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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended September 30, 2003
[ ] 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)
Delaware 6711 71-0673405
- ------------------------------- ----------------------------- --------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code No.) Identification No.)
3801 Old Greenwood Road
Fort Smith, Arkansas 72903
(479) 785-6000
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(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 registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at September 30, 2003
- ------------------------------ -------------------------------------------
Common Stock, $.01 par value 24,811,359 shares
ARKANSAS BEST CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002................................................ 3
Consolidated Statements of Income -
For the Three and Nine Months Ended September 30, 2003 and 2002......................... 5
Consolidated Statements of Stockholders' Equity
For the Nine Months Ended September 30, 2003............................................ 6
Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 2003 and 2002................................... 7
Notes to Consolidated Financial Statements - September 30, 2003........................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 30
Item 4. Controls and Procedures................................................................... 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 32
Item 2. Changes in Securities..................................................................... 32
Item 3. Defaults Upon Senior Securities........................................................... 32
Item 4. Submission of Matters to a Vote of Security Holders....................................... 32
Item 5. Other Information......................................................................... 32
Item 6. Exhibits and Reports on Form 8-K.......................................................... 32
SIGNATURES ..................................................................................... 33
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30 DECEMBER 31
2003 2002
------------ -----------
(UNAUDITED) NOTE
($ THOUSANDS)
ASSETS
CURRENT ASSETS
Cash and cash equivalents.................................................... $ 2,988 $ 39,644
Accounts receivable, less allowances (2003 - $3,264; 2002 - $2,942).......... 140,845 130,769
Prepaid expenses............................................................. 11,454 7,787
Deferred income taxes........................................................ 26,798 26,443
Federal and state income taxes prepaid....................................... 612 -
Other........................................................................ 3,119 3,729
------------ -----------
TOTAL CURRENT ASSETS 185,816 208,372
PROPERTY, PLANT AND EQUIPMENT
Land and structures.......................................................... 223,135 223,107
Revenue equipment............................................................ 371,319 343,100
Service, office and other equipment.......................................... 106,656 91,054
Leasehold improvements....................................................... 12,977 12,983
------------ -----------
714,087 670,244
Less allowances for depreciation and amortization............................ 350,475 330,841
------------ -----------
363,612 339,403
INVESTMENT IN WINGFOOT.......................................................... - 59,341
PREPAID PENSION COSTS........................................................... 35,669 29,017
OTHER ASSETS.................................................................... 65,597 53,225
ASSETS HELD FOR SALE............................................................ 5,641 3,203
GOODWILL, less accumulated amortization (2003 and 2002 - $32,037)............... 63,861 63,811
------------ -----------
$ 720,196 $ 756,372
============ ===========
See notes to consolidated financial statements.
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
3
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
SEPTEMBER 30 DECEMBER 31
2003 2002
------------ -----------
(UNAUDITED) NOTE
($ THOUSANDS)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft and drafts payable............................................ $ 10,588 $ 7,808
Accounts payable............................................................. 70,279 58,442
Federal and state income taxes............................................... - 5,442
Accrued expenses............................................................. 130,253 123,294
Current portion of long-term debt............................................ 340 328
------------ -----------
TOTAL CURRENT LIABILITIES................................................. 211,460 195,314
LONG-TERM DEBT, less current portion............................................ 19,561 112,151
FAIR VALUE OF INTEREST RATE SWAP................................................ 7,743 9,853
OTHER LIABILITIES............................................................... 65,391 59,938
DEFERRED INCOME TAXES........................................................... 32,605 23,656
FUTURE MINIMUM RENTAL COMMITMENTS, NET
(as of September 30, 2003 - $50,142).......................................... - -
OTHER COMMITMENTS AND CONTINGENCIES............................................. - -
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 70,000,000 shares;
issued 2003: 25,071,141; 2002: 24,972,086 shares.......................... 251 250
Additional paid-in capital................................................... 212,839 211,567
Retained earnings............................................................ 179,929 154,455
Treasury stock, at cost, 2003: 259,782 shares; 2002: 59,782 shares........... (5,807) (955)
Accumulated other comprehensive loss......................................... (3,776) (9,857)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY................................................ 383,436 355,460
------------ -----------
$ 720,196 $ 756,372
============ ===========
See notes to consolidated financial statements.
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
4
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
2003 2002 2003 2002
----------- ---------- ---------- -----------
($ THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
OPERATING REVENUES $ 402,878 $ 375,397 $1,140,330 $ 1,040,732
OPERATING EXPENSES AND COSTS 374,233 351,450 1,088,291 998,710
----------- ---------- ---------- -----------
OPERATING INCOME............................................... 28,645 23,947 52,039 42,022
OTHER INCOME (EXPENSE)
Net gains (losses) on sales of property and other........... (217) 3,721 (211) 3,721
Gain on sale - Wingfoot..................................... - - 12,060 -
IRS interest settlement(1).................................. - 5,221 - 5,221
Fair value changes and payments on interest rate swap(2).... (51) - (10,333) -
Interest expense............................................ (434) (2,053) (2,941) (6,108)
Other, net.................................................. 613 332 311 (178)
----------- ---------- ---------- -----------
(89) 7,221 (1,114) 2,656
----------- ---------- ---------- -----------
INCOME BEFORE INCOME TAXES..................................... 28,556 31,168 50,925 44,678
FEDERAL AND STATE INCOME TAXES
Current..................................................... 8,034 12,811 11,895 10,828
Deferred.................................................... 3,546 10 7,598 7,560
----------- ---------- ---------- -----------
11,580 12,821 19,493 18,388
----------- ---------- ---------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE.............................. 16,976 18,347 31,432 26,290
----------- ---------- ---------- -----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX BENEFITS OF $13,580(3)................ - - - (23,935)
----------- ---------- ---------- -----------
NET INCOME..................................................... $ 16,976 $ 18,347 $ 31,432 $ 2,355
=========== ========== ========== ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC:
Income before cumulative effect of change in accounting
principle $ 0.68 $ 0.74 $ 1.26 $ 1.07
Cumulative effect of change in accounting principle, net of tax - - - (0.97)
----------- ---------- ---------- -----------
NET INCOME PER SHARE........................................... $ 0.68 $ 0.74 $ 1.26 $ 0.10
----------- ---------- ---------- -----------
AVERAGE COMMON SHARES
OUTSTANDING (BASIC):........................................ 24,787,831 24,783,674 24,861,966 24,710,743
=========== ========== ========== ===========
DILUTED:
Income before cumulative effect of change in accounting
principle $ 0.67 $ 0.73 $ 1.24 $ 1.04
Cumulative effect of change in accounting principle, net of tax - - - (0.95)
----------- ---------- ---------- -----------
NET INCOME PER SHARE........................................... $ 0.67 $ 0.73 $ 1.24 $ 0.09
----------- ---------- ---------- -----------
AVERAGE COMMON SHARES
OUTSTANDING (DILUTED)....................................... 25,287,271 25,296,694 25,339,629 25,312,753
=========== ========== ========== ===========
CASH DIVIDENDS PAID PER COMMON SHARE........................... $ 0.08 $ - $ 0.24 $ -
=========== ========== ========== ===========
(1) In the third quarter of 2002, the Company recognized other income of $3.1
million, net of taxes, due to a favorable settlement with the Internal
Revenue Service.
(2) The nine months ended September 30, 2003 includes a pre-tax non-cash charge
of $8.9 million, due to no longer forecasting interest payments on $110.0
million of borrowings.
(3) In the first quarter of 2002, the Company recognized a non-cash impairment
loss of $23.9 million, net of taxes, due to the write-off of Clipper
goodwill.
See notes to consolidated financial statements.
5
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------- PAID-IN RETAINED TREASURY COMPREHENSIVE TOTAL
SHARES AMOUNT CAPITAL EARNINGS STOCK LOSS(c) EQUITY
-------------------------------------------------------------------------------
($ AND SHARES THOUSANDS)
BALANCES AT JANUARY 1, 2003 24,972 $ 250 $ 211,567 $ 154,455 $ (955) $ (9,857) $ 355,460
Net income........................................ - - - 31,432 - - 31,432
Interest rate swap, net of taxes of $3,833(a)..... - - - - - 6,020 6,020
Change in foreign currency translation,
net of taxes of $39(b).......................... - - - - - 61 61
---------
Comprehensive income(d)....................... - - - - - - 37,513
---------
Issuance of common stock.......................... 99 1 1,272 - - - 1,273
Purchase of treasury stock........................ - - - - (4,852) - (4,852)
Dividends paid on common stock.................... - - - (5,958) - - (5,958)
------ ------ --------- ---------- -------- ---------- ---------
BALANCES AT SEPTEMBER 30, 2003 25,071 $ 251 $ 212,839 $ 179,929 $ (5,807) $ (3,776) $ 383,436
====== ====== ========= ========== ======== ========== =========
(a) The accumulated loss from the fair value of the interest rate swap in
accumulated other comprehensive loss was $6.0 million, net of tax
benefits of $3.8 million at December 31, 2002. As of March 31, 2003,
the Company no longer forecasted borrowings and interest payments on
the full notional amount of the swap. During May 2003, interest
payments on borrowings hedged with the swap were reduced to zero. As a
result, the Company transferred the entire fair value of the interest
rate swap from accumulated other comprehensive loss into earnings
during the first and second quarters of 2003. Until the swap terminates
on April 1, 2005, changes in the fair value of the interest rate swap
are accounted for through the income statement.
