Arkansas Best Corp. Reports Operating Results (10-Q)
Arkansas Best Corp. has a market cap of $580.5 million; its shares were traded at around $22.94 with and P/S ratio of 0.4. The dividend yield of Arkansas Best Corp. stocks is 0.5%.ABFS is in the portfolios of Michael Price of MFP Investors LLC, Bruce Kovner of Caxton Associates, Chuck Royce of Royce& Associates, John Buckingham of Al Frank Asset Management, Inc., David Tepper of APPALOOSA MANAGEMENT LP, Steven Cohen of SAC Capital Advisors, PRIMECAP Management.
Highlight of Business Operations: Consolidated revenues for the three and six months ended June 30, 2010 increased 13.4% and 9.4%, respectively, on a per-day basis compared to the same prior year period, with the increase primarily attributable to ABF operations. Consolidated revenue growth was also impacted by business operations that are reported in the Companys revenues other than ABF, including increased roadside vehicle assistance services at Fleetnet America, Inc. and the effect of the acquisition, in late second quarter 2009, of a privately-owned logistics business. ABF represented 92% of the Companys consolidated revenues for the six months ended June 30, 2010. During the three and six months ended June 30, 2010, ABFs revenues increased 10.4% and 6.4%, respectively, on a per-day basis compared to the same periods in 2009.
For the three and six months ended June 30, 2010, the Company reported consolidated net losses allocable to the Companys shareholders of $7.4 million and $28.8 million, respectively, after taxes, primarily reflecting the operating results of ABF. ABFs second quarter 2010 operating ratio (defined as percent of operating expenses to revenues) improved to 103.3% from 107.8% in the second quarter 2009. For the six months ended June 30, 2010, ABFs operating ratio improved to 106.8% from 108.0% in the same period of 2009. On an ongoing basis, ABFs ability to operate profitably and generate cash is impacted by tonnage (defined as gross weight hauled), which influences operating leverage as tonnage levels vary; the pricing environment; customer account mix; and the ability to manage costs effectively, primarily in the area of salaries, wages and benefits (labor). The ABF key performance factors are discussed in the following paragraphs and ABFs operating results are more fully discussed in the ABF section of MD&A.
pricing for its services. Year-over-year tonnage began declining in the fourth quarter of 2006, and ABF experienced annual tonnage declines on a per-day basis of 5.3%, 4.2% and 11.4% in 2007, 2008 and 2009, respectively. For the three and six months ended June 30, 2010, ABFs tonnage improved 11.9% and 7.7%, respectively, on a per-day basis compared to the same periods of 2009. For the month of July 2010, average daily total tonnage for ABF increased approximately 13% compared to the same period last year. ABFs management believes the 2010 increase in tonnage is representative of modest year-over-year improvement in general economic conditions as indicated by measures such as the Institute for Supply Management Purchasing Managers Index and the seasonally adjusted Industrial Production Index published by the Federal Reserve. Although there are indications of economic factors that could contribute to further year-over-year increases in tonnage, management remains cautious in its expectations due to the uncertainty of continued general economic recovery. ABFs tonnage remains at depressed levels and there can be no assurances that ABF will achieve or maintain improvements in operating results based on current tonnage levels.
As a result of the extended recessionary economic environment and its impact on tonnage levels, ABF has implemented cost reduction programs. ABF is generally effective in managing its costs to business levels. However, during prolonged periods of depressed tonnage levels, incremental reductions in labor and other operating costs become increasingly challenging and less effective as a larger proportion of ABFs operating costs are fixed in nature when maintaining customer service levels. ABFs ability to effectively manage labor costs, which amounted to 65.6% and 68.1% of ABFs revenues for the three and six months ended June 30, 2010, respectively, has a direct impact on its operating performance. Labor costs, including retirement and health care benefits for ABFs contractual employees that are provided by a number of multiemployer plans (see Note E to the Companys consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q), are impacted by ABFs contractual obligations under its labor agreement primarily with the International Brotherhood of Teamsters (IBT). The current five-year collective bargaining agreement, which became effective April 1, 2008, provides for compounded annual contractual wage and benefit increases of approximately 4%, subject to wage rate cost-of-living adjustments.
Effective January 11, 2010 and January 5, 2009, ABF implemented general rate increases to cover known and expected cost increases. Nominally, the increases were 5.70% and 5.79%, respectively, although the amounts vary by lane and shipment characteristics. The general rate increase affected approximately 45% of ABFs business for the six months ended June 30, 2010, while rate increases on the remaining business are subject to individually negotiated pricing arrangements that are effective at various times throughout the year. ABFs ability to retain the general rate increase and to increase rates on the remainder of its business is dependent on the competitive pricing environment. Obtaining base rate increases involves a lengthy process to address the pricing and resulting profitability of individual customer accounts. Prolonged periods with insufficient base LTL rate improvements result in higher operating ratios as elements of unit cost, including contractual wage and benefit rates, continue to increase.
The transportation industry is dependent upon the availability of adequate fuel supplies. The Company has not experienced a lack of available fuel but could be adversely impacted if a fuel shortage were to develop. ABF charges a fuel surcharge based on changes in diesel fuel prices compared to a national index. The ABF fuel surcharge rate in effect is available on the ABF Web site at abf.com. (The information contained on the ABF Web site is not a part of this Quarterly Report on Form 10-Q nor shall it be deemed incorporated by reference into this Quarterly Report on Form 10-Q.) Although revenues from fuel surcharges generally more than offset increases in direct diesel fuel costs, other operating costs have been, and may continue to be, impacted by fluctuating fuel prices. The total impact of energy prices on other nonfuel-related expenses is difficult to ascertain. ABF cannot predict, with reasonable certainty, future fuel price fluctuations, the impact of energy prices on other cost elements, recoverability of fuel costs through fuel surcharges, and the effect of fuel surcharges on ABFs overall rate structure or the total price that ABF will receive from its customers. During periods of changing diesel fuel prices, the fuel surcharge and associated direct diesel fuel costs also vary by different degrees. Depending upon the rates of these changes and the impact on costs in other fuel- and energy-related areas, operating margins could be impacted. Fuel prices have fluctuated significantly in recent years. ABF experienced significantly higher fuel prices in the first ten months of 2008 compared to the same period in 2007. After reaching a peak in July 2008, fuel prices declined approximately 60% through mid-March 2009, then increased approximately 50% by the end of June 2010. As a result of the higher fuel prices in 2010, ABFs average fuel surcharge rate during the six months ended June 30, 2010 was 53% above the average rate for the same period of 2009. Whether fuel prices fluctuate or remain constant, ABFs operating income may be adversely affected if competitive pressures limit its ability to recover fuel surcharges. Throughout the first six months of 2010, the fuel surcharge mechanism had strong market acceptance among ABF customers, although certain nonstandard arrangements with some of ABFs customers have limited the amount of fuel surcharge recovered. While the fuel surcharge is one of several components in ABFs overall rate structure, the actual rate paid by customers is governed by market forces based on value provided to the customer.
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