e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
|
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarter Ended June 30, 2007
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o |
|
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number 0-19969
ARKANSAS BEST CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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71-0673405 |
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|
(State or other jurisdiction of
|
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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3801 Old Greenwood Road
Fort Smith, Arkansas 72903
(479) 785-6000
(Address, including zip code, and telephone number, including
area code, of the registrant’s principal executive offices)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of
the latest practicable date.
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Class
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Outstanding at July 31, 2007 |
|
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Common Stock, $.01 par value
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25,076,797 shares |
ARKANSAS BEST CORPORATION
INDEX
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
December 31 |
|
|
2007 |
|
2006 |
|
|
(Unaudited) |
|
|
($ thousands, except share data) |
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
6,412 |
|
|
$ |
5,009 |
|
Short-term investment securities |
|
|
130,012 |
|
|
|
135,317 |
|
Accounts receivable, less allowances (2007 – $3,921; 2006 – $4,476) |
|
|
149,677 |
|
|
|
143,216 |
|
Other accounts receivable, less allowances (2007 – $940; 2006 – $1,272) |
|
|
8,018 |
|
|
|
8,912 |
|
Prepaid expenses |
|
|
10,572 |
|
|
|
11,735 |
|
Deferred income taxes |
|
|
36,116 |
|
|
|
36,532 |
|
Prepaid income taxes |
|
|
2,492 |
|
|
|
3,024 |
|
Other |
|
|
6,767 |
|
|
|
7,212 |
|
|
TOTAL CURRENT ASSETS |
|
|
350,066 |
|
|
|
350,957 |
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
|
|
|
Land and structures |
|
|
229,361 |
|
|
|
228,375 |
|
Revenue equipment |
|
|
505,246 |
|
|
|
498,844 |
|
Service, office and other equipment |
|
|
139,890 |
|
|
|
140,516 |
|
Leasehold improvements |
|
|
17,985 |
|
|
|
17,735 |
|
|
|
|
|
892,482 |
|
|
|
885,470 |
|
Less allowances for depreciation and amortization |
|
|
423,929 |
|
|
|
423,587 |
|
|
|
|
|
468,553 |
|
|
|
461,883 |
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
66,761 |
|
|
|
61,959 |
|
|
|
|
|
|
|
|
|
|
GOODWILL, less accumulated amortization (2007 and 2006 – $32,037) |
|
|
63,954 |
|
|
|
63,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
949,334 |
|
|
$ |
938,716 |
|
|
See notes to consolidated financial statements.
3
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS — continued
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
December 31 |
|
|
2007 |
|
2006 |
|
|
(Unaudited) |
|
|
($ thousands, except share data) |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Bank overdraft and drafts payable |
|
$ |
17,542 |
|
|
$ |
17,423 |
|
Accounts payable |
|
|
63,583 |
|
|
|
63,477 |
|
Income taxes payable |
|
|
331 |
|
|
|
5,833 |
|
Accrued expenses |
|
|
164,513 |
|
|
|
171,432 |
|
Current portion of long-term debt |
|
|
78 |
|
|
|
249 |
|
|
TOTAL CURRENT LIABILITIES |
|
|
246,047 |
|
|
|
258,414 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM DEBT, less current portion |
|
|
82 |
|
|
|
1,184 |
|
|
|
|
|
|
|
|
|
|
PENSION AND POSTRETIREMENT LIABILITIES |
|
|
58,730 |
|
|
|
54,616 |
|
|
|
|
|
|
|
|
|
|
OTHER LIABILITIES |
|
|
24,876 |
|
|
|
25,655 |
|
|
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES |
|
|
22,339 |
|
|
|
19,452 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Common stock, $.01 par value, authorized 70,000,000 shares;
issued 2007: 26,449,820 shares; 2006: 26,407,472 shares |
|
|
264 |
|
|
|
264 |
|
Additional paid-in capital |
|
|
253,476 |
|
|
|
250,469 |
|
Retained earnings |
|
|
432,727 |
|
|
|
415,876 |
|
Treasury stock, at cost, 2007: 1,677,932 shares; 2006: 1,552,932 shares |
|
|
(57,770 |
) |
|
|
(52,825 |
) |
Accumulated other comprehensive loss |
|
|
(31,437 |
) |
|
|
(34,389 |
) |
|
TOTAL STOCKHOLDERS’ EQUITY |
|
|
597,260 |
|
|
|
579,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
949,334 |
|
|
$ |
938,716 |
|
|
See notes to consolidated financial statements.
4
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
(Unaudited) |
|
|
($ thousands, except share and per share data) |
OPERATING REVENUES |
|
$ |
458,209 |
|
|
$ |
479,254 |
|
|
$ |
880,828 |
|
|
$ |
904,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES AND COSTS |
|
|
427,894 |
|
|
|
432,799 |
|
|
|
843,735 |
|
|
|
849,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
|
30,315 |
|
|
|
46,455 |
|
|
|
37,093 |
|
|
|
54,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investment income |
|
|
1,347 |
|
|
|
1,206 |
|
|
|
2,547 |
|
|
|
2,215 |
|
Interest expense and other related financing costs |
|
|
(308 |
) |
|
|
(299 |
) |
|
|
(595 |
) |
|
|
(541 |
) |
Other, net |
|
|
800 |
|
|
|
(1 |
) |
|
|
975 |
|
|
|
950 |
|
|
|
|
|
1,839 |
|
|
|
906 |
|
|
|
2,927 |
|
|
|
2,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES |
|
|
32,154 |
|
|
|
47,361 |
|
|
|
40,020 |
|
|
|
56,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FEDERAL AND STATE INCOME TAXES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
12,397 |
|
|
|
19,120 |
|
|
|
14,173 |
|
|
|
25,842 |
|
Deferred |
|
|
135 |
|
|
|
(721 |
) |
|
|
1,426 |
|
|
|
(3,700 |
) |
|
|
|
|
12,532 |
|
|
|
18,399 |
|
|
|
15,599 |
|
|
|
22,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
19,622 |
|
|
|
28,962 |
|
|
|
24,421 |
|
|
|
34,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS, NET OF TAX |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
— |
|
|
|
234 |
|
|
|
— |
|
|
|
530 |
|
Gain from disposal |
|
|
— |
|
|
|
3,063 |
|
|
|
— |
|
|
|
3,063 |
|
|
|
|
|
— |
|
|
|
3,297 |
|
|
|
— |
|
|
|
3,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
19,622 |
|
|
$ |
32,259 |
|
|
$ |
24,421 |
|
|
$ |
38,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.79 |
|
|
$ |
1.15 |
|
|
$ |
0.98 |
|
|
$ |
1.38 |
|
Income from discontinued operations |
|
|
— |
|
|
|
0.13 |
|
|
|
— |
|
|
|
0.14 |
|
|
NET INCOME |
|
$ |
0.79 |
|
|
$ |
1.28 |
|
|
$ |
0.98 |
|
|
$ |
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE COMMON SHARES OUTSTANDING (BASIC) |
|
|
24,769,569 |
|
|
|
25,224,486 |
|
|
|
24,799,031 |
|
|
|
25,232,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.78 |
|
|
$ |
1.13 |
|
|
$ |
0.97 |
|
|
$ |
1.36 |
|
Income from discontinued operations |
|
|
— |
|
|
|
0.13 |
|
|
|
— |
|
|
|
0.14 |
|
|
NET INCOME |
|
$ |
0.78 |
|
|
$ |
1.26 |
|
|
$ |
0.97 |
|
|
$ |
1.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE COMMON SHARES OUTSTANDING (DILUTED) |
|
|
25,114,597 |
|
|
|
25,599,728 |
|
|
|
25,141,731 |
|
|
|
25,622,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH DIVIDENDS DECLARED AND
PAID PER COMMON SHARE |
|
$ |
0.15 |
|
|
$ |
0.15 |
|
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
See notes to consolidated financial statements.
5
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Retained |
|
|
Treasury Stock |
|
|
Comprehensive |
|
Total |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Shares |
|
|
Amount |
|
|
Loss |
|
Equity |
|
|
|
(Unaudited) |
|
|
|
($ and shares, thousands) |
|
Balances at January 1, 2007 |
|
|
26,407 |
|
|
$ |
264 |
|
|
$ |
250,469 |
|
|
$ |
415,876 |
|
|
|
1,553 |
|
|
$ |
(52,825 |
) |
|
$ |
(34,389 |
) |
|
$ |
579,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,421 |
|
Change in foreign currency
translation, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
17 |
|
Amortization of unrecognized net
periodic benefit costs, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,963 |
|
|
|
1,963 |
|
Prior service costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203 |
|
|
|
203 |
|
Net transition obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
6 |
|
Settlement expense (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
763 |
|
|
|
763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under
share-based compensation plans |
|
|
43 |
|
|
|
|
|
|
|
536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
536 |
|
Tax effect of share-based compensation
plans (including excess tax benefits)
and other |
|
|
|
|
|
|
|
|
|
|
281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281 |
|
Share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
2,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,190 |
|
Purchases of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
(4,945 |
) |
|
|
|
|
|
|
(4,945 |
) |
Dividends paid on common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2007 |
|
|
26,450 |
|
|
$ |
264 |
|
|
$ |
253,476 |
|
|
$ |
432,727 |
|
|
|
1,678 |
|
|
$ |
(57,770 |
) |
|
$ |
(31,437 |
) |
|
$ |
597,260 |
|
|
See notes to consolidated financial statements.
(1) Consists of adjustments to unrecognized actuarial loss and transition obligation as a
result of pension settlement accounting (see Note E).
(2) Total comprehensive income for the three months ended June 30, 2007 was $20.8 million. Total
comprehensive income for the three and six months ended June 30, 2006 was $33.0 million and
$43.2 million, respectively.
6
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30 |
|
|
2007 |
|
2006 |
|
|
(Unaudited) |
|
|
($ thousands) |
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,421 |
|
|
$ |
38,381 |
|
Adjustments to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
38,273 |
|
|
|
32,805 |
|
Other amortization |
|
|
115 |
|
|
|
106 |
|
Pension settlement expense |
|
|
1,249 |
|
|
|
9,083 |
|
Share-based compensation expense |
|
|
2,190 |
|
|
|
2,079 |
|
Provision for losses on accounts receivable |
|
|
627 |
|
|
|
54 |
|
Deferred income tax provision (benefit) |
|
|
1,426 |
|
|
|
(3,700 |
) |
Gain on disposal of discontinued operations, net of tax |
|
|
— |
|
|
|
(3,063 |
) |
Gain on sales of assets and other |
|
|
(1,799 |
) |
|
|
(1,415 |
) |
Excess tax benefits from share-based compensation |
|
|
(300 |
) |
|
|
(1,310 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Receivables |
|
|
(6,214 |
) |
|
|
(9,432 |
) |
Prepaid expenses |
|
|
1,163 |
|
|
|
2,390 |
|
Other assets |
|
|
(1,057 |
) |
|
|
21,250 |
|
Accounts payable, taxes payable,
accrued expenses and other liabilities(1,2) |
|
|
(3,510 |
) |
|
|
(13,004 |
) |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
|
56,584 |
|
|
|
74,224 |
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment (2) |
|
|
(49,788 |
) |
|
|
(60,214 |
) |
Proceeds from asset sales |
|
|
5,206 |
|
|
|
7,956 |
|
Proceeds from disposal of discontinued operations |
|
|
— |
|
|
|
21,450 |
|
Purchases of short-term investment securities |
|
|
(165,620 |
) |
|
|
(216,829 |
) |
Proceeds from sales of short-term investment securities |
|
|
170,925 |
|
|
|
195,005 |
|
Capitalization of internally developed software and other |
|
|
(2,271 |
) |
|
|
(2,119 |
) |
|
NET CASH USED BY INVESTING ACTIVITIES |
|
|
(41,548 |
) |
|
|
(54,751 |
) |
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Payments on long-term debt |
|
|
(1,273 |
) |
|
|
(289 |
) |
Net change in bank overdraft |
|
|
119 |
|
|
|
3,266 |
|
Payment of common stock dividends |
|
|
(7,570 |
) |
|
|
(7,646 |
) |
Purchases of treasury stock |
|
|
(4,945 |
) |
|
|
(12,558 |
) |
Excess tax benefits from share-based compensation |
|
|
300 |
|
|
|
1,310 |
|
Deferred financing costs |
|
|
(800 |
) |
|
|
— |
|
Proceeds from the exercise of stock options and other |
|
|
536 |
|
|
|
5,253 |
|
|
NET CASH USED BY FINANCING ACTIVITIES |
|
|
(13,633 |
) |
|
|
(10,664 |
) |
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
1,403 |
|
|
|
8,809 |
|
Cash and cash equivalents at beginning of period |
|
|
5,009 |
|
|
|
5,767 |
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
6,412 |
|
|
$ |
14,576 |
|
|
See notes to consolidated financial statements.
