EXHIBIT 13
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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
Controls and Procedures
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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
--------- ----------- --------
2004
First quarter ............ $ 34.15 $ 25.32 $ 0.12
Second quarter............ 32.92 25.20 0.12
Third quarter............. 36.93 30.29 0.12
Fourth quarter............ 46.10 36.79 0.12
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
At February 22, 2005, there were 25,291,970 shares of the Company's Common Stock
outstanding, which were held by 405 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 the
quarterly cash dividend to twelve cents per share, which totaled $3.0 million
per quarter in 2004. On January 26, 2005, the Board declared a quarterly cash
dividend of twelve cents per share, which totaled approximately $3.0 million.
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. The program has no expiration date but
may be terminated at any time at the Board's discretion. There were no shares
repurchased during the fourth quarter of 2004.
AVERAGE MAXIMUM DOLLAR
TOTAL NUMBER PRICE PAID TOTAL NUMBER OF VALUE OF SHARES
OF SHARES PER SHARE SHARES PURCHASED THAT MAY YET BE
PURCHASED DURING DURING AS PART OF PUBLICLY PURCHASED UNDER
PERIOD ENDING 4TH QUARTER 2004 4TH QUARTER 2004 ANNOUNCED PROGRAM THE PROGRAM
- ----------------- ---------------- ---------------- ------------------- ---------------
October 31, 2004 - $ - 471,500 $ 12,621,166.74
November 30, 2004 - - 471,500 12,621,166.74
December 31, 2004 - - 471,500 12,621,166.74
-- ------
- $ -
== ======
The purchases by the Company, since the inception of the stock purchase program
have been made at an average price of $26.25 per share.
See Note C for stock repurchased during the full years ended December 31, 2004
and 2003.
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 $15.0 million in any one
calendar year. The Company's Credit Agreement allows for repurchases of Common
Stock and the payment of a one-time dividend, provided the Company meets certain
debt-to-EBITDA-ratio requirements and certain Credit Agreement availability
requirements.
SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
2004 2003 2002 2001(1) 2000(1)
------------ ------------- ------------- ------------ -----------
($ thousands, except per share data)
STATEMENT OF INCOME DATA:
Operating revenues(11)..................... $ 1,715,763 $ 1,555,044 $ 1,448,590 $ 1,550,661 $ 1,865,364
Operating income........................... 124,299 73,180 68,221 75,934 140,152
Other income (expense) - net............... 1,324 1,291 3,286 (1,221) 647
Gain on sale/fair value net gain - Wingfoot (2) - 12,060 - - 5,011
Gain on sale - G.I. Trucking Company ...... - - - 4,642 -
Gain on sale - Clipper LTL (3)............. - 2,535 - - -
IRS interest settlement (4) ............... - - 5,221 - -
Fair value changes and payments on swap (5) 509 (10,257) - - -
Interest expense, net of temporary
investment (income)...................... 159 3,855 8,097 12,636 16,687
Income before income taxes................. 125,973 74,954 68,631 66,719 129,123
Provision for income taxes (6)............. 50,444 28,844 27,876 25,315 52,968
Income before accounting change............ 75,529 46,110 40,755 41,404 76,155
Cumulative effect of change in accounting
principle, net of tax benefits of $13,580 (7) - - (23,935) - -
Reported net income ....................... 75,529 46,110 16,820 41,404 76,155
Amortization of goodwill, net of tax (8) .. - - - 3,411 3,409
Adjusted net income (8).................... 75,529 46,110 16,820 44,815 79,564
Income per common share, diluted, before
accounting change........................ 2.94 1.81 1.60 1.66 3.17
Reported net income per common share,
diluted ................................. 2.94 1.81 0.66 1.66 3.17
Goodwill amortization, per common share,
diluted (8).............................. - - - 0.14 0.14
Adjusted net income per common share,
diluted (8).............................. 2.94 1.81 0.66 1.80 3.31
Cash dividends paid per common share (9) .. 0.48 0.32 - - -
BALANCE SHEET DATA:
Total assets .............................. 806,745 697,225 756,372 723,153 797,124
Current portion of long-term debt ......... 388 353 328 14,834 23,948
Long-term debt (including capital leases
and excluding current portion) .......... 1,430 1,826 112,151 115,003 152,997
OTHER DATA:
Gross capital expenditures ................ 79,533 68,202 58,313 74,670 93,585
Net capital expenditures (10).............. 63,623 60,373 46,439 64,538 83,801
Depreciation and amortization of
property, plant and equipment ........... 54,760 51,925 49,219 50,315 52,186
(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.
