EXHIBIT 13
Market and Dividend Information
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results
of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
MARKET AND DIVIDEND INFORMATION
The Common Stock of Arkansas Best Corporation ("the Company") trades on The
Nasdaq National Market under the symbol "ABFS." The following table sets forth
the high and low recorded last sale prices of the Common Stock during the
periods indicated as reported by Nasdaq and the cash dividends declared:
CASH
HIGH LOW DIVIDEND
---- --- --------
2003
First quarter ..................... $ 28.00 $ 23.08 $ 0.08
Second quarter..................... 29.18 23.36 0.08
Third quarter...................... 30.04 23.92 0.08
Fourth quarter..................... 34.55 28.76 0.08
2002
First quarter ..................... $ 31.19 $ 23.70 $ -
Second quarter..................... 27.39 23.00 -
Third quarter...................... 29.90 18.64 -
Fourth quarter..................... 32.04 25.70 -
At February 27, 2004, there were 24,961,367 shares of the Company's Common Stock
outstanding, which were held by 429 stockholders of record.
The Company's Board of Directors suspended payment of dividends on the Company's
Common Stock during the second quarter of 1996. On January 23, 2003, the Company
announced that its Board of Directors had declared a quarterly cash dividend of
eight cents per share to holders of record of its Common Stock, which totaled
$2.0 million per quarter in 2003. On January 28, 2004, the Board increased its
quarterly cash dividend to twelve cents per share (see Note T).
The Company has a program to repurchase, 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. See Note C for stock repurchased
during 2003 and Note T for shares repurchased in early 2004.
The Company's $225.0 million Credit Agreement ("Credit Agreement") limits the
total amount of "restricted payments" that the Company may make. Restricted
payments include payments for the prepayment, redemption or purchase of
subordinated debt, dividends on Common Stock, and other distributions that are
payments for the purchase, redemption or acquisition of any shares of capital
stock. Dividends on the Company's Common Stock are limited to the greater of
25.0% of net income from the preceding year, excluding extraordinary items,
accounting changes and one-time noncash charges, or $15.0 million in any one
calendar year. The Company's Credit Agreement allows for repurchases of Common
Stock and the payment of a one-time dividend, provided the Company meets certain
debt to EBITDA ratio requirements and certain Credit Agreement availability
requirements.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
2003 2002 2001(1) 2000(1) 1999
---- ---- ------- ------- ----
($ thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Operating revenues................................. $ 1,527,473 $ 1,422,297 $ 1,526,206 $ 1,839,567 $ 1,721,586
Operating income................................... 73,180 68,221 75,934 140,152 109,707
Minority interest income (expense) in
Treadco, Inc..................................... - - - - 245
Other income (expense) - net....................... 1,291 3,286 (1,221) 647 (3,920)
Gain on sale/fair value net gain - Wingfoot (2).... 12,060 - - 5,011 -
Gain on sale - G.I. Trucking Company (3)........... - - 4,642 - -
Gain on sale - Clipper LTL (4)..................... 2,535 - - - -
IRS interest settlement (5) ....................... - 5,221 - - -
Fair value changes and payments on swap (6)........ (10,257) - - - -
Interest expense, net.............................. 3,855 8,097 12,636 16,687 18,395
Income from continuing operations,
before income taxes.............................. 74,954 68,631 66,719 129,123 87,637
Provision for income taxes (7)..................... 28,844 27,876 25,315 52,968 36,455
Income from continuing operations,
before accounting change......................... 46,110 40,755 41,404 76,155 51,182
Cumulative effect of change in accounting
principle net of tax benefits of $13,580 (8).... - (23,935) - - -
Loss from discontinued operations, net of tax (9).. - - - - (786)
Reported net income ............................... 46,110 16,820 41,404 76,155 50,396
Amortization of goodwill, net of tax (10).......... - - 3,411 3,409 3,509
Adjusted net income (10)........................... 46,110 16,820 44,815 79,564 53,905
Income per common share, diluted from
continuing operations before accounting change... 1.81 1.60 1.66 3.17 2.14
Reported net income per common share,
diluted ......................................... 1.81 0.66 1.66 3.17 2.11
Goodwill amortization, per common share,
diluted (10)..................................... - - 0.14 0.14 0.15
Adjusted net income per common share,
diluted (10)..................................... 1.81 0.66 1.80 3.31 2.26
Cash dividends paid per common share (11) ......... 0.32 - - - -
BALANCE SHEET DATA:
Total assets ...................................... 697,225 756,372 723,153 797,124 731,929
Current portion of long-term debt ................. 353 328 14,834 23,948 20,452
Long-term debt (including capital leases
and excluding current portion) .................. 1,826 112,151 115,003 152,997 173,702
OTHER DATA:
Gross capital expenditures ........................ 68,202 58,313 74,670 93,585 76,209
Net capital expenditures (12)...................... 60,373 46,439 64,538 83,801 61,253
Depreciation and amortization ..................... 51,925 49,219 50,315 52,186 45,242
(1) Selected financial data is not comparable to prior years' information
due to the contribution of Treadco, Inc.'s ("Treadco") assets and
liabilities to Wingfoot Commercial Tire Systems, LLC ("Wingfoot") on
October 31, 2000 and the sale of G.I. Trucking Company ("G.I.
Trucking") on August 1, 2001 (see Note S).
(2) Gain on sale of Wingfoot (see Note E) and fair value net gain on the
contribution of Treadco's assets and liabilities to Wingfoot.
(3) Gain on the sale of G.I. Trucking on August 1, 2001 (see Note S).
(4) Gain on the sale of Clipper LTL vendor and customer lists on December
31, 2003 (see Note D).
(5) Internal Revenue Service ("IRS") interest settlement (see Note H).
(6) Fair value changes and payments on the interest rate swap (see Note F).
(7) 2001 provision for income taxes includes a nonrecurring tax benefit of
approximately $1.9 million ($0.08 per diluted common share) resulting
from the resolution of certain tax contingencies originating in prior
years (see Note H).
(8) Noncash impairment loss of $23.9 million, net of taxes ($0.94 per
diluted common share), due to the write-off of Clipper goodwill (see
Note G).
(9) Discontinued operations for 1999 include the operations of CaroTrans
International, Inc., which was sold on April 17, 1999.
(10) Net income and earnings per share, as adjusted, excluding goodwill
amortization (see Note G).
(11) Cash dividends on the Company's Common Stock were suspended by the
Company as of the second quarter of 1996. On January 23, 2003, the
Company announced that its Board had declared a quarterly cash dividend
of eight cents per share.
(12) Capital expenditures, net of proceeds from the sale of property, plant
and equipment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Arkansas Best Corporation (the "Company") is a diversified holding company
engaged through its subsidiaries primarily in motor carrier and intermodal
transportation operations. Principal subsidiaries are ABF Freight System, Inc.
("ABF"); Clipper Exxpress Company ("Clipper") (see Note D regarding the sale and
exit of Clipper's less-than-truckload ("LTL") business); FleetNet America, Inc.
("FleetNet"); and until August 1, 2001, G.I. Trucking Company ("G.I. Trucking")
(see Note S).
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 (many of which are determined by the
Company's accounting policies - see Note B) 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. Because the bill-by-bill methodology
utilizes the approximate location of the shipment in the delivery process to
determine the revenue to recognize, management of the Company believes it to be
a reliable method.
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. Management believes this methodology to be
reliable in estimating the allowance for doubtful accounts.
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. 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
continually monitors salvage values and depreciable lives in order to make
timely, appropriate adjustments to them. The Company's gains and losses on
revenue equipment have been historically immaterial, which reflects the accuracy
of the estimates used. Management has a policy of purchasing its revenue
equipment rather than utilizing off-balance-sheet financing.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The Company has a noncontributory defined benefit pension plan covering
substantially all noncontractual employees. Benefits are generally based on
years of service and employee compensation. The Company accounts for its
nonunion pension plan in accordance with Statement of Financial Accounting
Standards No. 87 ("FAS 87"), Employer's Accounting for Pensions, and follows the
disclosure requirements of Statement of Financial Accounting Standards No. 132
("FAS 132"), Employers' Disclosures about Pensions and Other Postretirement
Benefits. During the fourth quarter of 2003, the Company adopted the revised
disclosure provisions of FAS 132. The Company's pension expense and related
asset and liability balances are estimated 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 plan's obligations.
The following table provides the key assumptions the Company used for 2003
compared to those it is utilizing to estimate 2004 pension expense:
YEAR ENDED DECEMBER 31
2004 2003
---- ----
Discount rate ....................................... 6.01% 6.90%
Expected return on plan assets ...................... 8.25% 7.90%
Rate of compensation increase ....................... 4.00% 4.00%
The assumptions used directly impact the pension expense for a particular year
(see Note L for further discussion of the approach used to establish the
expected return on plan assets and for an explanation of the change in discount
rates). 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 improved
stock market performance in 2003 positively impacted the Company's pension plan
assets and created an actuarial gain. The Company has increased its pension plan
return on assets in accordance with its approach to establishing the rate. This
approach considers the historical returns for the plan's current investment mix,
which improved as a result of an improved stock market in 2003, and its
investment advisor's range of expected returns for the plan's current investment
mix. An increase in expected returns on plan assets, higher assets on which to
earn a return and actuarial gains, decrease the Company's pension expense. A
1.0% increase in the pension plan rate of return would reduce annual pension
expense (pre-tax) by approximately $1.6 million. The Company anticipates its
pension expense for nonunion plans to be between $6.0 and $7.0 million for 2004
compared to $11.1 million for 2003.
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 2003, these limits were $1.0 million
per claim for both workers' compensation claims and third-party casualty claims.
Workers' compensation and third-party casualty claims liabilities recorded in
the financial statements totaled $53.7 million and $49.1 million at December 31,
2003 and 2002, respectively. The Company does not discount its claims
liabilities. Under the Company's accounting policy for claims,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
management annually estimates the development of the claims based upon the
Company's historical development factors over a number of years. This annual
update of the development of claims allows management to address any changes or
trends identified in the process. The Company utilizes a third party to
calculate the 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 the overall economic environment,
as well as many other factors. The actual claims payments are charged against
the Company's accrued claims liabilities and have been reasonable with respect
to the estimates of the liabilities made under the Company's methodology.
The Company owned a 19.0% interest in Wingfoot Commercial Tire Systems, LLC
("Wingfoot"). The transaction which created Wingfoot was accounted for at fair
value, as prescribed by Emerging Issues Task Force Issue No. 00-5 ("EITF 00-5"),
Determining Whether a Nonmonetary Transaction is an Exchange of Similar
Productive Assets. The Company's investment was accounted for under the equity
method, similar to a partnership investment. However, the Company did not share
in the profits or losses of Wingfoot during the term of the Company's "Put"
option, based upon the terms of the operating agreement. See Note E regarding
the sale of the Company's interest in Wingfoot during 2003.
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 Statement of Financial Accounting Standards No. 133 ("FAS 133"),
Accounting for Derivative Financial Instruments and Hedging Activities. The
Company's fixed rate interest rate swap was an effective hedge on $110.0 million
of revolving Credit Agreement borrowings at December 31, 2002, in accordance
with its accounting policy. 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 losses, net of tax, rather than through the
income statement.
As discussed in Note E, on March 19, 2003, the Company announced its intention
to sell its 19.0% 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 The Goodyear Tire & Rubber Company ("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 Company has no current plans to change the methodologies outlined above,
which are utilized in determining its critical accounting estimates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $5.3 million and $39.6 million at December 31,
2003 and 2002, respectively. During 2003, cash provided from operations of $74.3
million, proceeds from the sale of Wingfoot of $71.3 million (see Note E),
proceeds from the sale of Clipper LTL of $2.7 million (see Note D), proceeds
from asset sales of $7.8 million and available cash were used to purchase
revenue equipment and other property and equipment totaling $68.2 million, pay
dividends on Common Stock of $8.0 million (see Note C), purchase 200,000 shares
of the Company's Common Stock for $4.8 million (see Note C) and reduce
outstanding debt by $110.3 million (see Note J). Revenue equipment includes
tractors and trailers used primarily in the Company's motor carrier
transportation operations.
During 2002, cash provided by operations of $88.7 million, proceeds from asset
sales of $11.9 million, borrowings of $2.6 million and available cash were used
primarily to purchase revenue equipment and other property and equipment
totaling $58.3 million, retire the remaining $5.0 million in face value of the
Company's WorldWay 6 1/4% Convertible Subordinated Debentures and reduce
outstanding debt obligations.
The following is a table providing the aggregate annual obligations of the
Company including debt, capital lease maturities and future minimum rental
commitments:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------
($ thousands)
12/31/03 LESS THAN 1-3 4-5 AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------- ---------- ---------- ---------- ----------
Long-term debt obligations............. $ 1,647 $ 133 $ 319 $ 351 $ 844
Capital lease obligations.............. 532 220 309 3 -
Operating lease obligations............ 49,615 11,261 17,856 11,730 8,768
Purchase obligations................... - - - - -
Other long-term liabilities............ - - - - -
----------- ---------- ---------- ---------- ----------
Total.................................. $ 51,794 $ 11,614 $ 18,484 $ 12,084 $ 9,612
=========== ========== ========== ========== ==========
The Company's primary subsidiary, ABF, maintains ownership of most of its larger
terminals or distribution centers. ABF leases certain terminal facilities, and
Clipper leases its office facilities. At December 31, 2003, the Company had
future minimum rental commitments, net of noncancellable subleases, totaling
$47.7 million for terminal facilities and $1.9 million primarily for revenue
equipment.
In 2002 and 2001, the Company's nonunion pension plan assets were adversely
impacted by stock market declines. In addition, nonunion pension plan
obligations have been adversely impacted by declining interest rates, which
increases the present value of the plan obligations. During 2003, the Company
made $15.0 million in tax-deductible contributions to its nonunion pension plan.
The Company's nonunion pension plan assets were favorably impacted by stock
market improvements in 2003. As a result, the Company has no required minimum
contributions to its pension plan for 2004. Based upon current information
available from plan actuaries, the Company anticipates no additional
contributions will be made in 2004, due to Internal Revenue Code limitations on
tax-deductible contributions.
As discussed in Note L, the Company has an unfunded supplemental pension benefit
plan for the purpose of supplementing benefits under the Company's defined
benefit plan. Based upon currently available information, distributions of
benefits are anticipated to be approximately $3.0 million in 2004, none in 2005
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
and between an estimated $8.0 million and $11.0 million in 2006, with no other
anticipated distributions occurring until the year 2010. Distributions are
funded from general corporate cash funds.
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% and 0.825% at December 31,
2003 and 2002, respectively. The fair value of the Company's interest rate swap
was ($6.3) million at December 31, 2003 and ($9.9) million at December 31, 2002
and represents the amount the Company would have had to pay at those dates if
the interest rate swap agreement were terminated. 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 December 31, 2003 and 2002 (see Note F).
The Company has guaranteed approximately $0.4 million that relates to a debt
owed by The Complete Logistics Company ("CLC") to the 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 $60,000 per year.
The following table sets forth the Company's historical and forecasted capital
expenditures, net of proceeds from asset sales, for the periods indicated below:
ACTUAL
FORECASTED -----------------------------
2004 2003 2002 2001
---------- ---- ------ ----
($ thousands)
CAPITAL EXPENDITURES (NET)
ABF Freight System, Inc. ...................................... $ 74,700 $ 47,611 $ 35,796 $ 54,176
Clipper ....................................................... 1,800 4,655 (109) 3,482
G.I. Trucking Company ......................................... - - - 4,415
Other and eliminations ........................................ (200) 8,107 10,752 2,465
-------- --------- --------- ---------
Total consolidated capital expenditures (net)............... $ 76,300 $ 60,373 $ 46,439 $ 64,538
======== ========= ========= =========
The amounts presented in the table include computer equipment purchases financed
with a capital lease of $31,000 in 2003. 2002 amounts include land purchases
financed with notes payable of $1.7 million and computer equipment purchases
financed with capital leases of $0.9 million. No notes payable or capital lease
obligations were incurred in 2001.
The Company has two principal sources of available liquidity, which are its
operating cash and the $166.6 million it has available under its revolving
Credit Agreement at December 31, 2003. The Company has generated between
approximately $65.0 million and $90.0 million of operating cash annually for the
years 2001 through 2003. Management of the Company is not aware of any known
trends or uncertainties that would cause a significant change in its sources of
liquidity. 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, quarterly
dividends, stock repurchases and fund its 2004 capital expenditures which
includes commitments to purchase approximately $51.0 million of revenue
equipment which are cancellable by the Company if certain conditions are met.
On September 26, 2003, the Company amended and restated its existing three-year
$225.0 million 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
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 December 31, 2003, there were no outstanding Revolver Advances and
approximately $58.4 million of outstanding letters of credit. At December 31,
2002, there were $110.0 million of Revolver Advances and approximately $66.4
million of outstanding letters of credit. As discussed in Note E, the Company
used the proceeds from the sale of its interest in Wingfoot and operating cash
to reduce outstanding debt under its Credit Agreement during 2003. 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
December 31, 2003, the Company was in compliance with the covenants. Interest
rates under the agreement are at variable rates as defined by the Credit
Agreement.