(b) The accumulated loss from the foreign currency translation in
accumulated other comprehensive loss is $0.3 million, net of taxes of
$0.2 million at December 31, 2002 and $0.2 million, net of taxes of
$0.2 million at September 30, 2003.
(c) The minimum pension liability, related to supplemental pension
benefits, included in accumulated other comprehensive loss is $3.5
million, net of taxes of $2.2 million at both December 31, 2002 and
September 30, 2003.
(d) Total comprehensive income for the three months ended September 30,
2003 was $16.9 million. Total comprehensive income for the three months
ended September 30, 2002 was $16.3 million. Total comprehensive loss
for the nine months ended September 30, 2002 was $0.4 million, which
included the cumulative effect of an accounting change of $23.9
million, resulting from the write-off of Clipper goodwill.
See notes to consolidated financial statements.
6
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
2003 2002
------------------------------------
($ THOUSANDS)
OPERATING ACTIVITIES
Net income................................................................... $ 31,432 $ 2,355
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in accounting principle, net of tax................................ - 23,935
Depreciation and amortization............................................. 37,483 36,972
Other amortization........................................................ 259 189
Provision for losses on accounts receivable............................... 1,057 1,189
Provision for deferred income taxes....................................... 7,598 7,560
Fair value of interest rate swap.......................................... 7,743 -
(Gain) loss on sales of assets and other.................................. 183 (3,664)
Gain on sale of Wingfoot.................................................. (12,060) -
Changes in operating assets and liabilities:
Receivables............................................................ (11,106) (26,418)
Prepaid expenses....................................................... (3,668) (4,308)
Other assets........................................................... (19,280) (2,254)
Accounts payable, bank drafts payable, taxes payable,
accrued expenses and other liabilities............................... 16,494 22,829
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................................... $ 56,135 $ 58,385
--------------- ---------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment,
less capitalized leases and notes payable.................................. (63,935) (49,130)
Proceeds from asset sales.................................................... 2,525 11,641
Proceeds from sale of Wingfoot............................................... 71,309 -
Capitalization of internally developed software and other.................... (2,854) (3,528)
--------------- ---------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES................................ 7,045 (41,017)
--------------- ---------------
FINANCING ACTIVITIES
Borrowings under revolving credit facilities................................. 207,200 61,200
Payments under revolving credit facilities................................... (299,500) (61,200)
Payments on long-term debt................................................... (278) (15,142)
Retirement of bonds.......................................................... - (4,983)
Net increase (decrease) in bank overdraft.................................... 2,796 (1,471)
Dividends paid on common stock............................................... (5,958) -
Purchase of treasury stock................................................... (4,852) -
Other, net................................................................... 756 1,918
--------------- ---------------
NET CASH USED BY FINANCING ACTIVITIES........................................... (99,836) (19,678)
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS....................................... (36,656) (2,310)
Cash and cash equivalents at beginning of period............................. 39,644 14,860
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 2,988 $ 12,550
=============== ===============
See notes to consolidated financial statements.
7
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2003
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
Arkansas Best Corporation (the "Company") is a diversified holding company
engaged through its subsidiaries primarily in motor carrier transportation
operations and intermodal transportation operations. Principal subsidiaries are
ABF Freight System, Inc. ("ABF"); Clipper Exxpress Company and related companies
("Clipper"); and FleetNet America, LLC.
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. The 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%.
Approximately 78% of ABF's employees are covered by the agreement. Carrier
members of the MFCA ratified the agreement on the same date.
The Company utilizes tractors and trailers primarily in its motor carrier
transportation operations. Tractors and trailers are commonly referred to as
"revenue equipment" in the transportation business.
NOTE B - FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial statements and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
nine months ended September 30, 2003 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003. For further
information, refer to the Company's financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002.
Certain reclassifications have been made to the prior year financial statements
to conform to the current year's presentation.
During, 2003, the Company announced that its Board of Directors had declared a
quarterly cash dividend of eight cents per share for its Common Stock on each of
the following dates:
QUARTER DECLARATION DATE TOTAL DIVIDENDS DECLARED
- ------- ---------------- ------------------------
First January 23, 2003 $2.0 million
Second April 23, 2003 $2.0 million
Third July 22, 2003 $2.0 million
Fourth October 22, 2003 $2.0 million
8
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
On January 23, 2003, the Board also approved the Company's repurchase from time
to time, in the open market or in privately negotiated transactions, up to a
maximum of $25.0 million of the Company's Common Stock. The repurchases may be
made either from the Company's cash reserves or from other available sources.
During the first and second quarters of 2003, the Company purchased 200,000
shares for $4.8 million. These common shares were added to the Company's
treasury stock. The Company did not make any open market purchases of its common
stock during the third quarter of 2003.
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143 ("FAS 143"), Accounting for Asset Retirement Obligations and
Statement of Financial Accounting Standards No. 146 ("FAS 146"), Accounting for
Costs Associated with Exit or Disposal Activities. Neither FAS 143 nor FAS 146
had a material impact upon the Company's financial statements or related
disclosures.
NOTE C - STOCK-BASED COMPENSATION
At September 30, 2003, the Company maintained three stock option plans: the 1992
Stock Option Plan, the 2000 Non-Qualified Stock Option Plan and the 2002 Stock
Option Plan, which provided for the granting of options to directors and
designated employees of the Company. The 1992 Stock Option Plan expired on
December 31, 2001, and therefore, no new options can be granted under this plan.
The 2000 Non-Qualified Stock Option Plan, a broad-based plan that allows options
to be granted to designated employees, provided 1.0 million shares of Common
Stock for the granting of options. The 2002 Stock Option Plan allows for the
granting of 1.0 million options, as well as two types of stock appreciation
rights ("SARs") which are payable in shares or cash. Employer SARs allow the
Company to decide, when an option is exercised, whether or not to treat the
exercise as a SAR. Employee SARs allow the optionee to decide, when exercising
an option, whether or not to treat it as a SAR. During 2003, the Company granted
182,500 Employer SARs in conjunction with stock option grants of 182,500 shares
to directors and key employees of the Company from the 2002 Stock Option Plan.
As of September 30, 2003, the Company had not exercised any Employer SARs. Also
during 2003, the Company granted 143,500 stock options to designated employees
under the 2000 Non-Qualified Stock Option Plan. All options or SARs granted are
exercisable starting on the first anniversary of the grant date, with 20% of the
shares or rights covered, thereby becoming exercisable at that time and with an
additional 20% of the option shares or SARs becoming exercisable on each
successive anniversary date, with full vesting occurring on the fifth
anniversary date. The options or SARs are granted for a term of 10 years.
The Company accounts for stock options under the "intrinsic value method" and
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees and related
interpretations, including Financial Accounting Standards Board Interpretation
No. 44 ("FIN 44"), Accounting for Certain Transactions Involving Stock
Compensation. During the fourth quarter of 2002, the Company adopted the
disclosure provisions of Statement of Financial Accounting Standards No. 148
("FAS 148"), Accounting for Stock-Based Compensation - Transition and
Disclosure. No stock-based employee compensation expense is reflected in net
income, as all options granted under the Company's plans had an exercise price
equal to the market value of the underlying Common Stock on the date of grant.
The Company has elected to use the APB 25 intrinsic value method because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123 ("FAS 123"), Accounting for Stock-Based
Compensation, requires the use of theoretical option valuation models, such as
the Black-Scholes model, that were not developed for use in valuing employee
stock options. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly
9
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of employee stock options.
For companies accounting for their stock-based compensation under the APB 25
intrinsic value method, pro forma information regarding net income and earnings
per share is required and is determined as if the Company had accounted for its
employee stock options under the fair value method of FAS 123. The fair value
for these options is estimated at the date of grant, using a Black-Scholes
option pricing model. For the stock option grants made in the first quarter of
2003, the assumptions used were as follows: risk-free interest rate of 2.7%;
dividend yield of 1.2%; volatility factor of the expected market price of the
Company's Common Stock of 56.2%; and an expected life of the option of 4 years.