(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 Clipper less-than-truckload ("LTL") vendor and
customer lists on December 31, 2003 (see Note D).
(4) Internal Revenue Service ("IRS") interest settlement (see Note H).
(5) Fair value changes and payments on the interest rate swap (see Note F).
(6) Provision for income taxes for 2001 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.
(7) 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).
(8) Net income and earnings per share, as adjusted, excluding goodwill
amortization.
(9) 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. On January 28, 2004, the Board increased the quarterly
cash dividend to twelve cents per share.
(10) Capital expenditures, net of proceeds from the sale of property, plant and
equipment.
(11) The 2003, 2002, 2001, and 2000 statements of income include
reclassifications to report revenue and purchased transportation expense,
on a gross basis, for certain shipments where ABF Freight System, Inc.
("ABF") utilizes a third-party carrier for pickup or delivery of freight
but remains the primary obligor. The amounts reclassified were $27.6
million in 2003, $26.3 million in 2002, $24.5 million in 2001, and $25.8
million in 2000. The comparable amount for 2004 was $28.7 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Arkansas Best Corporation (the "Company") is a 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") and FleetNet America, Inc. ("FleetNet").
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 reports revenue and purchased transportation
expense, on a gross basis, for certain shipments where ABF utilizes a
third-party carrier for pickup or delivery of freight but remains the primary
obligor.
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 allowances for doubtful accounts and revenue
adjustments.
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 based
on their estimated useful lives and estimated fair values to be received when
the equipment is sold or traded. 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. See Note L for nonunion pension plan
footnote disclosures. 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"),
Employers' Accounting for Pensions, and follows the revised disclosure
requirements of Statement of Financial Accounting Standards No. 132 ("FAS 132")
and Statement No. 132(R) ("FAS 132(R)"), Employers' Disclosures about Pensions
and Other Postretirement Benefits. 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 2004
compared to those it anticipates using for 2005 pension expense:
YEAR ENDED DECEMBER 31
2005 2004
---- ----
Discount rate 5.5% 6.0%
Expected return on plan assets 8.3% 8.3%
Rate of compensation increase 4.0% 4.0%
The assumptions used directly impact the pension expense for a particular year.
If actual results vary from the assumption, an actuarial gain or loss is created
and amortized into pension expense over the average remaining service period of
the plan participants beginning in the following year. The Company establishes
the expected rate of return on its pension plan assets by considering the
historical returns for the plan's current investment mix 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 expected rate of return would reduce annual pension
expense (pre-tax) by approximately $1.6 million.
At December 31, 2004, the Company's nonunion pension plan had $47.5 million in
unamortized actuarial losses, for which the amortization period is approximately
ten years. The Company amortizes actuarial losses over the average remaining
active service period of the plan participants and does not use a corridor
approach. The Company's 2005 pension expense will include amortization of
actuarial losses of approximately $4.7 million. The comparable amounts for 2004
and 2003 were $4.8 million and $5.3 million, respectively. The Company's 2005
total pension expense will be available for its first quarter 2005 Form 10-Q
filing and is not expected to be materially different than 2004 pension expense,
based upon currently available information.
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. See Note S for Recent Accounting Pronouncements regarding the
Financial Accounting Standards Board's Statement No. 123(R) ("FAS 123(R)"),
Share-Based Payment, issued in December 2004.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The Company is self-insured up to certain limits for workers' compensation and
certain third-party casualty claims. For 2004 and 2003, these limits are $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 total $63.6 million and $53.7 million at
December 31, 2004 and 2003, respectively. The Company does not discount its
claims liabilities. Under the Company's accounting policy for claims, management
annually estimates the development of the claims based upon a third party's
calculation of development factors and analysis of historical trends. This
annual update of the development of claims allows management to address any
changes or trends identified in the process. 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 is a party to an interest rate swap which matures on April 1, 2005
and which was designated as a cash flow hedge until March 19, 2003 under the
provisions of Statement of Financial Accounting Standards No. 133 ("FAS 133"),
Accounting for Derivative Financial Instruments and Hedging Activities. The fair
value of the swap liability of $0.9 million at December 31, 2004 and $6.3
million at December 31, 2003 is recorded on the Company's balance sheet.