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, Standard & Poor's 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 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.
OFF-BALANCE-SHEET ARRANGEMENTS
The Company's off-balance-sheet arrangements include future minimum rental
commitments, net of cancelable subleases of $49.6 million, which are disclosed
in Note I, and a guarantee of $0.4 million which is disclosed in Note J. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - 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. Note M to the Consolidated Financial Statements contains
additional information regarding the Company's operating segments:
YEAR ENDED DECEMBER 31
2003 2002 2001
---- ---- ----
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC.
Salaries and wages............................................. 65.1% 66.2% 65.6%
Supplies and expenses.......................................... 13.0 12.3 13.0
Operating taxes and licenses................................... 2.9 3.2 3.2
Insurance...................................................... 1.8 1.9 1.4
Communications and utilities................................... 1.1 1.1 1.2
Depreciation and amortization.................................. 3.2 3.3 3.1
Rents and purchased transportation............................. 7.0 6.4 6.1
Other.......................................................... 0.2 0.2 0.2
----- ---- ----
94.3% 94.6% 93.8%
===== ==== ====
CLIPPER (see Note D)
Cost of services............................................... 86.4% 85.9% 87.3%
Selling, administrative and general............................ 12.7 13.2 12.3
Exit costs - Clipper LTL....................................... 1.0 - -
Loss on sale or impairment of equipment and software........... 0.2 - -
----- ---- ----
100.3% 99.1% 99.6%
===== ==== ====
G.I. TRUCKING COMPANY (see Note S)
Salaries and wages............................................. - - 51.8%
Supplies and expenses.......................................... - - 9.7
Operating taxes and licenses................................... - - 2.4
Insurance...................................................... - - 2.4
Communications and utilities................................... - - 1.4
Depreciation and amortization.................................. - - 3.4
Rents and purchased transportation............................. - - 26.4
Other.......................................................... - - 2.5
(Gain) on sale of equipment ................................... - - (0.1)
----- ---- ----
- - 99.9%
===== ==== ====
OPERATING INCOME (LOSS)
ABF Freight System, Inc............................................ 5.7% 5.4% 6.2%
Clipper (see Note D)............................................... (0.3) 0.9 0.4
G.I. Trucking Company (see Note S)................................. - - 0.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
RESULTS OF OPERATIONS
EXECUTIVE OVERVIEW
Arkansas Best Corporation's operations include two primary operating
subsidiaries, ABF and Clipper. For the year ended December 31, 2003, ABF
represented 90.0% and Clipper represented 8.0% of total revenues. The Company's
results of operations are primarily driven by ABF. On an ongoing basis, ABF's
ability to operate profitably and generate cash is impacted by its tonnage
levels, the pricing environment, and its ability to manage costs effectively,
primarily in the area of salaries, wages and benefits ("labor").
ABF's ability to maintain existing tonnage levels or to grow tonnage levels is
impacted by the state of the U.S. economy as well as a number of other
competitive factors, which are more fully described in the General Development
of Business section of the Company's Form 10-K. ABF's results were negatively
impacted in 2002 and 2001 by tonnage declines resulting from declines in the
U.S. economy and the September 11 terrorist attacks. Two major events will
impact the competitive landscape for ABF in 2004: the new Hours of Service rules
that went into effect on January 4, 2004 and the combining of two of ABF's
primary competitors, Yellow Corporation ("Yellow") and Roadway Corporation
("Roadway") that occurred on December 11, 2003 (see General Development of
Business). With respect to the Hours of Service rules, the truckload industry
anticipates significantly higher costs associated with driver pay, customer
delays and increased charges for stop-off and detention services. As a result,
ABF believes that opportunities exist to handle some larger shipments that have
recently been moving by truckload carriers. With respect to the Yellow-Roadway
combination, because both companies are primary competitors of ABF, the
potential exists for ABF to gain additional business from customers moving their
business away from either Yellow or Roadway as a result of the combination,
although there can be no certainty the impact on ABF will be favorable.
As stated above, the pricing environment is a key to ABF's operating
performance. The impact of changes in the pricing environment is measured by
LTL-billed revenue per hundredweight, although this measure is also affected by
profile factors such as average shipment size and average length of haul. The
environment in 2003 was positive, with ABF growing LTL-billed revenue per
hundredweight, net of fuel surcharges, by 4.9%. In the fourth quarter of 2003,
the environment was more competitive, but ABF continued to price rationally and
manage effectively during this period. If the pricing environment were to
deteriorate, the impact on ABF's results of operations would be negative.
For 2003, salaries, wages and benefits accounted for 65.1% of ABF's costs. Labor
costs are impacted by ABF's contractual obligation under its agreement with the
International Brotherhood of Teamsters ("IBT"). In addition, ABF's ability to
effectively manage labor costs has a direct impact on its operating performance.
Shipments per dock, street and yard hour ("DSY") is the measure ABF uses to
assess this effectiveness. ABF is generally very effective in managing its labor
costs to business levels.
The Company ended 2003 with no borrowings under its revolving Credit Agreement
and $400.7 million in equity. ABF is in a position of strength to take advantage
of any potential growth opportunities as discussed above because of the
Company's financial position at December 31, 2003.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
2003 COMPARED TO 2002
Consolidated revenues and operating income for 2003 increased 7.4% and 7.3%,
respectively, when compared to 2002, due primarily to improved revenues at ABF.
Income before the cumulative effect of change in accounting principle for 2003
increased 13.1% when compared to 2002. This increase reflects primarily a gain
on the sale of the Company's 19.0% interest in Wingfoot (see Note E), a gain
from the sale of Clipper's LTL customer and vendor lists (see Note D), an
increase in ABF's operating income and lower interest expense from lower average
debt levels. These increases were offset in part by a one-time charge related to
the fair value of the Company's interest rate swap (see Note F). Income before
the cumulative effect of an accounting change for 2002 included the positive
impact of an Internal Revenue Service ("IRS") interest settlement (see Note H).
During the first quarter of 2002, the Company recognized a noncash impairment
loss on its Clipper goodwill as a cumulative effect of a change in accounting
principle as required by Statement of Financial Accounting Standards No. 142
("FAS 142"), Goodwill and Other Intangible Assets (see Note G).
The following table provides a reconciliation of GAAP income and diluted
earnings per share, before the cumulative effect of change in accounting
principle for 2003 and 2002. Management believes these non-GAAP financial
measures are useful to investors in understanding the Company's results of
operations, because they provide more comparable measures:
YEAR ENDED DECEMBER 31
2003 2002
-----------------------------------------------------
EARNINGS EARNINGS
NET PER SHARE NET PER SHARE
INCOME (DILUTED) INCOME (DILUTED)
--------- --------- --------- ---------
($ thousands, except per share data)
GAAP income before cumulative effect of change
in accounting principle ................................... $ 46,110 $ 1.81 $ 40,755 $ 1.60
Less gain on Wingfoot (see Note E)............................ (8,429) (0.33) - -
Less gain on sale of Clipper LTL (see Note D)................. (1,518) (0.06) - -
Less IRS interest settlement (see Note H)..................... - - (3,101) (0.12)
Plus Clipper LTL exit costs (see Note D)...................... 747 0.03 - -
Plus interest rate swap charge (see Note F)................... 5,364 0.21 - -
--------- --------- --------- ---------
Income before cumulative effect of change
in accounting principle, excluding above items............. $ 42,274 $ 1.66 $ 37,654 $ 1.48
========= ========= ========= =========
The improvement of 12.2% in diluted earnings per share, excluding the above
items, to $1.66 from $1.48, reflects improved operations at ABF and lower
interest expense in 2003 when compared to 2002.
On August 1, 2001, the Company sold the stock of G.I. Trucking for $40.5 million
in cash to a company formed by the senior executives of G.I. Trucking and Estes
Express Lines ("Estes"). The Company retained ownership of three California
terminal facilities and has agreed to lease them for an aggregate amount of $1.6
million per year to G.I. Trucking for a period of up to four years. G.I.
Trucking has an option at any time during the four-year lease term to purchase
these terminals for $19.5 million. The terminals may be purchased in aggregate
or individually. The facilities have a net book value of approximately $5.6
million. If the terminal facilities are sold to G.I. Trucking, the Company will
recognize a pre-tax gain of approximately $13.9 million in the period they are
sold.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
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. ABF charges a fuel surcharge, based on the increase in
diesel fuel prices compared to an index price. The fuel surcharge in effect
during 2003 averaged 3.6% of revenue compared to 2.0% in 2002.
Revenues for 2003 were $1,370.4 million compared to $1,277.1 million during
2002. ABF generated operating income of $77.8 million for 2003 compared to $68.8
million during 2002.
The following table provides a comparison of key operating statistics for ABF:
DECEMBER 31
2003 2002 % CHANGE
----------- ------------ --------
BILLED REVENUE PER HUNDREDWEIGHT, EXCLUDING FUEL SURCHARGES
Less than truckload ("LTL") (shipments less than 10,000 pounds)..... $ 22.99 $ 21.91 4.9%
Truckload ("TL") ................................................... $ 8.40 $ 7.94 5.8%
Total .............................................................. $ 20.15 $ 19.11 5.4%
TONNAGE (TONS)
LTL................................................................. 2,644,786 2,626,623 0.7%
TL ................................................................. 639,643 656,615 (2.6)%
----------- ------------ -----
Total .............................................................. 3,284,429 3,283,238 0.0%
=========== ============ =====
SHIPMENTS PER DSY HOUR................................................ 0.527 0.535 (1.7)%
ABF's 2003 increase in revenue of 7.3% over 2002 is due primarily to increases
in revenue per hundredweight and fuel surcharges. LTL tonnage showed a slight
increase, while total tonnage for 2003 equaled that of 2002.
Approximately one-half of the increase in LTL-billed revenue per hundredweight
was the result of changes in the profile of freight handled. For 2003, ABF's
average LTL length of haul increased, its LTL-rated commodity class increased
and its LTL weight per shipment declined, compared to 2002. Increases in length
of haul and LTL-rated commodity class and decreases in LTL weight per shipment
all impact LTL-billed revenue per hundredweight positively.
ABF's LTL tonnage levels increased during the first eight months of 2003 as a
result of the closure of a major competitor, Consolidated Freightways ("CF"), on
September 3, 2002. Since the one-year anniversary of the CF closure, monthly
year-over-year tonnages have declined, although declines were less severe during
the fourth quarter of 2003. September 2003's year-over-year LTL tonnage decline
of 5.4% compares to 2.0% in October 2003, 3.1% in November 2003 and 1.3% in
December 2003. These tonnage comparisons suggest that the improving U.S. economy
is benefiting the general freight market, although there can be no certainty.
ABF's improvement in its 2003 operating ratio to 94.3% from 94.6% in 2002
reflects revenue increases as a result of increases in revenue yields, fuel
surcharges and LTL tonnage, as well as changes in certain other operating
expense categories as follows:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Salaries and wages expense for 2003 decreased 1.1%, as a percent of revenue,
compared to 2002, due primarily to 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. This decrease was offset in part by
productivity declines and the annual general IBT contractual increases. 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. Productivity for 2003 was below that of 2002 primarily
because of additional shipment handling associated with ABF's concentration on
transit time improvements and premium services provided at pickup and delivery.
In addition, ABF's nonunion pension expense for 2003 increased by approximately
$4.8 million over 2002 amounts.
Supplies and expenses for 2003 increased 0.7%, as a percent of revenue, compared
to 2002, due primarily to an increase in fuel costs, excluding taxes, which on
an average price-per-gallon basis increased to $0.97 for 2003 from $0.79 in
2002.
The 0.6% increase in ABF's rents and purchased transportation costs, as a
percent of revenue, is due primarily to an increase in rail utilization to 16.2%
of total miles for 2003, compared to 14.4% during 2002. Rail miles have
increased due to tonnage growth in rail lanes.
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.
ABF's ability to retain this rate increase is dependent on the competitive
pricing environment. ABF could be impacted by fluctuating fuel prices in the
future. As previously discussed, ABF has experienced an increase in fuel prices
in 2003 as compared to 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. ABF's workers' compensation and
third-party casualty total premiums and claims costs for 2003 were consistent
with 2002. ABF's nonunion pension expense will decrease in 2004 to between $5.0
million and $6.0 million from $9.6 million in 2003, reflecting the improving
stock market in 2003. As previously discussed, ABF's results of operations in
2003 have been impacted by the wage and benefit increases associated with the
new labor agreement with the IBT and will continue to be impacted by this
agreement during the remainder of the contract term.
Because of changes that have occurred in the LTL industry since the closure of
CF, sequential comparisons of business levels are often more revealing than
year-over-year comparisons. An analysis of the 1998 through 2002 sequential
relationship between fourth quarter LTL tonnage levels and subsequent first
quarter LTL tonnage levels reveals a seasonal decline in ABF's LTL tonnage per
day. Applying this historical relationship to actual LTL tonnage-per-day figures
for the fourth quarter of 2003 yields a first quarter 2004 LTL daily tonnage
figure that is generally comparable to the LTL daily tonnage level of the first
quarter of 2003. It is not known at this time if this historical level of change
will, in fact, occur in the first quarter of 2004 relative to the first quarter
of 2003. This sequential tonnage analysis is only a starting point for
predicting upcoming business levels. The effects of various economic and
industry factors must also be considered.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The first quarter generally has the highest operating ratio of the year. First
quarter tonnage levels are normally lower during January and February while
March provides a disproportionately higher amount of the quarter's business.
Adverse weather conditions in the early months of the first quarter can have a
negative impact on productivity and costs. As the weather improves, business
levels tend to increase and the operating results of March often have a
significant impact on the first quarter's results. These observations are made
based on ABF's historical operating performance.
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 2003 increased
6.6% when compared to 2002.
As discussed in Note D, on December 31, 2003, Clipper closed the sale of all
customer and vendor lists related to its LTL freight business, resulting in a
pre-tax gain of $2.5 million. This gain is reported below the operating income
line. With this sale, Clipper exited the LTL business. Total costs incurred with
the exit of this business unit amounted to $1.2 million and included severance
pay, software and fixed asset abandonment and certain operating lease costs.
Exit costs are reported in operating income.
The following table provides a comparison of key operating statistics for
Clipper:
DECEMBER 31
2003 2002 % CHANGE
---- ---- --------
LTL
LTL hundredweight ............................................. 1,755,434 1,910,838 (8.1)%
Revenue per hundredweight, excluding fuel surcharges .......... $ 18.56 $ 18.46 0.5%
INTERMODAL
Shipments ..................................................... 31,630 24,232 30.5%
Revenue per shipment .......................................... $ 1,633.31 $ 1,684.10 (3.0)%
TEMPERATURE-CONTROLLED TRUCKLOAD
Shipments ..................................................... 9,761 10,983 (11.1)%
Revenue per shipment .......................................... $ 3,026.33 $ 2,813.10 7.6%
Clipper's LTL division accounted for approximately 30.0% of total Clipper
revenues. In 2003 and recent years, revenue and operating income of Clipper's
LTL operation had suffered, primarily from the negative effects of the U.S.
economy and, in the fourth quarter of 2003, from the announcement of the sale of
its customer and vendor lists to Hercules Forwarding Inc. Clipper has retained
its intermodal and temperature-controlled truckload businesses moving on the
rail, as well as its brokerage operation.
Clipper's intermodal division experienced significant growth in shipments as a
result of additional lanes awarded to Clipper by a large-volume customer.
Revenue per shipment declined 3.0% as a result of a more competitive pricing
environment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Clipper's temperature-controlled truckload business experienced a decline in
shipments that resulted primarily from low demand for produce on the East Coast;
however, revenue per shipment improved, indicating an improving pricing
environment for produce shipments.
The following table provides a reconciliation of GAAP operating income and
operating ratio for 2003 and 2002. Management believes the non-GAAP operating
income and operating ratio is useful to investors in understanding Clipper's
results of operations, because it provides more comparable measures:
2003 2002
-----------------------------------------------------
OPERATING OPERATING OPERATING OPERATING
CLIPPER - PRE-TAX INCOME (LOSS) RATIO INCOME (LOSS) RATIO
------------ --------- ------------ ---------
($ thousands)
Clipper's GAAP operating income (loss)........................ $ (421) 100.3% $ 1,123 99.1%
Clipper LTL exit costs........................................ 1,246 1.0 - -
--------- ----- --------- ----
Clipper's operating income, excluding exit costs.............. $ 825 99.3% $ 1,123 99.1%
========= ===== ========= ====
Clipper's operating ratio, excluding exit costs, increased slightly when 2003 is
compared to 2002. This increase results primarily from a change in the mix of
Clipper's business to more intermodal business and less temperature-controlled
produce business. The produce business historically has better margins than the
intermodal business. In addition, all business units have seen a reduction in
rail incentives, which increases direct costs as a percent of revenue.
During 2004, Clipper will focus on the consistent growth of its remaining
business units with an emphasis on individual account profitability. However,
Clipper's 2004 results could be adversely impacted by lower rail incentives and
higher trailer repositioning costs as a result of lower overall volumes because
of no longer having LTL freight. However, these adverse effects could be
overcome by growth in the remaining business units, although there can be no
assurances in this regard.