Subsequent to the issuance of the 2002 financial statements, the Company
determined that an inappropriate weighted average life assumption was used in
determining the fair value of options granted in 2002 and 2001. Additionally, a
computational error was identified. As a result, the weighted average life has
been revised from 9.5 years to 4 years, which reflects the Company's historical
experience. The impact of the revisions on the Company's previously reported
2002 pro forma annual net income is a decrease of $0.01 per basic and diluted
common share. The pro forma disclosures for the three and nine months ended
September 30, 2002 reflect the revised computations. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting period.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition under FAS 123 and FAS 148
to stock-based employee compensation:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2003 2002 2003 2002
-----------------------------------------------------
($ thousands, except per share information)
Net income - as reported................................... $ 16,976 $ 18,347 $ 31,432 $ 2,355
Less total stock option expense determined under fair
value-based methods for all awards, net of tax benefits.. (673) (629) (2,274) (2,056)
- ------------------------------------------------------------------------------------------------------------------
Net income - pro forma..................................... $ 16,303 $ 17,718 $ 29,158 $ 299
- ------------------------------------------------------------------------------------------------------------------
Net income per share - as reported (basic)................. $ 0.68 $ 0.74 $ 1.26 $ 0.10
- ------------------------------------------------------------------------------------------------------------------
Net income per share - as reported (diluted)............... $ 0.67 $ 0.73 $ 1.24 $ 0.09
- ------------------------------------------------------------------------------------------------------------------
Net income per share - pro forma (basic)................... $ 0.66 $ 0.71 $ 1.17 $ 0.01
- ------------------------------------------------------------------------------------------------------------------
Net income per share - pro forma (diluted)................. $ 0.65 $ 0.71 $ 1.17 $ 0.01
- ------------------------------------------------------------------------------------------------------------------
10
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
NOTE D - SALE OF 19% INTEREST IN WINGFOOT
On March 19, 2003, the Company announced that it had notified The Goodyear Tire
& Rubber Company ("Goodyear") of its intention to sell its 19% ownership
interest in Wingfoot Commercial Tire Systems, LLC ("Wingfoot") to Goodyear for a
cash price of $71.3 million. The transaction closed on April 28, 2003 and the
Company recorded a pre-tax gain of $12.1 million ($8.4 million after tax, or
$0.33 per diluted common share) during the second quarter of 2003. The Company
used the proceeds to reduce the outstanding debt under its Credit Agreement.
NOTE E - DERIVATIVE FINANCIAL INSTRUMENTS
The Company accounts for its derivative financial instruments in accordance with
Financial Accounting Standards Board Statement No. 133, ("FAS 133") Accounting
for Derivative Instruments and Hedging Activities. On February 23, 1998, the
Company entered into an interest rate swap agreement with an effective date of
April 1, 1998 and a termination date of April 1, 2005 on a notional amount of
$110.0 million. The Company's interest rate strategy has been to hedge its
variable 30-day LIBOR-based interest rate for a fixed interest rate of 5.845%
(plus the Credit Agreement margin which was 0.775% at September 30, 2003 and
0.825% at December 31, 2002) on $110.0 million of Credit Agreement borrowings
for the term of the interest rate swap to protect the Company from potential
interest rate increases. The Company had designated its benchmark variable
30-day LIBOR-based interest rate payments on $110.0 million of borrowings under
the Company's Credit Agreement as a hedged item under a cash flow hedge. As a
result, the fair value of the swap, as estimated by Societe Generale, the
counterparty, was a liability of ($9.9) million at December 31, 2002 and was
recorded on the Company's balance sheet through accumulated other comprehensive
loss, net of taxes, rather than through the income statement.
As previously discussed, on March 19, 2003, the Company announced its intention
to sell its 19% ownership interest in Wingfoot and use the proceeds to pay down
Credit Agreement borrowings. As a result, the Company forecasted Credit
Agreement borrowings to be below the $110.0 million level and reclassified the
majority of the negative fair value of the swap on March 19, 2003 of $8.5
million (pre-tax), or $5.2 million net of taxes, from accumulated other
comprehensive loss into earnings on the income statement, during the first
quarter of 2003. The transaction closed on April 28, 2003 and management used
the proceeds received from Goodyear to pay down its Credit Agreement borrowings
below the $110.0 million level. During the second quarter of 2003, the Company
reclassified the remaining negative fair value of the swap of $0.4 million
(pre-tax), or $0.2 million net of taxes, from accumulated other comprehensive
loss into earnings on the income statement. Changes in the fair value of the
interest rate swap since March 19, 2003, have been accounted for in the
Company's income statement. Future changes in the fair value of the interest
rate swap will be accounted for through the income statement until the interest
rate swap matures on April 1, 2005, unless the Company terminates the
arrangement prior to that date.
The fair value of the interest rate swap, as estimated by Societe Generale at
September 30, 2003, is a liability of $7.7 million and is recorded on the
Company's balance sheet and represents the amount the Company would have had to
pay if it had terminated the swap on September 30, 2003. Included in the income
statement for the third quarter 2003 is $1.3 million (pre-tax) of positive
changes in the fair value of the interest rate swap occurring in the third
quarter of 2003. Included in the income statement for the nine months ended
September 30, 2003 is the previously discussed $8.9 million (pre-tax)
reclassification of negative fair value from accumulated other comprehensive
loss into the income statement and $1.2 million in positive changes in the fair
value of the interest rate swap, from March 19, 2003 to September 30, 2003.
11
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
NOTE F - GOODWILL
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 ("FAS 142"), Goodwill and Other Intangible Assets. Under the
provisions of FAS 142, the Company's goodwill intangible asset is no longer
amortized but reviewed annually for impairment. At September 30, 2003 and
December 31, 2002, the Company's assets included goodwill of $63.9 and $63.8
million, respectively, related to ABF, from a 1988 leveraged buyout ("LBO")
transaction. The change in the amount of goodwill from December 31, 2002 to
September 30, 2003 relates to foreign currency translation adjustments on the
portion of the goodwill related to ABF Canadian operations.
The Company performed the required transitional impairment testing on its
goodwill during the first quarter of 2002 based on January 1, 2002 values, which
included $63.8 million related to ABF and $37.5 million related to the 1994
acquisition of Clipper. The Company performed both the first and second phases
of the transitional impairment testing on its Clipper goodwill and found the
entire $37.5 million balance to be impaired. As a result, the Company recognized
a non-cash impairment loss of $23.9 million, net of tax benefits of $13.6
million, as the cumulative effect of a change in accounting principle as
provided in FAS 142. This impairment loss results from the change in method of
determining recoverable goodwill from using undiscounted cash flows, as
prescribed by Statement of Financial Accounting Standards No. 121 ("FAS 121"),
Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, to the fair value method, as prescribed by FAS 142, determined by
using a combination of valuation methods, including EBITDA and net income
multiples and the present value of discounted cash flows. The Company performed
the first phase of impairment testing on its $63.8 million of LBO goodwill,
which was based on ABF's operations and fair value at January 1, 2002. There was
no indication of impairment with respect to this goodwill.
The Company performed the annual impairment testing on its ABF goodwill based
upon operations and fair value at January 1, 2003 and found there to be no
impairment.
NOTE G - LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
Various legal actions, the majority of which arise in the normal course of
business, are pending. 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 has accruals for certain legal and
environmental exposures. None of these legal actions is expected to have a
material adverse effect on the Company's financial condition, cash flows or
results of operations.
The Company's subsidiaries, or lessees, store fuel for use in tractors and
trucks in approximately 76 underground tanks located in 26 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 all such 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
("EPA") and others that it has been identified as a potentially responsible
party ("PRP") 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 minimis settlements (aggregating approximately $130,000 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.
12
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
As of September 30, 2003, the Company has accrued approximately $3.2 million to
provide for environmental-related liabilities. The Company's environmental
accrual is based on management's best estimate of the actual liability. The
Company's estimate is founded on management's experience in dealing with similar
environmental matters and on actual testing performed at some sites. Management
believes that the accrual is adequate to cover environmental liabilities based
on the present environmental regulations. Accruals for environmental liability
are included in the balance sheet as accrued expenses and in other liabilities.
NOTE H - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2003 2002 2003 2002
---------------------------------------------------------------
($ THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NUMERATOR:
Numerator for basic and diluted earnings per share -
Income before cumulative effect of
change in accounting principle.................. $ 16,976 $ 18,347 $ 31,432 $ 26,290
Cumulative effect of change in accounting
principle, net of tax........................... - - - (23,935)
- ------------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders....... $ 16,976 $ 18,347 $ 31,432 $ 2,355
========================================================================================================================
DENOMINATOR:
Denominator for basic earnings
per share - weighted-average shares.............. 24,787,831 24,783,674 24,861,966 24,710,743
Effect of dilutive securities:
Employee stock options........................... 499,440 513,020 477,663 602,010
- ------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings
per share - adjusted weighted-average
shares and assumed conversions................... 25,287,271 25,296,694 25,339,629 25,312,753
========================================================================================================================
NET INCOME (LOSS) PER COMMON SHARE
BASIC:
Income before cumulative effect of change
in accounting principle........................... $ 0.68 $ 0.74 $ 1.26 $ 1.07
Cumulative effect of change in accounting principle,
net of tax........................................ - - - (0.97)
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE................................... $ 0.68 $ 0.74 $ 1.26 $ 0.10
========================================================================================================================
DILUTED:
Income before cumulative effect of change
in accounting principle........................... $ 0.67 $ 0.73 $ 1.24 $ 1.04
Cumulative effect of change in accounting principle,
net of tax........................................ - - - (0.95)
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE................................... $ 0.67 $ 0.73 $ 1.24 $ 0.09
========================================================================================================================
CASH DIVIDENDS PAID PER COMMON SHARE................... $ 0.08 $ - $ 0.24 $ -
========================================================================================================================
13
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS
In April of 2003, the Financial Accounting Standards Board issued Statement No.
149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities
("FAS 149"). FAS 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under FAS 133. This statement is effective for contracts entered into
or modified after September 30, 2003 and has not had and is not expected to have
an impact upon the Company's financial statements or related disclosures.
