ARCB

Arkansas Best Corp. 10-Q Summary: Quarter Ended June 30, 1995

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 1995, and the six months ended on that date. Arkansas Best Corporation is a diversified holding company operating primarily through its motor carrier subsidiary (ABF Freight System), freight forwarding operations (Clipper Group), and truck tire retreading/sales subsidiary (Treadco, Inc.). The company reported 19,529,408 shares of common stock outstanding as of August 1, 1995.

Key Financial Metrics

Note: Working capital is negative due to current liabilities exceeding current assets. Total debt includes $59.5 million current portion and $79.7 million long-term debt.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 48.1% for the quarter and 31.0% for the six months compared to 1994. This growth is largely attributable to the inclusion of the Clipper Group (forwarding operations) acquired in September 1994, which had no comparable prior-year data.
• Profitability Turnaround: The company reported a net income of $1.7 million for the quarter, reversing a net loss of $3.4 million in the same period in 1994. The 1994 loss was significantly impacted by a 24-day Teamsters' strike at ABF.
• Segment Performance:
  • Carrier Operations: Revenues rose to $240.0 million (Q3) and $484.5 million (6M). Operating profit improved to $5.6 million (Q3) from a loss of $4.2 million in 1994, though management notes earnings are pressured by a slowing economy and pricing competition.
  • Tire Operations: Revenues increased 5.1% (Q3) and 8.6% (6M). However, operating margins compressed as expenses rose to 94.9% of revenue (Q3) from 92.0% in 1994, driven by a 9.6% increase in raw material costs from supplier Bandag Inc. that could not be fully passed to customers.
• Interest Expense: Interest costs increased to $2.5 million (Q3) from $1.8 million in 1994 due to higher debt levels associated with the Clipper acquisition and corporate office construction.

Outlook, Risks, and Unusual Items

• WorldWay Merger: On July 10, 1995, the company announced a definitive agreement to acquire WorldWay Corporation via a cash tender offer at $11.00 per share. The deal involves approximately $70 million in WorldWay debt and requires new financing, for which the company has received a commitment letter.
• Liquidity and Covenants: The company maintains a $150 million revolving credit facility with a borrowing base of $126.9 million as of June 30, 1995. All financial covenants were met. Management believes cash flow and available credit are sufficient for operations and debt service.
• Environmental Risks: The company faces potential liability as a responsible party at several hazardous waste sites. To date, settlements have been immaterial (approx. $223,000 over five years). Additionally, ABF is required to upgrade underground fuel tanks by December 1998, though management does not expect a material adverse effect.
• Franchise Risks: Treadco faces potential disruption if Bandag franchise agreements are not renewed, particularly seven expiring in June 1996. Bandag has also granted competing franchises in some areas.
• Seasonality: The motor carrier segment typically sees the highest tonnage in the third quarter and lowest in the first quarter.

Investor Verification Checklist

• Verify the status and financing terms of the pending WorldWay Corporation acquisition.
• Monitor Treadco's ability to pass on raw material cost increases from Bandag Inc. to maintain margins.
• Review the renewal status of Treadco's Bandag franchise agreements expiring in 1996.
• Assess the impact of the 1994 strike on year-over-year comparisons, noting that 1995 results are not fully comparable due to the absence of strike-related disruptions.
• Confirm the company's ability to meet debt covenants under the Credit Agreement as debt levels fluctuate with the WorldWay acquisition.