OTHER LONG-TERM ASSETS
Other assets increased $15.3 million from December 31, 2002 to December 31,
2003, due primarily to participant deferrals and related Company deposits into
the Company's Voluntary Savings Plan or related trusts.
OTHER LONG-TERM LIABILITIES
Other liabilities increased $6.3 million from December 31, 2002 to December 31,
2003, due primarily to participant deferrals and related Company deposits into
the Company's Voluntary Savings Plan or related trusts, offset in part by
distributions from its supplemental pension benefit plan.
INCOME TAXES
The difference between the effective tax rate for 2003 and the federal statutory
rate resulted from state income taxes and nondeductible expenses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
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 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 which was less than the liability the Company had
estimated if the IRS prevailed on all issues. As a result of the settlement, the
Company reduced its reserves for interest by approximately $5.2 million to
reflect the reduction in the Company's liability for future cash payments of
interest. The effect of this change resulted in an increase in the Company's
2002 net income per diluted common share of $0.12.
At December 31, 2003, the Company had deferred tax assets of $45.3 million, net
of a valuation allowance of $1.3 million, and deferred tax liabilities of $47.4
million. The Company believes that the benefits of the deferred tax assets of
$45.3 million will be realized through the reduction of future taxable income.
Management has considered appropriate factors in assessing the probability of
realizing these deferred tax assets. These factors include deferred tax
liabilities of $47.4 million and the presence of significant taxable income in
2003 and 2002. The valuation allowance has been provided for the benefit of net
operating loss carryovers in certain states with relatively short carryover
periods and other limitations.
Management intends to evaluate the realizability of net deferred tax assets on a
quarterly basis by assessing the need for any additional valuation allowance.
2002 COMPARED TO 2001
Consolidated revenues for 2002 decreased 6.8% as compared to 2001. On August 1,
2001, the Company sold the stock of G.I. Trucking (see Note S). The Company's
results for 2001 included seven months of operations for G.I. Trucking. The
decline in revenues in 2002 resulted from the sale of G.I. Trucking and
decreases in revenues for ABF and Clipper as a result of a decline in the U.S.
economy beginning in mid-2000. This economic decline was further accelerated by
the September 11 terrorist attacks on the World Trade Center and on the Pentagon
and continued to negatively impact the Company during the first eight months of
2002. These decreases were offset in part by an increase in ABF revenue as a
result of CF filing for bankruptcy protection and ceasing operations in early
September 2002. The Company's revenues increased 13.1% to $381.6 million in the
fourth quarter of 2002, from $337.5 million in the fourth quarter of 2001.
The decrease in operating income for 2002 is due primarily to a decline in
operating income for ABF, which relates primarily to the decline in the U.S.
economy. However, operating income for the fourth quarter 2002 increased to
$26.2 million from $14.8 million in the fourth quarter of 2001, primarily as a
result of additional business gained by ABF from the CF closure.
Income before the cumulative effect of change in accounting principle decreased
in 2002 due primarily to the decrease in 2002 operating income from 2001,
discussed above, offset in part by a favorable settlement with the IRS (see Note
H). In addition, 2002 had lower interest expense from lower average debt levels
and no goodwill amortization, in accordance with the Company's adoption of FAS
142. During the first quarter of
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
2002, the Company recognized a noncash impairment loss on its Clipper goodwill
as the cumulative effect of a change in accounting principle as required by FAS
142 (see Note G). The Company's 2001 income before cumulative effect of change
in accounting principle included a gain from the sale of G.I. Trucking (see
Note S).
Tonnage levels during the first eight months of 2002 continued to be impacted by
a decline in the U.S. economy, as previously discussed. During this time period,
ABF's LTL pounds per day were 6.9% below the same eight-month period in 2001.
During the four-month period from September through December 2002, following
CF's closure, ABF's LTL pounds per day were 6.2% above the same four-month
period in 2001. Comparing the first eight months of 2002 to the last four months
of 2002, ABF experienced an increase in tonnage trends of 13.1%.
ABF FREIGHT SYSTEM, INC.
Effective August 1, 2002 and 2001, ABF implemented general rate increases to
cover known and expected cost increases. Typically, the increases were 5.8% and
4.9%, respectively, although the amounts can vary by lane and shipment
characteristic. The fuel surcharge in effect during 2002 averaged 2.0% of
revenue. The fuel surcharge in effect during 2001 averaged 2.7% of revenue.
Revenues for 2002 were $1,277.1 million compared to $1,282.3 million during
2001. ABF generated operating income of $68.8 million for 2002 compared to $79.4
million during 2001.
The following table provides a comparison of key operating statistics for ABF:
DECEMBER 31
2002 2001 % CHANGE
---- ---- --------
BILLED REVENUE PER HUNDREDWEIGHT, EXCLUDING FUEL SURCHARGES
Less than truckload ("LTL") (shipments less than 10,000 pounds)..... $ 21.91 $ 21.00 4.3%
Truckload ("TL") ................................................... $ 7.94 $ 7.72 2.9%
Total .............................................................. $ 19.11 $ 18.19 5.1%
TONNAGE (TONS)
LTL................................................................. 2,626,623 2,701,195 (2.8)%
TL ................................................................. 656,615 726,144 (9.6)%
----------- ------------- -----
Total .............................................................. 3,283,238 3,427,339 (4.2)%
SHIPMENTS PER DSY HOUR................................................ 0.535 0.527 1.5%
ABF's decline in revenue for 2002 is due to a decrease in LTL tonnage and fuel
surcharges. ABF's performance for 2002 was affected by less available freight
due to decreased business levels at customer facilities, primarily as a result
of a decline in the U.S. economy impacting ABF through the first eight months of
2002. As previously discussed, ABF's business levels during the last four months
of 2002 were positively impacted by the CF closure. ABF experienced an increase
in tonnage trends of 13.1% when the last four months of 2002 are compared to the
first eight months of 2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The pricing environment remained relatively firm during the first eight months
of 2002, when compared to that in previous economic downturns. Since the closure
of CF, the pricing environment became more stable as reflected by the 2002
fourth quarter LTL-billed revenue per hundredweight, excluding fuel surcharge,
increase of 5.9% to $22.56 from $21.30 in the fourth quarter of 2001.
ABF's decrease in its fourth quarter 2002 operating ratio to 92.2% reflected
improved tonnage levels and a more stable pricing environment, both primarily as
a result of CF's closure.
ABF's full year operating ratio for 2002 increased primarily as a result of
tonnage declines as discussed above and increases in insurance costs and changes
in certain other operating expense categories as follows:
Salaries and wages expense for 2002 increased 0.6% as a percent of revenue
compared to the same period in 2001. The increase results from the annual
general IBT contractual base wage and pension cost increases of 1.8% and 4.9% on
April 1, 2002 and the August 1, 2002 increase of 12.9% for health and welfare
costs, as well as the fact that a portion of salaries and wages are fixed in
nature and increase as a percent of revenue with decreases in revenue levels. In
addition, workers' compensation costs increased, as a result of an increase in
severe claims and an increase in the Company's self-insurance retention level,
from $0.3 million per claim to $1.0 million per claim, as well as a $0.9 million
increase in reserves associated with ABF's exposure to the liquidation of
Reliance Insurance Company (see Note R), when 2002 is compared to 2001. These
increases were offset in part by revenue yield improvements and productivity
improvements.
Supplies and expenses decreased 0.7% as a percent of revenue for 2002 compared
to 2001, due primarily to a decline in fuel costs, excluding taxes, which on an
average price-per-gallon basis, declined to $0.79 for 2002 from $0.87 for 2001.
Insurance expense increased 0.5% as a percent of revenue for 2002, compared to
2001, due primarily to increased insurance premium costs for third-party
casualty claims, in part because of the effect on the insurance markets of the
September 11 terrorist attacks.
Rents and purchased transportation increased 0.3% as a percent of revenue for
2002, compared to 2001, due primarily to an increase in rail utilization to
14.4% of total miles for 2002, compared to 13.5% in 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
CLIPPER
Effective July 29, 2002 and August 13, 2001, Clipper implemented general rate
increases of 5.9% and 4.9%, respectively, for LTL shipments. Revenues for 2002
decreased to $118.9 million from $127.3 million during 2001.
The following table provides a comparison of key operating statistics for
Clipper:
DECEMBER 31
2002 2001 % CHANGE
---- ---- --------
LTL
LTL hundredweight ............................................. 1,910,838 1,998,230 (4.4)%
Revenue per hundredweight, excluding fuel surcharges .......... $ 18.46 $ 17.81 3.6%
INTERMODAL
Shipments ..................................................... 24,232 28,281 (14.3)%
Revenue per shipment .......................................... $ 1,684.10 $ 1,677.24 0.4%
TEMPERATURE-CONTROLLED TRUCKLOAD
Shipments ..................................................... 10,983 9,986 10.0%
Revenue per shipment .......................................... $ 2,813.10 $ 2,832.22 (0.7)%
LTL hundredweight declines reflect Clipper's movement away from unprofitable LTL
business and lower business levels, resulting from the decline in the U.S.
economy. The number of intermodal shipments decreased, primarily due to lower
shipment volumes from existing customers. The number of shipments for Clipper's
temperature-controlled division increased 10.0% due primarily to growth in
non-produce business.
Despite the overall decline in revenue, Clipper's operating ratio improved
slightly for 2002. Clipper's operating ratio was positively impacted by the
elimination of unprofitable accounts, higher utilization of rail in line-haul
movements and cost-efficient handling of customer shipments in service lanes
between major cities. Clipper's rail utilization for 2002 was 63.6% of total
miles, compared to 57.1% for 2001. For Clipper, rail costs per mile are
generally less expensive than over-the-road costs per mile.
G.I. TRUCKING COMPANY
On August 1, 2001, the Company sold the stock of G.I. Trucking for $40.5 million
in cash to a company formed by the senior executives of G.I. Trucking and Estes
(see Note S). The Company recognized a pre-tax gain on the sale of $4.6 million
in the third quarter of 2001, which was reported below the operating income
line. Revenue and operating income for the seven months of operations for G.I.
Trucking for 2001 were $95.5 million and $0.1 million, respectively.
INTEREST
Interest expense was $8.1 million for 2002, compared to $12.6 million for 2001.
The decline resulted from lower average debt levels when 2002 is compared to
2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
INCOME TAXES
The difference between the effective tax rate for 2002 and the federal statutory
rate resulted from state income taxes and nondeductible expenses.
SEASONALITY
ABF is affected by seasonal fluctuations, which affects its tonnage to be
transported. 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
being weaker in the first quarter and stronger during the months of June through
October.
ENVIRONMENTAL MATTERS
The Company's subsidiaries, or lessees, store fuel for use in tractors and
trucks in approximately 75 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.
As of December 31, 2003, the Company has accrued approximately $2.9 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
FORWARD-LOOKING STATEMENTS
Statements contained in this Management's Discussion and Analysis section that
are not based on historical facts are "forward-looking statements." Terms such
as "estimate," "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 risk, including, but not
limited to, union relations; availability and cost of capital; shifts in market
demand; weather conditions; the performance and needs of industries served by
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.
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 December 31, 2003 and 0.825%
at December 31, 2002). This instrument is recorded on the balance sheet of the
Company in other liabilities (see Note F). Details regarding the swap, as of
December 31, 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 Agreement LIBOR rate(1) ($6.3) million
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 December 31, 2003 to
terminate the agreement.
(3) The swap value changed from ($9.9) million at December 31, 2002. The
fair value is impacted by changes in rates of similarly termed Treasury
instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for all financial instruments, except for the interest
rate swap agreement disclosed above and capitalized leases:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance sheets
for cash and cash equivalents approximates its fair value.
LONG- AND SHORT-TERM DEBT: The carrying amount of the Company's borrowings under
its Revolving Credit Agreement approximates its fair value, since the interest
rate under this agreement is variable. The fair value of the Company's other
long-term debt was estimated using current market rates.
The carrying amounts and fair value of the Company's financial instruments at
December 31 are as follows:
2003 2002
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
($ thousands)
Cash and cash equivalents.............................. $ 5,251 $ 5,251 $ 39,644 $ 39,644
Short-term debt........................................ $ 133 $ 134 $ 133 $ 127
Long-term debt......................................... $ 1,514 $ 1,516 $ 111,647 $ 111,610
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - continued
Borrowings under the Company's Credit Agreement in excess of $110.0 million are
subject to market risk. During 2003, outstanding debt obligations under the
Credit Agreement did not exceed $110.0 million. As discussed in Note E, the
Company used the proceeds from the sale of its interest in Wingfoot and
operating cash to reduce outstanding debt under its Credit Agreement during
2003. The Company's average borrowings during the year were $41.0 million. A
100-basis-point change in interest rates on Credit Agreement borrowings above
$110.0 million would change annual interest cost by $100,000 per $10.0 million
of borrowings.
The Company is subject to market risk for increases in diesel fuel prices;
however, this risk is mitigated by fuel surcharges which are included in the
revenues of ABF and Clipper based on increases in diesel fuel prices compared to
relevant indexes.
The Company does not have a formal foreign currency risk management policy. The
Company's foreign operations are not significant to the Company's total revenues
or assets. Revenue from non-U.S. operations amounted to approximately 1.0% of
total revenues for 2003. Accordingly, foreign currency exchange rate
fluctuations have never had a significant impact on the Company, and they are
not expected to in the foreseeable future.
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.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholders and Board of Directors
Arkansas Best Corporation
We have audited the accompanying consolidated balance sheets of Arkansas Best
Corporation as of December 31, 2003 and 2002, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Arkansas Best Corporation at December 31, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States.
As discussed in Note G to the financial statements, in 2002, the Company changed
its method of accounting for goodwill.
Ernst & Young LLP
Little Rock, Arkansas
January 21, 2004
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
2003 2002
------------- -------------
($ thousands, except share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................... $ 5,251 $ 39,644
Accounts receivable, less allowances
(2003 - $3,558; 2002 - $2,942) ............................................ 132,320 130,769
Prepaid expenses ............................................................ 8,600 7,787
Deferred income taxes ....................................................... 27,006 26,443
Other ....................................................................... 3,400 3,729
------------- -------------
TOTAL CURRENT ASSETS ..................................................... 176,577 208,372
PROPERTY, PLANT AND EQUIPMENT
Land and structures ......................................................... 215,476 223,107
Revenue equipment ........................................................... 370,102 343,100
Service, office and other equipment ......................................... 107,066 91,054
Leasehold improvements ...................................................... 13,048 12,983
------------- -------------
705,692 670,244
Less allowances for depreciation and amortization ........................... 358,564 330,841
------------- -------------
347,128 339,403
INVESTMENT IN WINGFOOT ......................................................... - 59,341
PREPAID PENSION COSTS .......................................................... 32,887 29,017
OTHER ASSETS ................................................................... 68,572 53,225
ASSETS HELD FOR SALE ........................................................... 8,183 3,203
GOODWILL, less accumulated amortization
(2003 and 2002 - $32,037) ................................................... 63,878 63,811
------------- -------------
$ 697,225 $ 756,372
============= =============
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
2003 2002
------------- -------------
($ thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft and drafts payable ........................................... $ 8,861 $ 7,808
Accounts payable ............................................................ 55,764 58,442
Federal and state income taxes .............................................. 2,816 5,442
Accrued expenses ............................................................ 125,148 123,294
Current portion of long-term debt ........................................... 353 328
------------- -------------
TOTAL CURRENT LIABILITIES ................................................ 192,942 195,314
LONG-TERM DEBT, less current portion ........................................... 1,826 112,151
FAIR VALUE OF INTEREST RATE SWAP ............................................... 6,330 9,853
OTHER LIABILITIES .............................................................. 66,284 59,938
DEFERRED INCOME TAXES .......................................................... 29,106 23,656
FUTURE MINIMUM RENTAL COMMITMENTS, NET
(2003 - $49,615; 2002 - $42,494) ........................................... - -
OTHER COMMITMENTS AND CONTINGENCIES ............................................ - -
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 70,000,000 shares;
issued 2003: 25,295,984 shares; 2002: 24,972,086 shares ................ 253 250
Additional paid-in capital .................................................. 217,781 211,567
Retained earnings ........................................................... 192,610 154,455
Treasury stock, at cost, 2003: 259,782 shares; 2002: 59,782 shares .......... (5,807) (955)
Accumulated other comprehensive loss ........................................ (4,100) (9,857)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY ............................................... 400,737 355,460
------------- -------------
$ 697,225 $ 756,372
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
ARKANSAS BEST CORPORATION
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
2003 2002 2001
---- ---- ----
($ thousands, except per share data)
OPERATING REVENUES..................................................... $ 1,527,473 $ 1,422,297 $ 1,526,206
OPERATING EXPENSES AND COSTS........................................... 1,454,293 1,354,076 1,450,272
------------ ----------- ------------
OPERATING INCOME ...................................................... 73,180 68,221 75,934
OTHER INCOME (EXPENSE)
Net gains on sales of property and other ........................... 643 3,524 918
Gain on sale of G.I. Trucking Company .............................. - - 4,642
Gain on sale of Wingfoot ........................................... 12,060 - -
Gain on sale of Clipper LTL ........................................ 2,535 - -
IRS interest settlement ............................................ - 5,221 -
Fair value changes and payments on interest rate swap .............. (10,257) - -
Interest expense ................................................... (3,855) (8,097) (12,636)
Other, net ......................................................... 648 (238) (2,139)
------------ ----------- ------------
1,774 410 (9,215)
------------ ----------- ------------
INCOME BEFORE INCOME TAXES ............................................ 74,954 68,631 66,719
FEDERAL AND STATE INCOME TAXES
Current ............................................................ 26,275 19,464 25,367
Deferred ........................................................... 2,569 8,412 (52)
------------ ----------- ------------
28,844 27,876 25,315
------------ ----------- ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ...................................... 46,110 40,755 41,404
------------ ----------- ------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX BENEFITS OF $13,580 ........................... - (23,935) -
------------ ----------- ------------
NET INCOME ............................................................ 46,110 16,820 41,404
Preferred stock dividends .......................................... - - 2,487
------------ ----------- ------------
NET INCOME FOR COMMON STOCKHOLDERS .................................... $ 46,110 $ 16,820 $ 38,917
============ =========== ============
NET INCOME (LOSS) PER COMMON SHARE
BASIC:
Income before cumulative effect of change in accounting principle .. $ 1.85 $ 1.65 $ 1.79
Cumulative effect of change in accounting principle, net of tax .... - (0.97) -
------------ ----------- ------------
NET INCOME PER SHARE (BASIC) .......................................... $ 1.85 $ 0.68 $ 1.79
============ =========== ============
DILUTED:
Income before cumulative effect of change in accounting principle .. $ 1.81 $ 1.60 $ 1.66
Cumulative effect of change in accounting principle, net of tax .... - (0.94) -
------------ ----------- ------------
NET INCOME PER SHARE (DILUTED) ........................................ $ 1.81 $ 0.66 $ 1.66
============ =========== ============
CASH DIVIDENDS PAID PER COMMON SHARE .................................. $ 0.32 $ - $ -
============ =========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- -------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ ----------
(thousands)
BALANCES AT JANUARY 1, 2001 ........................ 1,390 $ 14 20,219 $ 202 $ 194,211
Net income ....................................... - - -
Fair value of interest rate swap,
net of tax benefits of $2,094 (a) .............. - - -
Foreign currency translation,
net of tax benefits of $193 (b)................. - - -
Total comprehensive income ...................