Subsequent to March 19, 2003, changes in the fair value of the interest rate
swap have been and will continue to 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.
Except as disclosed in Note S, the Company has no current plans to change the
methodologies outlined above, which are utilized in determining its critical
accounting estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note S for Recent Accounting Pronouncements regarding the Financial
Accounting Standards Board's Statement No. 123(R) ("FAS 123(R)"), Share-Based
Payment, issued in December 2004.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $70.9 million and $5.3 million at December 31,
2004 and 2003, respectively. During 2004, cash provided from operations of
$137.0 million and proceeds from asset sales of $15.9 million were used to
purchase revenue equipment (tractors and trailers used primarily in the
Company's motor carrier transportation operations) and other property and
equipment totaling $79.5 million, pay dividends on Common Stock of $12.0 million
and purchase 271,500 shares of the Company's Common Stock for $7.5 million (see
Note C).
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 less-than-truckload ("LTL") business 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 $110.3 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The following is a table providing the aggregate annual contractual obligations
of the Company including debt, capital lease maturities, future minimum rental
commitments and purchase obligations:
PAYMENTS DUE BY PERIOD
---------------------------------------------------
($ thousands)
12/31/04 LESS THAN 1-3 4-5 AFTER
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- --------------------------- -------- --------- ------- ------- -------
Long-term debt obligations $ 1,505 $ 151 $ 330 $ 373 $ 651
Capital lease obligations 313 237 76 - -
Operating lease obligations 45,763 11,377 17,741 10,090 6,555
Purchase obligations 850 850 - - -
Other long-term liabilities - - - - -
------- ------- ------- ------- -------
Total $48,431 $12,615 $18,147 $10,463 $ 7,206
======= ======= ======= ======= =======
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, 2004, the Company had
future minimum rental commitments, net of noncancellable subleases, totaling
$44.3 million for terminal facilities and Clipper's general office facility and
$1.5 million for other equipment.
During 2004 and 2003, the Company made the maximum allowed tax-deductible
contributions of $1.2 million and $15.0 million to its nonunion defined benefit
pension plan ("pension plan") (see Note L). The recent pension plan funding
relief, signed into law on April 10, 2004 by President Bush, had no impact on
the Company's contributions to its pension plan in 2004 because the Company had
no required minimum contributions in 2004. In 2005, the Company does not expect
to have required minimum contributions, but anticipates making the maximum
allowable tax-deductible contribution to its pension plan. Currently available
information would indicate a maximum contribution in the range of $5.0 million
to $8.0 million for 2005.
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. During 2004, the Company made distributions of $3.3 million to
plan participants. Based upon currently available information, future
distributions of benefits are not anticipated in 2005, and are expected to be
between an estimated $9.0 million and $10.0 million in 2006. Distributions are
funded from general corporate cash funds.
The Company also sponsors an insured postretirement health benefit plan that
provides supplemental medical benefits, life insurance, accident and vision care
to certain officers of the Company and certain subsidiaries. The plan is
generally noncontributory, with the Company paying the premiums. The Company's
postretirement health benefit payments were $0.9 million in 2004 (see Note L).
The Company is party to an interest rate swap on a notional amount of $110.0
million. The purpose of the swap was to limit the Company's exposure to
increases in interest rates on $110.0 million of bank borrowings over the
seven-year term of the swap. The interest rate under the swap is fixed at 5.845%
plus the Credit Agreement margin, which was 0.775% at both December 31, 2004 and
2003. The fair value of the Company's interest rate swap liability was $0.9
million at December 31, 2004 and $6.3 million at December 31, 2003 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The Company has guaranteed approximately $0.3 million that relates to a debt
owed by The Complete Logistics Company ("CLC") to the seller of a company CLC
acquired in 1995. CLC was a wholly owned subsidiary of the Company until 1997,
when it was sold. The Company's exposure to this guarantee declines by $60,000
per year.
