Arkansas Best Corporation (now ArcBest Corp.) — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual filing, not a standalone fourth-quarter report. The company was a transportation holding company; ABF Freight System was its only reportable operating segment and generated 92% of consolidated revenue.
Financial and operating results
| Metric | 2010 | 2009 | Change or context |
|---|---|---|---|
| Consolidated operating revenue | $1.658 billion | $1.473 billion | Up 12.6% overall; up 12.3% per workday |
| Operating income (loss) | $(54.5) million | $(168.7) million | Improved by $114.2 million |
| Net income (loss) attributable to Arkansas Best | $(32.7) million | $(127.9) million | Loss per diluted share: $(1.30), versus $(5.12) |
| Cash from operating activities | $26.3 million | $11.8 million | 2010 included $31.0 million of net income-tax refunds |
| Cash capital expenditures, net of asset-sale proceeds | $5.5 million | $43.1 million | 2010 gross spending included substantial capital-lease financing |
| Capital-lease debt | $56.7 million | $17.0 million | 2010 increase reflected equipment leases; no borrowings under the receivables facility |
Consolidated operating margin was approximately negative 3.3% in 2010, versus negative 11.5% in 2009. ABF revenue was $1.533 billion, up 10.5% per workday. ABF recorded an operating loss of $58.3 million and a 103.8% operating ratio, improved from a 112.2% ratio in 2009. The 2009 comparison included a $64.0 million noncash goodwill impairment and $4.6 million of pension settlement expense; excluding those charges, ABF’s 2009 operating ratio was 107.2%.
ABF daily tonnage rose 11.2%; total billed revenue per hundredweight, including fuel surcharges, declined 0.5%. Labor costs were 65.5% of ABF revenue, down from 70.1% in 2009; fuel, supplies and expenses rose to 17.2% from 16.0%, reflecting higher fuel prices. The filing does not provide a consolidated gross-margin measure.
Liquidity and balance sheet
- At year-end, unrestricted cash, cash equivalents and short-term investments totaled $141.9 million; a further $51.7 million was restricted, principally for claims-related collateral. Current assets were $399.7 million and current liabilities $233.9 million.
- Total assets were $861.0 million and stockholders’ equity was $479.7 million. Year-end debt consisted of capital-lease obligations; there was no outstanding borrowing under the $75 million accounts-receivable securitization facility, which matures in February 2013. The company reported covenant compliance.
- Operating cash flow improved from 2009 but remained below 2008’s $105.3 million. Management said existing liquidity, operating cash flow and available receivables financing should cover foreseeable operating needs and commitments.
Changes, outlook and management commentary
- Results improved substantially from the 2009 freight downturn as volumes recovered, but ABF remained unprofitable. Tonnage in 2010 was still 10.6% below 2006 levels. Management attributed improvement to stronger freight volumes, new customers and some late-year pricing improvement, while warning that recovery was uncertain.
- Management reported ABF’s average daily tonnage through mid-February 2011 was approximately 13% above the prior-year period, with severe weather affecting activity. ABF expected to complete coast-to-coast expansion of its Dual System network in March 2011. These are management expectations, not guarantees.
- For 2011, the company estimated net capital expenditures of $65 million to $85 million and depreciation and amortization of approximately $70 million to $75 million. Planned capital spending could be adjusted with business levels.
- The board reduced the quarterly dividend from $0.15 to $0.03 per share beginning in 2010; management expected to continue quarterly dividends, subject to financial conditions and board discretion.
- A proposed labor-agreement modification that included a 15% wage reduction was rejected by ABF’s Teamster employees in May 2010. ABF filed a grievance and lawsuit over concessions granted to YRC-affiliated carriers; the court dismissed the lawsuit, and ABF appealed. Related legal and advisory fees increased 2010 operating expenses by $4.2 million.
Risks, contingencies and unusual items
- Competitive pricing and weak freight demand may prevent rate increases from covering contractual wage, benefit, fuel and equipment costs. Fuel surcharges generally offset direct diesel-cost increases, but do not ensure recovery of other costs or adequate base-rate increases.
- Approximately 76% of ABF employees were covered by the Teamsters agreement expiring March 31, 2013, with contractual wage and benefit increases. Multiemployer pension funding is a significant exposure: about 65% of contributions went to plans in critical status, and approximately 55% went to the Central States Pension Fund, reported 63.1% funded. Withdrawal or plan termination could create material liabilities; the amount is not clearly quantified in the filing.
- The company’s nonunion defined-benefit pension plan was underfunded by $42.8 million on a projected-benefit-obligation basis. Investment returns, discount rates and future contribution requirements could affect expense and liquidity.
- Claims are substantially self-insured up to generally $1.0 million per event for workers’ compensation, cargo and third-party casualty claims. Adverse claims development, insurance availability or collateral requirements could increase costs or restrict cash.
- ABF faced litigation concerning the NMFA and a separate trademark suit filed by PODS Enterprises in January 2011. Management said the PODS allegations were without merit and an unfavorable outcome was unlikely, but could not estimate potential liability. Environmental cleanup reserves were $1.3 million; the company described other identified-site exposure as immaterial, subject to uncertainty.
- Other key risks include proposed changes to driver-hours rules and electronic logging requirements, safety and environmental regulation, weather, rail-service disruption, equipment costs and availability, and economic or fuel-price volatility.
The 2009 $64.0 million goodwill impairment was noncash and nondeductible for tax purposes. The 2010 statements reported no goodwill impairment. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether volume and late-2010 pricing improvements continued, and whether ABF can move its operating ratio below 100%.
- How 2011 labor, pension and health-benefit costs evolve, including Central States plan funding and any changes to required contributions.
- Whether forecast capital spending and equipment replacement can be funded without materially weakening cash generation or increasing lease obligations.
- Progress and outcomes in the NMFA appeal and PODS trademark litigation, including any resulting costs or liabilities.
- Whether reported operating cash flow is sustainable after accounting for tax refunds, working-capital movements and restricted cash.