In May of 2003, the Financial Accounting Standards Board issued Statement No.
150 Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity ("FAS 150"). FAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or
asset in some circumstances). Many of those instruments were previously
classified as equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003 and has not had and is not expected
to have an impact upon the Company's financial statements or related
disclosures.
In March of 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 ("FIN 46"). This Interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, addresses consolidation by business
enterprises of variable interest entities. This Interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. The Company has no investments in or known contractual arrangements with
variable interest entities and therefore, this Interpretation has not impacted
the Company's financial statements or related disclosures.
NOTE J - 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 operating segments.
During the periods being reported on, the Company operated in two defined
reportable operating segments: (1) ABF and (2) Clipper.
The Company eliminates intercompany transactions in consolidation. However, the
information used by the Company's management with respect to its reportable
segments is before intercompany eliminations of revenues and expenses.
Intercompany revenues and expenses are not significant.
Further classifications of operations or revenues by geographic location beyond
the descriptions provided above are impractical and are, therefore, not
provided. The Company's foreign operations are not significant.
At December 31, 2002, identifiable assets included a $59.3 million investment in
Wingfoot. As previously discussed in Note D, the Company sold its 19% ownership
interest in Wingfoot to Goodyear during the second quarter of 2003.
14
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - continued
The following tables reflect reportable operating segment information for the
Company, as well as a reconciliation of reportable segment information to the
Company's consolidated operating revenues, operating expenses, operating income
and consolidated income before income taxes:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2003 2002 2003 2002
----------------------------------------------------------
($ THOUSANDS)
OPERATING REVENUES
ABF Freight System, Inc................................. $ 360,609 $ 335,516 $ 1,021,979 $ 932,217
Clipper................................................. 33,980 32,399 95,446 88,634
Other revenues and eliminations......................... 8,289 7,482 22,905 19,881
- -----------------------------------------------------------------------------------------------------------------------
Total consolidated operating revenues................. $ 402,878 $ 375,397 $ 1,140,330 $ 1,040,732
=======================================================================================================================
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC.
Salaries and wages...................................... $ 229,552 $ 217,987 $ 671,782 $ 626,412
Supplies and expenses................................... 45,097 40,926 133,323 115,131
Operating taxes and licenses............................ 9,840 10,070 29,568 29,923
Insurance............................................... 6,158 5,862 17,801 17,008
Communications and utilities............................ 3,516 3,545 10,985 10,283
Depreciation and amortization........................... 11,116 10,391 31,788 31,137
Rents and purchased transportation...................... 25,215 21,836 69,044 58,001
Other................................................... 1,055 1,217 2,758 2,812
(Gain) on sale of equipment............................. (228) (31) (28) (255)
- -----------------------------------------------------------------------------------------------------------------------
331,321 311,803 967,021 890,452
- -----------------------------------------------------------------------------------------------------------------------
CLIPPER
Cost of services........................................ 29,292 27,634 82,480 76,121
Selling, administrative and general..................... 4,064 4,029 12,108 11,645
Loss on sale of equipment............................... 6 3 1 67
- -----------------------------------------------------------------------------------------------------------------------
33,362 31,666 94,589 87,833
- -----------------------------------------------------------------------------------------------------------------------
Other expenses and eliminations............................ 9,550 7,981 26,681 20,425
- -----------------------------------------------------------------------------------------------------------------------
Total consolidated operating expenses and costs......... $ 374,233 $ 351,450 $ 1,088,291 $ 998,710
=======================================================================================================================
OPERATING INCOME (LOSS)
ABF Freight System, Inc.................................... $ 29,288 $ 23,713 $ 54,958 $ 41,765
Clipper.................................................... 618 733 857 801
Other (loss) and eliminations.............................. (1,261) (499) (3,776) (544)
- -----------------------------------------------------------------------------------------------------------------------
Total consolidated operating income..................... $ 28,645 $ 23,947 $ 52,039 $ 42,022
=======================================================================================================================
TOTAL CONSOLIDATED OTHER
INCOME (EXPENSE)
Net gains (losses) on sales of property and other....... $ (217) $ 3,721 $ (211) $ 3,721
Gain on sale - Wingfoot................................. - - 12,060 -
IRS interest settlement................................. - 5,221 - 5,221
Fair value changes and payments on interest rate swap... (51) - (10,333) -
Interest expense........................................ (434) (2,053) (2,941) (6,108)
Other, net.............................................. 613 332 311 (178)
- -----------------------------------------------------------------------------------------------------------------------
Total consolidated other income (expense) $ (89) $ 7,221 $ (1,114) $ 2,656
=======================================================================================================================
TOTAL CONSOLIDATED INCOME
BEFORE INCOME TAXES....................................... $ 28,556 $ 31,168 $ 50,925 $ 44,678
=======================================================================================================================
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (UNAUDITED)
CRITICAL ACCOUNTING ESTIMATES
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.
The Company's accounting estimates 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 as follows:
Management of the Company utilizes a bill-by-bill analysis to establish
estimates of revenue in transit to recognize in each reporting period under the
Company's accounting policy for revenue recognition. The Company uses a method
prescribed by Emerging Issues Task Force Issue No. 91-9 ("EITF 91-9"), Revenue
and Expense Recognition for Freight Services in Process, where revenue is
recognized based on relative transit times in each reporting period with
expenses being recognized as incurred.
The Company estimates its allowance for doubtful accounts based on the Company's
historical write-offs, as well as trends and factors surrounding the credit risk
of specific customers. In order to gather information regarding these trends and
factors, the Company performs ongoing credit evaluations of its customers. The
Company's allowance for revenue adjustments is an estimate based on the
Company's historical revenue adjustments. Actual write-offs or adjustments could
differ from the allowance estimates the Company makes as a result of a number of
factors. These factors include unanticipated changes in the overall economic
environment or factors and risks surrounding a particular customer. The Company
continually updates the history it uses to make these estimates so as to reflect
the most recent trends, factors and other information available. Actual
write-offs and adjustments are charged against the allowances for doubtful
accounts and revenue adjustments.
Under its accounting policy for property, plant and equipment, management
establishes appropriate depreciable lives and salvage values for the Company's
revenue equipment (tractors and trailers) based on their estimated useful lives
and estimated fair values to be received when the equipment is sold or traded
in. Management has a policy of purchasing its revenue equipment or entering into
capital leases rather than utilizing off-balance-sheet financing.
The Company and its subsidiaries have noncontributory defined benefit pension
plans covering substantially all noncontractual employees. Benefits are
generally based on years of service and employee compensation. The Company
accounts for its non-union pension plans in accordance with Statement of
Financial Accounting Standards No. 87 ("FAS 87"), Employer's Accounting for
Pensions. The Company's pension expense and related asset and liability balances
is an estimate which is based upon a number of assumptions. The assumptions with
the greatest impact on the Company's expense are the assumed compensation cost
increase, the expected return on plan assets and the discount rate used to
discount the plans' obligations.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Unaudited) - continued
The following table provides the key assumptions the Company used for 2002
compared to those it is utilizing to estimate 2003 pension expense:
YEAR ENDING DECEMBER 31
2003 2002
-----------------------
Discount rate........................................ 6.9% 6.9%
Expected return on plan assets....................... 7.9% 9.0%
Rate of compensation increase........................ 4.0% 4.0%
The assumptions used directly affect the pension expense for a particular year.
If actual results vary from the assumption, an actuarial gain or loss is created
and amortized into pension expense over the average remaining service period of
the plan participants beginning in the following year. The declines in the stock
market during 2000, 2001 and 2002 negatively impacted plan assets and created a
plan actuarial loss. The Company reduced its expected return on plan assets in
2003 to reflect the historical returns on the investments the plan holds, which
includes the investment returns experienced during 2002. The reduction in the
expected return on plan assets, lower assets on which to earn a return and
actuarial losses increase the Company's pension expense. A 1.0% decrease in the
Company's expected return on plan assets, based upon pension plan assets at
December 31, 2002, would have increased pension expense by approximately $1.3
million. The Company estimates its 2003 pension expense for non-union plans to
be approximately $11.1 million. This compares to $5.3 million in actual pension
expense recorded for 2002.
At December 31, 2002, the fair value of the Company's pension plan assets was
$127.4 million, which exceeded plan accumulated benefit obligations by $6.8
million. At December 31, 2002, the Company's projected benefit obligations were
$141.6 million, which exceeded the fair value of the pension plan assets by
$14.2 million. During the second quarter of 2003, the Company made $15.0 million
in tax-deductible contributions which improved the plans' funded status. During
the fourth quarter 2003, the Company will evaluate whether or not additional
tax-deductible contributions can be made to its' non-union pension plans before
the end of 2003. If such contributions are allowed, the Company's current plans
are to make them. At December 31, 2002, the plans' assets were invested 54.3% in
equity securities and 45.7% in fixed income securities. At September 30, 2003,
the plans' assets were invested 63.2% in equity securities and 36.8% in fixed
income securities.