Issuance of common stock ......................... - 811 8 7,638
Tax effect of stock options exercised ............ - - 1,510
Purchase of preferred stock ...................... (7) - - (414)
Conversion of preferred stock
to common ...................................... (1,383) (14) 3,512 35 (21)
Dividends paid on preferred stock ................ - - -
Fair value of G.I. Trucking and Treadco
officer stock options and other ................ - - 1,539
------ ------ ------ ------ ----------
BALANCES AT DECEMBER 31, 2001 ...................... - - 24,542 245 204,463
Net income ....................................... - - -
Change in fair value of interest rate swap,
net of tax benefits of $1,739 (a) .............. - - -
Change in foreign currency translation,
net of tax benefits of $4(b) ................... - - 4
Minimum pension liability,
net of tax benefits of $2,245 (c) .............. - - -
Total comprehensive income ...................
Issuance of common stock ......................... - 430 5 3,908
Tax effect of stock options exercised............. - - 3,224
Change in fair value of Treadco
officer stock options .......................... - - (32)
------ ------ ------ ------ ----------
BALANCES AT DECEMBER 31, 2002 ...................... - - 24,972 250 211,567
Net income ...................................... - - -
Interest rate swap,
net of taxes of $3,833 (a) .................... - - -
Change in foreign currency translation,
net of taxes of $42 (b) ........................ - - -
Change in minimum pension liability,
net of tax benefits of $209 (c) ............... - - -
Total comprehensive income ...................
Issuance of common stock ......................... - 324 3 4,394
Tax effect of stock options exercised - - 1,820
Purchase of treasury stock ....................... - - -
Dividends paid on common stock ................... - - -
------ ------ ------ ------ ----------
BALANCES AT DECEMBER 31, 2003 ...................... - $ - 25,296 $ 253 $ 217,781
====== ====== ====== ====== ==========
ACCUMULATED
OTHER
RETAINED TREASURY COMPREHENSIVE TOTAL
EARNINGS STOCK LOSS EQUITY
-------- -------- ------------- ---------
(thousands)
BALANCES AT JANUARY 1, 2001 ........................ $ 98,718 $ (955) $ - $ 292,190
Net income ....................................... 41,404 - - 41,404
Fair value of interest rate swap,
net of tax benefits of $2,094 (a) .............. - - (3,289) (3,289)
Foreign currency translation,
net of tax benefits of $193 (b) ................ - - (303) (303)
---------
Total comprehensive income ................... 37,812
---------
Issuance of common stock ......................... - - - 7,646
Tax effect of stock options exercised ............ - - - 1,510
Purchase of preferred stock ...................... - - - (414)
Conversion of preferred stock
to common ...................................... - - - -
Dividends paid on preferred stock ................ (2,487) - - (2,487)
Fair value of G.I. Trucking and Treadco
officer stock options and other ................ - - - 1,539
-------- -------- ------------- ---------
BALANCES AT DECEMBER 31, 2001 ...................... 137,635 (955) (3,592) 337,796
Net income ....................................... 16,820 - - 16,820
Change in fair value of interest rate swap,
net of tax benefits of $1,739 (a) .............. - - (2,731) (2,731)
Change in foreign currency translation,
net of tax benefits of $4 (b) .................. - - (6) (2)
Minimum pension liability,
net of tax benefits of $2,245 (c) - - (3,528) (3,528)
---------
Total comprehensive income ................... 10,559
---------
Issuance of common stock ....... - - - 3,913
Tax effect of stock options exercised ............ - - - 3,224
Change in fair value of Treadco
officer stock options .......................... - - - (32)
-------- -------- ------------- ---------
BALANCES AT DECEMBER 31, 2002 ...................... 154,455 (955) (9,857) 355,460
Net income ....................................... 46,110 - - 46,110
Interest rate swap,
net of taxes of $3,833 (a) ..................... - - 6,020 6,020
Change in foreign currency translation,
net of taxes of $42 (b) ...... ................. - - 65 65
Change in minimum pension liability,
net of tax benefits of $209 (c) ................ - - (328) (328)
---------
Total comprehensive income ................... 51,867
---------
Issuance of common stock ......................... - - - 4,397
Tax effect of stock options exercised ............ - - - 1,820
Purchase of treasury stock ....................... - (4,852) - (4,852)
Dividends paid on common stock ................... (7,955) - - (7,955)
-------- -------- ------------- ---------
BALANCES AT DECEMBER 31, 2003 ...................... $192,610 $ (5,807) $ (4,100) $ 400,737
======== ======== ============= =========
The accompanying notes are an integral part of the consolidated financial
statements.
(a) The accumulated loss from the fair value of the interest rate swap in
accumulated other comprehensive loss was $3.3 million, net of tax
benefits of $2.1 million, at December 31, 2001 and $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 (see Note F).
(b) The accumulated loss from the foreign currency translation in
accumulated other comprehensive loss is $0.3 million, net of tax
benefits of $0.2 million, at both December 31, 2001 and 2002 and $0.2
million, net of tax benefits of $0.2 million, at December 31, 2003.
(c) The minimum pension liability included in accumulated other
comprehensive loss at December 31, 2002 was $3.5 million, net of tax
benefits of $2.2 million, and $3.9 million, net of tax benefits of $2.5
million, at December 31, 2003 (see Note L).
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
2003 2002 2001
---- ---- ----
($ thousands)
OPERATING ACTIVITIES
Net income .................................................................. $ 46,110 $ 16,820 $ 41,404
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in accounting principle, net of tax ............................... - 23,935 -
Depreciation and amortization ............................................ 51,925 49,219 50,315
Amortization of goodwill ................................................. - - 4,053
Amortization of deferred financing costs ................................. 332 275 180
Provision for losses on accounts receivable .............................. 1,556 1,593 2,966
Provision for deferred income taxes ...................................... 2,569 8,412 (52)
Fair value of interest rate swap ......................................... 6,330 - -
Gain on sales of assets and other ........................................ (419) (3,430) (2,322)
Gain on sale of G.I. Trucking Company .................................... - - (4,642)
Gain on sale of Wingfoot ................................................. (12,060) - -
Gain on sale of Clipper LTL............................................... (2,535) - -
Changes in operating assets and liabilities, net of sales and exchanges:
Receivables ........................................................... (3,125) (15,914) 35,236
Prepaid expenses ...................................................... (813) (982) (136)
Other assets .......................................................... (20,273) (12,631) (10,892)
Accounts payable, bank drafts payable, taxes payable,
accrued expenses and other liabilities .............................. 4,735 21,371 (51,263)
----------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................................... 74,332 88,668 64,847
----------- ---------- ----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment,
less capitalized leases and notes payable ................................. (68,171) (55,668) (74,670)
Proceeds from asset sales ................................................... 7,829 11,874 10,132
Proceeds from sale of G.I. Trucking Company ................................. - - 40,455
Proceeds from sale of Wingfoot .............................................. 71,309 - -
Proceeds from sale of Clipper LTL ........................................... 2,678 - -
Capitalization of internally developed software and other ................... (3,919) (4,381) (2,817)
----------- ---------- ----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ............................... 9,726 (48,175) (26,900)
----------- ---------- ----------
FINANCING ACTIVITIES
Borrowings under revolving credit facilities ................................ 273,700 61,200 92,800
Payments under revolving credit facilities .................................. (383,700) (61,200) (92,800)
Payments on long-term debt .................................................. (331) (15,191) (23,234)
Retirement of bonds ......................................................... - (4,983) (23,174)
Purchase of preferred stock ................................................. - - (414)
Dividends paid on preferred stock ........................................... - - (2,487)
Dividends paid on common stock .............................................. (7,955) - -
Purchase of treasury stock .................................................. (4,852) - -
Net increase (decrease) in bank overdraft ................................... 813 1,379 (18,165)
Other, net .................................................................. 3,874 3,086 7,645
----------- ---------- ----------
NET CASH USED BY FINANCING ACTIVITIES .......................................... (118,451) (15,709) (59,829)
----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... (34,393) 24,784 (21,882)
Cash and cash equivalents at beginning of period ............................ 39,644 14,860 36,742
----------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 5,251 $ 39,644 $ 14,860
=========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and intermodal
transportation operations. Principal subsidiaries are ABF Freight System, Inc.
("ABF"); Clipper Exxpress Company ("Clipper") (see Note D regarding the sale and
exit of Clipper's less-than-truckload ["LTL"] business); FleetNet America, Inc.
("FleetNet"); and until August 1, 2001, G.I. Trucking Company ("G.I. Trucking")
(see Note S).
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 77.0% of ABF's employees are covered by the agreement. Carrier
members of the MFCA ratified the agreement on the same date.
NOTE B - ACCOUNTING POLICIES
CONSOLIDATION: The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation.
CASH AND CASH EQUIVALENTS: Short-term investments that have a maturity of ninety
days or less when purchased are considered cash equivalents.
CONCENTRATION OF CREDIT RISK: The Company's services are provided primarily to
customers throughout the United States and Canada. ABF, the Company's largest
subsidiary, which represented approximately 90.0% of the Company's annual
revenues for 2003, had no single customer representing more than 3.0% of its
revenues during 2003 and no single customer representing more than 3.0% of its
accounts receivable balance during 2003. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company provides an allowance for doubtful accounts based upon historical trends
and factors surrounding the credit risk of specific customers. Historically,
credit losses have been within management's expectations.
ALLOWANCES: The Company maintains allowances for doubtful accounts, revenue
adjustments and deferred tax assets. The Company's allowance for doubtful
accounts represents an estimate of potential accounts receivable write-offs
associated with recognized revenue based on historical trends and factors
surrounding the credit risk of specific customers. The Company writes off
accounts receivable when it has determined it appropriate to turn them over to a
collection agency. Receivables written off are charged against the allowance.
The Company's allowance for revenue adjustments represents an estimate of
potential revenue adjustments associated with recognized revenue based upon
historical trends. The Company's valuation allowance against deferred tax assets
is established by evaluating whether the benefits of its deferred tax assets
will be realized through the reduction of future taxable income.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
IMPAIRMENT ASSESSMENT OF LONG-LIVED ASSETS: The Company follows Statement of
Financial Accounting Standards No. 144 ("FAS 144"), Accounting for the
Impairment and Disposal of Long-Lived Assets. The Company reviews its long-lived
assets, including property, plant, equipment and capitalized software, that are
held and used in its operations for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable, as required by FAS 144. If such an event or change in circumstances
is present, the Company will review its depreciation policies and, if
appropriate, estimate the undiscounted future cash flows, less the future cash
outflows necessary to obtain those inflows, expected to result from the use of
the asset and its eventual disposition. If the sum of the undiscounted future
cash flows is less than the carrying amount of the related assets, the Company
will recognize an impairment loss. The Company considers a long-lived asset as
abandoned when it ceases to be used. The Company records impairment losses
resulting from such abandonment in operating income. Assets to be disposed of
are reclassified as assets held for sale at the lower of their carrying amount
or fair value less costs to sell.
Based upon current available market information about ABF revenue equipment
trade-in values, during 2003 salvage value reductions were made to certain ABF
revenue equipment assets. These reductions resulted in additional depreciation
of $1.8 million in 2003. During 2003, ABF abandoned $0.1 million of capitalized
software, and Clipper abandoned $0.2 million of capitalized software.
Assets held for sale represent primarily ABF's nonoperating freight terminals
and older revenue equipment that are no longer in service. Assets held for sale
are carried at the lower of their carrying value or fair value less costs to
sell. Write-downs to fair value less costs to sell are reported below the
operating income line in gains or losses on sales of property, in the case of
real property, or above the operating income line as gains or losses on sales of
equipment, in the case of revenue or other equipment. Assets held for sale are
expected to be disposed of by selling the properties or assets to a third party
within the next 12 to 24 months.
Total assets held for sale at December 31, 2002 were $3.2 million. During 2003,
additional assets of $9.1 million were identified and reclassified to assets
held for sale. Nonoperating terminals and revenue equipment carried at $3.1
million were sold for gains of $2.0 million, of which $1.7 million related to
real estate and was reported below the operating line and $0.3 million was
related to equipment and reported in operating income. During 2003, the Company
recorded $1.0 million of losses from write-downs related to real estate moved
into assets held for sale. These real estate losses were reported below the
operating income line.
At December 31, 2003, management was not aware of any events or circumstances
indicating the Company's long-lived assets would not be recoverable.
PROPERTY, PLANT AND EQUIPMENT INCLUDING REPAIRS AND MAINTENANCE: 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. Purchases of property, plant and
equipment are recorded at cost. For financial reporting purposes, such property
is depreciated principally by the straight-line method, using the following
lives: structures - 15 to 20 years; revenue equipment - 3 to 12 years; other
equipment - 3 to 10 years; and leasehold improvements - 4 to 20 years. For tax
reporting purposes, accelerated depreciation or cost recovery methods are used.
Gains and losses on asset sales are reflected in the year of disposal. Unless
fair value can be determined, trade-in allowances in excess of the book value of
revenue equipment traded are accounted for by adjusting the cost of assets
acquired. Tires purchased with revenue equipment are capitalized as a part of
the cost of such equipment, with replacement tires being expensed when placed in
service. Repair and maintenance costs associated with property, plant and
equipment are expensed as incurred if the costs do not extend the useful life of
the asset. If such costs do extend the useful life of the asset, the costs are
capitalized and depreciated over the appropriate useful life. The Company has no
planned major maintenance activities.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, INCLUDING WEBSITE
DEVELOPMENT COSTS: The Company accounts for internally developed software in
accordance with Statement of Position No. 98-1 ("SOP 98-1"), Accounting for
Costs of Computer Software Developed for or Obtained for Internal Use. As a
result, the Company capitalizes qualifying computer software costs incurred
during the "application development stage." For financial reporting purposes,
capitalized software costs are amortized by the straight-line method over 2 to 5
years. The amount of costs capitalized within any period is dependent on the
nature of software development activities and projects in each period. In March
2000, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-2 ("EITF
00-2"), Accounting for Website Development Costs. EITF 00-2 did not change the
Company's practices, described above, with respect to website development costs.
GOODWILL: For 2003 and 2002, goodwill is accounted for under Statement of
Financial Accounting Standards No. 142 ("FAS 142"), Goodwill and Other
Intangible Assets. Under the provisions of FAS 142, goodwill is no longer
amortized but reviewed annually for impairment, using the fair value method to
determine recoverable goodwill. The fair value method uses a combination of
valuation methods, including EBITDA and net income multiples and the present
value of discounted cash flows (see Note G regarding the Company's impairment
testing). During 2001, goodwill was accounted for under the provisions of
Statement of Financial Accounting Standards No. 121 ("FAS 121"), Accounting for
Impairment of Long-Lived Assets and for Assets to be Disposed of and Accounting
Principles Board Opinion No. 17, Intangible Assets.
