Arkansas Best Corporation (now ArcBest) — Q1 2011 Form 10-Q
Business and period: The filing covers the three months ended March 31, 2011, compared with Q1 2010. The company is primarily a motor-carrier freight transportation holding company; ABF Freight represented 93% of consolidated revenue and was its only reportable operating segment. First-quarter results are typically seasonally weakest.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Consolidated operating revenue | $434.9 million | $359.9 million; up 19.0% per workday |
| Operating loss | $22.0 million | $35.3 million loss |
| Net loss attributable to Arkansas Best | $12.8 million; diluted loss per share $0.51 | $21.4 million loss; diluted loss per share $0.85 |
| Cash flow from operations | Used $6.4 million | Used $5.7 million |
| Cash and cash equivalents | $86.8 million | $102.6 million at Dec. 31, 2010 |
| Unrestricted cash, equivalents and short-term investments | $129.1 million | $141.9 million at Dec. 31, 2010 |
| Long-term debt, primarily capital leases | $53.2 million, including $14.2 million current | $56.7 million at Dec. 31, 2010 |
| Cash dividends declared | $0.03 per share | $0.03 per share |
ABF revenue was $402.4 million, up 18.9% per workday. ABF’s operating ratio improved to 105.6% from 110.7%, but remained above 100%, indicating an operating loss. Its average daily tonnage rose 17.4%; billed revenue per hundredweight, including fuel surcharges, rose 2.3%. The consolidated effective income tax benefit rate was 36.5%, versus 38.6%.
Unrestricted liquidity fell $12.8 million during the quarter, primarily as cash funded operations, $3.4 million of capital-lease debt repayment, capital expenditures net of asset-sale proceeds, and dividends. Receivables grew $16.3 million from year-end, principally reflecting higher March revenue. The company had a $75 million receivables facility available and unused and reported compliance with its covenants. Restricted cash and investments totaled $51.7 million. The company stated that available liquidity and the facility should be sufficient for foreseeable needs.
Material changes and management commentary
- Consolidated operating loss improved by $13.3 million year over year. Revenue growth and higher tonnage helped absorb fixed costs; severe late-January and early-February weather nevertheless increased ABF’s Q1 2011 operating ratio by an estimated 1.5 percentage points, versus 0.5 points in Q1 2010.
- ABF’s fuel, supplies and expenses rose to 19.7% of revenue from 18.3%; its average fuel price per gallon, excluding taxes, increased 35.2%. Fuel-surcharge caps and nonstandard customer arrangements were estimated to worsen the operating ratio by about 0.6 percentage points versus Q1 2010.
- Traditional LTL pricing, excluding fuel surcharges and freight-profile changes, declined by a low-single-digit percentage year over year. Management said it was pursuing price increases on underperforming accounts and correcting inadequate fuel-surcharge programs.
- Management reported April 2011 average daily tonnage up approximately 16% year over year and billed revenue per hundredweight up approximately 8%; excluding fuel surcharges and freight-profile changes, the latter was estimated to be up by a low-single-digit percentage. Management cautioned that these trends might not continue.
Outlook, risks, contingencies and unusual items
- The company estimated 2011 capital expenditures of approximately $65 million to $85 million, net of asset-sale proceeds; actual spending could vary. Management also estimated full-year 2011 nonunion defined-benefit pension expense of $12.9 million, compared with $15.3 million in 2010; no minimum cash contribution was required, though a contribution remained possible.
- ABF’s collective bargaining agreement provides for contractual wage and benefit increases. Contractual wages rose 1.7% effective April 1, 2011, and benefit rates were scheduled to rise 6.5% effective August 1, 2011. Competition, pricing pressure, fuel costs and recovery, labor costs, economic conditions, weather and self-insurance claims were identified as risks.
- ABF’s challenge to wage and benefit concessions granted to YRC-related carriers was on appeal after dismissal of its lawsuit; an appellate decision was expected by July 2011. The outcome and financial impact were uncertain. A separate PODS trademark and antitrust dispute was at a preliminary stage; management said the outcome could not be determined and considered an unfavorable outcome unlikely.
- Environmental cleanup reserves were $1.0 million at March 31, 2011. Management said routine legal matters were not expected to materially affect results, but outcomes and related impacts of certain nonroutine proceedings could not be determined.
- On April 21, 2011, the board declared a $0.03-per-share dividend payable to holders of record May 5. An additional $1.9 million capital lease for revenue equipment was entered into in April.
Important facts for investors to verify
- Whether ABF can convert higher tonnage and April pricing indicators into sustained operating-ratio improvement and profitable operations.
- Whether fuel-surcharge caps and weak underlying LTL pricing continue to pressure margins as fuel and contractual labor costs rise.
- Cash generation, receivables growth, capital spending, capital-lease commitments, and continued access to the unused $75 million receivables facility.
- Developments and potential financial consequences of the ABF labor-concession appeal, the PODS litigation, and self-insurance and environmental exposures.
- The realizability of deferred tax assets: the filing says approximately $51 million of future taxable income would be needed to realize net deferred tax assets, subject to carrybacks and tax-planning strategies.