Top business stories in Arkansas for 2010

Editor’s note: Beginning Jan. 3, The City Wire will post the top stories of importance in the Fort Smith region during 2010.

With a recession in the rearview mirror and constant chatter of a double-dip downturn on Wall Street throughout the year, concerns for a fragile recovery economy in Arkansas and across the nation dominated business headlines in 2010.

However, as Arkansas has garnered a reputation for stability in down times – mainly due to the fact that the gulf between recessions and boom periods are not as wide as other states – other top business headlines pushed “the state of the economy” out of the top spot.

Following are the top business stories in Arkansas for 2010:

No. 1 — National health care law
No other topic infiltrated the business and political psyche like health care reform did in 2010. After a Christmas 2009 vote to move a version of the controversial health care overhaul forward set the stage for this year, the reform measure stirred political passion and business uncertainty.

The bill led to the defeat of a two-term incumbent U.S. Senator from Arkansas, while creating landmark victories at the federal, state and local levels for Republicans.  Buoyed by TEA Party conservatives, health care reform – and its perceived detrimental effects – became the rallying cry for a movement of voters.

For businesses, many were quick to take one-time charges and cut benefits as they prepared for the changes. Others stewed in indecision awaiting controversial regulations that will be formed in 2011.  From coffee shops to corporate boardrooms, the rollicking health care reform debate was the defining issue of conversation for the entire year.

No. 2 – Swedish company announces plans to Baldor Electric
Zurich, Switzerland-based ABB — a global power and automation systems company that employs 117,000 — announced on Nov. 29 a $4.2 billion deal to acquire Fort Smith-based Baldor in a deal expected to close in the first quarter of 2011. The Baldor board unanimously agreed to the deal.

ABB said it will keep the corporate operation in Fort Smith.

John Taylor, senior vice president of John Taylor Financial-Sterne Agee and a member of the board of directors at Fort Smith-based Benefit Bank, said the $63.50 per share price in the ABB-Baldor deal provides an immediate economic stimulus to all Baldor employees, including the about 2,000 in the Fort Smith region.

A few days before Christmas, ABB and Baldor Electric officials announced that the Antitrust Division of the U.S. Department of Justice has made a second request for documents related to the pending acquisition.

No. 3 – Housing recovery stalled by foreclosures and bankruptcies
Three local real estate reports in the state’s most populated areas indicate that November home sales will be lackluster to lousy, at best.

A new central Arkansas report released by CARMLS (Cooperative Arkansas Realtors Multiple Listing Service) shows that home sales in the Faulkner, Grant, Lonoke, Pulaski and Saline counties tumbled 31.2% during November.

Combined with November home sales from Northwest Arkansas, which fell by 41.9% in a year-over-year comparison, and the latest numbers from the greater Fort Smith region, which were down 19.6%, Realtors may let this be a November to forget.

Additionally, the Arkansas Realtors Association noted in November that home sales in Arkansas were 31% lower in November than the same month a year ago. According to the report, 1,544 homes were sold last month, compared to 2,240 in November 2009.

And to add to the problem, November foreclosure actions in Arkansas were up 3.1% compared to a year ago, with a total of 1,621 Arkansas homes getting default notices.

Meanwhile, the number of bankruptcies in Arkansas was up 1.7% compared to a year ago. In November, 26,749 Arkansans filed for bankruptcy of some kind.  Of that total, 21,286, or 81%, were Chapter 13 filings, the most common liquidation that allows homeowners to modify their mortgage and repay their outstanding debt over three to five years.

No. 4 – It is the economy – stupid.
A recent revised GDP report shows an even gloomier picture of the U.S. economy in 2009, with construction and manufacturing showing the biggest declines. However, Arkansas’ performance was described as ‘remarkable" by one economist after reviewing the national trends.

The federal Bureau of Economic Analysis reported recently that 16 of 22 “major industry groups” contributed to the decline in real GDP growth in 2009. The construction sector, down for the fifth consecutive year, saw economic activity decline 15.6% in 2009, compared to a 5.7% decline in 2008.