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB 25"), Accounting for Stock Issued to Employees and related interpretations
in accounting for stock options because the alternative fair value accounting
provided for under the Statement of Financial Accounting Standards No. 123 ("FAS
123"), Accounting for Stock-Based Compensation, requires the use of option
valuation models that were not developed for use in valuing employee stock
options and are theoretical in nature. Under APB 25, because the exercise price
of the Company's employee and director options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company is self-insured up to certain limits for workers' compensation and
certain third-party casualty claims. For 2002, these limits were $1.0 million
per claim for workers' compensation claims and $500,000 per claim for
third-party casualty claims. For 2003, the Company increased its third-party
casualty self-insurance exposure by increasing its retention to $1.0 million per
claim. The Company's self-insured retention level for workers' compensation
remained the same for 2003. Workers' compensation and property damage claims
liabilities recorded in the financial statements totaled $53.1 million at
September 30, 2003 and $49.1 million at December 31, 2002. The Company does not
discount its claims liabilities. Under the Company's accounting policy for
claims, management annually estimates the development of the claims based upon
the Company's historical development factors over a number of years. The Company
utilizes a third party to calculate the
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Unaudited) - continued
development factors and analyze historical trends. Actual payments may differ
from management's estimates as a result of a number of factors. These factors
include increases in medical costs and changes in applicable laws, as well as
many other factors. The actual claims payments are charged against the Company's
accrued claims liabilities.
The Company's accounting policy for its 19% investment in Wingfoot Commercial
Tire Systems, LLC ("Wingfoot") was the equity method of accounting, similar to a
partnership investment. Under the terms of the LLC operating agreement, the
Company did not share in the profits or losses of Wingfoot during the term of
the Company's "Put" option. Therefore, the Company's investment balance of $59.3
million at March 31, 2003 and December 31, 2002 did not change during the "Put"
period. On March 19, 2003, the Company announced that it had notified The
Goodyear Tire & Rubber Company ("Goodyear") of its intention to sell its 19%
ownership interest in Wingfoot to Goodyear for a cash price of $71.3 million.
The transaction was closed on April 28, 2003. The Company recorded a pre-tax
gain of $12.1 million ($8.4 million after tax, or $0.33 per diluted common
share) during the second quarter of 2003. The Company used the proceeds to
reduce the outstanding debt under its Credit Agreement.
The Company hedged its interest rate risk by entering into a fixed rate interest
rate swap on $110.0 million of revolving Credit Agreement borrowings. The
Company's accounting policy for derivative financial instruments is as
prescribed by FAS 133. The fair value of the swap, as estimated by Societe
Generale, was a liability of ($9.9) million at December 31, 2002 and was
recorded on the Company's balance sheet through accumulated other comprehensive
loss, net of taxes, rather than through the income statement. During the first
quarter of 2003, management determined that it would use the proceeds received
from the sale of Wingfoot to Goodyear to pay down its Credit Agreement
borrowings. As a result, the Company forecasted Credit Agreement borrowings to
be below the $110.0 million level and reclassified the majority of the negative
fair value of the swap of $8.5 million (pre-tax), or $5.2 million net of taxes,
from accumulated other comprehensive loss into earnings on the income statement,
during the first quarter of 2003. As previously discussed, the transaction
closed on April 28, 2003 and Management used the proceeds received from Goodyear
to pay down its Credit Agreement borrowings below the $110.0 million level.
During the second quarter of 2003, the Company reclassified the remaining
negative fair value of the swap of $0.4 million (pre-tax), or $0.2 million net
of taxes, from accumulated other comprehensive loss into earnings on the income
statement. Changes in the fair value of the interest rate swap since March 19,
2003, have been accounted for in the Company's income statement. Future changes
in the fair value of the interest rate swap will be accounted for through the
income statement until the interest rate swap matures on April 1, 2005, unless
the Company terminates the arrangement prior to that date. The fair value of the
interest rate swap, as estimated by Societe Generale at September 30, 2003, is a
liability of $7.7 million and is recorded on the Company's balance sheet and
represents the amount the Company would have had to pay if it had terminated the
swap on September 30, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In April of 2003, the Financial Accounting Standards Board issued Statement No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities
("FAS 149"). FAS 149 amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement is effective for contracts entered into
or modified after September 30, 2003 and has not had and is not expected to have
an impact upon the Company's financial statements or related disclosures.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Unaudited) - continued
In May of 2003, the Financial Accounting Standards Board issued Statement No.
150 Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity ("FAS 150"). FAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or
asset in some circumstances). Many of those instruments were previously
classified as equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003 and has not had and is not expected
to have an impact upon the Company's financial statements or related
disclosures.
In March of 2003, the Financial Accounting Standards Board issued Interpretation
No. 46 ("FIN 46"). This Interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, addresses consolidation by business
enterprises of variable interest entities. This Interpretation applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. The Company has no investments in or known contractual arrangements with
variable interest entities and therefore, this Interpretation has not impacted
the Company's financial statements or related disclosures.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30 2003, cash provided from operations of
$56.1 million, proceeds from the sale of Wingfoot of $71.3 million, proceeds
from asset sales of $2.5 million and available cash were used to purchase
revenue equipment and other property and equipment totaling $63.9 million, pay
dividends on Common Stock of $6.0 million, purchase 200,000 shares of the
Company's Common Stock for $4.8 million and reduce outstanding debt by $92.6
million. During the nine months ended September 30, 2002, cash provided by
operations of $58.4 million, proceeds from asset sales of $11.6 million,
borrowings of $2.6 million and available cash were used primarily to purchase
revenue equipment and other property and equipment totaling $51.7 million,
retire the remaining $5.0 million in face value of the Company's WorldWay 6-1/4%
Convertible Subordinated Debentures and pay $15.1 million in outstanding debt
obligations. Revenue equipment includes tractors and trailers used primarily in
the Company's motor carrier transportation operations.
On September 26, 2003, the Company amended and restated its existing three-year
$225.0 million Credit Agreement ("Credit Agreement") dated as of May 15, 2002
with Wells Fargo Bank Texas, National Association as Administrative Agent and
Lead Arranger, and Fleet National Bank and Suntrust Bank as Co-Syndication
Agents, and Wachovia Bank, National Association as Documentation Agent. The
Amended and Restated Credit Agreement among Wells Fargo Bank, National
Association as Administrative Agent and Lead Arranger, and Fleet National Bank
and Suntrust Bank as Co-Syndication Agents, and Wachovia Bank, National
Association and The Bank of Tokyo-Mitsubishi, Ltd. as Co-documentation Agents,
extended the original maturity date for two years, to May 15, 2007. The Credit
Agreement provides for up to $225.0 million of revolving credit loans (including
a $125.0 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 participating bank approval. The Credit Agreement also allows the
Company to request an increase in the amount of revolving credit loans as long
as the total revolving credit loans do not exceed $275.0 million, subject to the
approval of participating banks.
At September 30, 2003, there were $17.7 million of Revolver Advances and $57.7
million of letters of credit outstanding. At September 30, 2003, the Company had
$149.6 million of borrowings available under the Credit Agreement. The Credit
Agreement contains various covenants, which limit, among other things,
indebtedness, distributions, stock repurchases and dispositions of assets and
which require the Company to meet certain quarterly financial ratio tests. As of
September 30, 2003, the Company was in compliance with the covenants.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Unaudited) - continued
The Company's Credit Agreement contains a pricing grid that determines its LIBOR
margin, facility fees and letter of credit fees. The pricing grid is based on
the Company's senior debt rating agency ratings. A change in the Company's
senior debt ratings could potentially impact its Credit Agreement pricing. In
addition, if the Company's senior debt ratings fall below investment grade, the
Company's Credit Agreement provides for limits on additional permitted
indebtedness without lender approval, acquisition expenditures and capital
expenditures. On May 28, 2003, S&P upgraded its corporate credit rating on the
Company to BBB+ from BBB, stating that the upgrade was driven by "...the
company's strong operating results and decreasing debt levels, which support
solid credit measures, despite the continued weak economic environment." The
Company is currently rated BBB+ by Standard & Poor's Rating Service and Baa3 by
Moody's Investors Service, Inc. The Company has no downward rating triggers that
would accelerate the maturity of its debt.
The Company is party to an interest rate swap on a notional amount of $110.0
million. The purpose of the swap was to limit the Company's exposure to
increases in interest rates on $110.0 million of bank borrowings over the
seven-year term of the swap. The interest rate under the swap is fixed at 5.845%
plus the Credit Agreement margin, which was 0.775% at September 30, 2003 and
0.825% at December 31, 2002. The fair value of the Company's interest rate swap
was ($7.7) million at September 30, 2003 and ($9.9) million at December 31,
2002. The fair value of the swap is impacted by changes in rates of similarly
termed Treasury instruments. The liability is recognized on the Company's
balance sheet in accordance with FAS 133, at September 30, 2003 and December 31,
2002.
The Company's primary subsidiary, ABF, maintains ownership of most all of its
larger terminals or distribution centers. Both ABF and Clipper lease certain
terminal facilities. At September 30, 2003, the Company has future minimum
rental commitments, net of noncancellable subleases, totaling $48.0 million for
terminal facilities and $2.1 million primarily for other equipment.
