges were higher, but management cautioned that recovery may not fully offset fuel and other cost changes.
- Operating cash flow improved, including because the company received $31.5 million of federal and state tax refunds. Working-capital growth in receivables partially offset cash generation.
- Capital-lease debt increased from $17.0 million at year-end 2009 to $30.2 million, reflecting equipment financing. The quarterly dividend was reduced to $0.03 per share from $0.15 in Q2 2009.
Outlook, commentary and risks
Management reported approximately 13% year-over-year growth in ABF average daily tonnage for July, but described the recovery outlook as uncertain and tonnage as still depressed. It expected competitive pricing to continue through the remainder of 2010; traditional LTL pricing, excluding freight-profile changes and fuel surcharges, had declined by low- to mid-single digits. Management said improved late-Q2 business conditions could support better pricing, but gave no assurance.
The April 2010 proposed labor-agreement modification, including a proposed 15% wage reduction and performance incentive plan, was not ratified by ABF’s IBT employees. The existing agreement provides for approximately 4% compounded annual wage and benefit increases, subject to adjustments. About 60% of ABF’s multiemployer pension contributions went to plans in critical status; the Central States plan reported a 63.1% funded percentage. Withdrawal or plan termination could create material liabilities.
Management estimated 2010 nonunion defined-benefit pension expense of $15.3 million, compared with $20.6 million in 2009. It had no required minimum contribution, but expected to decide in Q3 whether to contribute up to $10 million. The company estimated 2010 capital expenditures at $45–$50 million, net of asset-sale proceeds, including amounts financed through leases. Management believed available liquidity and operating cash flow would be sufficient for the foreseeable future, while noting continued losses could constrain cash generation.
Other risks include fuel-price volatility, inability to pass through cost increases, labor and benefit costs, self-insurance claims, economic and weather conditions, and realization of deferred tax assets. The company reported $13.4 million of net deferred tax assets and said approximately $38 million of future taxable income would be needed for realization absent relevant carrybacks or tax-planning strategies. Legal and environmental matters were not expected by management to have a material adverse effect; environmental cleanup reserves were $1.1 million.
Most important facts for investors to verify
- Whether tonnage recovery continues and translates into profitable ABF operations, given operating ratios above 100% and continued pricing pressure.
- Whether fuel surcharges and negotiated rates adequately offset fuel, contractual wage and benefit, and other cost increases.
- The funding condition and potential contribution or withdrawal exposure associated with multiemployer pension plans, especially Central States.
- Cash generation excluding the $31.5 million tax refunds, the planned $45–$50 million capital-spending program, and the effect of additional equipment leases on debt and liquidity.
- Whether deferred tax assets are realizable and whether the contemplated nonunion pension contribution is made.