Arkansas Best Corporation (ARCBEST) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. The company provides freight transportation and logistics services through five reportable segments; Freight Transportation (ABF) generated about 76% of revenue before eliminations in the first nine months. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $623.4 | $577.5 | $1,721.0 | $1,529.0 |
| Operating income (loss) | $20.5 | $12.2 | $5.6 | $(3.6) |
| Net income | $14.0 | $6.5 | $5.5 | $0.2 |
| Diluted EPS | $0.52 | $0.24 | $0.20 | — |
| Operating cash flow | Not separately reported for the quarter | $66.3 | $48.1 |
- Q3 revenue rose 7.9%; nine-month revenue rose 12.6%. The nine-month comparison includes Panther for a full period in 2013, but only from its June 2012 acquisition date in the 2012 reported results.
- ABF’s Q3 operating income was $17.2 million versus $8.5 million; its nine-month result was $0.2 million versus a $5.8 million loss. ABF’s operating ratio improved to 96.3% in Q3 and 100.0% year to date, from 98.1% and 100.4%, respectively.
- Management-reported consolidated EBITDA, a non-GAAP measure, was $47.7 million in Q3 (+15.0%) and $88.8 million for nine months (+16.2%).
Liquidity, debt and balance sheet
- At September 30, unrestricted cash, cash equivalents and short-term investments totaled $136.2 million; restricted funds were $1.9 million. Cash and equivalents alone were $107.6 million.
- Total debt, including current maturities, was $124.2 million, down from $156.0 million at year-end 2012. The Term Loan balance was $86.9 million; its stated interest rate was 1.7%. The company had repaid $31.8 million of long-term debt during the first nine months.
- Operating cash flow of $66.3 million funded debt repayment, net capital expenditures, a $4.1 million acquisition and dividends, among other uses. Net cash used in investing was $20.8 million; net cash used in financing was $28.5 million.
- Available capacity was $54.5 million under the receivables securitization program and up to $73.1 million for letters of credit, subject to issuance requirements. No revolving-credit or securitization borrowings were outstanding. The company reported compliance with financing covenants; fixed-charge coverage was 1.8:1 against a 1.25:1 minimum.
Changes, outlook and risks
- ABF tonnage per day increased 3.5% in Q3 and 3.9% year to date. Billed revenue per hundredweight, including fuel surcharges, rose 0.7% in Q3 but declined 0.5% year to date. Management attributed improvement primarily to tonnage growth, with Q3 pricing also benefiting from rate increases and improved contract pricing.
- A new ABF labor agreement was implemented November 3, 2013, after quarter-end, and runs through March 31, 2018. It provides for a 7% wage-rate reduction at implementation, offset in part by benefit-rate increases applied retroactively to August 1; management estimated an initial net reduction of about 4% in combined contractual wage and benefit rates. Further annual increases are estimated at 2.5%–3.0%. Savings are expected to phase in over time.
- Management was evaluating potential ABF terminal and distribution-center changes; it cautioned that material operating improvement is not assured. October ABF tonnage per day was up 2%–3% and revenue per day up 6%–7% year over year, but management noted tougher future comparisons. No consolidated earnings or revenue guidance was provided.
- 2013 net capital expenditures were estimated at $25–$30 million, with depreciation and amortization of $80–$85 million. Management said available cash, operating cash flow and borrowing capacity should meet foreseeable liquidity needs, while noting results and cash generation depend on economic conditions, tonnage, pricing and costs.
- Unusual items included a $1.8 million pre-tax pension settlement expense and a $1.7 million alternative-fuel-tax-credit benefit in the first nine months. A freeze of the nonunion defined-benefit plan reduced the pension obligation by $46.3 million; fourth-quarter settlement expense was expected to be $0.5–$0.7 million.
- Risks include competitive pricing and fuel-surcharge recovery, labor and multiemployer pension costs, self-insurance claims, weather and economic conditions, and potential impairment of Panther goodwill and intangibles. The Central States pension plan was in critical status and reported a 53.9% funded percentage for 2012; the company disclosed potential material liability if it withdrew from or certain plans terminated.
- The ABF lawsuit alleging unequal labor concessions to YRC was concluded after an appeals court affirmed dismissal on August 30, 2013; ABF did not pursue further appeal. Environmental cleanup reserves were $0.9 million. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether the labor agreement’s cost savings materialize as expected, and how benefit increases and later contractual increases affect ABF margins.
- Whether ABF’s tonnage and pricing improvements continue, particularly as year-over-year comparisons become more demanding.
- Debt repayment, covenant headroom and availability of receivables and letter-of-credit facilities, alongside self-insurance and multiemployer-plan exposures.
- Whether Panther’s growth supports its goodwill and intangible asset carrying values, and whether the stated capital-spending outlook changes.