INCOME TAXES: Deferred income taxes are accounted for under the liability
method. Deferred income taxes relate principally to asset and liability basis
differences arising from the 1988 leveraged buyout transaction ("LBO") and from
a 1995 acquisition, as well as to the timing of the depreciation and cost
recovery deductions previously described and to temporary differences in the
recognition of certain revenues and expenses of carrier operations.
REVENUE RECOGNITION: Revenue is recognized based on relative transit time in
each reporting period with expenses recognized as incurred, as prescribed by the
Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 101
("SAB 101"), Revenue Recognition in Financial Statements, and the Emerging
Issues Task Force Issue No. 91-9 ("EITF 91-9"), Revenue and Expense Recognition
for Freight Services in Process.
EARNINGS (LOSS) PER SHARE: The calculation of earnings (loss) per share is based
on the weighted-average number of common (basic earnings per share) or common
equivalent shares outstanding (diluted earnings per share) during the applicable
period. The dilutive effect of Common Stock equivalents is excluded from basic
earnings per share and included in the calculation of diluted earnings per
share. The calculation of basic earnings per share reduces income available to
common stockholders by Preferred Stock dividends paid or accrued during the
period (see Note C).
STOCK-BASED COMPENSATION: At December 31, 2003, the Company had three stock
option plans which are described more fully in Note C. 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. The Company
also follows 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.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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 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. Subsequent to the issuance of the 2002 financial
statements, the Company determined that an inappropriate weighted-average life
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 and 2001 pro forma annual net income is a
decrease of $0.02 and an increase of $0.01 per diluted common share,
respectively. The pro forma disclosures for 2002 and 2001 have been revised for
these items. The Company's pro forma assumptions for 2003, 2002 and 2001 are as
follows:
2003 2002 2001
---- ---- ----
Risk free rates ........................ 2.7% 4.3% 4.2% - 4.9%
Volatility.............................. 56.2% 61.0% 60.5% - 61.5%
Weighted-average life .................. 4 years 4 years 4 years
Dividend yields ........................ 1.2% 0.01% 0.01%
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition under FAS 123 and FAS 148
to stock-based employee compensation:
DECEMBER 31
2003 2002 2001
---- ---- ----
($ thousands, except per share data)
Net income - as reported ........................................ $ 46,110 $ 16,820 $ 41,404
Less total stock option expense determined under fair
value-based methods for all awards, net of tax................. (2,775) (2,538) (1,545)
----------- ------------ -----------
Net income - pro forma .......................................... $ 43,335 $ 14,282 $ 39,859
=========== ============ ===========
Net income per share - as reported (basic) ...................... $ 1.85 $ 0.68 $ 1.79
=========== ============ ===========
Net income per share - as reported (diluted) .................... $ 1.81 $ 0.66 $ 1.66
=========== ============ ===========
Net income per share - pro forma (basic) ........................ $ 1.74 $ 0.58 $ 1.71
=========== ============ ===========
Net income per share - pro forma (diluted) ...................... $ 1.73 $ 0.57 $ 1.60
=========== ============ ===========
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
CLAIMS LIABILITIES: The Company is self-insured up to certain limits for
workers' compensation, certain third-party casualty claims and cargo loss and
damage claims. Above these limits, the Company has purchased insurance coverage,
which management considers to be adequate. The Company records an estimate of
its liability for self-insured workers' compensation and third-party casualty
claims which includes the incurred claim amount plus an estimate of future claim
development calculated by applying the Company's historical claims development
factors to its incurred claims amounts. The Company's liability also includes an
estimate of incurred, but not reported, claims. Netted against this liability
are amounts the Company expects to recover from insurance carriers and insurance
pool arrangements. The Company records an estimate of its potential self-insured
cargo loss and damage claims by estimating the amount of potential claims based
on the Company's historical trends and certain event-specific information. The
Company's claims liabilities have not been discounted.
INSURANCE-RELATED ASSESSMENTS: The Company accounts for insurance-related
assessments in accordance with Statement of Position No. 97-3 ("SOP 97-3"),
Accounting by Insurance and Other Enterprises for Insurance-Related Assessments.
At December 31, 2003 and 2002, the Company recorded estimated liabilities of
$0.9 million and $0.6 million, respectively, for state guaranty fund assessments
and other insurance-related assessments. Management has estimated the amounts
incurred, using the best available information about premiums and guaranty
assessments by state. These amounts are expected to be paid within a period not
to exceed one year. The liabilities recorded have not been discounted.
ENVIRONMENTAL MATTERS: The Company expenses environmental expenditures related
to existing conditions resulting from past or current operations and from which
no current or future benefit is discernible. Expenditures which extend the life
of the related property or mitigate or prevent future environmental
contamination are capitalized. The Company determines its liability on a
site-by-site basis with actual testing at some sites, and records a liability at
the time when it is probable and can be reasonably estimated. The estimated
liability is not discounted or reduced for possible recoveries from insurance
carriers or other third parties (see Note Q).
DERIVATIVE FINANCIAL INSTRUMENTS: The Company has, from time to time, entered
into interest rate swap agreements and interest rate cap agreements designated
to modify the interest characteristic of outstanding debt or limit exposure to
increasing interest rates in accordance with its interest rate risk management
policy (see Notes F and N). The differential to be paid or received as interest
rates change is accrued and recognized as an adjustment of interest expense
related to the debt (the accrual method of accounting). The related amount
payable or receivable from counterparties is included in other current
liabilities or current assets. Under the provisions of Statement of Financial
Accounting Standards No. 133 ("FAS 133"), Accounting for Derivative Financial
Instruments and Hedging Activities, the Company is required to recognize all
derivatives on its balance sheet at fair value. Derivatives that are not hedges
will be adjusted to fair value through income. If a derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the
derivative will either be offset against the change in fair value of the hedged
asset, liability or firm commitment through earnings, or recognized in other
comprehensive income until the hedged item is recognized in earnings. Hedge
ineffectiveness associated with interest rate swap agreements will be reported
by the Company in interest expense.
In April 2003, the Financial Accounting Standards Board issued Statement No. 149
("FAS 149"), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. 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 did not have an impact upon the
Company's financial statements or related disclosures.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
COSTS OF START-UP ACTIVITIES: The Company expenses certain costs associated with
start-up activities as they are incurred.
COMPREHENSIVE INCOME: The Company reports the components of other comprehensive
income by their nature in the financial statements and displays the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the consolidated statements of stockholders'
equity. Other comprehensive income refers to revenues, expenses, gains and
losses that are included in comprehensive income but excluded from net income.
ASSET RETIREMENT OBLIGATIONS: On January 1, 2003, the Company adopted Statement
of Financial Accounting Standards No. 143 ("FAS 143"), Accounting for Asset
Retirement Obligations. This Statement applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and/or the normal operation of a long-lived asset,
except for certain obligations of lessees. The adoption of FAS 143 did not have
an impact upon the Company's financial statements or related disclosures.
EXIT OR DISPOSAL ACTIVITIES: On January 1, 2003, the Company adopted Statement
of Financial Accounting Standards No. 146 ("FAS 146"), Accounting for Costs
Associated with Exit or Disposal Activities. As prescribed by FAS 146,
liabilities for costs associated with the exit or disposal activity are
recognized when the liability is incurred. See Note D regarding the sale and
exit of Clipper's LTL division in 2003. The adoption of FAS 146 did not have a
material impact upon the Company's financial statements or related disclosures.
VARIABLE INTEREST ENTITIES: In January 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.
SEGMENT INFORMATION: The Company uses the "management approach" for determining
appropriate segment information to disclose. The management approach is based on
the way management organizes the segments within the Company for making
operating decisions and assessing performance.
INVESTMENT IN WINGFOOT: The Company's investment in Wingfoot represented a 19.0%
interest in Wingfoot Commercial Tire Systems, LLC. The transaction which created
Wingfoot was accounted for at fair value, as prescribed by Emerging Issues Task
Force Issue No. 00-5 ("EITF 00-5"), Determining Whether a Nonmonetary
Transaction is an Exchange of Similar Productive Assets. The Company's
investment was accounted for under the equity method, similar to a partnership
investment. However, the Company did not share in the profits or losses of
Wingfoot during the term of the Company's "Put" option, based upon the terms of
the operating agreement. See Note E regarding the sale of the Company's interest
in Wingfoot in 2003.
USE OF 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.
RECLASSIFICATIONS: Certain reclassifications have been made to the prior year
financial statements to conform to the current year's presentation.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
OTHER ACCOUNTING PRONOUNCEMENTS: In May 2003, the Financial Accounting Standards
Board issued Statement No. 150 ("FAS 150"), Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. 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. FAS 150 did not have an
impact upon the Company's financial statements or related disclosures.
NOTE C - STOCKHOLDERS' EQUITY
PREFERRED STOCK: In February 1993, the Company completed a public offering of
1,495,000 shares of Preferred Stock at $50 per share. The Preferred Stock was
convertible at the option of the holder into Common Stock at the rate of 2.5397
shares of Common Stock for each share of Preferred Stock. Annual dividends were
$2.875 and were cumulative. The Preferred Stock was exchangeable, in whole or in
part, at the option of the Company on any dividend payment date beginning
February 15, 1995 for the Company's 5 3/4% Convertible Subordinated Debentures
due February 15, 2018, at a rate of $50 principal amount of debentures for each
share of Preferred Stock. The Preferred Stock was redeemable at any time, in
whole or in part, at the Company's option, initially at a redemption price of
$52.0125 per share and thereafter at redemption prices declining to $50 per
share on or after February 15, 2003, plus unpaid dividends to the redemption
date. Holders of Preferred Stock had no voting rights unless dividends were in
arrears six quarters or more, at which time they had the right to elect two
directors of the Company until all dividends had been paid.
On July 10, 2000, the Company purchased 105,000 shares of its Preferred Stock at
$37.375 per share, for a total cost of $3.9 million. All of the shares purchased
were retired. On August 13, 2001, the Company announced the call for redemption
of its $2.875 Series A Cumulative Convertible Exchangeable Preferred Stock
("ABFSP"). As of August 10, 2001, 1,390,000 shares of Preferred Stock were
outstanding. At the end of the extended redemption period on September 14, 2001,
1,382,650 shares of the Preferred Stock were converted to 3,511,439 shares of
Common Stock. A total of 7,350 shares of Preferred Stock were redeemed at the
redemption price of $50.58 per share. The Company paid $0.4 million to the
holders of these shares in redemption of their Preferred Stock. Preferred Stock
dividends of $2.5 million were paid during 2001. There were no Preferred Stock
dividends paid during 2003 or 2002.
COMMON STOCK: During 2003, the Company's Board of Directors declared a quarterly
cash dividend of eight cents per share for its Common Stock, which totaled $8.0
million in 2003.
STOCKHOLDERS' RIGHTS PLAN: Each issued and outstanding share of Common Stock has
associated with it one Common Stock right to purchase a share of Common Stock
from the Company at an exercise price of $80 per right. The rights are not
currently exercisable, but could become exercisable if certain events occur,
including the acquisition of 15.0% or more of the outstanding Common Stock of
the Company. Under certain conditions, the rights will entitle holders, other
than an acquirer in a nonpermitted transaction, to purchase shares of Common
Stock with a market value of two times the exercise price of the right. The
rights will expire in 2011 unless extended.
TREASURY STOCK: At December 31, 2002, the Company had 59,782 shares of treasury
stock with a cost basis of $1.0 million. These shares were purchased at various
times throughout 2000, as employees tendered shares they had held for six months
or more as payments for the exercise price of stock options, as allowed by the
Company's stock option plans.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
On January 23, 2003, the Board 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 2003, the Company purchased 200,000 shares for $4.8 million. These common
shares were added to the Company's treasury stock. At December 31, 2003, the
Company had a total of 259,782 shares of treasury stock with a cost basis of
$5.8 million.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS: At December 31, 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 December 31,
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 20.0% of the shares or
rights covered, thereby becoming exercisable at that time and with an additional
20.0% 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.
As more fully described in the Company's accounting policies (see Note B), the
Company has elected to follow APB 25 and related interpretations in accounting
for its employee stock options. Under APB 25, no stock-based employee
compensation expense is reflected in net income, as all options granted under
the plans had an exercise price equal to the market value of the underlying
Common Stock on the date of grant.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The following table is a summary of the Company's stock option activity and
related information for the years ended December 31:
2003 2002 2001
--------------------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
Outstanding - beginning of year.. 1,768,115 $ 17.44 2,201,214 $ 15.78 2,235,731 $ 9.84
Granted ......................... 326,000 24.59 7,500 23.53 819,201 25.71
Exercised ...................... (339,167) 13.34 (430,599) 9.13 (826,718) 9.66
Forfeited ....................... (40,301) 21.81 (10,000) 14.11 (27,000) 17.48
--------- ------- --------- ------- --------- --------
Outstanding - end of year........ 1,714,647 $ 19.51 1,768,115 $ 17.44 2,201,214 $ 15.78
========= ======= ========= ======= ========= ========
Exercisable - end of year........ 713,586 $ 15.99 684,411 $ 13.34 690,856 $ 8.55
========= ======= ========= ======= ========= ========
Estimated weighted-average fair
value per share of options in
excess of the exercise price
granted to employees during
the year (1)................... $ 10.39 $ 11.86 $ 13.07
========= ======= ========= ======= ========= ========
(1) Considers the option exercise price, historical volatility, risk-free
interest rate, weighted-average life of the options and dividend
yields, under the Black-Scholes method. Subsequent to the issuance of
the 2002 financial statements, the Company determined that an
inappropriate weighted-average life was used in determining the fair
value of options granted in 2002 and 2001. Additionally, a
computational error was identified. The estimated weighted-average fair
value per share for options granted during 2002 and 2001 has been
revised for these matters.
The following table summarizes information concerning currently outstanding and
exercisable options:
WEIGHTED-
NUMBER AVERAGE WEIGHTED- WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
EXERCISE PRICES DECEMBER 31, 2003 LIFE PRICE DECEMBER 31, 2003 PRICE
- --------------- ----------------- ----------- ----------- ----------------- ----------
$ 4 - $ 6 48,500 3.2 $ 5.11 48,500 $ 5.11
$ 6 - $ 8 174,400 3.8 7.27 136,000 7.17
$ 8 - $10 27,000 3.4 8.24 24,600 8.23
$10 - $12 33,000 4.0 10.51 33,000 10.51
$12 - $14 403,354 5.8 13.48 194,518 13.38
$14 - $16 24,000 6.3 14.99 14,400 14.99
$22 - $24 7,500 8.3 23.53 1,500 23.53
$24 - $26 711,572 7.7 24.47 143,172 24.38
$26 - $28 20,000 7.0 26.81 8,000 26.81
$28 - $30 265,321 7.5 28.05 109,896 28.05
--------- --- ---------- ------- ----------
1,714,647 6.5 $ 19.51 713,586 $ 15.99
========= === ========== ======= ==========
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE D - SALE AND EXIT OF CLIPPER'S LTL BUSINESS
On December 31, 2003, Clipper Exxpress Company closed the sale of all customer
and vendor lists related to Clipper's LTL freight business to Hercules
Forwarding Inc. of Vernon, California for $2.7 million in cash, resulting in a
pre-tax gain of $2.5 million. This gain is reported below the operating income
line. Total costs incurred with the exit of this business unit amounted to $1.2
million and include severance pay, software and fixed asset abandonment and
certain operating leases. These exit costs are reported above the operating
income line. No additional costs relating to the exit of this business are
expected to be incurred. The impact of the gain was $1.5 million, net of taxes,
or $0.06 per diluted common share and the impact of the exit costs was $0.7
million, net of taxes, or $0.03 per diluted common share.
NOTE E - 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 19.0% 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 F - DERIVATIVE FINANCIAL INSTRUMENTS
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 $225.0 million Credit Agreement ("Credit Agreement")
margin which was 0.775% at December 31, 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 losses, net of tax, rather than through the
income statement.
As previously discussed, on March 19, 2003, the Company announced its intention
to sell its 19.0% 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.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The fair value of the interest rate swap at December 31, 2003, is a liability of
$6.3 million. Included in the income statement for 2003 is the previously
discussed $8.9 million (pre-tax) reclassification of negative fair value from
accumulated other comprehensive losses into the income statement and $2.5
million in positive changes in the fair value of the interest rate swap, from
March 19, 2003 to December 31, 2003.
The Company reported no gain or loss during 2003, 2002, or 2001 as a result of
hedge ineffectiveness.
NOTE G - GOODWILL
On January 1, 2002, the Company adopted FAS 142. Under the provisions of FAS
142, the Company's goodwill intangible asset is no longer amortized but reviewed
annually for impairment. At December 31, 2001, the Company's assets included
goodwill of $101.3 million of which $63.8 million was from an LBO transaction
related to ABF, and $37.5 million related to the 1994 acquisition of Clipper.
