Arkansas Best Corporation (ARCBEST) 2009 10-K Summary
Business Context and Reporting Period
This Annual Report on Form 10-K covers the fiscal year ended December 31, 2009. Arkansas Best Corporation is a holding company primarily engaged in motor carrier freight transportation through its principal subsidiary, ABF Freight System, Inc. ("ABF"). ABF is a major less-than-truckload (LTL) carrier serving over 98% of U.S. cities with a population of 30,000 or more. The company operates 281 service centers and employs approximately 10,347 people, roughly 72% of whom are unionized under a collective bargaining agreement with the International Brotherhood of Teamsters (IBT) extending through March 2013.
Key Financial Metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Operating Revenues | $1,472.9 million | $1,833.1 million | -19.6% |
| Operating Income (Loss) | ($168.7 million) | $48.5 million | Significant Decline |
| Net Income (Loss) | ($127.9 million) | $29.2 million | Significant Decline |
| Diluted EPS | ($5.12) | $1.14 | N/A |
| Operating Ratio (ABF) | 112.2% | 97.2% | +15.0 pts |
| Operating Cash Flow | $11.8 million | $105.3 million | -88.8% |
| Total Assets | $869.5 million | $972.3 million | -10.6% |
| Long-Term Debt | $13.4 million | $1.5 million | +793% |
| Cash & Equivalents | $39.3 million | $100.9 million | -61.0% |
Note: The 2009 operating loss includes a non-cash goodwill impairment charge of $64.0 million and a pension settlement expense of $4.6 million. Excluding these items, the operating loss was $100.2 million.
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 19.6% year-over-year, driven by an 11.4% decline in daily tonnage and a 10.8% decrease in billed revenue per hundredweight. The revenue per hundredweight drop was largely due to lower fuel surcharges resulting from decreased diesel prices.
- Profitability Collapse: The company swung from a net income of $29.2 million in 2008 to a net loss of $127.9 million in 2009. The ABF operating ratio deteriorated to 112.2% from 97.2% in 2008.
- Goodwill Impairment: Due to the challenging economic environment and reduced operating results, the company recorded a $64.0 million non-cash impairment charge against the entire goodwill balance associated with ABF.
- Debt Increase: Long-term debt increased significantly due to new capital lease agreements entered in December 2009 to finance $15.0 million of revenue equipment.
- Liquidity Reduction: Cash and cash equivalents dropped by over $60 million, primarily due to capital expenditures ($43.1 million net) and dividend payments ($15.5 million), offset by lower operating cash flow.
Guidance, Outlook, and Risks
Management Commentary & Outlook: Management attributes the poor performance to a prolonged freight recession, reduced customer demand, and a highly competitive pricing environment. While year-over-year tonnage comparisons improved in late 2009 and early 2010, management cautions that tonnage levels remain depressed. A general rate increase of 5.70% was implemented in January 2010 to cover cost increases, though its retention depends on market conditions. Capital expenditures for 2010 are estimated between $45.0 million and $50.0 million.
Risks and Contingencies:
- Economic Sensitivity: Operations are heavily dependent on the health of the residential/commercial construction, manufacturing, and retail sectors.
- Competitive Pricing: Non-union competitors and union competitors with lower cost structures have reduced rates, limiting ABF's ability to raise base freight rates.
- Multiemployer Pension Plans: Approximately 50% of contributions go to the Central States Southeast and Southwest Area Pension Fund, which is in "critical status." While the current collective bargaining agreement covers potential surcharges, a revocation of IRS amortization extensions could result in material liabilities.
- Fuel Price Volatility: While fuel surcharges generally offset direct fuel costs, volatile prices impact the ability to secure base rate increases.
- Insurance Solvency: The company faces risks related to the solvency of excess insurance carriers (e.g., Reliance, Kemper) for workers' compensation claims.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the fair value calculation (discount rate of 12.5%, revenue growth projections) that led to the $64.0 million write-off.
- Operating Ratio Recovery: Monitor the effectiveness of the January 2010 rate increase and cost-cutting measures in reducing the operating ratio below 100%.
- Pension Obligations: Review the funding status of the Central States Pension Fund and any potential for additional contribution requirements beyond the collective bargaining agreement.
- Liquidity Position: Assess the sufficiency of the $74.0 million available under the new accounts receivable securitization facility and the $184.1 million in total cash/investments to fund operations and capital needs.
- Dividend Sustainability: Note the Board's reduction of the quarterly dividend to $0.03 per share in January 2010; verify if this reduction is permanent given the operating losses.