Bizz Buzz: A little color: Making sense of a quarterly Form 10-Q

By KEVIN JONES
The Trucker Staff

11/12/2009

I continue to be surprised by the number of truckers I meet who have an interest in industry finances. But it makes sense to know if trucking, generally, is making any money.

Of course, not a lot of companies will let just anybody take a peak at the profit-and-loss numbers. Companies that are publicly owned and traded on a stock exchange, however, must say how much they’re making, or losing.

And so every quarter The Trucker rounds up these reports, officially SEC Form 10-Q filings. For the past couple of years, your Bizz Buzz correspondent has been compiler and editor of 10-Qs from the likes of YRC, Knight, Saia, Celadon, Con-way, J.B. Hunt, Landstar, and a dozen or two other public trucking companies.

(Of note, Swift and U.S. Xpress both have been ‘taken private’ recently — meaning that the public shares all were bought back, and the controlling shareholders no longer trade them. And Schneider National, the nation’s largest truckload carrier, also is privately owned.)

Even though your company might not be covered, the round-ups do offer a slice of the industry every three months.

Sadly, Bizz Buzz got this gig  because the previous curators became ill while sifting through pages full of numbers and trying to make sense of them in a couple of paragraphs.

I’ve built up my immunity, apparently. And I’ve had some help from transportation industry analysts at Stephens Inc., Wolfe Research, Stifel Nicolaus, and JPMorgan among others. These guys make their living by turning corporate spreadsheets into buy or sell recommendations for investors. They know the business inside out.

And I happened to grow up with a kid who has gone on to become director of investor relations at Arkansas Best Corp., which runs ABF. It’s now David Humphrey’s job to answer all the analysts’ questions — and he’ll tolerate a reporter’s call every now then, or at least from one he’s known since we were in the church nursery together.

So, in advance of the quarterly reports which I’ll write about in the Nov. 15 edition, I thought I’d let Humphrey offer up a few things truckers might look for to better understand the industry’s financial measures.

“A financial report gives you benchmarks,” Humphrey said. “Are you making progress in the things you’re trying to achieve?”

Results are compared (“comps”) to the previous year (“year-over-year,” with the shorthand being something like 3Q09 vs. 3Q08) and sequentially, to the previous quarter (3Q09 vs. 2Q09).

The morning we spoke, Humphrey had just received the quarterly report from LTL competitor Old Dominion Freight.

“We do a lot of analysis internally of competitors’ reports, comparing ours to theirs,” he said. “It really helps to understand your trends. What’s the emphasis around the industry? So we try to benchmark ourselves against the other competitors and try to understand what they’re doing and what we need to be doing.”

Rates get crazy in a time of excess “capacity” — an industry buzzword for the number of trucks available to carry freight. Too many trucks means fierce competition for freight, and competition drives pricing downward.

So while ABF is known for its “pricing discipline,” meaning the company won’t take a money-losing load, management can’t really know the extent of the pricing horror stories coming in from the field until they get a look at everybody’s reports.

“At the end of the day, you really don’t know until you see their numbers for the quarter,” Humphrey said.

A key standard for trucking is the operating ratio (OR), which is total expenses divided by total revenue — so an OR number greater than 100 means the company is losing money. A good number for LTLs is in the low 90s, while truckload carriers can post numbers in the 80s, or even lower. The OR for LTLs tends to be higher than that of truckload carriers because of the costs of running a multi-terminal network.

Additionally, LTLs like to benchmark tonnage — or how much freight is being carried.

“But the only real measure you have for pricing is the revenue per hundredweight number,” Humphrey said, referring to amount of money a shipment earns divided by 100 pounds — also referred to as “yield.”

Unfortunately, comparing one year to the next can be tricky, he pointed out, depending on whether the figure is “gross of fuel” (the fuel surcharge is included) or “net of fuel” (fuel surcharge excluded) — the 3Q surcharge rate is  running at about half of what it was last year, for instance. Some companies use one or the other, some report both.

The freight “profile” — or the customer and type of commodities — can also change over time, Humphrey noted, impacting the yield comps.

But, if you can make all the allowances and adjustments, you’ll be able to figure how much pricing has actually changed.

On the TL side, a key measure is “utilization,” or the loaded miles per average tractor. Truckload carriers will also keep an eye on revenue per tractor and, correspondingly, deadhead miles. “Average length of haul” is another standard.

Arkansas Best, as do those companies who have a similar luxury, likes to point to its strong “balance sheet,” or the ratio of its cash to debt. Companies with extra cash often will engage in “stock buybacks,” or will look for “strategic growth opportunities,” such as buying a competitor. A number of carriers, on the other hand, have had to renegotiate credit agreements because the lingering freight recession has drained capital reserves lower than lenders like to see.

“In times like we’re in now, cash is a cushion that helps tremendously,” Humphrey said.  “The term we use a lot around here is ‘dry powder.’”

After a 10-Q report is released, a company will hold a conference call to discuss the results with investment analysts.

This is where management provides “a little color,” meaning they explain the operational or accounting circumstances that drove the results. In Arkansas Best’s Oct. 21 call, for instance, CEO Bob Davidson highlighted a dramatic reduction in ABF’s accident rate — which clearly impacts the bottom line.

“If you’re not having accidents, you’re not paying as many bills, and you’re insurance rates are down as well,” Humphrey said. “Being safe has so many benefits.”

Additionally, some companies will provide “guidance,” which is a best guess at upcoming financial results, typically measured in earnings per share (EPS). Analysts also provide EPS estimates, with the rough average being referred to “the consensus.” An EPS “miss” means a company didn’t do as well as expected — and usually results in a falling stock price.

Because of differences in the number of shares issued by companies, however, Humphrey suggests that the EPS figure is more useful for tracking the historical results of one company rather than a way to measure one against another.

That’s just some the basics. For those interested in digging deeper, complete financial details are available on the companies’ Web sites, usually in the Investor Relations section.

Otherwise, look for the next business section of The Trucker.

Kevin Jones of The Trucker staff can be reached for comment at kevinj@thetrucker.com.

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