ARCB

Arkansas Best Corp. (ARCBEST) - Q2 2009 10-Q Summary

Business Context and Reporting Period

This filing covers the quarterly period ended June 30, 2009. Arkansas Best Corporation is a holding company primarily engaged in motor carrier freight transportation through its subsidiary, ABF Freight System, Inc. The company operates in a highly competitive less-than-truckload (LTL) environment and is significantly impacted by general economic conditions, fuel prices, and labor agreements with the International Brotherhood of Teamsters (IBT).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Operating revenues decreased 27.3% for the quarter and 25.8% for the six-month period compared to 2008. This was driven by a 17.0% decline in daily tonnage and a 13.1% decrease in billed revenue per hundredweight (largely due to lower fuel surcharges).
• Profitability Reversal: The company reported an operating loss of $27.3 million for the quarter, compared to an operating income of $25.7 million in the same period in 2008. The operating ratio deteriorated to 107.8% from 94.7% in Q2 2008.
• Cost Structure: Salaries, wages, and benefits increased as a percentage of revenue to 71.3% (Q2) and 71.8% (YTD) due to fixed labor costs and contractual wage increases under the IBT agreement, which were not offset by revenue growth.
• Pension Expenses: Nonunion pension expense increased significantly due to higher amortization of actuarial losses and lower expected returns on plan assets.
• Cash Flow: Net cash provided by operating activities dropped to $2.1 million for the six months ended June 30, 2009, compared to $58.9 million in the prior year period.

Outlook, Risks, and Management Commentary

• Economic Environment: Management cites the prolonged economic recession as the primary driver of declining tonnage and pricing pressure. Tonnage per day declined 17.0% in Q2 2009, following declines in previous quarters.
• Liquidity Concerns: While the company holds $191.4 million in cash and short-term investments and has no revolver borrowings, the fixed charge coverage ratio declined to 4.7 to 1. Management warns that if operating results do not improve, the company may fail to meet the 2.0 to 1 minimum ratio required by its Credit Agreement, potentially requiring cash deposits to replace letters of credit.
• Debt Ratings: Standard & Poor's has placed the company's BBB+ rating on watch with negative implications, and Moody's is reviewing the Baa2 rating for a possible downgrade.
• Cost Reduction: ABF has implemented cost reduction programs, but further reductions are challenging due to the need to maintain service levels and fixed labor obligations.
• Goodwill Impairment Risk: Management notes that if forecasted cash flows and revenue growth are not achieved due to the economic downturn, a goodwill impairment test could result in a material non-cash charge.

Investor Verification Checklist

• Fixed Charge Coverage Ratio: Verify if the company meets the 2.0 to 1 covenant requirement in upcoming quarters to avoid liquidity constraints on its $325 million credit facility.
• Tonnage Trends: Monitor monthly tonnage reports to assess if the 17% year-over-year decline is stabilizing or worsening.
• Base Rate Increases: Confirm the company's ability to secure base LTL rate increases to offset contractual wage hikes, given the competitive pricing environment.
• Pension Contributions: Track additional voluntary contributions to the nonunion pension plan (up to $10 million potential in 2009) and their impact on cash flow.
• Goodwill Valuation: Review future filings for any impairment charges related to the $66.5 million goodwill balance on the balance sheet.