During the first quarter of 2002, the Company performed the first phase of the
required transitional 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. At the same time, 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 noncash 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 by FAS 142. This
impairment loss results from the change in method of determining recoverable
goodwill from using undiscounted cash flows, as prescribed by FAS 121, 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 annual impairment
testing on its ABF goodwill based upon operations and fair value at January 1,
2004 and 2003 and found there to be no impairment at either of these dates.
At December 31, 2003 and 2002, the Company's assets included goodwill of $63.9
million and $63.8 million, respectively, from the LBO transaction related to
ABF. The change in the goodwill asset balance is due to ABF's foreign currency
translation adjustments on the portion of the goodwill related to ABF Canadian
operations.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
A comparison of the Company's net income and earnings per share for the year
ended December 31, 2001 shown on an adjusted basis, excluding goodwill
amortization, to the Company's actual income before the cumulative effect
change, net income (loss), and earnings per share for the years ended December
31, 2003 and 2002 is as follows:
YEAR ENDED DECEMBER 31
2003 2002 2001
------------------------------------------
($ thousands, except per share data)
NET INCOME (LOSS):
Income before cumulative effect of change in accounting principle ........ $ 46,110 $ 40,755 $ 41,404
Cumulative effect of change in accounting principle, net of tax .......... - (23,935) -
- -----------------------------------------------------------------------------------------------------------------------
Reported net income ...................................................... 46,110 16,820 41,404
Add back goodwill amortization, net of tax ............................... - - 3,411
- -----------------------------------------------------------------------------------------------------------------------
Adjusted net income ...................................................... $ 46,110 $ 16,820 $ 44,815
=======================================================================================================================
NET INCOME (LOSS) PER COMMON SHARE BASIC:
Income before cumulative effect of change in accounting principle......... $ 1.85 $ 1.65 $ 1.79
Cumulative effect of change in accounting principle, net of tax .......... - (0.97) -
- -----------------------------------------------------------------------------------------------------------------------
Reported net income per common share ..................................... 1.85 0.68 1.79
Goodwill amortization, net of tax ........................................ - - 0.16
- -----------------------------------------------------------------------------------------------------------------------
Adjusted net income per common share ..................................... $ 1.85 $ 0.68 $ 1.95
=======================================================================================================================
NET INCOME (LOSS) PER COMMON SHARE DILUTED:
Income before cumulative effect of change in accounting principle ........ $ 1.81 $ 1.60 $ 1.66
Cumulative effect of change in accounting principle, net of tax .......... - (0.94) -
- -----------------------------------------------------------------------------------------------------------------------
Reported net income per common share ..................................... 1.81 0.66 1.66
Goodwill amortization, net of tax ........................................ - - 0.14
- -----------------------------------------------------------------------------------------------------------------------
Adjusted net income per common share ..................................... $ 1.81 $ 0.66 $ 1.80
=======================================================================================================================
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE H - FEDERAL AND STATE INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31
2003 2002
-----------------------------
($ thousands)
Deferred tax liabilities:
Amortization, depreciation and basis differences
for property, plant and equipment and other long-lived assets................. $ 40,812 $ 34,413
Revenue recognition.............................................................. 3,929 4,271
Prepaid expenses................................................................. 2,638 1,854
Other ........................................................................... - 5,934
- -----------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities................................................. 47,379 46,472
Deferred tax assets:
Accrued expenses................................................................. 39,723 38,787
Fair value of interest rate swap ................................................ 2,491 3,897
Postretirement benefits other than pensions...................................... 2,523 1,889
State net operating loss carryovers.............................................. 1,273 2,196
Basis difference in investment in Wingfoot....................................... - 1,130
Other............................................................................ 613 4,088
- -----------------------------------------------------------------------------------------------------------------------
Total deferred tax assets...................................................... 46,623 51,987
Valuation allowance for deferred tax assets.................................... (1,344) (2,728)
- -----------------------------------------------------------------------------------------------------------------------
Net deferred tax assets....................................................... 45,279 49,259
- -----------------------------------------------------------------------------------------------------------------------
Net deferred tax assets (liabilities)............................................... $ (2,100) $ 2,787
=======================================================================================================================
Significant components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31
2003 2002 2001
-----------------------------------------------
($ thousands)
Current:
Federal....................................................... $ 23,408 $ 17,675 $ 23,297
State......................................................... 2,867 1,789 2,070
- -----------------------------------------------------------------------------------------------------------------------
Total current ............................................. 26,275 19,464 25,367
- -----------------------------------------------------------------------------------------------------------------------
Deferred:
Federal....................................................... 1,511 5,266 (2,274)
State......................................................... 1,058 3,146 2,222
- -----------------------------------------------------------------------------------------------------------------------
Total deferred ............................................ 2,569 8,412 (52)
- -----------------------------------------------------------------------------------------------------------------------
Total income tax expense ........................................ $ 28,844 $ 27,876 $ 25,315
=======================================================================================================================
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
A reconciliation between the effective income tax rate, as computed on income
before income taxes, and the statutory federal income tax rate is presented in
the following table:
YEAR ENDED DECEMBER 31
2003 2002 2001
-----------------------------------------------
($ thousands)
Income tax at the
statutory federal rate of 35%...................................... $ 26,234 $ 24,021 $ 23,352
Federal income tax effects of:
State income taxes .............................................. (1,373) (1,727) (1,502)
Nondeductible goodwill .......................................... - - 841
Reduction of valuation allowance - Wingfoot sale ................ (1,130) - -
Other nondeductible expenses..................................... 1,322 1,184 1,287
Resolution of tax contingencies.................................. - - (1,943)
Other............................................................ (134) (537) (1,012)
- -----------------------------------------------------------------------------------------------------------------------
Federal income taxes................................................ 24,919 22,941 21,023
State income taxes.................................................. 3,925 4,935 4,292
- -----------------------------------------------------------------------------------------------------------------------
Total income tax expense............................................ $ 28,844 $ 27,876 $ 25,315
=======================================================================================================================
Effective tax rate.................................................. 38.5% 40.6% 37.9%
=======================================================================================================================
The Company's tax rate of 38.5% in 2003 reflects a lower tax rate required on
the Wingfoot gain, because of a higher tax basis than book basis. The tax rate
for 2003 without this benefit would have been 40.1%. The lower tax rate in 2001
reflects tax benefits of approximately $1.9 million resulting from the
resolution of certain issues relating to the utilization of net operating losses
and tax credits arising in prior years.
Income taxes of $34.8 million were paid in 2003, $18.6 million were paid in
2002, and $39.9 million were paid in 2001. 2001 includes $11.9 million in
payments to the Internal Revenue Service ("IRS") related to the multiemployer
pension issues that are discussed below. Income tax refunds amounted to $10.0
million in 2003, $12.0 million in 2002, and $7.6 million in 2001.
The tax benefit associated with stock options exercised amounted to $3.2 million
for 2002 and $1.5 million for 2001. The benefit reflected in the 2003 financial
statements is $1.8 million; however, this amount could increase as additional
information becomes available to the Company regarding stock sales by employees
during 2003. Tax benefits of stock options are not reflected in net income;
rather, the benefits are credited to additional paid-in capital.
As of December 31, 2003, the Company had state net operating loss carryovers of
approximately $21.7 million. State net operating loss carryovers expire
generally in five to fifteen years.
For financial reporting purposes, the Company had a valuation allowance of
approximately $0.9 million for state net operating loss carryovers and $0.4
million for state tax benefits of tax deductible goodwill for which realization
is uncertain. During 2003, the net change in the valuation allowance was a $1.4
million decrease, which related to a decrease in the valuation allowance of
approximately $1.1 million relating to the excess tax basis in its investment in
Wingfoot (see Note E) and a decrease of approximately $0.3 million in the
valuation allowance for state tax benefits of tax deductible goodwill.
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 IRS had previously raised the same issue with
respect to the Company. There were certain factual differences between those
present in the Tenth Circuit
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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, the Company reduced
its reserves for interest by approximately $5.2 million to reflect the reduction
in the Company's liability for future cash payments of interest. The effect of
this change resulted in an increase in the Company's 2002 net income per diluted
common share of $0.12.
The Company's federal tax returns for 1995 and 1996 and the returns of an
acquired company for 1994 and 1995 have been examined by the IRS, and the
Company is involved in the administrative appeals process with the IRS.
Resolution of the issues before the IRS is not expected to result in any
significant additional liabilities to the Company. The Company currently has no
other income tax returns under examination by the IRS.
NOTE I - OPERATING LEASES AND COMMITMENTS
Rental expense amounted to approximately $13.2 million in 2003, $13.0 million in
2002, and $13.8 million in 2001.
The future minimum rental commitments, net of future minimum rentals to be
received under noncancellable subleases, as of December 31, 2003 for all
noncancellable operating leases are as follows:
EQUIPMENT
AND
PERIOD TOTAL TERMINALS OTHER
- ------------------------------------------------------------------------------------------------------------------------
($ thousands)
2004.................................................... $ 11,261 $ 10,744 $ 517
2005.................................................... 9,462 8,945 517
2006.................................................... 8,394 7,906 488
2007.................................................... 6,918 6,488 430
2008.................................................... 4,812 4,812 -
Thereafter.............................................. 8,768 8,768 -
- ------------------------------------------------------------------------------------------------------------------------
$ 49,615 $ 47,663 $ 1,952
- -=======================================================================================================================
Certain of the leases are renewable for substantially the same rentals for
varying periods. Future minimum rentals to be received under noncancellable
subleases totaled approximately $2.1 million at December 31, 2003.
Commitments to purchase revenue equipment, which are cancellable by the Company
if certain conditions are met, aggregated approximately $51.0 million at
December 31, 2003.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE J - LONG-TERM DEBT AND CREDIT AGREEMENTS
DECEMBER 31
2003 2002
----------------------------
($ thousands)
Revolving credit agreement (1) ...................................................... $ - $ 110,000
Capitalized lease obligations (2) ................................................... 532 699
Other .............................................................................. 1,647 1,780
- -----------------------------------------------------------------------------------------------------------------------
2,179 112,479
Less current portion ................................................................ 353 328
- -----------------------------------------------------------------------------------------------------------------------
$ 1,826 $ 112,151
=======================================================================================================================
(1) On September 26, 2003, the Company amended and restated its existing
three-year $225.0 million 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 December 31, 2003, there were no outstanding Revolver Advances and
approximately $58.4 million of outstanding letters of credit. At
December 31, 2002, there were $110.0 million of Revolver Advances and
approximately $66.4 million of outstanding letters of credit. As
previously discussed, the Company used the proceeds from the sale of
its interest in Wingfoot and operating cash to reduce outstanding debt
under its Credit Agreement during 2003. Outstanding revolving credit
advances may not exceed a borrowing base calculated using the Company's
equipment, real estate and eligible receivables. The borrowing base was
$352.2 million at December 31, 2003, which would allow borrowings up to
the $225.0 million limit specified by the Credit Agreement. The amount
available for borrowing under the Credit Agreement at December 31, 2003
was $166.6 million.
The Credit Agreement contains various covenants, which limit, among
other things, indebtedness, distributions, stock repurchases and
dispositions of assets and which require the Company to meet certain
quarterly financial ratio tests. As of December 31, 2003, the Company
was in compliance with the covenants. Interest rates under the
agreement are at variable rates as defined by the Credit Agreement.
The Company's Credit Agreement contains a pricing grid that determines
its LIBOR margin, facility fees and letter of credit fees. The pricing
grid is based on the Company's senior debt rating agency ratings. A
change in the Company's senior debt ratings could potentially impact
its Credit Agreement pricing. In addition, if the Company's senior debt
ratings fall below investment grade, the Company's Credit Agreement
provides for limits on additional permitted indebtedness without lender
approval, acquisition expenditures and capital expenditures. On May 28,
2003, Standard & Poor's upgraded its
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
corporate credit rating on the Company to BBB+ from BBB, stating that
the upgrade was driven by "...the company's strong operating results
and decreasing debt levels, which support solid credit measures,
despite the continued weak economic environment." The Company is
currently rated BBB+ by Standard & Poor's Rating Service and Baa3 by
Moody's Investors Service, Inc. The Company has no downward rating
triggers that would accelerate the maturity of its debt. The Company's
LIBOR margin and facility fees were 0.775% and 0.225%, respectively, at
December 31, 2003 and 0.825% and 0.175% at December 31, 2002.
(2) Capitalized lease obligations are for computer equipment. These
obligations have a weighted-average interest rate of approximately
7.4%.
The future minimum payments under capitalized leases at December 31,
2003 consisted of the following ($ thousands):
2004........................................................................................... $ 252
2005........................................................................................... 252
2006........................................................................................... 74
- --------------------------------------------------------------------------------------------------------------
2007........................................................................................... 3
- --------------------------------------------------------------------------------------------------------------
Total minimum lease payments................................................................... 581
Amounts representing interest ................................................................. 49
- --------------------------------------------------------------------------------------------------------------
Present value of net minimum leases
included in long-term debt .................................................................. $ 532
==============================================================================================================
Assets held under capitalized leases are included in property, plant
and equipment as follows:
DECEMBER 31
2003 2002
-------------------------------
($ thousands)
Service, office and other equipment ..................................... $ 1,044 $ 1,013
Less accumulated amortization ........................................... 543 334
- --------------------------------------------------------------------------------------------------------------
$ 501 $ 679
==============================================================================================================
Capital lease obligations of $31,000 and $0.9 million were incurred for
the years ended December 31, 2003 and 2002. Capital lease amortization
is included in depreciation expense.
Annual maturities of other long-term debt, excluding capitalized lease
obligations, in 2004 through 2008 are approximately $0.1 million; $0.2 million;
$0.2 million; $0.2 million; and $0.2 million, respectively.
Interest paid, including payments made on the interest rate swap, was $10.6
million in 2003, $8.2 million in 2002, and $32.3 million in 2001. Amounts
include $3.7 million and $21.2 million in IRS interest payments for 2003 and
2001, respectively. There was no interest paid to the IRS during 2002. Interest
capitalized totaled $0.2 million in 2003, $0.4 million in 2002, and $0.3 million
in 2001.
The Company is party to an interest rate swap on a notional amount of $110.0
million (see Notes F and N). The purpose of the swap was to limit the Company's
exposure to interest rate increases on $110.0 million of bank borrowings. The
interest rate under the swap is fixed at 5.845% plus the Credit Agreement
margin, which was 0.775% at December 31, 2003 and 0.825% at December 31, 2002.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The Company has guaranteed approximately $0.4 million that relates to a debt
owed by The Complete Logistics Company ("CLC") to the 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 $60,000 per year.
NOTE K - ACCRUED EXPENSES
DECEMBER 31
2003 2002
-------------------------------
($ thousands)
Accrued salaries, wages and incentive plans ...................................... $ 17,831 $ 20,791
Accrued vacation pay ............................................................. 33,690 33,149
Accrued interest ................................................................. 517 589
Taxes other than income .......................................................... 7,123 7,364
Loss, injury, damage and workers' compensation claims reserves ................... 60,252 56,553
Other ............................................................................ 5,735 4,848
- -----------------------------------------------------------------------------------------------------------------------
$ 125,148 $ 123,294
=======================================================================================================================
The increase in loss, injury, damage and workers' compensation claims reserves
is due primarily to an increase in required reserves for workers' compensation
and third-party casualty claims for ABF.
NOTE L - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has a funded noncontributory defined benefit pension plan covering
substantially all noncontractual employees. Benefits are generally based on
years of service and employee compensation. Contributions are made based upon at
least the minimum amounts required to be funded under provisions of the Employee
Retirement Income Security Act of 1974, with the maximum contributions not to
exceed the maximum amount deductible under the Internal Revenue Code.
The Company also has an unfunded supplemental pension benefit plan for the
purpose of supplementing benefits under the Company's defined benefit plan. The
plan will pay sums in addition to amounts payable under the defined benefit plan
to eligible participants. Participation in the plan is limited to employees of
the Company who are participants in the Company's defined benefit plan and who
are designated as participants in the plan by the Company's Board of Directors.
The plan provides that upon a participant's termination, the participant may
elect either a lump-sum payment or a deferral of receipt of the benefit. The
supplemental pension benefit plan includes a provision that benefits accrued
under the plan will be paid in the form of a lump sum following a
change-in-control of the Company.
The Company also sponsors an insured postretirement health benefit plan that
provides supplemental medical benefits, life insurance, accident and vision care
to certain full-time officers of the Company and certain subsidiaries. The plan
is generally noncontributory, with the Company paying the premiums.
The Company accounts for its pension and postretirement plans in accordance with
Statement of Financial Accounting Standards No. 87 ("FAS 87"), Employer's
Accounting for Pensions, Statement of Financial Accounting Standards No. 106
("FAS 106"), Employer's Accounting for Postretirement Benefits Other Than
Pensions and Statement of Financial Accounting Standards No. 132 ("FAS 132"),
Employers' Disclosures about Pensions and Other Postretirement Benefits. During
the fourth quarter of 2003, the Company adopted the revised disclosure
provisions of FAS 132.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The Company uses a December 31 measurement date for its defined benefit pension
plan and its supplemental pension benefit plan. The postretirement health
benefit plan uses a measurement date of January 1.