Greg Kaza, an economic researcher and executive director of the Arkansas Policy Foundation, said the revised BEA report is yet more confirmation of how deep the recession was.

“The release confirms the severity of the Great Recession as the worst contraction of the postwar era,” Kaza said.

Dr. Michael Pakko, chief economist and state economic forecaster at the Institute for Economic Advancement at the University of Arkansas at Little Rock, said the report indicates the resilience of the Arkansas economy in 2009.

“Overall, looking at sectoral decomposition of GDP in 2009 for the nation, it is even more remarkable that Arkansas’ GDP displayed positive growth for the year,” Pakko said.

No. 5 –  Bank buys, performance and anxieties
With the closure of troubled First Southern Bank in Batesville near the end of the year, there have only been two Arkansas banks to land on the FDIC’s “failed banks” list in the last decade. At the same time, Arkansas banks emerged as major players in acquiring insolvent banks across the U.S. from the federal government.

As of Dec. 17, of the 157 Federal Deposit Insurance Corp.-insured institutions to crash in the past year, Arkansas banks have snapped more than a dozen failing lenders in six states with assets of more than $3.5 billion and customer deposits worth another $3.1 billion.

Bank of the Ozarks announced a week before Christmas that it had entered into a deal to purchase assets and assume deposits of Chestatee State Bank of Dawsonville, Ga. It is the fourth bank that Little Rock-based Bank of the Ozarks acquired this year.

Conway-based Home Bancshares, the parent company of Centennial Bank, purchased five troubled banks from the FDIC’s failed bank inventory. Home Bancshares and Bank of the Ozark executives have indicated that will continue to seek new acquisition opportunities, especially in Florida, Georgia and the Southeast.

Still, Arkansas bankers expressed some trepidation with the recently enacted financial reform overhaul law known as the Dodd-Frank Act.

Reynie Rutledge, Chairman of First Security Bancorp and former chair of the Arkansas Bankers’ Association, said he lobbied Arkansas lawmakers to kill the federal bill. He said increased insurance limits for depositors, the recalculation of FDIC premiums for community banks, and the Fed’s additional powers and ability to monitor systemic risks and curtail threats to the overall economy were all good outcomes of the new law.

However, he argued that too much new regulation for smaller banks and the soon-to-be-powerful Consumer Financial Protection Bureau will hurt banks in Arkansas. Rutledge is the former chair of the Arkansas Bankers’ Association, the state’s trade group representing Arkansas financial institutions.

Revenue for Arkansas banks was up in 2010.  The most recent FDIC report found third quarter profits at Arkansas banks leap a whopping 67% from a year ago and at the same time added nearly 600 jobs to state payrolls, according to the FDIC’s quarterly banking profile.

For the period ended Sept. 30, the Federal Deposit Insurance Corp.’s quarterly report showed that Arkansas banks earned $347 million during the three-month period compared to $207 million a year ago. When compared to the previous quarter, profits at FDIC-insured Arkansas banks and savings institutions were up 65% from $210 million.

No. 6 – Arkansas’ dull employment picture mirrors federal trend/state’s unemployment insurance fund debt grows
The employment picture for the state Arkansas is a micro-representation of the nation’s jobless recovery. Essentially, Arkansans labor market is mostly unchanged from a year ago, except for the fact that the state’s civilian labor force is shrinking in size.

Otherwise, the statistical information compiled each month by the Arkansas Department of Workforce Services is very similar to 2009 – boring and stuck in the mud. For example, Arkansas’ seasonally adjusted unemployment rate has largely stalled, rising only three-tenths of a percentage point in the past year, from 7.6% in November 2009 to 7.9% in November 2010.

At the same time, there are now 1,350,900 in the state’s civilian labor force, a total of 23,300 fewer workers and jobseekers than a year ago. Of that total, 1,244,400 Arkansans were employed, more than 25,000 less than a year ago. Another 106,500 Arkansas residents were out of work, up 2,500 from a year ago.

Meanwhile, the Arkansas legislature will face the looming question in the upcoming session of how will the state get a handle on a $475 million debt to the federal government related to unemployment benefit payments.