The following table sets forth the Company's historical capital expenditures,
net of proceeds from asset sales, for the periods indicated below:
ACTUAL
----------------------------------
2004 2003 2002
-------- ---------- ---------
($ thousands)
CAPITAL EXPENDITURES (NET)
ABF Freight System, Inc. ......................... $ 60,862 $ 47,611 $ 35,796
Clipper .......................................... 1,421 4,655 (109)
Other and eliminations ........................... 1,341 8,107 10,752
-------- --------- ---------
Total consolidated capital expenditures (net).. $ 63,624 $ 60,373 $ 46,439
======== ========= =========
The amounts presented in the table include computer equipment purchases financed
with a capital lease of $31,000 in 2003. Amounts for 2002 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 2004.
In 2005, the Company estimates net capital expenditures to be approximately
$94.0 million, which relates primarily to ABF. This consists of $55.0 million
for revenue equipment replacements, $6.0 million for revenue equipment additions
and approximately $33.0 million for real estate and other. Net capital
expenditures anticipated for 2005 are above the 2004 total of $63.6 million. A
few significant items explain most of the increase in anticipated 2005 net
capital expenditures. The unit cost increases for replacement tractors and
trailers represent an increase of approximately $5.5 million. Replacement of a
greater number of trailers is anticipated in 2005 over 2004 levels, which
increases net capital expenditures by $3.5 million. Expansion of the road
tractor and trailer fleet causes an increase of approximately $5.0 million, and
expansion and maintenance of ABF's terminal network and other net capital
expenditures are anticipated to increase by $12.0 million, over 2004.
The Company has two principal sources of available liquidity, which are its
operating cash and the $170.9 million it has available under its revolving
Credit Agreement at December 31, 2004. The Company has generated between
approximately $74.0 million and $137.0 million of operating cash annually for
the years 2002 through 2004. 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, nonunion pension contributions and capital
expenditures, which includes commitments to purchase approximately $1.7 million
of revenue equipment, of which $0.8 million 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; Bank of
America, N.A. and SunTrust Bank as Co-Syndication Agents; and Wachovia Bank,
National Association as Documentation Agent. The amendment 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
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, 2004, there were no outstanding Revolver Advances and
approximately $54.1 million of outstanding letters of credit. At December 31,
2003, there were no outstanding Revolver Advances and approximately $58.4
million of outstanding letters of credit. 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, 2004, 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. The Company is currently rated BBB+ by Standard & Poor's Rating
Service ("S&P") and Baa3 by Moody's Investors Service, Inc. The Company has no
downward rating triggers that would accelerate the maturity of its debt. On
October 15, 2004, S&P revised its outlook on the Company to positive from
stable. At the same time, S&P affirmed the Company's BBB+ corporate credit
rating.
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 2004 or 2003.
OFF-BALANCE-SHEET ARRANGEMENTS
The Company's off-balance-sheet arrangements include future minimum rental
commitments, net of noncancellable subleases of $45.8 million, which are
disclosed in Note I, and a guarantee of $0.3 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 executive officers or
directors of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
OPERATING SEGMENT DATA
The 2003 and 2002 statements of income include reclassifications to report
revenue and purchased transportation expense, on a gross basis, for certain
shipments where ABF utilizes a third-party carrier for pickup or delivery of
freight but remains the primary obligor. The amounts reclassified were $27.6
million for 2003 and $26.3 million for 2002. The comparable amount for 2004 was
$28.7 million.
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:
2004 2003 2002
---- ---- ----
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC.
