Arkansas Best Corporation (now ArcBest Corp.) — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; filed November 4, 2010. The company is a transportation holding company, with ABF Freight System as its principal operation and only reportable segment. ABF generated 92% of consolidated revenue for the nine-month period. Amounts below are in millions of dollars unless otherwise noted.
Financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Consolidated operating revenue | $445.5 | $399.0 | $1,216.8 | $1,101.3 |
| Consolidated operating loss | $(1.8) | $(12.2) | $(47.9) | $(68.1) |
| Net loss attributable to Arkansas Best | $(0.7) | $(5.6) | $(29.6) | $(39.2) |
| Loss per diluted share | $(0.03) | $(0.23) | $(1.18) | $(1.58) |
| Cash from operating activities | Not stated by quarter | $21.9 | $23.9 |
- Consolidated revenue rose 11.7% per workday in Q3 and 10.2% for the nine months. ABF revenue per workday increased 10.9% and 8.0%, respectively, supported by higher tonnage and fuel-surcharge revenue.
- ABF’s operating ratio improved to 100.6% in Q3 from 103.8%; for nine months it improved to 104.5% from 106.5%. ABF nevertheless remained loss-making, with operating losses of $2.6 million in Q3 and $50.8 million year to date.
- ABF tonnage per day increased 13.9% in Q3 and 9.9% year to date. Billed revenue per hundredweight, including fuel surcharges, declined 2.5% and 1.5%, respectively. Management attributed the measure partly to changes in freight mix; traditional LTL pricing excluding mix and fuel-surcharge effects declined in the low- to mid-single digits.
- Labor expense as a share of ABF revenue fell, but fuel expense and rents/purchased transportation as shares of revenue increased. ABF’s average fuel cost per gallon, excluding taxes, rose 16.1% in Q3 and 32.5% year to date.
Liquidity, debt and capital resources
- At September 30, unrestricted cash, cash equivalents and short-term investments totaled $145.3 million, versus $133.2 million at December 31, 2009. A further $50.8 million was restricted, primarily as collateral for letters of credit and surety bonds.
- Nine-month operating cash flow was $21.9 million and included $32.0 million of tax refunds. Investing activities provided $43.9 million, mainly reflecting net sales of short-term investments; financing activities used $5.6 million. Cash and cash equivalents ended the period at $99.5 million.
- Capital lease obligations totaled $44.6 million, including $10.8 million current, compared with $17.0 million at year-end 2009. The increase chiefly reflects lease financing of revenue equipment. After quarter-end, ABF entered into additional equipment leases to finance $10.5 million.
- The company reported $75.0 million available under its receivables securitization facility, with no borrowings in 2010 through September 30, and stated it was in compliance with facility covenants. Letters of credit outstanding were $44.7 million; $44.2 million was collateralized by restricted funds.
- Management said available liquidity and expected operating cash flow were sufficient for the foreseeable future to support operations, lease commitments, dividends, benefit contributions and capital expenditures. The 2010 capital expenditure plan was approximately $45–$50 million, net of asset-sale proceeds; the filing notes actual spending could vary.
Changes, outlook and material risks
- Results improved year over year, but the company remained unprofitable. Management linked the improvement chiefly to higher freight volumes and operating leverage, while noting tonnage remained depressed versus 2006 levels.
- For October 2010, ABF’s average daily tonnage was approximately 16% above October 2009. ABF implemented a nominal 5.90% general rate increase effective October 1. Management saw potential for pricing improvement but cautioned that retaining increases depended on competitive conditions; it expected pricing to remain competitive through the rest of 2010.
- ABF’s five-year Teamsters agreement provides compounded annual wage and benefit increases of approximately 4%, subject to cost-of-living adjustments. A proposed 2010 modification, including a proposed 15% wage reduction and incentive plan, was not ratified by union members. ABF said its labor costs were disadvantaged relative to some competitors.
- On November 1, 2010, ABF filed a grievance and lawsuit alleging violations of the National Master Freight Agreement and seeking to invalidate concessions granted to YRC and recover damages. The outcome was uncertain; management said the actions were intended to help ABF achieve a more equitable cost structure.
- Approximately 60% of ABF’s multiemployer pension contributions went to plans in critical status, including the Central States plan, reported 63.1% funded. Withdrawal or plan termination could expose ABF to material liabilities. Management reported no current intention to withdraw and no notice of plan termination.
- Management estimated 2010 nonunion defined benefit pension expense at $15.3 million, versus $20.6 million in 2009. It cautioned that lower-than-expected asset returns or lower discount rates could increase the pension liability. A voluntary $5.0 million contribution was made in Q3.
- Other significant risks include recessionary conditions, pricing and fuel volatility, ability to recover costs through rates and surcharges, labor relations and benefit costs, self-insurance claims, and the company’s ability to realize deferred tax assets. The filing reported $11.5 million of net deferred tax assets and said approximately $33 million of future taxable income would be needed for realization, before considering certain carryback provisions and tax-planning strategies.
- Ordinary-course legal and environmental matters were not expected by management to materially adversely affect results, cash flows or financial condition; the environmental cleanup reserve was $1.3 million at September 30.
Key facts for investors to verify
- Whether ABF can sustain tonnage growth and turn improved operating ratios into operating profitability.
- Whether the October rate increase is retained and whether pricing can cover contractual labor, fuel and other cost increases.
- The progress and outcome of ABF’s grievance and lawsuit concerning YRC’s labor concessions.
- Multiemployer pension plan funding developments, potential contribution increases and the company’s exposure to plan liabilities.
- Cash generation excluding the $32.0 million of tax refunds, capital spending, equipment lease commitments and continued availability of the $75.0 million receivables facility.
- Assumptions supporting realization of deferred tax assets and the potential year-end effects of pension investment returns and discount rates.