(1) |
|
Includes payments to retiring officers under the Company’s unfunded Supplemental Benefit
Plan of $3.7 million in 2007 and $23.4 million in 2006. |
|
(2) |
|
Does not include $5.4 million and $10.7 million of revenue equipment which was received but not
yet paid for at June 30, 2007 and 2006, respectively. |
7
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A – ORGANIZATION AND DESCRIPTION OF THE BUSINESS
Arkansas Best Corporation (the “Company”) is a holding company engaged, through its subsidiaries,
primarily in motor carrier transportation operations. The principal subsidiary of the Company is
ABF Freight System, Inc. (“ABF”).
Clipper Exxpress Company (“Clipper”), an intermodal transportation subsidiary, was sold in June
2006 and has been reported as discontinued operations in the accompanying consolidated statements
of income for the three and six months ended June 30, 2006. Cash flows associated with the
discontinued operations of Clipper have been combined with cash flows from continuing operations
in the accompanying consolidated statement of cash flows for the six months ended June
30, 2006 (see Note I).
On March 28, 2003, the International Brotherhood of Teamsters (“IBT”) announced the ratification
of its National Master Freight Agreement with the Motor Freight Carriers Association (“MFCA”) by
its membership. Carrier members of MFCA, including ABF, ratified the agreement on the same date.
Effective October 1, 2005, the MFCA was dissolved and replaced by Trucking Management, Inc.
(“TMI”). ABF is a member of TMI. The IBT agreement has a five-year term and was effective April 1,
2003. The agreement provides for annual contractual wage and benefit increases of approximately
3.2% – 3.4%, subject to wage rate cost-of-living adjustments. Approximately 78% of ABF’s employees
are covered by the agreement. Contract negotiations for periods subsequent to March 31, 2008 are
expected to begin later in 2007. The Company anticipates reaching an agreement with the IBT prior
to the expiration of its current agreement; however, there can be no assurance that this will
occur.
NOTE B – FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States and applicable rules
and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim
financial information. Accordingly, these interim financial statements do not include all
information or footnote disclosures required by accounting principles generally accepted in the
United States for complete financial statements and, therefore, should be read in conjunction with
the audited financial statements and accompanying notes included in the Company’s 2006 Annual
Report on Form 10-K and other current filings with the Commission. In the opinion of management,
all adjustments (which are of a normal and recurring nature) considered necessary for a fair
presentation have been included. ABF is impacted by seasonal fluctuations, which affect tonnage
and shipment levels. The third calendar quarter of each year usually has the highest tonnage
levels while the first quarter generally has the lowest. Operating results for the interim periods
presented may not necessarily be indicative of the results for the fiscal year.
Preparation of financial statements in conformity with accounting principles generally accepted in
the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosed amounts of contingent liabilities and the reported
amounts of revenues and expenses. If the underlying estimates and assumptions, upon which the
financial statements are based, change in future periods, actual amounts may differ from those
included in the accompanying consolidated financial statements.
8
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued
Income Taxes
Effective January 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB
Statement No. 109 (“FIN 48”), which establishes the accounting and disclosure requirements for
uncertain tax positions. FIN 48 requires a two-step approach to evaluate tax positions and
determine if they should be recognized. This approach involves recognizing any tax positions that
are “more likely than not” to occur and then measuring those positions to determine the amounts to
be recognized in the financial statements. In applying the provisions of FIN 48, the Company has
determined that no reserves for uncertain tax positions are required at January 1, 2007 or June 30,
2007. Federal income tax returns filed for years through 2002 are closed by the applicable statute
of limitations. The Internal Revenue Service (IRS) is currently examining the Company’s federal
income tax returns for 2003 through 2005. The Company expects the IRS examination to be completed
in the third quarter of 2007. The Company’s policy is that interest and penalty amounts related to
income tax matters will continue to be classified as interest expense and operating expenses,
respectively, in the Company’s consolidated financial statements. Interest expense related to
amended state income tax returns yet to be filed was less than $0.1 million for each of the
three–month and six–month periods ended June 30, 2007 and 2006. At June 30, 2007 and December 31,
2006, the accrued interest liability, which related to amended state income tax returns, totaled
$1.2 million and $1.1 million, respectively.
The difference between the Company’s effective tax rate and the federal statutory rate for all
periods presented primarily results from the effect of state income taxes, nondeductible expenses
and tax-exempt income.
Recent Accounting Pronouncements: In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.
This statement permits companies to choose to measure selected financial assets and liabilities at
fair value. Adoption of this statement, which is effective for the Company beginning January 1,
2008, is not expected to have a material effect on the Company’s consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements. This statement clarifies the definition of fair value, establishes a framework for
measuring fair value and expands the disclosures on fair value measurements. Adoption of this
statement, which is effective for the Company beginning January 1, 2008, is not expected to have a
material effect on the Company’s consolidated financial statements.
In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 06-4
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar
Life Insurance Arrangements (“EITF 06-4”), which requires the Company to recognize a postretirement
liability for the discounted future benefit obligation that the Company will have to pay upon the
death of the underlying insured employee. EITF 06-4 is effective for the Company beginning January
1, 2008. Although the Company maintains endorsement split-dollar life insurance policies, adoption
of EITF 06-4 is not expected to have a material effect on the Company’s consolidated financial
statements.
9
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued
NOTE C – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
($ thousands, except share and per share data) |
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
19,622 |
|
|
$ |
28,962 |
|
|
$ |
24,421 |
|
|
$ |
34,788 |
|
Discontinued operations, net of tax |
|
|
— |
|
|
|
3,297 |
|
|
|
— |
|
|
|
3,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
19,622 |
|
|
$ |
32,259 |
|
|
$ |
24,421 |
|
|
$ |
38,381 |
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share –
weighted-average shares |
|
|
24,769,569 |
|
|
|
25,224,486 |
|
|
|
24,799,031 |
|
|
|
25,232,438 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards |
|
|
99,295 |
|
|
|
55,913 |
|
|
|
98,419 |
|
|
|
55,595 |
|
Stock options |
|
|
245,733 |
|
|
|
319,329 |
|
|
|
244,281 |
|
|
|
334,205 |
|
|
Denominator for diluted earnings
per share – adjusted weighted-average
shares and assumed conversions |
|
|
25,114,597 |
|
|
|
25,599,728 |
|
|
|
25,141,731 |
|
|
|
25,622,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.79 |
|
|
$ |
1.15 |
|
|
$ |
0.98 |
|
|
$ |
1.38 |
|
Discontinued operations |
|
|
— |
|
|
|
0.13 |
|
|
|
— |
|
|
|
0.14 |
|
|
Net income |
|
$ |
0.79 |
|
|
$ |
1.28 |
|
|
$ |
0.98 |
|
|
$ |
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.78 |
|
|
$ |
1.13 |
|
|
$ |
0.97 |
|
|
$ |
1.36 |
|
Discontinued operations |
|
|
— |
|
|
|
0.13 |
|
|
|
— |
|
|
|
0.14 |
|
|
Net income |
|
$ |
0.78 |
|
|
$ |
1.26 |
|
|
$ |
0.97 |
|
|
$ |
1.50 |
|
|
For the three and six months ended June 30, 2007 and 2006, no outstanding stock options were
antidilutive.
NOTE D – STOCKHOLDERS’ EQUITY
Dividends on Common Stock
The following table is a summary of dividends declared during the applicable quarter being reported
upon or subsequent thereto.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
Per Share |
|
Amount |
|
Per Share |
|
Amount |
|
|
($ thousands, except per share data) |
First quarter dividend |
|
$ |
0.15 |
|
|
$ |
3,780 |
|
|
$ |
0.15 |
|
|
$ |
3,801 |
|
Second quarter dividend |
|
$ |
0.15 |
|
|
$ |
3,790 |
|
|
$ |
0.15 |
|
|
$ |
3,845 |
|
Third quarter dividend |
|
$ |
0.15 |
|
|
$ |
3,790 |
|
|
$ |
0.15 |
|
|
$ |
3,827 |
|
10
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued
On July 24, 2007, the Company’s Board of Directors declared a dividend of $0.15 per share
payable to stockholders of record as of August 7, 2007.
Treasury Stock
The Company has a program to repurchase its Common Stock in the open market or in privately
negotiated transactions. In 2003, the Company’s Board of Directors authorized stock repurchases of
up to $25.0 million and in 2005, an additional $50.0 million was authorized for a total of $75.0
million. For the three months ended March 31, 2007 the Company purchased 125,000 shares of the
Company’s Common Stock for $4.9 million. The Company made no repurchases during the second quarter
of 2007. Since inception of the program, the Company has purchased 1,618,150 shares for an
aggregate cost of $56.8 million, leaving $18.2 million available for repurchase under the program.
The program has no expiration date but may be terminated at any time at the Board of Directors’
discretion. Repurchases may be made using the Company’s cash reserves or other available sources.
Stockholders’ Rights Plan
Under the Company’s stockholders’ right plan, each issued and outstanding share of Common Stock has
associated with it one Common Stock right to purchase a share of Common Stock from the Company at
an exercise price of $80 per right. The rights are not currently exercisable, but could become
exercisable if certain events occur, including the acquisition of 15.0% or more of the outstanding
Common Stock of the Company. Under certain conditions, the rights will entitle holders, other than
an acquirer in a nonpermitted transaction, to purchase shares of Common Stock with a market value
of two times the exercise price of the right. The rights will expire in 2011 unless extended. On
May 18, 2007, the Company amended its stockholders’ rights plan to permit a named stockholder to
beneficially own up to 17.999% of the Company’s Common Stock without causing the rights to become
exercisable.
Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss are as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
December 31 |
|
|
2007 |
|
2006 |
|
|
($ thousands) |
Pre-tax amounts: |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
$ |
(495 |
) |
|
$ |
(524 |
) |
Unrecognized net periodic benefit costs |
|
|
(50,960 |
) |
|
|
(55,762 |
) |
|
Total |
|
$ |
(51,455 |
) |
|
$ |
(56,286 |
) |
|
|
|
|
|
|
|
|
|
|
After-tax amounts: |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
$ |
(301 |
) |
|
$ |
(318 |
) |
Unrecognized net periodic benefit costs |
|
|
(31,136 |
) |
|
|
(34,071 |
) |
|
Total |
|
$ |
(31,437 |
) |
|
$ |
(34,389 |
) |
|
11
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued
NOTE E – PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Nonunion Defined Benefit Pension, Supplemental Benefit Pension and Postretirement Health Plans
The following is a summary of the components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
|
Nonunion Defined |
|
Supplemental |
|
Postretirement |
|
|
Benefit Pension Plan |
|
Benefit Pension Plan |
|
Health Plan |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
($ thousands) |
Service cost |
|
$ |
2,499 |
|
|
$ |
2,462 |
|
|
$ |
202 |
|
|
$ |
240 |
|
|
$ |
46 |
|
|
$ |
42 |
|
Interest cost |
|
|
2,758 |
|
|
|
2,607 |
|
|
|
304 |
|
|
|
410 |
|
|
|
286 |
|
|
|
253 |
|
Expected return on plan assets |
|
|
(3,511 |
) |
|
|
(3,311 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Transition (asset) obligation recognition |
|
|
— |
|
|
|
(2 |
) |
|
|
(29 |
) |
|
|
(33 |
) |
|
|
33 |
|
|
|
34 |
|
Amortization of prior service cost (credit) |
|
|
(224 |
) |
|
|
(230 |
) |
|
|
390 |
|
|
|
390 |
|
|
|
— |
|
|
|
2 |
|
Pension accounting settlement |
|
|
— |
|
|
|
— |
|
|
|
189 |
|
|
|
645 |
|
|
|
— |
|
|
|
— |
|
Recognized net actuarial loss and other |
|
|
1,039 |
|
|
|
1,364 |
|
|
|
372 |
|
|
|
302 |
|
|
|
258 |
|
|
|
315 |
|
|
Net periodic benefit cost |
|
$ |
2,561 |
|
|
$ |
2,890 |
|
|
$ |
1,428 |
|
|
$ |
1,954 |
|
|
$ |
623 |
|
|
$ |
646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
Nonunion Defined |
|
Supplemental |
|
Postretirement |
|
|
Benefit Pension Plan |
|
Benefit Pension Plan |
|
Health Plan |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
($ thousands) |
Service cost |
|
$ |
4,998 |
|
|
$ |
4,924 |
|
|
$ |
416 |
|
|
$ |
500 |
|
|
$ |
92 |
|
|
$ |
84 |
|
Interest cost |
|
|
5,515 |
|
|
|
5,214 |
|
|
|
645 |
|
|
|
836 |
|
|
|
570 |
|
|
|
506 |
|
Expected return on plan assets |
|
|
(7,022 |
) |
|
|
(6,622 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Transition (asset) obligation recognition |
|
|
— |
|
|
|
(4 |
) |
|
|
(58 |
) |
|
|
(68 |
) |
|
|
67 |
|
|
|
68 |
|
Amortization of prior service cost (credit) |
|
|
(448 |
) |
|
|
(460 |
) |
|
|
780 |
|
|
|
780 |
|
|
|
— |
|
|
|
4 |
|
Pension accounting settlement |
|
|
— |
|
|
|
— |
|
|
|
1,249 |
|
|
|
9,083 |
|
|
|
— |
|
|
|
— |
|
Recognized net actuarial loss and other |
|
|
2,077 |
|
|
|
2,728 |
|
|
|
778 |
|
|
|
644 |
|
|
|
517 |
|
|
|
630 |
|
|
Net periodic benefit cost |
|
$ |
5,120 |
|
|
$ |
5,780 |
|
|
$ |
3,810 |
|
|
$ |
11,775 |
|
|
$ |
1,246 |
|
|
$ |
1,292 |
|
|
The Company’s full-year 2007 nonunion defined benefit pension plan expense is estimated to be
$10.2 million compared to $11.6 million for the year ended December 31, 2006. The Company is
considering making a voluntary tax-deductible contribution of no more than $8.0 million to its
nonunion defined benefit pension plan in the third quarter of 2007. The Company’s nonunion defined
benefit pension plan covers substantially all noncontractual employees hired before January 1,
2006. All eligible noncontractual employees hired subsequent to December 31, 2005 participate in a
new defined contribution plan into which the Company anticipates making discretionary contributions
of approximately $0.8 million for 2007.
The Company has an unfunded supplemental benefit pension plan for the purpose of providing
additional retirement benefits to certain executive officers of the Company. The Company is
required to record a pension accounting settlement when cash payouts exceed annual service and
interest costs of the related plan.
12
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued
The following is a summary of the obligations settled and pension settlement expense related to the
supplemental benefit pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
($ thousands, except per share data) |
|
Obligations settled |
|
$ |
592 |
|
|
$ |
1,872 |
|
|
$ |
3,709 |
|
|
$ |
23,394 |
|
Pension settlement expense, pre-tax |
|
$ |
189 |
|
|
$ |
645 |
|
|
$ |
1,249 |
|
|
$ |
9,083 |
|
Pension settlement expense per
share, net of taxes |
|
$ |
— |
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
0.22 |
|
During the remainder of 2007, the Company anticipates settling obligations of approximately
$1.6 million and recording additional pension settlement expense of $0.5 million on a pre-tax
basis, or $0.01 per share, net of taxes. The final settlement amounts are dependent upon the
pension actuarial valuations, which are based on the applicable discount rates determined at the
settlement dates.
Multiemployer Plans
Under the provisions of the Taft-Hartley Act, retirement and health care benefits for ABF’s
contractual employees are provided by a number of multiemployer plans. The trust funds for these
plans are administered by trustees, an equal number of whom generally are appointed by the IBT and
certain management carrier organizations or other appointing authorities for employer trustees as
set forth in the fund’s trust agreements. ABF is not directly involved in the administration of the
trust funds. ABF contributes to these plans monthly based on the time worked by its contractual
employees, as specified in the National Master Freight Agreement and other supporting supplemental
agreements. No amounts are required to be paid beyond ABF’s monthly contractual obligations based
on the time worked by its employees, except as discussed below.
ABF has contingent liabilities for its share of the unfunded liabilities of each plan to which it
contributes. ABF’s contingent liability for a plan would become payable if it were to withdraw from
that plan. ABF has gathered data from the majority of these plans and currently estimates its
contingent withdrawal liabilities for these plans to be approximately $600 to $650 million, on a
pre-tax basis. Though the best information available to ABF was used in computing this estimate, it
is calculated with numerous assumptions, is not current and changes periodically. The funding
status of these plans may also be impacted by investment returns, as well as changes in member
benefits, the number of participating employees, the number of employers who contribute and their
related contractual contributions and the number of employees or retirees participating in the plan
who no longer have a contributing employer. Any one or combination of these items, which are
outside the control of the Company, has the potential for affecting the funding status of these
plans. If ABF did incur withdrawal liabilities, those amounts could be paid in a lump sum or
payable over a period of 10 to 15 years.
Aside from the withdrawal liabilities, ABF would only have an obligation to pay an amount beyond
its contractual obligations if it received official notification of a funding deficiency. ABF has
not received notification of a funding deficiency for any of the plans to which it contributes. The
amount of any potential funding deficiency, if it were to materialize in the future, should be
substantially less than the full withdrawal liability for each plan.
In July 2005, the Central States Southeast and Southwest Area Pension Fund (“Central States Pension
Fund”), to which ABF makes approximately 50% of its contributions, received a ten-year extension
from the IRS of the
13
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued
period over which it amortizes unfunded liabilities. For the foreseeable future, this extension
should help the Central States Pension Fund avoid a funding deficiency. In addition, in July 2007
the Teamsters National Freight Industry Negotiating Committees for the Central States Pension Fund
Supplemental Agreement reallocated $0.40 per hour of a previously negotiated $0.70 per hour rate
increase for health and welfare to the Central States Pension Fund. This reallocation will have a
positive effect on the funded status of the Central States Pension Fund.
In August 2006, the Pension Protection Act of 2006 (the “Act”) became law. The Act mandates that
multiemployer plans that are below certain funding levels adopt a rehabilitation program to improve
the funding levels over a defined period of time. Based on currently available information, the
Company believes that a number of plans in which it participates, including the Central States
Pension Fund, may be below the required funding levels when the Act becomes effective in 2008 and
therefore would have to adopt rehabilitation programs for future plan years. However, the funding
levels of these multiemployer plans in 2008 could vary from the current funding status. The Act
preserves the ten-year amortization extension previously received by the Central States Pension
Fund from the IRS. In addition, the Act accelerates the timing of annual funding notices and
requires additional disclosures from certain multiemployer plans. Information to determine the
actual impact the Act will have on the Company is not available at this time.
Under the current IBT collective bargaining agreement, which extends through March 31, 2008, ABF is
obligated to continue contributions to the multiemployer pension plans. The Company intends to meet
its obligations under the agreement. Contract negotiations for periods subsequent to March 31, 2008
are expected to begin later in 2007. The financial condition of the multiemployer pension plans,
the effect of the Pension Protection Act of 2006 on the plans, and the methodology (including
participation in the plans) and level of ABF’s funding required to provide retirement benefits for
its union employees, will all be significant matters to be addressed in the contract negotiations.
In anticipation of the contract negotiations, ABF is currently considering alternatives which could
result in withdrawal from one or more of the multiemployer pension plans as retirement benefits for
its union employees could be provided under a Company-sponsored, single-employer benefit plan.
Potential withdrawal liabilities, which may be paid in a lump sum or over a certain period of time,
may vary from current estimates depending on the number of multiemployer pension plans impacted and
the resulting liabilities determined at the time. If ABF withdraws and forms a replacement
retirement benefit plan as a result of the negotiations, the Company would recognize a tax
deductible charge for the amount of withdrawal liabilities that become probable of payment to one
or more of the multiemployer pension plans. Because of uncertainties regarding these negotiations
and the financial condition of the plans, either changes in ABF’s funding methodologies as a result
of the negotiations or continued participation could have a material impact on the Company’s
liquidity, financial condition and results of operations.
NOTE F – SHARE-BASED COMPENSATION
As of June 30, 2007, the Company had outstanding stock options granted under the 1992 Stock Option
Plan, the 2000 Non-Qualified Stock Option Plan and the 2002 Stock Option Plan and outstanding
restricted stock and restricted stock units granted under the 2005 Ownership Incentive Plan.
Stock options generally vest in equal amounts over a five-year period and expire ten years from the
date of grant. No stock options have been granted since 2004. As of June 30, 2007, the Company had
not elected to treat any exercised options as employer stock appreciation rights (“SARS”) and no
employee SARS had been granted. The restricted stock and restricted stock unit awards generally
vest at the end of a five-year period following the date of grant, subject to accelerated vesting
due to death, disability, retirement and change-in-control
14
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued
provisions. The Company issues new shares upon the granting of restricted stock, and dividends are
paid on restricted stock and restricted stock units during the vesting period.
