Arkansas Best Corp. 10-Q Summary: Quarter Ended September 30, 1998
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1998, for Arkansas Best Corporation, a diversified holding company. The Company operates primarily through three segments: LTL Motor Carrier (ABF Freight System and G.I. Trucking), Intermodal (Clipper Group), and Tire Operations (Treadco, Inc.). The Company recently increased its ownership in Treadco to 49% and entered a new $250 million credit agreement in June 1998.
Key Financial Metrics
| Metric ($ Thousands) | 3 Months Ended Sep 30, 1998 | 9 Months Ended Sep 30, 1998 | 3 Months Ended Sep 30, 1997 | 9 Months Ended Sep 30, 1997 |
|---|---|---|---|---|
| Operating Revenues | $431,525 | $1,236,290 | $425,289 | $1,243,582 |
| Operating Income | $19,455 | $49,367 | $21,647 | $50,991 |
| Net Income | $8,093 | $19,112 | $5,802 | $10,493 |
| Net Income (Common Shareholders) | $7,018 | $15,888 | $4,727 | $7,269 |
| Diluted EPS | $0.34 | $0.80 | $0.24 | $0.37 |
| Cash Flow from Operations | N/A | $40,555 | N/A | $60,946 |
| Cash and Equivalents | $4,405 | $4,405 | N/A | N/A |
| Total Debt (Current + Long-Term) | $242,362 | $242,362 | N/A | N/A |
Note: Total Debt calculated as Current portion of long-term debt ($17,406) + Long-term debt ($224,956). Cash flow from operations is reported for the nine-month period only.
Material Changes vs. Prior Period
- Revenue: Consolidated revenues increased 1.5% for the quarter but decreased 0.6% for the nine months compared to 1997. The nine-month decline was driven by the sale of Cardinal Freight Carriers (July 1997) and a drop in Intermodal revenues, partially offset by growth in Tire and LTL operations.
- Profitability: Net income for common shareholders increased 48.5% for the quarter and 118.6% for the nine months. The nine-month improvement was primarily due to a significant reduction in interest expense ($13.6M vs $19.1M in 1997) and gains on asset sales, offset by the absence of the Cardinal sale gain in 1998.
- Segment Performance:
- LTL (ABF): Revenues were flat to slightly up; operating ratio remained steady at 93.5% (Q3) and 94.5% (9M).
- Intermodal (Clipper): Revenues declined significantly (14.1% Q3, 13.0% 9M) due to U.S. rail service problems. Operating ratios worsened to 101.2% (Q3) and 100.3% (9M) as the company utilized higher-cost trucking to compensate for rail failures.
- Tire (Treadco): Revenues increased 11.5% (Q3) and 12.9% (9M). Operating ratios improved to 97.3% (Q3) and 98.3% (9M) due to lower new tire costs and improved casing controls.
- Liquidity: Cash provided by operating activities for the nine months decreased to $40.6M from $60.9M in 1997, largely because the Company resumed income tax payments in 1998 after utilizing net operating loss carryovers in 1997.
Outlook, Risks, and Management Commentary
- Intermodal Outlook: Management expects rail service problems to continue adversely affecting Clipper Domestic operations through at least the remainder of 1998. If service does not improve, negative impacts may extend beyond 1998.
- Labor Relations: A new five-year collective bargaining agreement with the International Brotherhood of Teamsters (IBT) began April 1, 1998, covering 79% of ABF employees. The agreement includes an average annual wage/benefit increase of 2.3% and a $750 lump-sum payment.
- Capital Resources: The Company entered a new $250 million revolving credit agreement in June 1998. As of September 30, 1998, approximately $74.8 million in borrowing availability remained. Management believes current cash and credit facilities are sufficient to meet future obligations.
- Year 2000 (Y2K) Risk: The Company is actively converting internal IT systems, with mainframe applications 99% complete. External risks remain regarding suppliers and customers. Management estimates total Y2K costs to date at approximately $600,000, with no material adverse impact on cash flows to date. A contingency plan is expected by June 30, 1999.
- Environmental: The Company has accrued $3.6 million for environmental liabilities related to underground storage tanks and hazardous waste sites. Management believes this accrual is adequate.
Investor Verification Checklist
- Verify the extent of ongoing U.S. rail service disruptions and their specific impact on Clipper Group's cost structure and future revenue recovery.
- Confirm the Company's compliance with the financial covenants of the new $250 million Credit Agreement, particularly regarding indebtedness and capital expenditure limits.
- Assess the progress of Year 2000 compliance for critical third-party suppliers and customers, as the Company relies on external entities for telecommunications and banking.
- Monitor the impact of the new IBT labor contract on ABF's operating costs and operating ratio in subsequent quarters.
- Review the sustainability of Treadco's revenue growth and margin improvements given the competitive tire market.