The fund pays unemployment insurance to workers who have lost their jobs. However, since more workers across the state are unemployed, are taking to find jobs, or can’t find work at all – the fund’s debt continues to grow as more cash is being paid to unemployed workers at a faster pace than employers’ can replenish the trust.

The amount in the Arkansas trust fund fell to $142.8 million by the beginning of 2008 and it continued to drop as more Arkansans lost their jobs and qualified for unemployment insurance. Last year the fund was depleted and the state had to rely on a provision in federal law that allows it to borrow from the federal government.

The state trust fund is now more than $331 million in debt to the federal government, and it’s estimated that the deficit will soon reach $450 million. Other states are in similar difficulties, and some are in even deeper holes.

Some officials in other states are hoping that the federal government will forgive the debt, but Arkansas business and government leaders don’t expect that to happen.

No. 7 – Fayetteville Shale growth moves Arkansas into top tier of U.S. natural gas producers
Fueled by billions of dollars of new investment in the Fayetteville Shale, Arkansas is now the 7th largest producer of marketed natural gas, trailing only Texas, Wyoming, Oklahoma, New Mexico, Colorado and Louisiana.

Arkansas leapfrogged states such as California, Utah and Alaska to jump into the nation’s top 10 in 2008, and has remained strongly in the position in 2009 and throughout 2010. The surprising ranking comes from recent annual reports compiled by the Energy Information Administration, housed in the U.S. Department of Energy, and requested information from the Arkansas Oil and Gas Commission.

According to the EIA ranking, Arkansas’ annual production of marketed natural gas jumped nearly 140% from 187 billion cubic feet (bcf) to 446.5 bcf between 2004-2008. Sales of Arkansas natural gas continued to grow in 2009, spiking 53% to 683 bcf of production, according to figures from AOGC.

Still, the natural gas production spike in 2009 occurred despite a 32% decline in the natural gas wellhead prices from the previous year. More recently, the EIA again lowered its 2011 expectation for the Henry Hub spot gas prices in 2011 to an average of $4.76 per MMBtu, down 22 cents from earlier predictions.

No. 8 – Wal-Mart execs play musical chairs
Years from now, Wall Street analysts and business may look back at 2010 as a year of dynamic change at Wal-Mart, beginning in the executive suite.

Wal-Mart president and CEO Mike Duke, who took over as CEO of Wal-Mart in two years ago after the surprise announcement that longtime company chief Lee Scott would step down, began putting his stamp on the company in 2010. In July, the company announced that his Duke’s former rival for the company’s top spot was taking a lesser role in the company as the president and CEO of Global.com and Global Sourcing.

Eduardo Castro-Wright, Wal-Mart’s vice chairman and head of the company’s flagship U.S. operations, was replaced by Bill Simon as president and CEO of Walmart US.

Although not termed a demotion, the company said Castro-Wright would be relocating to the west coast and taking on a new role as the CEO of the retailer’s global sourcing and e-commerce strategy.

Shortly afterward, Simon began restructuring the senior leadership at Wal-Mart domestic operations with announcement that longtime Chief Merchandising Officer John Fleming was resigning from the company. Fleming oversaw the company’s failed attempted to drive upscale shoppers into Wal-Mart stores.

A few months later, Wal-Mart Stores announced that the board of directors had selected Charles Holley to succeed longtime executive Tom Schoewe as the company’s CFO. Shorting after taking on the chief financial officer’s job, Holley made a big splash by announced on Wall Street by announced the global retail giant plans to boost tepid U.S. sales and build upon international sales growth.

Key aspects of the plans focus on the company reducing capital expenditures for fiscal year 2011 and refocusing on smaller markets with smaller stores. Several retail analysts noted Wednesday that Wal-Mart is going after the dollar stores.

More recently, Wal-Mart announced today that Jeff Davis would be replacing Holley as senior vice president and treasurer, effective Dec. 1. Davis assumes responsibility for treasury operations, capital markets, investor relations and risk management.

