Arkansas Best posts net income of $13.9 million (Updated)

It would be an understatement to say the equity market liked Arkansas Best Corp.’s  quarterly results posted Monday (Nov. 11). Shares surged higher by $4.10 – up more than 15% – to end the day at $30.80.

The company’s shares (NASDAQ: ABFS) have not traded above $30 for almost four years. During the past 52 weeks the share price has ranged from a $29.89 high to a $6.43 low.

What drove the share price surge? The quarterly earnings blew past market expectations with third quarter net income of $13.982 million from revenue of more than $623 million.

The per share earnings of 52 cents was well ahead of the consensus estimate of 36 cents and the revenue bested the market estimate of $605.98 million.

The quarterly net income more than doubled the $6.518 million reported during the third quarter of 2012, and the revenue was up almost 8% compared to the 2012 quarter. Helping fuel the improved results was a 4.3% uptick in tonnage during the quarter and a 4.5% increase in per-day shipments. ABF Freight System, one of the nation’s largest less-than-truckload carriers, is the largest subsidiary of Arkansas Best.

"This was our strongest quarter of the year thanks to the solid performances of our emerging businesses and a tonnage uptick for ABF Freight," Arkansas Best President and Chief Executive Officer Judy McReynolds said in the earnings report released early Monday. "In particular, Panther Expedited Services, which we acquired in June 2012, showed improved demand in several of the industries it serves."

In 2012, the transportation holding company posted a $7.7 million loss, a wide swing from the $6.159 million gain in 2011. The largest subsidiary of Arkansas Best is ABF Freight System, one of the largest less-than-truckload carriers in the U.S.

For the first nine months of the year, Arkansas Best has posted $5.465 million in net income, a big improvement over the $4.676 million loss during the same period in 2012. Total revenue for the first nine months is $1.721 billion, well ahead of the $1.528 billion in the same period of 2012.

SEGMENT INCOME
ABF Freight has generated almost 77% of operating income for Arkansas Best during the first nine months of 2013, down from 84.17% during the same period of 2012. The reduction is the direction hoped for by Arkansas Best officials who have worked to improve revenue in the non-asset based business like Panther Expedited (logistics) services.

ABF Freight
Operating income
2013 (January-September): $1.325 billion
2012 (January-September): $1.287 billion

Panther (premium logistics freight services)
Operating income
2013 (January-September): $179.533 million
2012 (January-September): $71.28 million (Panther was acquired in June 2012)

Domestic/Global transportation management
Operating income
2013 (January-September): $74.554 million
2012 (January-September): $44.954 million

Emergency/preventative maintenance
Operating income
2013 (January-September): $102.504 million
2012 (January-September): $85.264 million

Household goods moving
Operating income
2013 (January-September): $65.358 million
2012 (January-September): $61.233 million

LABOR SAVINGS TO COME
The improved earnings also came without the expected cost savings from a new labor agreement between Arkansas Best Corp. and the International Brotherhood of Teamsters that was fully ratified during the fourth quarter. Arkansas Best Corp. officials announced Oct. 30 that the ABF National Master Freight Agreement was ratified by the Teamsters’ ABF National Negotiating Committee.

The contract covers about 7,500 employees of ABF Freight System who are members of the union. Most of those workers are drivers. The company has said the agreement will result in savings of between $55 million and $65 million a year. The savings come from an immediate 7% wage reduction that is recovered by the fifth year of the contract. The wage and benefit reductions are set to begin Nov. 3. The company was also able to negotiate for flexibility in work schedules and work across job classifications. Most of those workers are drivers.

"While our third quarter results improved on prior quarter trends and reflected strides in our emerging businesses, we remain focused on returning ABF Freight to its historic profitability," McReynolds said in the earnings statement. "After a long and complex labor negotiation process at ABF Freight, we are pleased to have an implemented contract that allows us to lower costs while still providing the best-paying jobs in the industry.”

FOURTH QUARTER OUTLOOK
In a call with analysts, Arkansas Best Chief Financial Officer Michael Newcity said the company was able to obtain an overall price increase in the system of 2%. The financial boost was largely the result of the pricing improvement and a gain in tonnage – especially in the shorter-haul regional network.

“During this year's third quarter, regional freight, defined as tonnage moving 1,000 miles or less, represented 60.5% of ABF's total tonnage, an increase of nearly 1% compared to the third quarter of 2012. In this year's third quarter, ABF's regional business grew 5%, while our traditional long haul business increased by just above 1%,” Newcity noted in a transcript provided by Seeking Alpha.

Prospects look good for a positive fourth quarter report. Newcity said in the call that daily tonnage was up 2%-3% for ABF during October.

“On a per-day basis, ABF's October 2013 revenues were 6% to 7% above October 2012, reflecting a combination of higher revenue per hundredweight and the tonnage improvement,” Newcity said during the call.

‘NETWORK ANALYSIS’
The improved quarterly report, a good start to the fourth quarter and expected savings from the new labor agreement are not enough, according to CEO McReynolds.

“While we believe the savings reached in the negotiations process puts ABF in a much stronger position to further invest and serve customers and put the company on a path to better financial performance, it does not meet our objective of returning ABF to its historic sustained levels of profitability. Therefore, an active network analysis is underway, the results of which are expected to be announced in the first half of 2014,” McReynolds said in the earnings call.

Brad Delco, a transportation industry analyst with Little Rock-based Stephens Inc., has said he believes ABF has more facilities in its network than it needs. Delco estimated that each closed terminal could save ABF just short of $1 million. A complete “rationalizing” of the network could ultimately generate up to $32.5 million in annual savings, Delco wrote in a note to investors.