The following is a table providing the aggregate annual obligations of the
Company including debt, capital lease maturities and future minimum rental
commitments:
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------------
($ thousands)
LESS THAN 1-3 4-5 AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
--------------------------------------------------------------------------------
Long-term debt $ 19,347 $ 134 $ 319 $ 18,051 $ 843
Capital lease obligations 554 206 332 16 -
Minimum rental commitments under
operating leases, net of subleases 50,142 11,002 17,703 11,802 9,635
Unconditional purchase obligations - - - - -
Other long-term debt obligations - - - - -
- -----------------------------------------------------------------------------------------------------------------------
Total contractual cash obligations $ 70,043 $ 11,342 $ 18,354 $ 29,869 $ 10,478
=======================================================================================================================
The Company has guaranteed approximately $0.4 million at September 30, 2003,
that relates to a debt owed by The Complete Logistics Company ("CLC"), to the
former owner of a company CLC acquired in 1995. CLC was a wholly owned
subsidiary of the Company until 1997, when CLC was sold. The Company's exposure
to this guarantee declines by approximately $60,000 per year.
In 2003, the Company forecasts total spending of approximately $68.0 to $72.0
million for capital expenditures, net of proceeds from equipment and real estate
sales. Of the $68.0 to $72.0 million, ABF is budgeted for
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Unaudited) - continued
approximately $51.0 to $55.0 million, primarily for revenue equipment, and
Clipper is budgeted for approximately $5.0 million, primarily for revenue
equipment.
The Company's non-union pension plan assets have been adversely impacted by
stock market declines in recent past years. In addition, non-union pension plan
obligations have been adversely impacted by declining interest rates, which
increases the present value of the plan obligations. During the second quarter
of 2003, the Company made $15.0 million in tax-deductible contributions to its
non-union pension plans. During the fourth quarter 2003, the Company will
evaluate whether or not additional tax-deductible contributions can be made to
its non-union pension plans before the end of 2003. If such contributions are
allowed, the Company's current plans are to make them.
The Company has two principal sources of available liquidity, which are its
operating cash and the $149.6 million it has available under its revolving
Credit Agreement at September 30, 2003. The Company has generated between $60.0
million and $130.0 million of operating cash annually for the years 2000 through
2002. The Company expects cash from operations and its available revolver to
continue to be principal sources of cash to finance its annual debt maturities,
lease commitments, letter of credit commitments, pension contributions, fund its
2003 capital expenditures, and to fund quarterly dividends and stock
repurchases.
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 2003 or 2002. The Company has no
investments, loans or any other known contractual arrangements with
special-purpose entities, variable interest entities or financial partnerships
and has no outstanding loans with officers or directors of the Company.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Unaudited) - continued
OPERATING SEGMENT DATA
The following table sets forth, for the periods indicated, a summary of the
Company's operating expenses by segment as a percentage of revenue for the
applicable segment.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2003 2002 2003 2002
---------------------------------------------------------
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC.
Salaries and wages................................... 63.7% 65.0% 65.7% 67.2%
Supplies and expenses................................ 12.5 12.2 13.0 12.4
Operating taxes and licenses......................... 2.7 3.0 2.9 3.2
Insurance............................................ 1.7 1.7 1.7 1.8
Communications and utilities......................... 1.0 1.1 1.1 1.1
Depreciation and amortization........................ 3.1 3.1 3.1 3.3
Rents and purchased transportation................... 7.0 6.5 6.8 6.2
Other................................................ 0.3 0.3 0.3 0.3
(Gain) on sale of equipment.......................... (0.1) - - -
- -------------------------------------------------------------------------------------------------------------------
91.9% 92.9% 94.6% 95.5%
- -------------------------------------------------------------------------------------------------------------------
CLIPPER
Cost of services..................................... 86.2% 85.3% 86.4% 85.9%
Selling, administrative and general.................. 12.0 12.4 12.7 13.1
Loss on sale of equipment............................ - - - 0.1
- -------------------------------------------------------------------------------------------------------------------
98.2% 97.7% 99.1% 99.1%
- -------------------------------------------------------------------------------------------------------------------
OPERATING INCOME
ABF Freight System, Inc................................. 8.1% 7.1% 5.4% 4.5%
Clipper................................................. 1.8 2.3 0.9 0.9
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2002
Consolidated revenues for the three and nine months ended September 30, 2003
were $402.9 million and $1,140.3 million compared to $375.4 million and $1,040.7
million for the same periods in 2002, due to increases in revenues for ABF and
Clipper. Operating income increased to $28.6 million and $52.0 million for the
three and nine months ended September 30, 2003 from $23.9 million and $42.0
million during the same periods in 2002, primarily as a result of improved
operating income at ABF.
Income before the cumulative effect of change in accounting principle for the
three months ended September 30, 2003 was $17.0 million, or $0.67 per diluted
common share, compared to $18.3 million, or $0.73 per diluted common share, for
the same period in 2002. The third quarter of 2002 included $5.2 million, or
$0.12 per diluted common share related to a favorable settlement with the
Internal Revenue Service ("IRS") and $3.7 million, or $0.09 per diluted common
share associated with the gains on sales of excess freight facilities at ABF,
offset in part by the negative impact of $0.9 million, or $0.02 per diluted
common share relating to an increase in the workers' compensation liability
reserves for the Company's exposure to Reliance Insurance Company ("Reliance"),
(see discussion below).
Income before the cumulative effect of change in accounting principle for the
nine months ended September 30, 2003 was $31.4 million, or $1.24 per diluted
common share, compared to $26.3 million, or $1.04 per diluted common share, for
the same period in 2002. The increase reflects primarily a $12.1 million (or
$0.33 per diluted common share) gain on the sale of Wingfoot (see Note D), an
increase in operating income and lower interest expense from lower average debt
levels. This increase is offset in part by pre-tax charges of $10.3 million for
the nine months ended September 30, 2003, related to fair value changes and
payments on the Company's interest rate swap. The nine months ended September
30, 2002 included the previously discussed IRS settlement, gains on excess
facility sales, offset in part by the increased workers' compensation liability
reserves for the Company's exposure to Reliance.
During the first quarter of 2002, the Company recognized a non-cash impairment
loss on its Clipper goodwill of $23.9 million, net of taxes, or ($0.95) per
diluted common share, as the cumulative effect of a change in accounting
principle as required by FAS 142 (see Note F).
The Company's net income for the three and nine months ended September 30, 2003
was $17.0 million and $31.4 million respectively, or $0.67 and $1.24 per diluted
common share, compared to net income, including the impact of the accounting
change, of $18.3 million and $2.4 million, respectively, or $0.73 and $0.09 per
diluted common share, for the same periods in 2002.
Reliance insures the Company's workers' compensation claims in excess of
$300,000 ("excess claims") for the period from 1993 through 1999. According to
an Official Statement by the Pennsylvania Insurance Department on October 3,
2001, Reliance was determined to be insolvent, with total admitted assets of
$8.8 billion and liabilities of $9.9 billion, or a negative surplus position of
$1.1 billion, as of March 31, 2001. As of September 30, 2003, the Company
estimates its workers' compensation claims insured by Reliance to be
approximately $5.6 million. The Company has been in contact with and has
received either written or verbal confirmation from a number of state guaranty
funds that they will accept excess claims, representing a total of approximately
$3.5 million of the $5.6 million, which leaves the Company with a net exposure
amount of $2.1 million. At September 30, 2003, the Company had $1.6 million of
liability recorded in its financial statements
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
for its estimated exposure to Reliance. The Company anticipates receiving, from
guaranty funds or through orderly liquidation, partial reimbursement for future
claims payments; however, the process could take several years.
Kemper Insurance Companies ("Kemper") insure the Company's workers' compensation
excess claims for the period from 2000 through 2001. In March 2003, Kemper
announced that it was discontinuing its business of providing future insurance
coverage. Lumbermens Mutual Casualty Company, the Kemper company which insures
the Company's excess claims, received a going concern opinion on its 2002
statutory financial statements. The Company has not received any communications
from Kemper regarding any changes in the handling of the Company's existing
excess insurance coverage with Kemper. The Company is uncertain as to the future
impact this will have on insurance coverage provided by Kemper.
ABF FREIGHT SYSTEM, INC.
Effective July 14, 2003 and August 1, 2002, ABF implemented general rate
increases to cover known and expected cost increases. Typically, the increases
were 5.9% and 5.8%, respectively, although the amounts can vary by lane and
shipment characteristic.
Revenues for the three and nine months ended September 30, 2003 were $360.6
million and $1,022.0 million compared to $335.5 million and $932.2 million
during the same periods in 2002, representing per-day increases of 7.5% and
9.6%, respectively. ABF generated operating income of $29.3 million and $55.0
million for the three and nine months ended September 30, 2003 compared to $23.7
million and $41.8 million during the same periods in 2002.
ABF's increase in revenue is due to an increase in LTL tonnage, revenue per
hundredweight and fuel surcharges. ABF's LTL tonnage increased 0.5% and 1.7%
during the three and nine months ended September 30, 2003 compared to the same
periods in 2002. ABF's business levels during the first eight months of 2003
increased as a result of the closure of a major competitor, Consolidated
Freightways ("CF") on September 3, 2002. The monthly tonnage comparisons for the
months of the third quarter 2003 compared to the months of the third quarter of
2002, were as follows: July increased 3.9%, August increased 3.2% and September
decreased 5.4%. The July and August 2003 comparisons to the same months in 2002
include increased tonnage levels at ABF primarily as a result of CF's closure.