The following table summarizes the Company’s share-based compensation expense which has been
recognized in the accompanying consolidated financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
($ thousands, except per share data) |
Share-based compensation expense (pre-tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and restricted stock units |
|
$ |
1,043 |
|
|
$ |
555 |
|
|
$ |
1,680 |
|
|
$ |
1,012 |
|
Stock options |
|
|
245 |
|
|
|
378 |
|
|
|
510 |
|
|
|
1,067 |
|
|
|
|
$ |
1,288 |
|
|
$ |
933 |
|
|
$ |
2,190 |
|
|
$ |
2,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense (net of tax): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and restricted stock units |
|
$ |
634 |
|
|
$ |
337 |
|
|
$ |
1,021 |
|
|
$ |
615 |
|
Stock options |
|
|
199 |
|
|
|
291 |
|
|
|
417 |
|
|
|
838 |
|
|
|
|
$ |
833 |
|
|
$ |
628 |
|
|
$ |
1,438 |
|
|
$ |
1,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense per diluted share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and restricted stock units |
|
$ |
0.02 |
|
|
$ |
0.01 |
|
|
$ |
0.04 |
|
|
$ |
0.02 |
|
Stock options |
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.02 |
|
|
|
0.03 |
|
|
|
|
$ |
0.03 |
|
|
$ |
0.02 |
|
|
$ |
0.06 |
|
|
$ |
0.05 |
|
|
Restricted Stock
A summary of the Company’s restricted stock program, which consists of restricted stock and
restricted stock units, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Grant Date |
|
|
Shares/Units |
|
Fair Value |
|
Nonvested – January 1, 2007 |
|
|
333,531 |
|
|
$ |
36.31 |
|
Granted |
|
|
191,520 |
|
|
$ |
38.98 |
|
Vested |
|
|
(13,812 |
) |
|
$ |
36.16 |
|
Forfeited |
|
|
(14,112 |
) |
|
$ |
36.45 |
|
|
Nonvested – June 30, 2007 |
|
|
497,127 |
|
|
$ |
37.34 |
|
|
On April 23, 2007, the Compensation Committee of the Company’s Board of Directors granted
191,520 restricted stock units under the 2005 Ownership Incentive Plan at a fair value of $38.98
per unit on the date of grant.
15
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued
Stock Options
A summary of the Company’s stock option program is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
Intrinsic |
|
|
Shares |
|
Average |
|
Contractual |
|
Value(1) |
|
|
Under Option |
|
Exercise Price |
|
Term (years ) |
|
($ thousands) |
|
Outstanding – January 1, 2007 |
|
|
867,350 |
|
|
$ |
24.43 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(36,612 |
) |
|
$ |
14.65 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(9,600 |
) |
|
$ |
27.60 |
|
|
|
|
|
|
|
|
|
|
Outstanding – June 30, 2007 |
|
|
821,138 |
|
|
$ |
24.83 |
|
|
|
4.4 |
|
|
$ |
11,612 |
|
|
Options outstanding at June 30, 2007 which are
vested or expected to vest |
|
|
814,580 |
|
|
$ |
24.83 |
|
|
|
4.4 |
|
|
$ |
11,518 |
|
|
Exercisable – June 30, 2007 |
|
|
675,408 |
|
|
$ |
24.20 |
|
|
|
4.0 |
|
|
$ |
9,975 |
|
|
|
|
|
(1) |
|
Intrinsic value represents the fair market value of the Company’s Common Stock on June 30,
2007, less the weighted-average exercise price of the stock options, multiplied by the number of
shares under option. |
NOTE G – OPERATING SEGMENT DATA
The Company uses the “management approach” to determine its reportable operating segments, as well
as to determine the basis of reporting the operating segment information. The management approach
focuses on financial information that the Company’s management uses to make decisions about
operating matters. Management uses operating revenues, operating expense categories, operating
ratios, operating income and key operating statistics to evaluate performance and allocate
resources to the Company’s operations. ABF, which provides transportation of general commodities,
represents the Company’s only reportable operating segment. The operations of Clipper, which are
reported as discontinued operations in the accompanying consolidated statements of income for the
three and six months ended June 30, 2006, were previously reported as a separate segment prior to
its sale in June 2006 (see Note I).
The Company eliminates intercompany transactions in consolidation. However, the information used
by the Company’s management with respect to its reportable segment is before intercompany
eliminations of revenues and expenses. Intercompany revenues and expenses are not significant.
Further classifications of operations or revenues by geographic location are impractical and are,
therefore, not provided. The Company’s foreign operations are not significant.
16
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued
The following tables reflect reportable operating segment information for the Company, as well as
a reconciliation of reportable segment information to the Company’s consolidated financial
statement information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
($ thousands) |
OPERATING REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABF |
|
$ |
442,894 |
|
|
$ |
466,884 |
|
|
$ |
850,320 |
|
|
$ |
880,534 |
|
Other revenues and eliminations |
|
|
15,315 |
|
|
|
12,370 |
|
|
|
30,508 |
|
|
|
23,682 |
|
|
|
|
$ |
458,209 |
|
|
$ |
479,254 |
|
|
$ |
880,828 |
|
|
$ |
904,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES AND COSTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABF |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits |
|
$ |
266,784 |
|
|
$ |
267,626 |
|
|
$ |
530,415 |
|
|
$ |
525,377 |
|
Supplies and expenses |
|
|
72,609 |
|
|
|
74,425 |
|
|
|
140,510 |
|
|
|
141,999 |
|
Operating taxes and licenses |
|
|
11,975 |
|
|
|
11,848 |
|
|
|
23,720 |
|
|
|
23,213 |
|
Insurance |
|
|
5,248 |
|
|
|
7,605 |
|
|
|
9,666 |
|
|
|
14,074 |
|
Communications and utilities |
|
|
3,703 |
|
|
|
3,737 |
|
|
|
7,638 |
|
|
|
7,864 |
|
Depreciation and amortization |
|
|
18,569 |
|
|
|
15,282 |
|
|
|
36,685 |
|
|
|
30,033 |
|
Rents and purchased transportation |
|
|
32,431 |
|
|
|
39,824 |
|
|
|
63,834 |
|
|
|
74,214 |
|
Other |
|
|
1,357 |
|
|
|
685 |
|
|
|
2,115 |
|
|
|
1,323 |
|
Pension settlement expense |
|
|
189 |
|
|
|
645 |
|
|
|
1,249 |
|
|
|
9,083 |
|
Gain on sale of property and equipment |
|
|
(477 |
) |
|
|
(1,231 |
) |
|
|
(1,799 |
) |
|
|
(1,487 |
) |
|
Total ABF operating expenses and costs |
|
|
412,388 |
|
|
|
420,446 |
|
|
|
814,033 |
|
|
|
825,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses and eliminations |
|
|
15,506 |
|
|
|
12,353 |
|
|
|
29,702 |
|
|
|
24,217 |
|
|
|
|
$ |
427,894 |
|
|
$ |
432,799 |
|
|
$ |
843,735 |
|
|
$ |
849,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABF |
|
$ |
30,506 |
|
|
$ |
46,438 |
|
|
$ |
36,287 |
|
|
$ |
54,841 |
|
Other income and eliminations |
|
|
(191 |
) |
|
|
17 |
|
|
|
806 |
|
|
|
(535 |
) |
|
|
|
$ |
30,315 |
|
|
$ |
46,455 |
|
|
$ |
37,093 |
|
|
$ |
54,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investment income |
|
$ |
1,347 |
|
|
$ |
1,206 |
|
|
$ |
2,547 |
|
|
$ |
2,215 |
|
Interest expense and other related financing costs |
|
|
(308 |
) |
|
|
(299 |
) |
|
|
(595 |
) |
|
|
(541 |
) |
Other, net |
|
|
800 |
|
|
|
(1 |
) |
|
|
975 |
|
|
|
950 |
|
|
|
|
$ |
1,839 |
|
|
$ |
906 |
|
|
$ |
2,927 |
|
|
$ |
2,624 |
|
|
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES |
|
$ |
32,154 |
|
|
$ |
47,361 |
|
|
$ |
40,020 |
|
|
$ |
56,930 |
|
|
17
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued
NOTE H – LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
The Company is involved in various legal actions arising in the ordinary course of business. The
Company maintains liability insurance against certain risks arising out of the normal course of its
business, subject to certain self-insured retention limits. The Company routinely establishes and
reviews the adequacy of reserves for estimated legal and environmental exposures. While management
believes that amounts accrued in the accompanying consolidated financial statements are adequate,
estimates of these liabilities may change as circumstances develop. Considering amounts recorded,
these matters are not expected to have a material adverse effect on the Company’s consolidated
financial condition, cash flows or results of operations.
On July 30, 2007, a class action lawsuit was filed against the Company and other
less-than-truckload carriers in the U.S. District Court for the Southern District of California.
This lawsuit alleges that the carriers violated U.S. antitrust laws regarding fuel surcharges and
seeks unspecified treble damages allegedly sustained by class members, along with attorney’s fees
and costs. This class action litigation is in a preliminary stage and the Company cannot predict
its outcome, as the litigation process is inherently uncertain. If an adverse outcome were to
occur, it could have a material adverse effect on the Company’s consolidated financial condition,
cash flows and results of operations. However, the Company believes that the allegations
in this litigation are without merit and intends to contest such allegations and defend itself
vigorously.
The Company’s subsidiaries store fuel for use in tractors and trucks in 71 underground tanks
located in 23 states. Maintenance of such tanks is regulated at the federal and, in some cases,
state levels. The Company believes that it is in substantial compliance with these regulations. The
Company’s underground storage tanks are required to have leak-detection systems. The Company is not
aware of any leaks from such tanks that could reasonably be expected to have a material adverse
effect on the Company.
The Company has received notices from the Environmental Protection Agency and others that it has
been identified as a potentially responsible party under the Comprehensive Environmental Response
Compensation and Liability Act, or other federal or state environmental statutes, at several
hazardous waste sites. After investigating the Company’s or its subsidiaries’ involvement in waste
disposal or waste generation at such sites, the Company has either agreed to de minimus settlements
(aggregating to approximately $103,000 over the last 10 years, primarily at seven sites) or
believes its obligations, other than those specifically accrued for with respect to such sites,
would involve immaterial monetary liability, although there can be no assurances in this regard.
At June 30, 2007 and December 31, 2006, the Company’s reserve for estimated environmental clean-up
costs of properties currently or previously operated by the Company totaled $1.2 million, which is
included in accrued expenses in the accompanying consolidated balance sheets. Amounts accrued
reflect management’s best estimate of the future undiscounted exposure related to identified
properties based on current environmental regulations. The Company’s estimate is based on
management’s experience with similar environmental matters and on testing performed at certain
sites.
NOTE I – SALE OF CLIPPER AND DISCONTINUED OPERATIONS
In June 2006, the Company completed the sale of Clipper for $21.5 million in cash. After recording
costs associated with the transaction, the Company recognized a pre-tax gain in the second quarter
2006 of $4.9 million or $3.1 million after-tax ($0.12 per diluted share). Pursuant to the sale
agreement, the Company has
agreed to indemnify the purchaser upon the occurrence of certain events and has provided lease
guarantees through March 2012 totaling $1.2 million. The accompanying consolidated statements of
income for the three
18
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued
and six months ended June 30, 2006 reflect Clipper as a discontinued
operation. Cash flows associated with the discontinued operations of Clipper have been combined
within operating, investing and financing cash flows, as appropriate, in the accompanying
consolidated cash flow statement for the six months ended June 30, 2006.
