Arkansas Best posts $21.4 million loss; internal memo paints tough future

Fort Smith-based Arkansas Best Corp. reported early Friday (April 23) that it lost $21.4 million in the first quarter of 2010, and a recent internal memo to company employees suggests more difficult times ahead for the trucking company.

The first quarter hit for Arkansas Best amounted to a loss of 85 cents per share, worse than analysts estimates of a 63-cent per share loss.

Arkansas Best, whose largest subsidiary is ABF Freight System, posted quarterly revenue of $359.88 million, 5.9% higher than the first quarter of 2009.

“Despite some signs of improvement in our nation’s economy resulting in the stabilization of our business, Arkansas Best’s first quarter results illustrate the ongoing effects of low freight levels combined with a weak pricing environment,” Judy McReynolds, Arkansas Best president and CEO, said in the earnings statement. “We are encouraged by the first quarter increases in ABF’s tonnage versus very low totals last year. However, in order for ABF’s operating results to improve in a meaningful way, we need further increases in freight demand, strong improvements in pricing and the positive financial impact of wage concessions.”

The company burned through $10 million of its cash reserves during the first quarter of 2010. Unrestricted cash and short term investments were at $123.1 million as of March 31, down from the $133.2 million at the end of 2009.

Also, the company known for operating with little to no debt has seen its debt increase in the past six months. During the fourth quarter of 2009 and the first quarter of 2010, ABF purchased new tractors (trucks), which pushed debt from $1.8 million as of Sept. 30, 2009, to $27 million as of March 31.

Cutting costs and surviving the tough freight environment is part of a recent move by Arkansas Best to seek union concessions. The International Brotherhood of Teamsters and Arkansas Best have reached a tentative agreement on 15% pay cuts through 2013 for the roughly 6,000 drivers who work for the less-than-truckload carrier. The agreement awaits a Teamsters vote.

The tentative deal with the union requires company management and nonunion employees to take an equal amount of pay cuts. However, nine separate nonunion wage and benefit cuts, already implemented since Jan. 1, 2008, will be considered in determining if further management and nonunion employee cuts are required.

A recent memo from ABF President and CEO Wesley Kemp to the more than 9,000 ABF employees best explains the company’s dilemma.

“As you know, ABF lost almost $100 million in 2009, the greatest loss in our history, due largely to the worst economic conditions since the Great Depression of the 1930s and our inability to adjust spending to the levels of our competitors. In addition, our parent company’s unrestricted cash reserves have dropped 44% and we’re starting to take on debt again. While some segments of the economy are showing signs of recovery, the LTL sector of our industry is still lagging. There continues to be excess capacity, and companies with significant cost and operating advantages are taking a toll on our margins. Very simply, we need more business and better yields which doesn’t appear likely in the foreseeable future. There are just too many LTL carriers for the volume of business currently available in the market.”

According to Kemp’s note, other aspects of the agreement with IBT include:
• Multiple “snapback provisions” would restore some or all of the wage and mileage rates if ABF’s operating metrics improve sufficiently.

• An “Earnings Plus” component will allow employees to receive cash payments every calendar quarter for which the company’s public operating ratio is better than 99.

• The plan requires Arkansas Best to continue making full contributions to the health & welfare and pension funds of union employees.

“I assure you this is not something I relish doing. What’s made ABF great is the caliber of our people and I’m finding it most difficult to ask you to help solve a problem that is not of our doing. However, in reality, I feel we have little choice if we’re to insure the long-term security of our jobs and the viability of our company,” Kemp noted in the memo.

Arkansas Best, which employs about 9,500 nationwide, posted a 2009 net income loss of $127.52 million, compared to a $29.168 million gain in 2008. However, the 2009 income loss includes a non-cash accounting charge of $64 million for the impairment of goodwill. Total revenue in 2009 was $1.472 billion, a 19.6% dip from 2008 revenue of $1.833 billion.

ABF shares (NASDAQ: ABFS) closed Thursday at $31.49. During the past 52 weeks the share price has ranged from a $34.56 high to a $20.19 low.