ABF's monthly tonnage comparison from September 2003 to September 2002 is
impacted by the fact that both periods include the positive impact of CF's
closure on tonnage levels.
ABF has not yet experienced an increase in tonnage as a result of any
improvement in the U.S. economy. The fourth quarter of 2002 includes the
positive impact of CF's closure upon ABF's tonnage levels. If there is no
significant change in the U.S. economy in the fourth quarter 2003, ABF's tonnage
levels could be below that of the levels in the fourth quarter 2002, although
there can be no certainty.
ABF's LTL billed revenue per hundredweight, excluding fuel surcharges, increased
5.4% and 5.9% to $23.60 and $22.96 for the three and nine months ended September
30, 2003 compared to $22.39 and $21.68 for the same periods in 2002.
Approximately one-half of these increases were the result of changes in the
profile of freight handled. For the three months ended September 30, 2003, ABF's
average LTL length of haul increased, its LTL rated commodity class remained
unchanged and its LTL weight per shipment declined, compared to the same period
in 2002. For the nine months ended September 30, 2003, ABF's average LTL length
of haul increased, its LTL rated commodity class increased and its LTL weight
per shipment declined, compared to the same period in 2002. Increases in length
of haul and LTL rated commodity class and decreases in LTL weight per shipment
impact LTL billed revenue per hundredweight positively.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
ABF charges a fuel surcharge, based on the increase in diesel fuel prices
compared to an index price. The fuel surcharge in effect during the three and
nine months ended September 30, 2003 averaged 3.3% and 3.6% of revenue. The fuel
surcharge in effect during the three and nine months ended September 30, 2002
averaged 2.2% and 1.7% of revenue.
During the first quarter of 2003, ABF was impacted by adverse weather. A major
storm in the Upper Midwest, Northeast and Atlantic Coast regions around February
17 closed three of ABF's distribution centers and three of ABF's major line-haul
relay locations for almost two days. In addition, 38 of ABF's service centers
were fully or partially closed due to this storm. ABF's operations were also
affected by storms in the Southeast during mid-January and in the Rocky Mountain
region during mid-March. The impact on ABF's operating income of lost revenue
and increased costs related to the first quarter 2003 adverse weather was
estimated at approximately $2.0 million. Categories of ABF costs most adversely
impacted were salaries and wages; supplies and expenses; and rents and purchased
transportation.
During the third quarter of 2003, ABF had five U.S. terminal facilities that
were impacted by Hurricane Isabel. The Northeast blackout caused three Canadian
terminals to be closed for one day and three U.S. terminals to be closed for two
days during the third quarter of 2003. The impact of these events on ABF's
revenue and operating profits during the third quarter of 2003 was minimal.
As discussed in Note A, in March 2003, the IBT announced the ratification of its
National Master Freight Agreement with the MFCA by its membership. The five-year
agreement provides for annual contractual wage and benefit increases of
approximately 3.2% - 3.4% and was effective April 1, 2003. For 2003, the annual
wage increase occurred on April 1, 2003 and was 2.5% and the annual health and
welfare cost increase occurred on August 1, 2003 and was 6.5%. The previous
agreement included contractual base wage and pension cost increases of 1.8% and
4.9%, respectively, on April 1, 2002 and an August 1, 2002 increase of 12.9% for
health and welfare costs.
ABF's operating ratio was 91.9% and 94.6% for the three and nine months ended
September 30, 2003 compared to 92.9% and 95.5% for the same periods in 2002,
reflecting revenue increases as a result of improved tonnage levels, increases
in fuel surcharges and revenue yields, as well as changes in certain other
operating expense categories as follows:
Salaries and wages expense for the three and nine months ended September 30,
2003 decreased 1.3% and 1.5% as a percent of revenue compared to the same
periods in 2002. The decrease results primarily from revenue yield improvements
and the fact that a portion of salaries and wages are fixed in nature and
decrease as a percent of revenue with increases in revenue levels. These
decreases were offset in part by the annual general IBT contractual increases
discussed above. ABF's non-union pension expense also increased by approximately
$1.2 million and $3.6 million during the three and nine months ended September
30, 2003.
Supplies and expenses increased 0.3% and 0.6% as a percent of revenue for the
three and nine months ended September 30, 2003 compared to the same periods in
2002, due primarily to an increase in fuel costs, excluding taxes, which on an
average price-per-gallon basis increased to $0.92 and $0.97 for the three and
nine months ended September 30, 2003 from $0.83 and $0.75 for the same periods
in 2002.
Operating taxes and licenses decreased 0.3% as a percent of revenue for both the
three and nine months ended September 30, 2003 compared to the same periods in
2002, due primarily to revenue yield improvements and the fact that a portion of
these costs are fixed in nature and decrease as a percent of revenue with
increases in revenue levels, as previously discussed.
25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
Rents and purchased transportation increased 0.5% and 0.6% as a percent of
revenue for the three and nine months ended September 30, 2003, compared to the
same periods in 2002, due primarily to an increase in rail utilization to 16.7%
and 15.5% of total miles for the three and nine months ended September 30, 2003,
compared to 15.1% and 13.9% during the same periods in 2002. During the three
and nine months ended September 30, 2003, rail miles have increased due to
tonnage growth in rail lanes. Rail miles for the nine months ended September 30,
2003 have also increased due to the increased use of the railroads to facilitate
freight movement as a result of backlogs caused by the first quarter 2003
adverse weather closures of distribution centers and relay points in ABF's
network.
As previously mentioned, ABF's general rate increase on July 14, 2003 was put in
place to cover known and expected cost increases for the next twelve months.
Typically, the increase was 5.9%, although the amount can vary by lane and
shipment characteristic. ABF's ability to retain this rate increase is dependent
on the pricing environment. ABF could be impacted by fluctuating fuel prices in
the future. ABF has experienced an increase in fuel prices in the first nine
months of 2003 as compared to the same period in 2002. ABF's fuel surcharges on
revenue are intended to offset any fuel cost increases. ABF's total insurance
costs are dependent on the insurance markets which have been adversely impacted
by the events of September 11, 2001 and other factors in recent years. The
Company anticipated ABF's workers' compensation and third-party casualty total
premiums and claims costs for 2003 to be consistent with 2002, assuming similar
claims experience and considering cost differences that occur because of changes
in business levels. However, in the first quarter of 2003, ABF experienced a
deterioration in workers' compensation claims experience which resulted in
additional costs of $2.5 million compared to the same period in 2002. In the
second and third quarters of 2003, the Company's workers' compensation expense
was consistent with the same periods in 2002. As previously discussed, the
Company increased its third-party casualty claims self-insurance retention layer
for 2003. ABF's non-union pension expense will increase in 2003 to approximately
$9.6 million from $4.8 million in 2002, reflecting the declining stock market in
recent past years and lower long-term interest rates. As previously discussed,
ABF's results of operations in 2003 have been and will continue to be impacted
by the wage and benefit increases associated with the new labor agreement with
the IBT, which was effective April 1, 2003.
On July 8, 2003, Yellow Corporation announced that it had entered into a
definitive agreement to acquire Roadway Corporation. Yellow Corporation and
Roadway Corporation are ABF's primary competitors. Management of the Company
expects that the combining of these two companies could, over time, result in
opportunities for additional business for ABF and improved pricing due to
eventual reductions in industry capacity, although there is no certainty that
the impact on the Company will be favorable.
Effective January 1, 2004, ABF will adopt the new Hours of Service rule as
prescribed by the U.S. Department of Transportation. The new rule reduces the
number of hours a driver can be on duty from 15 to 14, but increases the number
of driving hours, during that tour of duty, from 10 to 11. In addition, the new
rule requires the rest period between tours to be 10 hours as opposed to eight.
The new rule also provides for a "restart" provision, which states that a driver
can be on duty for 70 hours in eight days, but if the driver has 34 consecutive
hours off duty, for any reason, he "restarts" at zero hours. The Company is
still evaluating the impact the new rule will have on ABF's operations and the
financial impact of the changes on ABF's financial statements and related
disclosures.
Since 2001, ABF has been subject to compliance with cargo security and
transportation regulations issued by the Transportation Security Administration.
Since 2002, ABF has been subject to regulations issued by the Department of
Homeland Security. ABF is not able to accurately predict how recent events will
affect government regulation and the transportation industry. However, ABF
believes that any additional security
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
measures that may be required by future regulations could result in additional
costs and could have an adverse impact on its financial condition, cash flows
and results of operations.
CLIPPER
Effective August 1, 2003 and July 29, 2002, Clipper implemented general rate
increases of 5.9% in both years, for LTL shipments. Revenues for the three and
nine months ended September 30, 2003 increased to $34.0 million and $95.4
million from $32.4 million and $88.6 million during the same periods in 2002,
representing per-day increases of 4.9% and 7.7%, respectively.
LTL revenue per hundredweight, excluding fuel surcharge, increased 5.9% and 4.1%
to $19.28 and $18.40 for the three and nine months ended September 30, 2003,
compared to $18.21 and $17.68 for the same periods in 2002. LTL hundredweight
declined 5.3% and 2.4% when the three and nine months ended September 30, 2003
are compared to the same periods in 2002. Intermodal shipments increased 43.9%
and 27.6% and revenue per shipment decreased 7.1% and 3.2% for the three and
nine months ended September 30, 2003, compared to the same periods in 2002.