Summarized financial information for Clipper is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2006 |
|
2006 |
|
|
($ thousands, except per share data) |
Revenue from discontinued operations |
|
$ |
22,561 |
|
|
$ |
48,252 |
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations,
net of tax of $0.1 million and $0.3 million, respectively |
|
$ |
234 |
|
|
$ |
530 |
|
|
|
|
|
|
|
|
|
|
Gain from disposal of discontinued operations,
net of tax of $1.8 million |
|
$ |
3,063 |
|
|
$ |
3,063 |
|
|
|
|
|
|
|
|
|
|
Discontinued Operations Per Diluted Share: |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
0.01 |
|
|
$ |
0.02 |
|
Gain from disposal of discontinued operations |
|
|
0.12 |
|
|
|
0.12 |
|
|
|
|
$ |
0.13 |
|
|
$ |
0.14 |
|
|
NOTE J – CREDIT AGREEMENT
On May 4, 2007, the Company entered into a revolving credit agreement (the “Credit Agreement”)
with a syndicate of 10 financial institutions. The new facility amended a $225.0 million
agreement, which was scheduled to expire in May 2010. The Credit Agreement, which has a maturity
date of May 4, 2012, provides for up to $325.0 million of revolving credit loans (including a
$150.0 million sublimit for letters of credit) and allows the Company to request extensions of the
maturity date for a period not to exceed two years, subject to approval of a majority of the
participating financial institutions. The Credit Agreement also allows the Company to request an
increase in the amount of revolving credit loans of up to $200.0 million to an aggregate amount of
$525.0 million, to the extent commitments are received.
Interest rates under the agreement are at variable rates as defined by the Credit Agreement. The
Credit Agreement contains a pricing grid, based on the Company’s senior debt ratings, that
determines its Eurodollar margin, facility fees, utilization fees and letter of credit fees. The
Credit Agreement requires the payment of a utilization fee if the borrowings under the Credit
Agreement exceed 50% of the facility amount.
The Company has a senior unsecured debt rating of BBB+ with a positive outlook by Standard & Poor’s
Rating Service and a senior unsecured debt rating of Baa2 with a stable outlook by Moody’s
Investors Service, Inc. The
Company has no downward rating triggers that would accelerate the maturity of amounts drawn under
the facility. The Credit Agreement contains various customary covenants, which limit, among other
things,
19
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — continued
indebtedness and dispositions of assets and which require the Company to maintain
compliance with certain quarterly financial ratios.
As of June 30, 2007 and December 31, 2006, there were no outstanding revolver advances, and there
were $51.9 million and $51.3 million, respectively, of outstanding letters of credit issued under
the Credit Agreement.
20
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) |
General
Arkansas Best Corporation (the “Company”), a Delaware corporation, is a holding company engaged
through its subsidiaries primarily in motor carrier transportation operations. The principal
subsidiary of the Company is ABF Freight System, Inc. (“ABF”). Clipper Exxpress Company
(“Clipper”), an intermodal transportation subsidiary, was sold in June 2006. The operations of
Clipper, which are reported as discontinued operations in the accompanying consolidated financial
statements, were previously reported as a separate segment prior to its sale.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations
describes the principal factors affecting critical accounting policies, liquidity and capital
resources, and results of operations of the Company. This discussion should be read in conjunction
with the accompanying quarterly unaudited condensed consolidated financial statements and the
Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Company’s 2006
Annual Report on Form 10-K includes additional information about significant accounting policies,
practices and the transactions that underlie the Company’s financial results, as well as a detailed
discussion of the most significant risks and uncertainties to which its financial and operating
results are subject. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Critical Accounting Policies
The Company’s accounting policies that are “critical,” or the most important, to understand the
Company’s financial condition and results of operations and that require management of the Company
to make the most difficult judgments are described in the Company’s 2006 Annual Report on Form
10-K. There have been no material changes in these critical accounting policies.
On January 1, 2007 the Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (“FIN 48”). The adoption
of FIN 48 did not have an effect on the Company’s consolidated financial position and results of
operations. See Note B to the Company’s consolidated financial statements for additional
information and related disclosures.
Liquidity and Capital Resources
The Company’s primary sources of liquidity are cash generated by operations, short-term investments
and borrowing capacity under its revolving Credit Agreement.
Cash Flow and Short-Term Investments: Cash and cash equivalents and short-term investments totaled
$136.4 million at June 30, 2007 and $140.3 million at December 31, 2006.
During the six months ended June 30, 2007, cash provided from operations of $56.6 million, proceeds
from asset sales of $5.2 million and proceeds from the net sales of short-term investments of $5.3
million were used to purchase revenue equipment (tractors and trailers used primarily in ABF’s
operations) and other property and equipment totaling $49.8 million, make payments on long-term
debt of $1.3 million, purchase 125,000 shares of the Company’s Common Stock for $4.9 million and
pay dividends on Common Stock of $7.6 million.
21
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
During the six months ended June 30, 2006, cash provided from operations of $74.2 million, proceeds
from the sale of Clipper of $21.5 million, proceeds from asset sales of $8.0 million and proceeds
from stock option exercises of $5.3 million were used to purchase revenue equipment and other
property and equipment totaling $60.2 million, purchase 300,000 shares of the Company’s Common
Stock for $12.6 million and pay dividends on Common Stock of $7.6 million.
The year-over-year decline in cash provided by operations primarily reflects the impact of the
weaker freight tonnage environment on ABF’s operating income.
Credit Agreement: On May 4, 2007, the Company entered into a revolving credit agreement (the
“Credit Agreement”) with a syndicate of 10 financial institutions. The new facility amended a
$225.0 million agreement, which was scheduled to expire in May 2010. The new facility provides for
improved pricing and terms. The Credit Agreement, which has a maturity date of May 4, 2012,
provides for up to $325.0 million of revolving credit loans (including a $150.0 million sublimit
for letters of credit) and allows the Company to request extensions of the maturity date for a
period not to exceed two years, subject to approval of a majority of the participating financial
institutions. The Credit Agreement also allows the Company to request an increase in the amount of
revolving credit loans of up to $200.0 million to an aggregate amount of $525.0 million, to the
extent commitments are received.
Interest rates under the agreement are at variable rates as defined by the Credit Agreement. The
Credit Agreement contains a pricing grid, based on the Company’s senior debt ratings, that
determines its Eurodollar margin, facility fees, utilization fees and letter of credit fees. The
Credit Agreement requires the payment of a utilization fee if the borrowings under the Credit
Agreement exceed 50% of the facility amount.
The Company has a senior unsecured debt rating of BBB+ with a positive outlook by Standard & Poor’s
Rating Service and a senior unsecured debt rating of Baa2 with a stable outlook by Moody’s
Investors Service, Inc. The Company has no downward rating triggers that would accelerate the
maturity of amounts drawn under the facility. The Credit Agreement contains various customary
covenants, which limit, among other things, indebtedness and dispositions of assets and which
require the Company to maintain compliance with certain quarterly financial ratios.
As of June 30, 2007, there were no outstanding revolver advances, and there were $51.9 million of
outstanding letters of credit issued, resulting in borrowing capacity of $273.1 million. As of
December 31, 2006, there were no outstanding revolver advances and approximately $51.3 million of
outstanding letters of credit.
22
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
Contractual Obligations: The following table provides the aggregate annual contractual obligations
of the Company including capital and operating lease obligations, purchase obligations and
near-term estimated benefit plan distributions as of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
($ thousands) |
|
|
|
|
|
|
|
|
|
|
Less Than |
|
1-3 |
|
3-5 |
|
More Than |
Contractual Obligations |
|
Total |
|
1 Year |
|
Years |
|
Years |
|
5 Years |
|
|
|
Capital lease obligations |
|
$ |
160 |
|
|
$ |
78 |
|
|
$ |
82 |
|
|
$ |
— |
|
|
$ |
— |
|
Operating lease obligations (1) |
|
|
43,018 |
|
|
|
12,406 |
|
|
|
16,582 |
|
|
|
9,281 |
|
|
|
4,749 |
|
Purchase obligations (2) |
|
|
43,624 |
|
|
|
43,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Voluntary savings plan distributions (3) |
|
|
3,646 |
|
|
|
3,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement health distributions (4) |
|
|
675 |
|
|
|
675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred salary distributions (5) |
|
|
848 |
|
|
|
848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental pension distributions (6) |
|
|
2,161 |
|
|
|
2,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
94,132 |
|
|
$ |
63,438 |
|
|
$ |
16,664 |
|
|
$ |
9,281 |
|
|
$ |
4,749 |
|
|
(1) While the Company owns the majority of its larger terminals and distribution centers,
certain facilities and equipment are leased. As of June 30, 2007, the Company had future minimum
rental commitments, net of noncancelable subleases, totaling $40.4 million for terminal facilities
and $2.6 million for other equipment. In addition, the Company has provided lease guarantees
through March 2012 totaling $1.2 million related to Clipper, a former subsidiary of the Company.
(2) Purchase obligations relating to revenue equipment and property are cancelable if certain
conditions are met. These commitments are included in the Company’s 2007 annual net capital
expenditure plan which is now estimated to be approximately $95 million to $110 million. Due to the
current freight environment and timing of certain real estate opportunities, this revised
expenditure plan is lower than the $110 million to $135 million range estimated at the beginning of
the year.
(3) The Company maintains a Voluntary Savings Plan (“VSP”). The VSP is a nonqualified deferred
compensation plan for certain executives of the Company and certain subsidiaries. Eligible
employees may defer receipt of a portion of their regular compensation, incentive compensation and
other bonuses into the VSP. The Company credits participants’ accounts with applicable matching
contributions and rates of return based on investments selected by the participants. All deferrals,
Company match and investment earnings are considered part of the general assets of the Company
until paid. Elective distributions anticipated within the next twelve months under this plan are
included in the contractual obligations table above.
(4) The Company sponsors an insured postretirement health benefit plan that provides supplemental
medical benefits, life and accident insurance and vision care to certain officers of the Company
and certain subsidiaries. The plan is generally noncontributory, with the Company paying the
premiums. The Company’s near-term projected distributions for postretirement health benefits are
included in the contractual obligations table above. Future distributions are subject to change
based upon assumptions for projected discount rates, increases in premiums and medical costs and
continuation of the plan for current participants. As a result, estimates of distributions beyond
one year are not presented.
(5) The Company has deferred salary agreements with certain employees of the Company. The Company’s
near-term projected deferred salary agreement distributions are included in the contractual
obligations table above.
23
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
Future distributions are subject to change based upon assumptions for projected salaries and
retirements, early retirements, deaths or disability of current employees. As a result, estimates
of distributions beyond one year are not presented.
(6) The Company has an unfunded supplemental pension benefit plan for the purpose of providing
additional retirement benefits to certain executive officers of the Company and certain
subsidiaries. Distributions anticipated within the next twelve months under this plan are included
in the contractual obligations table above. The amounts and dates of distributions in future
periods are dependent upon actual retirement dates of eligible officers and other events and
factors, including assumptions involved in distribution calculations such as the discount rate,
years of service and future salary changes. As a result, estimates of distributions beyond one year
cannot be made with a reasonable level of accuracy and are not presented (see Note E to the
accompanying consolidated financial statements). Supplemental pension benefit plan liabilities
accrued in the accompanying consolidated balance sheet totaled $24.0 million as of June 30, 2007.
Effective January 1, 2006, the Compensation Committee of the Company’s Board of Directors elected
to close the supplemental pension benefit plan and deferred salary agreement programs to new
entrants. In place of these programs, officers appointed after 2005 participate in a long-term cash
incentive plan that is based 60% on the Company’s three-year average return on capital employed and
40% on the Company achieving specified levels of profitability or earnings growth, as defined in
the plan. In 2006, three officers elected to switch from participation in the supplemental pension
benefit plan and deferred salary agreement programs to the Company’s long-term cash incentive plan
under terms approved by the Company’s Compensation Committee. As a result, the participants who
elected to switch benefit programs will no longer earn additional benefits under the supplemental
pension benefit plan and deferred salary agreement programs after January 31, 2008.
The Company does not expect to have required minimum contributions, but could make tax-deductible
contributions to its nonunion pension plan in 2007. Based upon current information, the Company is
considering making a voluntary tax-deductible contribution to its nonunion pension plan of no more
than $8.0 million in the third quarter of 2007. In August 2006, the Pension Protection Act of 2006
(the “Act”) became law. The Company does not expect any material impact on the amount of future
required contributions to its nonunion defined benefit pension plan as a result of the Act.
