Arkansas Best Returns to Profits

Trucking company emerges from acquisition losses

Despite the trend that has dominated American business in the last few years, the process of acquiring a competing company and assimilating its assets can be difficult.

Arkansas Best Corp. of Fort Smith, a company accustomed to acquisition, is just emerging from multi-million dollar losses caused by the $76 million acquisition of WorldWay Corp. in the third quarter of 1995. The company lost money every quarter after the acquisition for almost two years.

“In some ways, it’s harder than starting from scratch,” says Robert Young III, president and CEO of the company.

In the year before the acquisition, Arkansas Best reported profits of $18.7 million. In 1995, the company lost $32.8 million, about $1.90 per share of common stock, with $26.5 million of the loss occurring in the quarter immediately following the acquisition of WorldWay. The problems continued in 1996 and the company lost another $36.6 million, or $2.10 per share.

Wall Street began shunning the company. Standard & Poor’s CreditWatch and Moody’s Investor Service labeled the company a risky investment in 1996. Young said the period “was not pleasant nor one I ever want to repeat.”

Then, last year, Arkansas Best began making money again and had a profit of $15.3 million. For the first quarter of this year, the company had a profit of $2.5 million, a 400 percent increase from its first quarter loss of $1.4 million last year. Young expects record earnings and profits this year.

“We accomplished what we set out to do, but it took longer than we expected,” he says.

Now, the stock is being called the best investment in the trucking industry by analysts. Tim Quillin, an analyst with Stephens Inc. of Little Rock, describes Arkansas Best as the best long-haul carrier in the nation. The company’s stock is undervalued and will increase 80 percent by the end of the year, Quillin says.

“They are past the hurdles,” he says.

Integrating the assets of WorldWay into Arkansas Best’s operations was a complex and difficult process, Young says. The purchase of WorldWay had added Carolina Freight Carriers, G.I. Trucking, CaroTrans International, Cardinal Freight Carriers, two logistic carriers and FleetNet America Inc. to Arkansas Best. The acquisition increased the size of the company by 30 percent and put the company $400 million in debt.

However, it wasn’t the size of the acquisition that created a problem for Arkansas Best. The company has acquired 26 companies in the last 43 years, two of them larger than Arkansas Best. The problem was the timing of the purchase.

In 1994, the trucking industry reached record levels of profitability and many companies expanded their fleets. When the amount of freight being shipped by trucks declined in 1995 and again in 1996, those companies had excess equipment. Idle equipment combined with the increased debt of buying it eroded profits.

For Arkansas Best, the situation was magnified. Reconfiguring the company to accommodate the acquisition while facing an industry-wide slump was a unique challenge, Young says. He promised stockholders at the 1996 annual meeting that he would sell or close every subsidiary that wasn’t profitable for the company.

Carolina Freight was incorporated into ABF Freight System Inc., the less-than-truckload carrier that is Arkansas Best’s largest subsidiary. The addition increased the company’s presence on the East Coast but also created some duplications for the company, which already was serving the area. Arkansas Best closed 200 terminals and eliminated several thousand jobs for dockworkers and drivers.

G.I. Trucking, a regional West Coast carrier based in La Mirado, Calif., that was acquired in the purchase, still operates in 15 Western and Southwestern states as well as Mexico. G.I. Trucking lost 60 percent of its existing business after being acquired by Arkansas Best.

“That company has been through a traumatic period,” Young says. “It lost 60 percent of its business in one day.”

Within 20 months, G.I. Trucking was making a profit again. During 1997, the subsidiary’s revenue was growing at an annual rate of more than 25 percent. Young estimates that the subsidiary will have revenue of about $120 million this year and will make a profit.

CaroTrans International Inc., an intermodal company acquired in the purchase, was incorporated into The Clipper Group, the intermodal subsidiary of Arkansas Best. The intermodal subsidiary, which transports freight by railroad and ocean liner, has remained something of a disappointment to the company, partly because of the gridlock problems on the nation’s rail system. Revenue for the intermodal operations last year was $182 million, up just .8 percent from last year’s $181 million.

Arkansas Best sold the two logistic companies, Cardinal Freight Carriers, thousands of surplus tractors and trailers and real estate. The company raised about $100 million in the sales and used the money to reduce its debt. In the first 18 months after the acquisition, the company paid about one-half of the debt it incurred in the purchase.

The reduction of that debt is a top priority for the company and leading concern of analysts. Young says he plans to reduce the debt another $30 million by the end of 1999. Savings from interest on the debt alone could increase earnings per share as much as 25 cents, he says.

The company rewarded its executives for their efforts with bonuses last year. Six of the company’s top executives received bonuses exceeding their salaries. Young, whose salary was $375,000 last year, received a $540,765 bonus. He says the payments were the most generous bonuses the company had ever paid and the first bonuses the management had received in two years.

After the dismal two years of integrating the acquisition into the company, Young says he isn’t searching for another acquisition, yet. He will focus his attention on reducing the company’s debt and improving the operations of the subsidiaries, he says.

“We don’t have anything on the drawing board of that magnitude at all,” he says.

However, that doesn’t mean that Arkansas Best wouldn’t consider buying another company if the right opportunity arose, he says, or that the company could be acquired for the right price.

“We wouldn’t be thrilled but we have to consider what is best for the stockholders,” he says. “If someone offered the right price, who knows?”

However, the company resisted a hostile takeover attempt in 1988 by becoming private for four years. The company became public again in 1992.