Revenue per shipment for Clipper Controlled Logistics, Clipper's
temperature-controlled division, increased 5.8% and 4.5% but shipments decreased
18.5% and 8.2% for the three and nine months ended September 30, 2003, compared
to the same periods in 2002.
Clipper's operating ratio increased to 98.2% for the third quarter of 2003, from
97.7% during the third quarter in 2002. Clipper's operating ratio was adversely
impacted by lower tonnage levels at Clipper's LTL division and Clipper
Controlled Logistics. Clipper Controlled Logistics business levels were
negatively impacted by low demand for produce on the East Coast. These adverse
impacts on operating results were partially offset by Clipper's intermodal
division, which experienced significant increases in shipment levels when the
third quarter 2003 is compared to the same period in 2002. For both the nine
months ended September 30, 2003 and 2002, Clipper's operating ratio was 99.1%.
Clipper is continuing to solicit additional shipments in its traditional
metro-to-metro lanes. These shipments should provide a better match with
Clipper's core operations and have historically been more profitable.
INCOME TAXES
The difference between the effective tax rate for the three and nine months
ended September 30, 2003 and the federal statutory rate resulted from state
income taxes and nondeductible expenses.
In March 1999, the Tenth Circuit Court of Appeals ruled against an appealing
taxpayer regarding the timing of the deductibility of contributions to
multiemployer pension plans. The Internal Revenue Service ("IRS") had previously
raised the same issue with respect to the Company. There were certain factual
differences between those present in the Tenth Circuit case and those relating
specifically to the Company. The Company was involved in the administrative
appeals process with the IRS regarding those factual differences beginning in
1997. During 2001, the Company paid approximately $33.0 million which
represented a substantial portion of the tax and interest that would be due if
the multiemployer pension issue was decided adversely to the Company, and which
was accounted for in prior years as a part of the Company's net deferred tax
liability and accrued expenses. In August 2002, the Company reached a settlement
with the IRS of the multiemployer pension issue and all other outstanding issues
relating to the Company's federal income tax returns for the years 1990 through
1994. The settlement resulted in a liability for tax and interest that was less
than the liability the Company had estimated if the IRS prevailed on all issues.
As a result of the settlement, in 2002 the Company reduced its
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
reserves for interest by approximately $5.2 million to reflect the reduction in
the Company's liability for future cash payments of interest.
PREPAID EXPENSES
Prepaid expenses increased $3.7 million from December 31, 2002 to September 30,
2003, due primarily to the prepayment of 2003 annual insurance premiums for the
Company, which are typically paid in the first quarter of each year.
INVESTMENT IN WINGFOOT
On March 19, 2003, the Company announced that it had notified Goodyear of its
intention to sell its 19% ownership interest in Wingfoot to Goodyear for a cash
price of $71.3 million. The Company closed the transaction and received the
proceeds from Goodyear on April 28, 2003. The Company recorded a pre-tax gain of
$12.1 million ($8.4 million after tax, or $0.33 per diluted common share) during
the second quarter of 2003. The Company used the proceeds to reduce the
outstanding debt under its Credit Agreement.
PREPAID PENSION COSTS
Prepaid pension costs increased $6.7 million from December 31, 2002 to September
30, 2003, due primarily to $15.0 million in contributions made to its non-union
pension plan during the second quarter of 2003, offset in part by pension
expense of $8.3 million recorded during the first nine months of 2003.
OTHER ASSETS
Other assets increased $12.4 million from December 31, 2002 to September 30,
2003, due primarily to participant deferrals and related Company deposits into
the Company's Voluntary Savings Plan or related trusts.
ACCOUNTS PAYABLE
Accounts payable increased $11.8 million from December 31, 2002 to September 30,
2003, due primarily to the accrual of $8.0 million at September 30, 2003 for the
purchase of revenue equipment.
ACCRUED EXPENSES
Accrued expenses increased $7.0 million from December 31, 2002 to September 30,
2003, due to a $4.0 million increase in required reserves for loss, injury and
damage claims and due to a $3.0 million increase in accrued salaries and wages.
Loss, injury and damage claims have increased as a result of a deterioration in
workers' compensation claims experience in the first quarter of 2003 and due to
an increase in the Company's self-insured retention levels. Accrued salaries and
wages increased due primarily to holiday pay accruals for which there is no
balance at year end.
OTHER LIABILITIES
Other liabilities increased $5.5 million from December 31, 2002 to September 30,
2003, due primarily to participant deferrals and related Company deposits into
the Company's Voluntary Savings Plan or related trusts and increases in
post-retirement medical benefit reserves.
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Unaudited) - continued
DEFERRED INCOME TAX LIABILITIES
Deferred income tax liabilities increased $8.9 million from December 31, 2002 to
September 30, 2003, due primarily to capital expenditures for revenue equipment,
which is subject to accelerated tax depreciation, and the contributions to the
non-union pension plans.
ACCUMULATED OTHER COMPREHENSIVE LOSS
During the first quarter of 2003, management determined that it would use the
proceeds received from the sale of Wingfoot to Goodyear, as previously
discussed, to pay down its Credit Agreement borrowings. As a result, the Company
forecasted Credit Agreement borrowings to be below $110.0 million. As a result,
the Company reclassified $8.9 million (pre-tax), or $5.4 million net of taxes,
relating to its interest rate swap, from accumulated other comprehensive loss
into earnings on the income statement during the first and second quarters of
2003.
SEASONALITY
ABF is affected by seasonal fluctuations, which impact the tonnage it will
transport. 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 has the
lowest. Clipper's operations are similar to operations at ABF, with revenues
usually being weaker in the first quarter and stronger during the months of June
through October.
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 "estimate," "forecast," "expect," "predict," "plan," "anticipate,"
"believe," "intend," "should," "would," "scheduled," 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 risks,
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 Arkansas Best's subsidiaries; actual future costs of
operating expenses such as fuel and related taxes; self-insurance claims and
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 ("SEC") public filings.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE INSTRUMENTS
The Company has historically been subject to market risk on all or a part of its
borrowings under bank credit lines, which have variable interest rates.
In February 1998, the Company entered into an interest rate swap effective April
1, 1998. The swap agreement is a contract to exchange variable interest rate
payments for fixed rate payments over the life of the instrument. The notional
amount is used to measure interest to be paid or received and does not represent
the exposure to credit loss. The purpose of the swap was to limit the Company's
exposure to increases in interest rates on the notional amount of bank
borrowings over the term of the swap. The fixed interest rate under the swap is
5.845% plus the Credit Agreement margin (0.775% at September 30, 2003 and 0.825%
at December 31, 2002). This instrument is recorded on the balance sheet of the
Company in other liabilities (see Note E). Details regarding the swap, as of
September 30, 2003, are as follows:
NOTIONAL RATE RATE FAIR
AMOUNT MATURITY PAID RECEIVED VALUE (2)(3)
------ -------- ---- -------- ------------
$110.0 million April 1, 2005 5.845% Plus Credit LIBOR rate (1) ($7.7) million
Agreement Margin (0.775%) Plus Credit Agreement
Margin (0.775%)
(1) LIBOR rate is determined two London Banking Days prior to the first day of
every month and continues up to and including the maturity date.
(2) The fair value is an amount estimated by Societe Generale ("process agent")
that the Company would have paid at September 30, 2003 to terminate the
agreement.
(3) The swap value changed from ($9.9) million at December 31, 2002. The fair
value is impacted by changes in rates of similarly termed Treasury
instruments.
OTHER MARKET RISKS
Since December 31, 2002, there have been no significant changes in the Company's
other market risks, as reported in the Company's Form 10-K Annual Report.
30
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 September 30, 2003. 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.
31
PART II.
OTHER INFORMATION
ARKANSAS BEST CORPORATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is named as a defendant in legal actions, the
majority of which arise out of the normal course of its business. The Company
maintains liability insurance in excess of self-retention levels for certain
risks arising out of the normal course of its business. The Company has accruals
for certain legal and environmental exposures. The Company is not a party to any
pending legal proceeding which the Company's management believes to be material
to the financial condition, cash flows or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
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
(b) REPORTS ON FORM 8-K.
The Company filed Form 8-K dated July 18, 2003, for Item No. 9 -
Information being provided under Item 12. The information furnished
announced the Company's second quarter 2003 earnings.
The Company filed Form 8-K dated July 23, 2003, for Item No. 5 - Other
Events. The filing announced the Company's quarterly cash dividend.
The Company filed Form 8-K dated September 30, 2003, for Item No. 5 -
Other Events and Regulation FD Disclosure. The filing announced that
the Company had amended and restated its existing three-year $225
million Credit Agreement dated as of May 15, 2002. The amended and
restated Credit Agreement extended the original maturity date for two
years, to May 15, 2007.
32
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: October 31, 2003 /s/ David E. Loeffler
-------------------------------------
David E. Loeffler
Vice President-Treasurer, Chief
Financial Officer and Principal
Accounting Officer
33