Other Liquidity Information: Management believes cash generated by operations, short-term
investments and amounts available under the existing Credit Agreement will be sufficient for the
foreseeable future to finance its lease commitments; letter of credit commitments; quarterly
dividends; stock repurchases; nonunion pension contributions; supplemental benefit and
postretirement medical distributions; capital expenditures; health, welfare and pension
contributions under collective bargaining agreements and other expenditures.
The Company expects to continue to pay quarterly dividends in the foreseeable future, although
there can be no assurances in this regard since future dividends are dependent upon future
earnings, capital requirements, the Company’s financial condition and other factors.
The current International Brotherhood of Teamsters (“IBT”) collective bargaining agreement extends
through March 31, 2008. Contract negotiations for periods subsequent to March 31, 2008 are
expected to begin later in 2007. In anticipation of the contract negotiations, ABF is currently
considering alternatives which could result in withdrawal from one or more of the multiemployer
pension plans as retirement benefits for its contractual employees could be provided under a
Company-sponsored, single-employer benefit plan (see Note E to the accompanying consolidated
financial statements). Potential withdrawal liabilities, which may be paid in a lump sum or over a
certain period of time, may vary from current estimates depending on the number of
24
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
multiemployer pension plans impacted and the resulting liabilities determined at the time. If ABF
withdraws from the multiemployer pension plans, withdrawal payments could be funded through a
combination of existing cash and short-term investments, borrowing capacity under the revolving
credit agreement and debt or equity financing; or could be paid directly to the applicable
multiemployer pension plans either as a lump sum or over a 10 to 15 year period. If ABF withdraws
and forms a replacement retirement benefit plan as a result of the negotiations, the Company would
recognize a tax deductible charge for the amount of withdrawal liabilities that become probable of
payment to the multiemployer pension plans. Because of uncertainties regarding these negotiations
and the financial condition of the plans, either changes in ABF’s funding methodologies as a
result of the negotiations or continued participation could have a material impact on the
Company’s consolidated liquidity, financial condition and results of operations.
Financial Instruments: The Company has not historically entered into financial instruments for
trading purposes, nor has the Company historically engaged in hedging fuel prices. No such
instruments were outstanding during the six months ended June 30, 2007 or in 2006.
Off-Balance-Sheet Arrangements: The Company’s off-balance-sheet arrangements include future minimum
rental commitments, net of noncancelable subleases, of $43.0 million under operating lease
agreements. The Company has no investments, loans or any other known contractual arrangements with
special-purpose entities, variable interest entities or financial partnerships.
Recent Accounting Pronouncements
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities. This statement permits companies to
choose to measure selected financial assets and liabilities at fair value. Adoption of this
statement, which is effective for the Company beginning January 1, 2008, is not expected to have a
material effect on the Company’s consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements. This statement clarifies the definition of fair value, establishes a framework for
measuring fair value and expands the disclosures on fair value measurements. Adoption of this
statement, which is effective for the Company beginning January 1, 2008, is not expected to have a
material effect on the Company’s consolidated financial statements.
In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 06-4
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar
Life Insurance Arrangements (“EITF 06-4”), which requires the Company to recognize a postretirement
liability for the discounted future benefit obligation that the Company will have to pay upon the
death of the underlying insured employee. EITF 06-4 is effective for the Company beginning January
1, 2008. Although the Company maintains endorsement split-dollar life insurance policies, adoption
of EITF 06-4 is not expected to have a material effect on the Company’s consolidated financial
statements.
25
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
Results of Operations
Executive Overview
Arkansas Best Corporation is a holding company engaged through its subsidiaries primarily in motor
carrier transportation operations. The principal subsidiary of the Company is ABF Freight System,
Inc. (“ABF”) which represented 97% of consolidated revenues for the six months ended June 30,
2007. Clipper Exxpress Company (“Clipper”), an intermodal transportation subsidiary, was sold in
June 2006. The operations of Clipper, which are reported as discontinued operations in the
accompanying consolidated financial statements, were previously reported as a separate segment
prior to its sale.
On an ongoing basis, ABF’s ability to operate profitably and generate cash is impacted by tonnage,
which influences operating leverage as tonnage levels vary; the pricing environment; customer
account mix; and the ability to manage costs effectively, primarily in the area of salaries, wages
and benefits (“labor”).
During the three and six months ended June 30, 2007, ABF’s revenues decreased 5.1% and 3.4%,
respectively, on a per-day basis compared to the same periods in 2006. The decrease in revenues
resulted from lower tonnage levels partially offset by increases in revenue per hundredweight.
ABF’s second quarter 2007 operating ratio increased to 93.1% from 90.1% in the second quarter of
2006. During the six months ended June 30, 2007, ABF’s operating ratio increased to 95.7% from
93.8% in the same period of 2006. The increase in ABF’s operating ratio was influenced by the
decline in the year-over-year tonnage levels and additional operating expenses associated with
investment in regional service initiatives. The impact of these items more than offset the
favorable effect of improved revenue yields, a decrease in pension settlement expense and lower
costs associated with third-party casualty claims. These changes are more fully discussed below in
the ABF section of Management’s Discussion and Analysis
ABF’s ability to maintain or grow existing tonnage levels is impacted by the market tonnage
available, influenced in part by the state of the construction, manufacturing and retail sectors
of the North American economy, as well as a number of other competitive factors that are more
fully described in the General Development of Business and Risk Factors sections of the Company’s
2006 Annual Report on Form 10-K. Year-over-year tonnage comparisons for 2007 were affected by
increased tonnage levels experienced in the first nine months of 2006. Due to a favorable freight
environment in the U.S. construction, manufacturing and retail sectors, ABF’s tonnage in the
second quarter of 2006 was 6.4% higher than the second quarter of 2005. During the three and six
months ended June 30, 2007, ABF’s total tonnage per day decreased by 6.9% and 6.4% compared to the
same periods in 2006 primarily reflecting a change in the freight environment, especially in the
U.S. construction, manufacturing and retail sectors. Through the end of July 2007, average daily
total tonnage figures for ABF have declined about 5% below the same period last year, although
comparisons for the month are complicated by the favorable calendar effects associated with
Independence Day.
The industry pricing environment is another key to ABF’s operating performance. The pricing
environment influences ABF’s ability to obtain compensatory margins and price increases on customer
accounts. ABF’s pricing is typically measured by billed revenue per hundredweight. This measure is
affected by profile factors such as average shipment size, average length of haul, freight density
and customer and geographic mix. For many years, consistent profile characteristics made billed
revenue per hundredweight changes a reasonable, although approximate, measure of price change. In
the last few years, it has become more difficult to quantify with sufficient accuracy the impact of
changes in profile characteristics in order to estimate true price changes. ABF focuses on
individual account profitability and rarely considers revenue per hundredweight in its customer
26
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
account or market evaluations. For ABF, total company profitability must be considered, together
with measures of billed revenue per hundredweight changes. The pricing environment generally
becomes more competitive during lower tonnage levels. During the three and six months ended June
30, 2007, the pricing environment was competitive but compensatory for efficient carriers, with
total billed revenue per hundredweight, including fuel surcharges, increasing 1.2% and 2.6%,
respectively, over the same periods in 2006. During the six months ended June 30, 2007, ABF
experienced freight profile changes that impacted the reported revenue per hundredweight, as
further discussed in the ABF section. Management expects the pricing environment in 2007 to remain
competitive, although there can be no assurances in this regard.
The transportation industry is dependent upon the availability of adequate fuel supplies. The
Company has not experienced a lack of available fuel but could be adversely impacted if a fuel
shortage were to develop. Although fuel prices for the first six months of 2007 were relatively
consistent with the prior year period, ABF has experienced higher fuel prices in recent years. ABF
charges a fuel surcharge based on changes in diesel fuel prices compared to a national index. The
ABF fuel surcharge rate in effect is available on the ABF Web site at abf.com. Revenues from fuel
surcharges generally more than offset increases in direct diesel fuel costs. Other operating costs
have been, and may continue to be, impacted by fluctuating fuel prices. However, the total impact
of higher energy prices on other nonfuel-related expenses is difficult to ascertain. ABF cannot
predict, with reasonable certainty, future fuel price fluctuations, the impact of higher energy
prices on other cost elements, recoverability of higher fuel costs through fuel surcharges, the
effect of fuel surcharges on ABF’s overall rate structure or the total price that ABF will receive
from its customers. During periods of changing diesel fuel prices, the fuel surcharge and
associated direct diesel fuel costs also vary by different degrees. Depending upon the rates of
these changes and the impact on costs in other fuel- and energy-related areas, operating margins
could be impacted. However, lower fuel surcharge levels may over time improve ABF’s ability to
increase other elements of margin, since the total price is governed by market forces, although
there can be no assurances in this regard. Through the six months ended June 30, 2007, the fuel
surcharge mechanism continued to have strong market acceptance among ABF customers. Whether fuel
prices fluctuate or remain constant, ABF’s operating income may be adversely affected if
competitive pressures limit its ability to recover fuel surcharges. In July 2007, a large
competing carrier announced that it was reducing its fuel surcharge rate by approximately 25%.
ABF’s ability to recover fuel surcharges at the levels experienced during the first six months of
2007 and prior years may be affected as a result. However, lower fuel surcharge levels may over
time improve ABF’s ability to increase other elements of margin although there can be no
assurances in this regard. While the fuel surcharge impacts ABF’s overall rate structure, the
total price received from customers is governed by market forces based on value provided to the
customer.
Labor costs are impacted by ABF’s contractual obligations under its labor agreement primarily with
the IBT. The IBT agreement has a five-year term and was effective April 1, 2003. Contract
negotiations for periods subsequent to March 31, 2008 are expected to begin later in 2007. The
Company anticipates reaching an agreement with the IBT prior to the expiration of its current
agreement; however, there can be no assurance that this will occur. ABF’s ability to effectively
manage labor costs, which amounted to approximately 62% of ABF’s revenues for the six months ended
June 30, 2007, has a direct impact on its operating performance. Shipments per dock, street and
yard (“DSY”) hour and total pounds per mile are measures ABF uses to assess effectiveness of labor
costs. Shipments per DSY hour is used to measure effectiveness in ABF’s local operations, although
total pounds per DSY hour is also a relevant measure when the average shipment size is changing.
Total pounds per mile is used by ABF to measure the effectiveness of its linehaul operations,
although this metric is influenced by other factors, including freight density, loading
efficiency, length of haul, lane mix and the degree to which rail service is used. ABF is
generally effective in managing its labor costs to business levels, although labor as a percentage
of revenue does increase during periods of business decline. Labor costs
27
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
include retirement and health care benefits for ABF’s contractual employees that are provided by a
number of multiemployer plans (see Note E to the accompanying consolidated financial statements).
In addition to the traditional long-haul model, ABF has implemented a regional network to
facilitate its customers’ next-day and second-day delivery needs. Development and expansion of the
regional network required added work-rule flexibility, strategically positioned freight exchange
points and increased door capacity at a number of key locations. The operational implementation of
this program began in June 2005 in certain ABF facilities in the Northeast. Through a multi-phased
program ABF’s regional network now includes 228 of ABF’s total 290 facilities covering the eastern
two-thirds of the United States. Marketing of the regional initiative known as the Regional
Performance Model (“RPM”), was initiated in August 2006 in the East Coast states and in January
2007 in the South and Central regions.