On December 8, 2003, President Bush signed into law the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 ("the Act"). The Act expanded
Medicare to include, for the first time, coverage for prescription drugs. The
Company expects that this legislation will eventually reduce the Company's costs
for its postretirement health benefit plan. At this point, the Company's
investigation into its response to the legislation is preliminary, as guidance
is awaited from various governmental and regulatory agencies concerning the
requirements that must be met to obtain these cost reductions, as well as the
manner in which such savings should be measured. Based on this preliminary
analysis, it appears that the Company's postretirement health benefit plan could
possibly need to be changed in order to qualify for beneficial treatment under
the Act. Because of various uncertainties related to the Company's response to
this legislation and the appropriate accounting methodology for this event, the
Company has elected to defer financial recognition of this legislation until the
Financial Accounting Standards Board issues final accounting guidance. When
issued, that final guidance could require the Company to change previously
reported information. This deferral election is permitted under Financial Staff
Position FAS 106-1.
The Company's union employees and union retirees are provided pension, health
care and other benefits through defined benefit multiemployer plans administered
and funded based on the applicable labor agreement. ABF's monthly contributions
to the multiemployer plans are based upon the number of hours worked each week
by contractual employees, as agreed to under the IBT National Master Freight
Agreement. ABF's aggregate contributions to the multiemployer health and welfare
benefit plans totaled approximately $90.4 million, $79.7 million and $78.8
million, for the years ended December 31, 2003, 2002 and 2001, respectively.
ABF's aggregate contributions to the multiemployer pension plans totaled $77.1
million, $75.1 million and $74.1 million for the years ended December 31, 2003,
2002 and 2001, respectively. The Central States Pension Fund ("Central States"),
the multiemployer plan to which ABF makes approximately 50.0% of its
contributions, suffered significant investment losses due to the depressed stock
markets and operating deficits in the years 2000 through 2002. Pursuant to a
Court Order from the U.S. District Court for the Northern District of Illinois
(Eastern Division) on November 17, 2003, pension and health and welfare benefits
provided to Central States beneficiaries are to be reduced no later than January
1, 2004. The Court Order acknowledged the need for corrective measures to
address potential future "Funding Deficiencies" in the Central States plan.
There was no change in ABF's required contributions to Central States as a
result of the Court Order. ABF's contributions continue to be contractually
determined as described above. The U.S. District Court, however, stated that in
the event a "Funding Deficiency" occurred, the plan's contributing employers are
obligated to correct this "Funding Deficiency." Neither the Company nor ABF has
received notification of a "Funding Deficiency" from Central States or any other
multiemployer plan to which it contributes. If the Company or ABF were notified
of a "Funding Deficiency" in a future period, the amount could be material. In
December 2003, Central States Trustees applied to the IRS for an extension of
the amortization period for actuarial losses. Central States Pension Fund
reported earning investment returns of approximately 25.4% in 2003. The Company
has received no current financial or funding information from Central States (or
any other multiemployer plan) for the period ending December 31, 2003. However,
the extension of the amortization period, if granted, the improved investment
returns in 2003 and the changes in pension and health and welfare benefits
ordered by the U.S. District Court should positively impact the funded status of
the Central States plan, as determined under the Internal Revenue Code and
regulations, although there can be no assurances in this regard.
Legislation has passed the U.S. Senate, providing relief to multiemployer plans
through a two-year hiatus from amortization of experience losses, which include
investment losses. The language in the Senate bill allows a multiemployer plan
to elect to defer for up to three years the start of the 15-year amortization of
experience
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
losses. This election may be applied to two plan years. If this legislation
became law, it would provide near-term funding relief to multiemployer plans. At
this point, the bill is expected to go to the Senate-House Conference Committee,
but it is unclear whether it will become law or whether the relief provision
described will be included in any law enacted.
In the event of insolvency or reorganization, plan terminations or withdrawal by
the Company from the multiemployer plans, the Company may be liable for a
portion of the multiemployer plan's unfunded vested benefits, the amount of
which, if any, has not been determined, but which would be material. At December
31, 2003, the Company has a strong financial position with no borrowings under
its Credit Agreement and $400.7 million of Stockholders' Equity. The Company has
no plans to withdraw from the multiemployer plans to which ABF contributes.
THE FOLLOWING IS A SUMMARY OF THE CHANGES IN BENEFIT OBLIGATIONS AND PLAN
ASSETS:
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------
SUPPLEMENTAL POSTRETIREMENT
PENSION BENEFITS PENSION PLAN HEALTH BENEFITS
2003 2002 2003 2002 2003 2002
-------------------------------------------------------------------
($ thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.......... $ 141,607 $ 131,351 $ 28,726 $ 26,176 $ 16,980 $ 9,016
Service cost..................................... 7,269 6,389 690 769 119 115
Interest cost.................................... 9,557 9,249 1,532 1,658 1,004 860
Actuarial loss (gain) and other ................. 7,630 5,583 2,363 2,740 (623) 7,759
Benefits and expenses paid....................... (14,939) (10,965) (10,440) (2,617) (792) (770)
- ------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year................ 151,124 141,607 22,871 28,726 16,688 16,980
- ------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year .. 127,407 132,416 - - - -
Actual return on plan assets and other........... 29,429 (9,791) - - - -
Employer contributions........................... 15,000 15,747 10,440 2,617 792 770
Benefits and expenses paid ...................... (14,939) (10,965) (10,440) (2,617) (792) (770)
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year......... 156,897 127,407 - - - -
- ------------------------------------------------------------------------------------------------------------------------
Funded status.................................... 5,773 (14,200) (22,871) (28,726) (16,688) (16,980)
Unrecognized net actuarial loss.................. 32,738 49,772 9,185 7,608 8,881 10,559
Unrecognized prior service cost (benefit)........ (5,607) (6,529) 9,194 10,754 168 300
Unrecognized net transition obligation (asset)
and other...................................... (17) (26) (1,253) (1,510) 1,205 1,339
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized............................ $ 32,887 $ 29,017 $ (5,745) $ (11,874) $ (6,434) $ (4,782)
========================================================================================================================
AMOUNTS RECOGNIZED IN THE BALANCE SHEET CONSIST OF THE FOLLOWING:
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------
SUPPLEMENTAL POSTRETIREMENT
PENSION BENEFITS PENSION PLAN HEALTH BENEFITS
2003 2002 2003 2002 2003 2002
-------------------------------------------------------------------
($ thousands)
Prepaid benefit cost............................. $ 32,887 $ 29,017 $ - $ - $ - $ -
Accrued benefit cost (included in other liabilities) - - (21,250) (28,401) (6,434) (4,782)
Intangible assets (included in other assets)..... - - 9,194 10,754 - -
Accumulated other comprehensive loss (pre-tax)... - - 6,311 5,773 - -
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized............................ $ 32,887 $ 29,017 $ (5,745) $ (11,874) $ (6,434) $ (4,782)
========================================================================================================================
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
OTHER INFORMATION REGARDING THE COMPANY'S DEFINED BENEFIT PENSION PLAN IS AS
FOLLOWS:
DECEMBER 31
2003 2002
-------------------------------
($ thousands)
Projected benefit obligation ..................................................... $ 151,125 $ 141,607
Accumulated benefit obligation ................................................... 122,317 120,587
Fair value of plan assets ........................................................ 156,897 127,407
THE FOLLOWING IS A SUMMARY OF THE COMPONENTS OF NET PERIODIC BENEFIT COST:
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------
SUPPLEMENTAL POSTRETIREMENT
PENSION BENEFITS PENSION PLAN HEALTH BENEFITS
----------------------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
----------------------------------------------------------------------------------------------
($ thousands)
COMPONENTS OF NET
PERIODIC BENEFIT COST
Service cost......... $ 7,269 $ 6,389 $ 7,448 $ 690 $ 769 $ 753 $ 119 $ 115 $ 86
Interest cost........ 9,557 9,249 11,217 1,532 1,658 1,595 1,004 860 622
Expected return
on plan assets..... (10,083) (11,530) (15,232) - - - - - -
Transition (asset)
obligation
recognition........ (8) (8) (8) (256) (256) (256) 135 135 135
Special termination
benefit .......... - - 100 - - - - - -
Amortization of
prior service cost
(credit)........... (922) (922) (884) 1,560 1,560 1,600 131 131 131
Recognized net
actuarial loss
and other.......... 5,317 2,145 1,150 962 578 784 1,055 596 209
- ------------------------------------------------------------------------------------------------------------------------
Net periodic
benefit cost....... 11,130 5,323 3,791 4,488 4,309 4,476 2,444 1,837 1,183
Multiemployer plans.. 77,110 75,062 74,131 - - - - - -
- ------------------------------------------------------------------------------------------------------------------------
$ 88,240 $ 80,385 $ 77,922 $ 4,488 $ 4,309 $ 4,476 $ 2,444 $ 1,837 $ 1,183
========================================================================================================================
ADDITIONAL INFORMATION:
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------
SUPPLEMENTAL POSTRETIREMENT
PENSION BENEFITS PENSION PLAN HEALTH BENEFITS
----------------------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
----------------------------------------------------------------------------------------------
($ thousands)
Increase in minimum
liability included in
other comprehensive
loss (pre-tax) ....... $ - $ - $ - $ 538 $ 5,773 $ - $ - $ - $ -
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
ASSUMPTIONS:
Weighted-average assumptions used to determine benefit obligations were as
follows:
DECEMBER 31
-----------------------------------------------------------------------------------
SUPPLEMENTAL POSTRETIREMENT
PENSION BENEFITS PENSION PLAN HEALTH BENEFITS
-----------------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002
-----------------------------------------------------------------------------------
Discount rate................... 6.0% 6.9% 6.0% 6.9% 6.0% 6.9%
Rate of compensation increase... 4.0% 4.0% 4.0% 5.0% - -
Weighted-average assumptions used to determine net periodic benefit cost were as
follows:
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------
SUPPLEMENTAL POSTRETIREMENT
PENSION BENEFITS PENSION PLAN HEALTH BENEFITS
-----------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001 2003 2002 2001
-----------------------------------------------------------------------------------
Discount rate................... 6.9% 7.55% 7.55% 6.9% 7.55% 7.55% 6.9% 7.55% 7.55%
Expected return on plan assets.. 7.9% 9.0% 9.0 - 10.0% - - - - - -
Rate of compensation increase... 4.0% 4.0% 3.0 - 4.0% 4.0% 5.0% 4.0% - - -
The Company establishes its pension plan expected long-term rate of return on
assets by considering the 10-year historical returns for the current mix of
investments in the Company's pension plan. In addition, consideration is given
to the range of expected returns for the pension plan investment mix provided by
the plan's investment advisors. The Company uses the historical information to
determine if there has been a significant change in the pension plan's
investment return history. If it is determined that there has been a significant
change, the rate is adjusted up or down, as appropriate, by a portion of the
change. This approach is intended to establish a long-term, nonvolatile rate
that does, however, reflect significant changes in the plan's 10-year asset
return history. The Company has established its long-term expected rate of
return utilized in determining its 2004 pension plan expense as 8.25%, which
compares to 7.9% for 2003.
The Company reduced its discount rate for determining benefit obligations from
6.9% at December 31, 2002 to 6.0% for December 31, 2003. This reduction reflects
lower long-term market interest rates.
ASSUMED HEALTH CARE COST TREND RATES:
DECEMBER 31
2003 2002
-----------------------
Health care cost trend rate assumed for next year ................................... 11.5% 12.0%
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate).................................................. 5.0% 4.5%
Year that the rate reaches the ultimate trend rate .................................. 2012 2010
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects for the year ended
December 31, 2003:
1% 1%
INCREASE DECREASE
-----------------------------
($ thousands)
Effect on total of service and interest cost components............................. $ 145 $ (122)
Effect on postretirement benefit obligation......................................... 1,987 (1,687)
THE COMPANY'S DEFINED BENEFIT PENSION PLAN WEIGHTED-AVERAGE ASSET ALLOCATION IS
AS FOLLOWS:
DECEMBER 31
2003 2002
-------------------------
EQUITY
Large Cap U.S. Equity............................................................... 36.2% 35.9%
Small Cap Growth.................................................................... 7.9% -
Small Cap Value..................................................................... 8.3% 4.2%
International Equity................................................................ 12.0% 14.2%
FIXED INCOME
U.S. Fixed Income................................................................... 35.5% 37.4%
Cash Equivalents................................................................... 0.1% 8.3%
- ----------------------------------------------------------------------------------------------------------------------
100.0% 100.0%
======================================================================================================================
The investment strategy for the Company's defined benefit pension plan is to
maximize the long-term return on plan assets subject to an acceptable level of
investment risk, liquidity risk and long-term funding risk. The plan's long-term
asset allocation policy is designed to provide a reasonable probability of
achieving a nominal return of 8.0% to 10.0% per year, protecting or improving
the purchasing power of plan assets and limiting the possibility of experiencing
a substantial loss over a one-year period. Target asset allocations are used for
investments. At December 31, 2003, the target allocations and acceptable ranges
were as follows:
TARGET ACCEPTABLE
ALLOCATION RANGE
----------------------------------
EQUITY
Large Cap U.S. Equity........................................................... 35.0% 30.0% - 40.0%
Small Cap Growth................................................................ 7.5% 5.5% - 9.5%
Small Cap Value................................................................. 7.5% 5.5% - 9.5%
International Equity............................................................ 10.0% 8.0% - 12.0%
FIXED INCOME
U.S. Fixed Income............................................................... 40.0% 35.0% - 45.0%
Investment balances and results are reviewed quarterly. Investment segments
which fall outside the acceptable range at the end of any quarter are rebalanced
based on the target allocation of all segments.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For the Large Cap U.S. Equity segment, the International Equity segment and the
U.S. Fixed Income segment, index funds are used as the investment vehicle. Small
Cap Growth and Small Cap Value investments are in actively managed funds.
Investment performance is tracked against recognized market indexes generally
using three-to-five year performance. Certain types of investments and
transactions are prohibited or restricted by the Company's written investment
policy, including short sales; purchase or sale of futures; options or
derivatives for speculation or leverage; private placements; purchase or sale of
commodities; or illiquid interests in real estate or mortgages.
The Company has no required minimum contributions to its pension plan in 2004.
Based upon current information available from the plan's actuaries, the Company
anticipates no additional tax-deductible contributions will be made in 2004, due
to Internal Revenue Code limitations on tax-deductible contributions.
At December 31, 2002, the pension plan's assets included 205,428 shares of the
Company's Common Stock, which had a fair market value of $5.3 million. During
the period October 27 through 29, all of the Company's Common Stock held by the
pension plan was sold at an average price of $32.60 per share, for a gain of
$3.8 million. In 2003, the Company paid quarterly dividends of eight cents per
share (see Note C). There were no dividends paid on the Company's Common Stock
during 2002 or 2001.
The Company has deferred compensation agreements with certain executives for
which liabilities aggregating $5.1 million and $4.5 million as of December 31,
2003 and 2002, respectively, have been recorded as other liabilities in the
accompanying consolidated financial statements. The deferred compensation
agreements include a provision that immediately vests all benefits and, at the
executive's election, provides for a lump-sum payment upon a change-in-control
of the Company.
An additional benefit plan provides certain death and retirement benefits for
certain officers and directors of an acquired company and its former
subsidiaries. The Company has liabilities of $2.0 million and $2.1 million at
December 31, 2003 and 2002, respectively, for future costs under this plan,
reflected as other liabilities in the accompanying consolidated financial
statements.
The Company and its subsidiaries have various defined contribution plans that
cover substantially all of its employees. The plans permit participants to defer
a portion of their salary up to a maximum of 50.0% as provided in Section 401(k)
of the Internal Revenue Code. The Company matches a portion of participant
contributions up to a specified compensation limit ranging from 0% to 6% in
2003. The plans also allow for discretionary Company contributions determined
annually. The Company's expense for the defined contribution retirement plans
totaled $3.9 million for 2003, $3.6 million for 2002, and $5.0 million for 2001.
The Company has a performance award program available to certain of its
officers. Units awarded will be initially valued at the closing price per share
of the Company's Common Stock on the date awarded. The vesting provisions and
the return-on-equity target will be set upon award. No awards have been granted
under this program.
The Company maintains a Voluntary Savings Plan ("VSP"). The VSP is a
nonqualified deferred compensation plan for certain executives of the Company
and certain subsidiaries. Eligible employees are allowed to defer receipt of a
portion of their regular compensation, incentive compensation and other bonuses,
distributions from the Company's supplemental pension benefit plan and certain
deferred compensation plans by making an election before the compensation is
payable. In addition, the Company credits participants' accounts with applicable
matching contributions and rates of return based on investment indexes selected
by the participants. Salary deferrals, Company match and investment earnings are
considered part of the general assets of the Company until paid. As of December
31, 2003, the Company has recorded liabilities of $29.1 million in other
liabilities and assets of $29.1 million in other
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
assets associated with the plan. As of December 31, 2002, the Company had
recorded liabilities of $16.8 million included in other liabilities and assets
of $16.8 million in other assets.