No. 9 – Dillard’s and Tyson Foods comeback
Christmas in 2009 or the year before was a very merry affair for Dillard’s. But 2010 has been a year to remember for the Little Rock upscale retailer.

It seems like only days ago when the Little Rock retail chain’s stock fell to about $3 a share. That precipitous drop in the spring of 2009 caused two New York hedge funds to seek changes to the company’s board of directors, voicing that the Dillard’s clan should be kicked out of the executive suite.

In a proxy fight to add four new directors to Dillard’s board,  New York-based Barington Group said changes were needed to improve the company’s operations, profitability,  corporate governance and share price performance.

“The Barington Group believes that the Company’s vast value potential is not being realized and lacks confidence in the ability of Dillard’s current  Board … to improve shareholder value,” the hedge fund said in April 2009. “Moreover, Dillard’s has the third worst corporate governance profile of all the companies in the Standard & Poor’s 500 Index, as measured by Institutional Shareholder Services.”

How things have change.

Today, Dillard’s is one of the darling’s of the retail sector and recently landed on the Fortune 500 list of “top performing stocks of 2010 at No. 10 with a year-to-date yield of 97%.

Here’s what Fortune had to say about the Little Rock retailer: “Dillard’s managed to make a major comeback, even as the retail sector continued to struggle. The company sold more merchandise this November than last year, with sales totaling almost $470 million for the month. That marked a 7% increase over last year.”

It hasn’t been easy. Dillard’s has had to significantly cut costs to stay afloat. Since 2008, the retailer has closed six stores and introduced new strategies to manage its inventory. These started paying off in 2009, when the department store owner pulled in a net gain of $68 million, compared to a net loss of $241 million the year before. These moves continue to pay off. At the start of 2010, Dillard’s reported net income of $48.8 million in the first quarter, compared to net income of $7.7 million in the prior year.

And to top it off, Dillard’s also made a recent announcement that will add 300 new jobs to the Arkansas economy by locating an Internet Fulfillment Center in Maumelle.

Tyson Foods’ turnaround in 2010 was a magnified mirror image of Dillard’s. The Springdale-based meat giant’s full year earnings topped $780 million compared to a $547 million net loss in the previous year. For Tyson, it was a back-to-basics approach that helped restore company confidence and reduce its debt to its lowest level in a decade.

CEO Donnie Smith said that the current fiscal year was off to a "strong" start. He said Tyson Foods expects all segments of its operation to increase production next year and he noted that exports are likely to grow in 2011. If Tyson stays the course, then the phrase "turnaround" may be replaced with "business as usual."

No. 10 — Tax cuts emerge at state, federal level
A lame duck Congress passed a renewal of the Bush-era tax cuts for two years as Democratic President Barack Obama and GOP Congressional leaders struck a deal to extend the popular cuts.

The $858 billion compromise keeps in place the Bush tax cuts, including tax rates for the wealthy that Obama had vowed to let expire. The deal also included a 13-month extension of jobless benefits for the unemployed and a nearly one-third cut in payroll taxes that finance Social Security.

At the state level, Gov. Mike Beebe proposed taking another half-cent off the Arkansas grocery tax in his conservative, pre-session balanced budget. But Republicans — and some Democrats — want more. More than a dozen pre-filed bills called for additional state tax cuts. Proposals include cutting the capital gains tax, new and used car taxes, income taxes and more.

Beebe says the half-cent grocery tax cut is all the state can afford, setting up a potential showdown with lawmakers when the 2011 General Assembly convenes in January.

Other notable business stories of 2010:
• Fort Smith-based Arkansas Best Corp. and Teamsters engage in a legal battle over wage contracts and concessions.

• SWEPCO’s Southwest Arkansas saga persists after the Arkansas Supreme Court blocks construction of a multi-billion coal-fired energy plant in Hempstead County.

• Rising energy prices foreshadow economic recovery in 2011.

• The University of Arkansas system receives $102 million from the federal government to boost broadband access.

• The Alltel breakup creates a telecom alphabet soup of new technology companies in central Arkansas.