Through the six months ended June 30, 2007, the operation of ABF’s RPM initiative has been in line
with management’s expectations. However, continuing development and operation of the RPM network
will require ongoing investment in personnel and infrastructure that may affect ABF’s operating
results. Management estimates that costs of the RPM initiative increased ABF’s operating ratio by
1.3 percentage points for the three and six months ended June 30, 2007 compared to the same periods
in 2006. Management expects the RPM effect in the second half of 2007 to be slightly less than the
operating ratio increase experienced in the second quarter of 2007 as the third and fourth quarters
of 2006 were the initial periods impacted by the costs of this multi-phased program. However,
additional RPM service enhancements that may be implemented in the third quarter of 2007 could add
approximately $1.0 million to the annual cost of operating this program.
The Company ended the second quarter with no outstanding revolver advances and borrowing capacity
of $273.1 million under its revolving Credit Agreement, cash and short-term investments of $136.4
million and stockholders’ equity of $597.3 million. Because of the Company’s financial position at
June 30, 2007, the Company should continue to be in a position to pursue growth initiatives and
effectively consider alternatives that might arise during negotiations of the IBT collective
bargaining agreement (see Note E to the accompanying consolidated financial statements).
28
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
Consolidated Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
($ thousands, except per share data) |
WORKDAYS |
|
|
64 |
|
|
|
64 |
|
|
|
128 |
|
|
|
128 |
|
OPERATING REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABF |
|
$ |
442,894 |
|
|
$ |
466,884 |
|
|
$ |
850,320 |
|
|
$ |
880,534 |
|
Other revenues and eliminations |
|
|
15,315 |
|
|
|
12,370 |
|
|
|
30,508 |
|
|
|
23,682 |
|
|
|
|
$ |
458,209 |
|
|
$ |
479,254 |
|
|
$ |
880,828 |
|
|
$ |
904,216 |
|
|
OPERATING INCOME (LOSS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABF |
|
$ |
30,506 |
|
|
$ |
46,438 |
|
|
$ |
36,287 |
|
|
$ |
54,841 |
|
Other and eliminations |
|
|
(191 |
) |
|
|
17 |
|
|
|
806 |
|
|
|
(535 |
) |
|
|
|
$ |
30,315 |
|
|
$ |
46,455 |
|
|
$ |
37,093 |
|
|
$ |
54,306 |
|
|
DILUTED EARNINGS PER SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.78 |
|
|
$ |
1.13 |
|
|
$ |
0.97 |
|
|
$ |
1.36 |
|
Income from discontinued operations |
|
|
— |
|
|
|
0.13 |
|
|
|
— |
|
|
|
0.14 |
|
|
NET INCOME |
|
$ |
0.78 |
|
|
$ |
1.26 |
|
|
$ |
0.97 |
|
|
$ |
1.50 |
|
|
Consolidated revenues from continuing operations for the three and six months ended June 30,
2007 decreased 4.4% and 2.6%, respectively, on a per-day basis, as compared to the same periods in
2006. The decrease is primarily due to the revenue decline at ABF, as discussed in the ABF section
that follows.
Consolidated operating income from continuing operations for the three and six months ended June
30, 2007, decreased 34.7% and 31.7%, respectively, as compared to the same periods in 2006. The
comparisons primarily reflect the operating results of ABF as discussed in the ABF section below
and were impacted by pension settlement expense in the amounts as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
|
($ thousands) |
|
|
|
|
Effect on operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension settlement expense (*) |
|
$ |
(189 |
) |
|
$ |
(645 |
) |
|
$ |
(1,249 |
) |
|
$ |
(9,083 |
) |
Consolidated income from continuing operations per share for the three and six months ended
June 30, 2007 decreased 31.0% and 28.7%, respectively, compared to the same periods in 2006. The
comparisons primarily reflect the operating results of ABF and were impacted by pension settlement
expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Effect on diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension settlement expense (*) |
|
$ |
— |
|
|
$ |
(0.02 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.22 |
) |
|
|
|
(*) |
|
The Company has an unfunded supplemental pension benefit plan for the purpose of providing
supplemental retirement benefits to certain executive officers of the Company (see Note E to the
accompanying consolidated financial statements). During the remainder of 2007, the Company
anticipates settling obligations of approximately $1.6 million |
29
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
|
|
and recording additional pension settlement expense of $0.5 million on a pre-tax basis, or $0.01
per share, net of taxes. The final settlement amounts are dependent upon the pension actuarial
valuations, which are based on the applicable discount rates determined at the settlement dates. |
As discussed in Note I to the Company’s consolidated financial statements, in June 2006, the
Company sold Clipper, its intermodal subsidiary. The Company’s discontinued operations for 2006
included an after-tax gain of $0.12 per share as a result of the sale. In addition, discontinued
operations for 2006 included after-tax income of $0.02 per share associated with Clipper’s
year-to-date operating results through the closing date of the sale.
ABF Freight System, Inc.
The following table sets forth a summary of operating expenses and operating income as a
percentage of revenue for ABF, the Company’s only reportable operating segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
ABF OPERATING EXPENSES AND COSTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages and benefits |
|
|
60.2 |
% |
|
|
57.3 |
% |
|
|
62.4 |
% |
|
|
59.7 |
% |
Supplies and expenses |
|
|
16.4 |
|
|
|
15.9 |
|
|
|
16.5 |
|
|
|
16.1 |
|
Operating taxes and licenses |
|
|
2.7 |
|
|
|
2.6 |
|
|
|
2.8 |
|
|
|
2.6 |
|
Insurance |
|
|
1.2 |
|
|
|
1.6 |
|
|
|
1.1 |
|
|
|
1.6 |
|
Communications and utilities |
|
|
0.8 |
|
|
|
0.8 |
|
|
|
0.9 |
|
|
|
0.9 |
|
Depreciation and amortization |
|
|
4.2 |
|
|
|
3.3 |
|
|
|
4.3 |
|
|
|
3.4 |
|
Rents and purchased transportation |
|
|
7.3 |
|
|
|
8.5 |
|
|
|
7.5 |
|
|
|
8.4 |
|
Other |
|
|
0.4 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
0.2 |
|
Pension settlement expense |
|
|
— |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
1.1 |
|
Gain on sale of property and equipment |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
|
|
93.1 |
% |
|
|
90.1 |
% |
|
|
95.7 |
% |
|
|
93.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ABF OPERATING INCOME |
|
|
6.9 |
% |
|
|
9.9 |
% |
|
|
4.3 |
% |
|
|
6.2 |
% |
30
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
The following table provides a comparison of key operating statistics for ABF:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
|
2007 |
|
2006 |
|
% Change |
|
|
|
Workdays |
|
|
64 |
|
|
|
64 |
|
|
|
|
|
Billed revenue* per hundredweight, including fuel surcharges |
|
$ |
25.53 |
|
|
$ |
25.22 |
|
|
|
1.2 |
% |
Pounds |
|
|
1,745,252,511 |
|
|
|
1,873,883,453 |
|
|
|
(6.9 |
)% |
Pounds per day |
|
|
27,269,570 |
|
|
|
29,279,429 |
|
|
|
(6.9 |
)% |
Shipments per DSY hour |
|
|
0.484 |
|
|
|
0.493 |
|
|
|
(1.8 |
)% |
Pounds per DSY hour |
|
|
624.33 |
|
|
|
639.37 |
|
|
|
(2.4 |
)% |
Pounds per shipment |
|
|
1,289 |
|
|
|
1,297 |
|
|
|
(0.6 |
)% |
Pounds per mile |
|
|
19.06 |
|
|
|
19.46 |
|
|
|
(2.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
2007 |
|
2006 |
|
% Change |
|
|
|
Workdays |
|
|
128 |
|
|
|
128 |
|
|
|
|
|
Billed revenue* per hundredweight, including fuel surcharges |
|
$ |
25.17 |
|
|
$ |
24.54 |
|
|
|
2.6 |
% |
Pounds |
|
|
3,401,922,850 |
|
|
|
3,632,594,622 |
|
|
|
(6.4 |
)% |
Pounds per day |
|
|
26,577,522 |
|
|
|
28,379,645 |
|
|
|
(6.4 |
)% |
Shipments per DSY hour |
|
|
0.484 |
|
|
|
0.497 |
|
|
|
(2.6 |
)% |
Pounds per DSY hour |
|
|
613.01 |
|
|
|
634.77 |
|
|
|
(3.4 |
)% |
Pounds per shipment |
|
|
1,265 |
|
|
|
1,278 |
|
|
|
(1.0 |
)% |
Pounds per mile |
|
|
18.84 |
|
|
|
19.59 |
|
|
|
(3.8 |
)% |
|
|
|
* |
|
Billed revenue does not include revenue deferral required for financial statement purposes
under the Company’s revenue recognition policy. |
ABF’s revenue for the three and six months ended June 30, 2007 was $442.9 million and $850.3
million, respectively, compared to $466.9 million and $880.5 million reported for the same periods
in 2006. ABF’s revenue-per-day declined 5.1% and 3.4% for the three and six months ended June 30,
2007 as compared to the same periods in 2006. The revenue decline primarily reflects a 6.9% and
6.4% decrease in tonnage for the three and six months ended June 30, 2007, respectively, as
compared to the same periods in 2006, partially offset by improvement in revenue per
hundredweight, including fuel surcharges.
Effective March 26, 2007 and April 3, 2006, ABF implemented general rate increases to cover known
and expected cost increases. Nominally, the increases were 4.95% and 5.9%, respectively, although
the amounts vary by lane and shipment characteristic. ABF also charges a fuel surcharge based on
changes in diesel fuel prices compared to a national index. The ABF fuel surcharge rate in effect
is available on the ABF Web site at abf.com.
31
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
ABF’s 1.2% and 2.6% increase in reported revenue per hundredweight for the three and six months
ended June 30, 2007 compared to the same periods in 2006 has been impacted not only by the general
rate increase and fuel surcharge, but also by changes in profile such as length of haul, pounds per
shipment, freight density and customer and geographic mix. Total weight per shipment declined 0.6%
and 1.0% compared to the second quarter and first half of 2006, which has the effect of increasing
the nominal revenue per hundredweight measure. However, ABF’s length of haul declined 1.7% and 0.9%
in the three and six month periods ended June 30, 2007 compared to the same prior year periods,
influenced in part by the regional freight initiative. In addition, ABF experienced a higher
proportion of truckload-rated shipments, including business in the volume spot market. A shorter
length of haul and a higher mix of volume spot shipments have the effect of decreasing the nominal
revenue per hundredweight without a commensurate impact on effective pricing or shipment
profitability. For the three and six months ended June 30, 2007, billed revenue per hundredweight
compared to the same period in 2006 reflects a pricing environment that is competitive but
compensatory for efficient carriers.
ABF generated operating income of $30.5 million and $36.3 million for the three and six month
periods ended June 30, 2007 versus $46.4 million and $54.8 million during the same periods in
2006.
ABF’s second quarter 2007 operating ratio increased to 93.1% from 90.1% in the second quarter of
2006. For the six months ended June 30, 2007, ABF’s operating ratio increased to 95.7% from 93.8%
in the same period of 2006. The increase in ABF’s operating ratio in both the quarter and
year-to-date periods was influenced by the decline in tonnage levels mentioned above, as well as
incremental costs associated with investments in RPM which added approximately 1.3% of revenues to
ABF’s operating ratio and other changes in operating expenses as discussed in the following
paragraphs. ABF’s operating income includes pension settlement expense of $1.2 million in the six
months ended June 30, 2007 and $9.1 million reported in the six months ended June 30, 2006. On a
year-to-date basis, pension settlement expense added 0.1% of revenues to ABF’s operating ratio in
2007 and 1.1% of revenues to the operating ratio in 2006.