Other assets include $25.6 million and $21.0 million at December 31, 2003 and
2002, respectively, in cash surrender value of life insurance policies. These
policies are intended to provide funding for long-term benefit arrangements such
as the Company's supplemental pension benefit plan and certain deferred
compensation plans.
NOTE M - OPERATING SEGMENT DATA
The Company used 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 three reportable
operating segments:
(1) ABF; (2) Clipper (see Note D regarding the sale and exit of Clipper's LTL
division); and (3) G.I. Trucking (which was sold on August 1, 2001) (see Note
S). A discussion of the services from which each reportable segment derives its
revenues is as follows:
ABF is headquartered in Fort Smith, Arkansas, and is one of North America's
largest LTL motor carriers, providing direct service to over 98.6% of the cities
in the United States having a population of 25,000 or more. ABF offers national,
interregional and regional transportation of general commodities through
standard, expedited and guaranteed LTL services.
Clipper is headquartered in Lemont, Illinois. Clipper offers domestic intermodal
freight services, utilizing transportation movement over the road and on the
rail.
The Company's other business activities and operating segments that are not
reportable include FleetNet America, Inc., a third-party vehicle maintenance
company; Arkansas Best Corporation, the parent holding company; and Transport
Realty, Inc., a real estate subsidiary of the Company, as well as other
subsidiaries.
The Company eliminates intercompany transactions in consolidation. However, the
information used by the Company's management with respect to its reportable
segments is before intersegment eliminations of revenues and expenses.
Intersegment revenues and expenses are not significant.
Further classifications of operations or revenues by geographic location beyond
the descriptions provided above is impractical and is, therefore, not provided.
The Company's foreign operations are not significant.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - 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 and operating
income:
YEAR ENDED DECEMBER 31
2003 2002 2001
------------------------------------------------
($ thousands)
OPERATING REVENUES
ABF Freight System, Inc. ....................................... $ 1,370,382 $ 1,277,117 $ 1,282,315
Clipper (see Note D)............................................ 126,768 118,949 127,278
G.I. Trucking Company (see Note S).............................. - - 95,477
Other revenues and eliminations ................................ 30,323 26,231 21,136
- -----------------------------------------------------------------------------------------------------------------------
Total consolidated operating revenues ....................... $ 1,527,473 $ 1,422,297 $ 1,526,206
=======================================================================================================================
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
YEAR ENDED DECEMBER 31
2003 2002 2001
-----------------------------------------------
($ thousands)
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC.
Salaries and wages .......................................... $ 891,732 $ 845,562 $ 841,106
Supplies and expenses ....................................... 178,002 157,058 167,072
Operating taxes and licenses ................................ 39,662 40,233 40,426
Insurance ................................................... 24,397 24,606 17,342
Communications and utilities ................................ 14,463 13,874 15,081
Depreciation and amortization ............................... 44,383 41,510 39,848
Rents and purchased transportation .......................... 96,468 82,080 77,690
Other ....................................................... 3,817 3,576 5,036
(Gain) on sale of equipment ................................. (311) (206) (641)
- -----------------------------------------------------------------------------------------------------------------------
1,292,613 1,208,293 1,202,960
- -----------------------------------------------------------------------------------------------------------------------
CLIPPER (see Note D)
Cost of services ............................................ 109,554 102,152 111,131
Selling, administrative and general ......................... 16,144 15,620 15,651
Exit costs - Clipper LTL..................................... 1,246 - -
Loss on sale or impairment of equipment and software ........ 245 54 43
- -----------------------------------------------------------------------------------------------------------------------
127,189 117,826 126,825
- -----------------------------------------------------------------------------------------------------------------------
G.I. TRUCKING COMPANY (see Note S)
Salaries and wages .......................................... - - 49,496
Supplies and expenses ....................................... - - 9,252
Operating taxes and licenses ................................ - - 2,255
Insurance ................................................... - - 2,312
Communications and utilities ................................ - - 1,348
Depreciation and amortization ............................... - - 3,275
Rents and purchased transportation .......................... - - 25,212
Other ....................................................... - - 2,302
(Gain) on sale of equipment ................................. - - (48)
- -----------------------------------------------------------------------------------------------------------------------
- - 95,404
- -----------------------------------------------------------------------------------------------------------------------
Other expenses and eliminations ................................ 34,491 27,957 25,083
- -----------------------------------------------------------------------------------------------------------------------
Total consolidated operating expenses and costs ............. $ 1,454,293 $ 1,354,076 $ 1,450,272
=======================================================================================================================
OPERATING INCOME (LOSS)
ABF Freight System, Inc. ....................................... $ 77,769 $ 68,824 $ 79,355
Clipper (see Note D)............................................ (421) 1,123 453
G.I. Trucking Company (see Note S) ............................. - - 73
Other loss and eliminations .................................... (4,168) (1,726) (3,947)
- -----------------------------------------------------------------------------------------------------------------------
Total consolidated operating income ......................... $ 73,180 $ 68,221 $ 75,934
=======================================================================================================================
TOTAL CONSOLIDATED OTHER INCOME (EXPENSE)
Net gains on sales of property and other .................... $ 643 $ 3,524 $ 918
Gain on sale of G.I. Trucking Company ....................... - - 4,642
Gain on sale of Wingfoot .................................... 12,060 - -
Gain on sale of Clipper LTL.................................. 2,535 - -
IRS interest settlement ..................................... - 5,221 -
Fair value changes and payments on interest rate swap ....... (10,257) - -
Interest expense ............................................ (3,855) (8,097) (12,636)
Other, net .................................................. 648 (238) (2,139)
- -----------------------------------------------------------------------------------------------------------------------
1,774 410 (9,215)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL CONSOLIDATED INCOME
BEFORE INCOME TAXES........................................... $ 74,954 $ 68,631 $ 66,719
=======================================================================================================================
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The following tables provide asset, capital expenditure and depreciation and
amortization information by reportable operating segment for the Company, as
well as reconciliations of reportable segment information to the Company's
consolidated assets, capital expenditures and depreciation and amortization at
December 31, 2003. Subsequent to the recognition of the impairment loss on the
Company's Clipper goodwill, the Company reclassified the remainder of the LBO
goodwill from the "other" segment to ABF (see Note G).
YEAR ENDED DECEMBER 31
2003 2002 2001
------------------------------------------------
($ thousands)
IDENTIFIABLE ASSETS
ABF Freight System, Inc. ...................................... $ 499,310 $ 487,752 $ 441,644
Clipper ....................................................... 33,685 24,819 46,618
Investment in Wingfoot (see Note E) ........................... - 59,341 59,341
Other and eliminations ........................................ 164,230 184,460 175,550
- -----------------------------------------------------------------------------------------------------------------------
Total consolidated identifiable assets ..................... $ 697,225 $ 756,372 $ 723,153
=======================================================================================================================
CAPITAL EXPENDITURES (GROSS)
ABF Freight System, Inc. ...................................... $ 51,668 $ 46,823 $ 62,332
Clipper ....................................................... 4,733 94 3,582
G.I. Trucking Company (see Note S) ............................ - - 4,537
Other equipment and information technology purchases .......... 11,801 11,396 4,219
- -----------------------------------------------------------------------------------------------------------------------
Total consolidated capital expenditures (gross)............. $ 68,202 $ 58,313 $ 74,670
=======================================================================================================================
DEPRECIATION AND AMORTIZATION EXPENSE
ABF Freight System, Inc. ...................................... $ 44,383 $ 41,510 $ 41,334
Clipper ....................................................... 2,006 1,757 2,451
G.I. Trucking Company (see Note S) ............................ - - 3,185
Other ......................................................... 5,868 6,227 7,578
- -----------------------------------------------------------------------------------------------------------------------
Total consolidated depreciation and amortization expense ... $ 52,257 $ 49,494 $ 54,548
=======================================================================================================================
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE N - FINANCIAL INSTRUMENTS
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 December 31, 2003 and 0.825%
at December 31, 2002). This instrument is recorded on the balance sheet of the
Company in other liabilities (see Note F). Details regarding the swap, as of
December 31, 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 Agreement LIBOR rate (1) ($6.3) million
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 December 31, 2003 to terminate the
agreement.
(3) The swap value changed from ($9.9) million at December 31, 2002. The fair
value is impacted by changes in rates of similarly termed Treasury
instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for all financial instruments, except for the interest
rate swap agreement disclosed above and capitalized leases:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance sheets
for cash and cash equivalents approximates its fair value.
LONG- AND SHORT-TERM DEBT: The carrying amount of the Company's borrowings under
its Revolving Credit Agreement approximates its fair value, since the interest
rate under this agreement is variable. The fair value of the Company's other
long-term debt was estimated using current market rates.
The carrying amounts and fair value of the Company's financial instruments at
December 31 are as follows:
2003 2002
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-----------------------------------------------------------
($ thousands)
Cash and cash equivalents........................... $ 5,251 $ 5,251 $ 39,644 $ 39,644
Short-term debt..................................... $ 133 $ 134 $ 133 $ 127
Long-term debt...................................... $ 1,514 $ 1,516 $ 111,647 $ 111,610
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE O - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
YEAR ENDED DECEMBER 31
2003 2002 2001
-------------------------------------------------
($ thousands, except share and per share data)
NUMERATOR:
Numerator for basic earnings per share -
Income before cumulative effect of change
in accounting principle ................................. $ 46,110 $ 40,755 $ 41,404
Cumulative effect of change in accounting
principle, net of tax ................................... - (23,935) -
Preferred stock dividends ................................ - - (2,487)
- -----------------------------------------------------------------------------------------------------------------------
Net income available to common stockholders.................. 46,110 16,820 38,917
Effect of dilutive securities ............................... - - 2,487
- -----------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share -
Net income available to common stockholders .............. $ 46,110 $ 16,820 $ 41,404
=======================================================================================================================
DENOMINATOR:
Denominator for basic earnings per share -
weighted-average shares ................................... 24,914,345 24,746,051 21,802,258
Effect of dilutive securities:
Conversion of preferred stock ............................ - - 2,354,157
Employee stock options ................................... 498,270 604,632 805,464
- -----------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted-average
shares and assumed conversions ............................ 25,412,615 25,350,683 24,961,879
=======================================================================================================================
NET INCOME (LOSS) PER COMMON SHARE
BASIC:
Income before cumulative effect of change
in accounting principle ................................... $ 1.85 $ 1.65 $ 1.79
Cumulative effect of change in accounting
principle, net of tax ..................................... - (0.97) -
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE ........................................... $ 1.85 $ 0.68 $ 1.79
=======================================================================================================================
DILUTED:
Income before cumulative effect of change
in accounting principle .................................. $ 1.81 $ 1.60 $ 1.66
Cumulative effect of change in accounting
principle, net of tax...................................... - (0.94) -
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE ........................................... $ 1.81 $ 0.66 $ 1.66
=======================================================================================================================
CASH DIVIDENDS PAID PER COMMON SHARE ........................... $ 0.32 $ - $ -
=======================================================================================================================
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The tables below present unaudited quarterly financial information for 2003 and
2002:
2003
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------------------
($ thousands, except share and per share data)
Operating revenues .................................. $ 359,577 $ 377,875 $ 402,878 $ 387,143
Operating expenses and costs ........................ 349,723 364,335 374,233 366,001
- -----------------------------------------------------------------------------------------------------------------------
Operating income ................................... 9,854 13,540 28,645 21,142
Other income (expense) - net ........................ (11,088) 10,063 (89) 2,888
Income tax expense (benefit)......................... (500) 8,413 11,580 9,352
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of change
in accounting principle............................ (734) 15,190 16,976 14,678
Cumulative effect of change in accounting
principle.......................................... - - - -
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) ................................... $ (734) $ 15,190 $ 16,976 $ 14,678
=======================================================================================================================
Net income (loss) per common share, basic:
Income (loss) before cumulative effect
of change in accounting principle............... $ (0.03) $ 0.61 $ 0.68 $ 0.59
Cumulative effect of change in accounting
principle, net of tax........................... - - - -
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) per share.......................... $ (0.03) $ 0.61 $ 0.68 $ 0.59
- -----------------------------------------------------------------------------------------------------------------------
Average shares outstanding (basic) .................. 24,892,430 24,796,726 24,787,831 24,955,488
=======================================================================================================================
Net income (loss) per common share, diluted:
Income (loss) before cumulative effect of
change in accounting principle.................. $ (0.03) $ 0.60 $ 0.67 $ 0.58
Cumulative effect of change in accounting
principle, net of tax........................... - - - -
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) per share.......................... $ (0.03) $ 0.60 $ 0.67 $ 0.58
- -----------------------------------------------------------------------------------------------------------------------
Average shares outstanding (diluted) ................ 24,892,430 25,262,013 25,287,271 25,517,061
=======================================================================================================================
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
2002
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------------------------------------------------------------
($ thousands, except share and per share data)
Operating revenues .................................. $ 320,198 $ 345,137 $ 375,397 $ 381,565
Operating expenses and costs ........................ 315,380 331,880 351,450 355,366
- -----------------------------------------------------------------------------------------------------------------------
Operating income .................................... 4,818 13,257 23,947 26,199
Other income (expense) - net ........................ (2,352) (2,213) 7,221 (2,245)
Income tax expense .................................. 1,016 4,550 12,821 9,489
- -----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle............................ 1,450 6,494 18,347 14,465
Cumulative effect of change in accounting
principle, net of tax benefits of $13,580.......... (23,935) - - -
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) ................................... $ (22,485) $ 6,494 $ 18,347 $ 14,465
=======================================================================================================================
Net income (loss) per common share, basic:
Income before cumulative effect
of change in accounting principle............... $ 0.06 $ 0.26 $ 0.74 $ 0.58
Cumulative effect of change in accounting
principle, net of tax........................... (0.97) - - -
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) per share.......................... $ (0.91) $ 0.26 $ 0.74 $ 0.58
- -----------------------------------------------------------------------------------------------------------------------
Average shares outstanding (basic) .................. 24,584,022 24,760,978 24,783,674 24,850,147
=======================================================================================================================
Net income (loss) per common share, diluted:
Income before cumulative effect of
change in accounting principle.................. $ 0.06 $ 0.26 $ 0.73 $ 0.57
Cumulative effect of change in accounting
principle, net of tax........................... (0.95) - - -
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) per share.......................... $ (0.89) $ 0.26 $ 0.73 $ 0.57
- -----------------------------------------------------------------------------------------------------------------------
Average shares outstanding (diluted) ................ 25,334,995 25,311,665 25,296,694 25,462,838
=======================================================================================================================
NOTE Q - LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS AND OTHER EVENTS
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 75 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.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
As of December 31, 2003, the Company has accrued approximately $2.9 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 R - EXCESS INSURANCE CARRIERS
Reliance Insurance Company ("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 December 31, 2003, the Company estimates its workers' compensation claims
insured by Reliance to be approximately $7.4 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 $5.2 million of the $7.4 million, which leaves the
Company with a net exposure amount of $2.2 million. At December 31, 2003, the
Company had $1.6 million of liability recorded in its financial statements for
its estimated exposure to Reliance. As of December 31, 2002, the Company
estimated its workers' compensation claims insured by Reliance to be
approximately $5.5 million and the amounts accepted by state guaranty funds to
be $3.7 million, for a net exposure amount of $1.8 million, of which $1.4
million was recorded as a liability in its financial statements. 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. Lumbermen's 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 to the Company
during 2000 and 2001. The Company estimates its workers' compensation claims
insured by Kemper to be approximately $1.0 million. At December 31, 2003, the
Company had $0.1 million of liability recorded in its financial statements for
its potential exposure to Kemper, based upon Kemper's financial information
available to the Company.
NOTE S - SALE OF G.I. TRUCKING COMPANY
On August 1, 2001, the Company sold the stock of G.I. Trucking for $40.5 million
in cash to a company formed by the senior executives of G.I. Trucking and Estes
Express Lines ("Estes"). G.I. Trucking and Estes have been partners in
ExpressLINK(R), a North American transportation partnership since 1996. The
Company recognized a pre-tax gain on the sale of $4.6 million in the third
quarter of 2001. Cash proceeds from the sale of G.I. Trucking, net of costs and
income taxes, of approximately $33.0 million were used to pay down the Company's
outstanding debt.
The Company retained ownership of three California terminal facilities and has
agreed to lease them for an aggregate amount of $1.6 million per year to G.I.
Trucking for a period of up to four years. G.I. Trucking has an option at any
time during the four-year lease term to purchase these terminals for $19.5
million. The terminals may be purchased in aggregate or individually. The
facilities have a net book value of approximately
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
$5.6 million. If the terminal facilities are sold to G.I. Trucking, the Company
will recognize a pre-tax gain of approximately $13.9 million in the period they
are sold.
NOTE T - SUBSEQUENT EVENTS (UNAUDITED)
On January 28, 2004, the Company announced that its Board had increased its
quarterly cash dividend from eight cents to twelve cents per share. In addition,
on January 29, 2004, the Company purchased 131,400 shares of the Company's
Common Stock for a total cost of $3.9 million. These common shares were added to
the Company's treasury stock.