Salaries, wages and benefits expense for the three and six months ended June 30, 2007 increased
2.9% and 2.7% of revenues, respectively. Portions of salaries, wages and benefits are fixed in
nature and increase, as a percent of revenue, with decreases in revenue levels. The increase in
salaries, wages and benefits as a percent of revenue also reflects contractual increases under the
IBT National Master Freight Agreement. The five-year agreement was effective April 1, 2003 and
provides for annual contractual total wage and benefit increases of approximately 3.2% – 3.4%,
subject to additional wage rate cost-of-living increases. The annual wage adjustment occurred on
April 1, 2007 for an increase of 2.3%. On August 1, 2006, health, welfare and pension benefit
costs under this agreement increased 5.4%. Health, welfare and pension benefit costs increased
6.0% on August 1, 2007.
Salaries, wages and benefits expense is also influenced by managing labor costs to business levels
as measured by the productivity figures reported in the table above. For the three and six months
ended June 30, 2007, pounds per DSY hour decreased 2.4% and 3.4% and pounds per mile decreased
2.1% and 3.8% compared to the same periods in 2006. These measures reflect the effect of the
tonnage decline combined with the addition of new employees to support ABF’s RPM program and
initiatives to improve customer service levels. Management expects these productivity measures to
improve with increasing tonnage levels.
Supplies and expenses increased 0.5% and 0.4% of revenues for the three and six months ended June
30, 2007, respectively, but declined slightly when compared with the same periods in 2006 on an
absolute dollar basis. Portions of supplies and expenses are fixed in nature and increase, as a
percent of revenue, with decreases in revenue levels.
32
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
Insurance expense in the three and six month periods ended June 30, 2007 declined 0.4% and 0.5% of
revenues compared to the same periods in 2006. The decline on both an absolute dollar basis as
well as a percent of revenue is primarily attributable to the lower severity of third-party
casualty claims in the six months ended June 30, 2007 versus the same period in 2006.
Depreciation and amortization increased 0.9% of revenues, for both the three and six months ended
June 30, 2007 compared to the same periods in 2006. This change primarily reflects increased
depreciation on road tractors and trailers purchased in 2006 and 2007, influenced by higher unit
costs and the effect of replacing older, fully depreciated trailers with new trailers. The impact
of higher depreciation associated with these new units was partially offset by reduced rail
spending that resulted in greater utilization of ABF’s linehaul network, as discussed in the
following paragraph.
Rents and purchased transportation for the three and six months ended June 30, 2007 decreased 1.2%
and 0.9% of revenues, compared to the prior year periods. The decrease in both the quarter and
year-to-date periods primarily reflects a decline of rail utilization to 11.8% and 12.1% of total
miles for the three and six months ended June 30, 2007, respectively, compared to 16.1% and 15.4%
of total miles reported in the three and six months ended June 30, 2006. ABF reduced its rail
spending to increase utilization of ABF’s linehaul network in order to improve customer service
levels.
Accounts Receivable
Accounts receivable, less allowances, increased $6.5 million from December 31, 2006 to June 30,
2007, primarily due to an increase in business levels in June of 2007 compared to December of
2006.
Other Assets
Other assets increased $4.8 million from December 31, 2006 to June 30, 2007, primarily due to the
reclassification of additional assets as held for sale under ABF’s process of evaluating assets
expected to be sold within the next 12 months. In addition, an increase in the cash surrender value
of the Company’s life insurance policies contributed to the growth in other assets.
Accrued Expenses
Accrued expenses decreased $6.9 million from December 31, 2006 to June 30, 2007, primarily due to
the payment of 2006 incentive amounts in January 2007 and distributions made under the Company’s
supplemental pension benefit plan.
Income Taxes
The difference between the Company’s effective tax rate and the federal statutory rate for all
periods presented primarily results from the effect of state income taxes, nondeductible expenses
and tax-exempt income.
Seasonality
ABF is impacted by seasonal fluctuations, which affect tonnage and shipment levels. Freight
shipments, operating costs and earnings are also affected adversely by inclement weather
conditions. The third calendar quarter of each year usually has the highest tonnage levels while
the first quarter generally has the lowest.
33
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Unaudited) — continued |
Effects of Inflation
Management believes that, for the periods presented, inflation has not had a material effect on the
Company’s operating results as increases in labor and fuel costs, which are discussed above, have
generally been offset through price increases and fuel surcharges.
Forward-Looking Statements
Statements contained in the Management’s Discussion and Analysis section of this report that are
not based on historical facts are “forward-looking statements.” Terms such as “anticipate,”
“believe,” “estimate,” “expect,” “forecast,” “intend,” “plan,” “predict,” “prospect,” “scheduled,”
“should,” “would,” and similar expressions and the negatives of such terms are intended to identify
forward-looking statements. Such statements are by their nature subject to uncertainties and risk,
including, but not limited to, union relations; availability and cost of capital; shifts in market
demand; weather conditions; the performance and needs of industries served by the Company’s
subsidiaries; actual future costs of operating expenses such as fuel and related taxes;
self-insurance claims; union and nonunion employee wages and benefits; actual costs of continuing
investments in technology; the timing and amount of capital expenditures; competitive initiatives
and pricing pressures; general economic conditions; and other financial, operational and legal
risks and uncertainties detailed from time to time in the Company’s Securities and Exchange
Commission public filings.
34
|
|
|
ITEM 3. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risks
Since December 31, 2006, there have been no significant changes in the Company’s market risks, as
reported in the Company’s 2006 Annual Report on Form 10-K.
35
ITEM 4. CONTROLS AND PROCEDURES
Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed with the
participation of the Company’s management, including the CEO and CFO, of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures. Based on that evaluation,
the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure
controls and procedures were effective as of June 30, 2007. There have been no changes in the
Company’s internal controls over financial reporting that occurred during the most recent fiscal
quarter that have materially affected, or are reasonably likely to materially affect, the Company’s
internal controls over financial reporting.
36
PART II.
OTHER INFORMATION
ARKANSAS BEST CORPORATION
ITEM 1. LEGAL PROCEEDINGS.
For information related to the Company’s legal proceedings, see Note H, Legal Proceedings and
Environmental Matters under Part 1, Item 1, of this quarterly report on Form 10-Q.
ITEM 1A. RISK FACTORS.
The Company’s risk factors are fully described in the Company’s 2006 Annual Report on Form 10-K. No
material changes to the Company’s risk factors have occurred since the Company filed its 2006 Form
10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(a) Recent sales of unregistered securities.
None.
(b) Use of proceeds from registered securities.
None.
(c) Purchases of equity securities by the issuer and affiliated purchasers.
The Company has a program to repurchase its Common Stock in the open market or in privately
negotiated transactions. In 2003, the Company’s Board of Directors authorized stock repurchases of
up to $25.0 million and in 2005 an additional $50.0 million was authorized for a total of $75.0
million. The repurchases may be made either from the Company’s cash reserves or from other
available sources. The program has no expiration date but may be terminated at any time at the
Board of Directors’ discretion. As of June 30, 2007, the Company has purchased 1,618,150 shares for
an aggregate cost of $56.8 million, leaving $18.2 million available for repurchase under the
program. The Company made no repurchases during the second quarter of 2007.
37
PART II. — continued
OTHER INFORMATION
ARKANSAS BEST CORPORATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company’s Annual Meeting of Shareholders was held on April 24, 2007.
The first proposal considered at the Annual Meeting was to elect John W. Alden, Frank Edelstein and
Robert A. Young III to serve as directors of the Company. The results of this proposal were as
follows:
|
|
|
|
|
|
|
|
|
Directors |
|
Votes For |
|
Votes Withheld |
John W. Alden
|
|
|
22,054,986 |
|
|
|
1,295,450 |
|
Frank Edelstein
|
|
|
21,636,767 |
|
|
|
1,713,669 |
|
Robert A. Young III
|
|
|
21,640,606 |
|
|
|
1,709,830 |
|
The second proposal was to ratify the appointment of Ernst & Young LLP as independent registered
public accounting firm for the fiscal year 2007. This proposal received 23,216,298 votes for
adoption, 118,368 against adoption, 15,770 abstentions and no broker non-votes.
The third proposal was a non-binding shareholder proposal to declassify the Board of Directors.
This non-binding proposal received 13,715,401 votes for adoption, 7,770,364 against adoption,
25,946 abstentions and 1,838,725 broker non-votes.
ITEM 5. OTHER INFORMATION.
None.
38
ITEM 6. EXHIBITS.
The following exhibits are filed or furnished with this report or are incorporated by reference to
previously filed material:
|
|
|
Exhibit |
|
|
No. |
|
|
|
|
|
3.1
|
|
Restated Certificate of Incorporation of the Company (previously filed as Exhibit 3.1 to
the Company’s Registration Statement on Form S-1 under the Securities Act of 1933 filed with
the Securities and Exchange Commission (the “Commission”) on March 17, 1992, Commission File
No. 33-46483, and incorporated herein by reference). |
|
|
|
3.2
|
|
Amended and Restated Bylaws of the Company dated as of February 17, 2003 (previously
filed as Exhibit 10.17 to the Company’s 2002 Form 10-K, filed with the Commission on
February 27, 2003, Commission File No. 0-19969, and incorporated herein by reference). |
|
|
|
4.1
|
|
First Amended and Restated Rights Agreement, dated as of May 1, 2001 between Arkansas
Best Corporation and Computershare Investor Services, LLC, as Rights Agent (including
exhibits thereto). (Previously filed as Exhibit 4.1 to the Form 8-A/A Amendment No. 2 filed
with the Commission on May 16, 2001, Commission File No. 000-19969, and incorporated herein
by reference). |
|
|
|
4.2
|
|
Amendment to First Amended and Restated Rights Agreement, dated as of April 4, 2003
between Arkansas Best Corporation and LaSalle Bank, National Association, as Rights Agent.
(Previously filed as Exhibit 4.2 to the Form 8-A/A Amendment No. 3 filed with the Commission
on April 4, 2003, Commission File No. 000-19969, and incorporated herein by reference). |
|
|
|
4.3
|
|
Second Amendment to First Amended and Restated Rights Agreement, dated as of May 18, 2007
between Arkansas Best Corporation and LaSalle Bank, National Association, as Rights Agent.
(Previously filed as Exhibit 4.3 to the Form 8-K filed with the Commission on May 18, 2007,
Commission File No. 000-19969, and incorporated herein by reference). |
|
|
|
10.1*+
|
|
$325 million Second Amended and Restated Credit Agreement dated as of May 4, 2007 among
Wells Fargo Bank, National Association as Administrative Agent and Lead Arranger; Bank of
America, N.A. and SunTrust Bank as Co-Syndication Agents; and Wachovia Bank, National
Association and The Bank of Tokyo-Mitsubishi, UFJ, LTD as Co-Documentation Agents. |
|
|
|
31.1*
|
|
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2*
|
|
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32**
|
|
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |
|
+ |
|
Certain portions of this exhibit have been omitted and filed separately with the Securities
and Exchange Commission under a confidential treatment request pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended. |
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
|
|
|
|
|
ARKANSAS BEST CORPORATION
(Registrant)
|
|
Date: August 3, 2007 |
/s/ Judy R. McReynolds
|
|
|
Judy R. McReynolds |
|
|
Senior Vice President – Chief Financial Officer,
Treasurer and Principal Accounting Officer |
|
40