Salaries and wages..................................... 61.0% 63.8% 64.9%
Supplies and expenses.................................. 13.0 12.7 12.0
Operating taxes and licenses........................... 2.7 2.8 3.1
Insurance.............................................. 1.5 1.7 1.9
Communications and utilities........................... 0.9 1.0 1.1
Depreciation and amortization.......................... 3.0 3.2 3.2
Rents and purchased transportation..................... 9.7 8.9 8.3
Other.................................................. 0.2 0.3 0.2
(Gain) on sale of equipment ........................... (0.1) - -
---- ----- ----
91.9% 94.4% 94.7%
==== ===== ====
CLIPPER (see Note D)
Cost of services....................................... 90.6% 86.4% 85.9%
Selling, administrative and general.................... 8.5 12.7 13.2
Exit costs - Clipper LTL............................... - 1.0 -
Loss on sale or impairment of equipment and software... - 0.2 -
---- ----- ----
99.1% 100.3% 99.1%
==== ===== ====
OPERATING INCOME (LOSS)
ABF Freight System, Inc.................................... 8.1% 5.6% 5.3%
Clipper (see Note D)....................................... 0.9 (0.3) 0.9
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 2004, ABF represented 92.4% and Clipper
represented 5.6% 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, which creates operating
leverage at higher 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 or grow existing 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 operating results were negatively impacted in
2002 by tonnage declines resulting from declines in the U.S. economy and the
September 11, 2001 terrorist attacks. ABF's LTL per-day tonnage grew slightly in
2003. Following minimal increases in February and March of 2004, ABF's
year-over-year LTL tonnage levels began to dramatically improve in April by
percentages not seen in several years. ABF's fourth quarter and full-year 2004
LTL tonnage per day increased 9.0% and 6.8%, respectively, over the same periods
in 2003. ABF's fourth quarter and full-year 2004 truckload ("TL") tonnage per
day increased 16.5% and 13.0%, respectively, over the same periods in 2003.
Management of the Company believes these increases primarily reflected an
improving U.S. economy. ABF's improved operating performance in 2004 over 2003
reflects the operating leverage it gained from higher LTL and TL tonnage levels.
Through February 13, 2005, 2005 average daily LTL tonnage levels are
approximately 4.0% above the comparable period in 2004. Average daily TL tonnage
levels are approximately 5.0% above the comparable period in 2004. Early
first-quarter 2005 LTL tonnage was affected by reduced shipping levels following
the holiday period, particularly from customers on the West Coast and in the New
England-Middle Atlantic portion of the country. 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. In 2005, the Easter
holiday occurs in March 2005 while it occurred in April 2004. 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.
The pricing environment is a key to ABF's operating performance. The pricing
environment determines ABF's ability to obtain compensatory margins and price
increases on customer accounts. The impact of changes in the pricing environment
is typically measured by LTL billed revenue per hundredweight. This measure is
affected by profile factors such as average shipment size, average length of
haul and customer and geographic mix. For many years, consistent profile
characteristics made LTL billed revenue per hundredweight changes a reasonable
although approximate measure of price change. In the last few years, it has been
difficult to quantify with any degree of accuracy the impact of larger changes
in profile characteristics in order to estimate true price changes. ABF focuses
on individual account profitability and rarely considers revenue per
hundredweight in its customer account or market evaluations. For ABF, total
company profitability must be considered together with measures of LTL billed
revenue per hundredweight changes. The pricing environment in 2003 was positive,
with ABF growing LTL billed revenue per hundredweight, net of fuel surcharges,
by 4.9% over 2002. During 2004, the pricing environment remained firm as
industry capacity continued to tighten with LTL billed revenue per
hundredweight, net of fuel surcharges, increasing by 2.2%. If the U.S. economy
continues to improve and
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
capacity remains tight, the general pricing environment should remain firm,
although there can be no assurances in this regard.
For 2004, salaries, wages and benefit costs accounted for 61.0% of ABF's
revenue. Labor costs are impacted by ABF's contractual obligations 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") and
total pounds-per-mile are measures ABF uses to assess this effectiveness. DSY is
used to measure effectiveness in ABF's local operations, although total weight
per hour may also be a relevant measure when the average shipment size is
changing. Total pounds-per-mile is used by ABF to measure the effectiveness of
its linehaul operations. ABF is generally very effective in managing its labor
costs to business levels. As a result of improving tonnage levels and recent
employee retirements, ABF has experienced an increased demand for additional
employees in specific locations, particularly for over-the-road drivers, city
drivers and freight handlers. Although the ABF positions are highly desirable in
the industry, the Company's pace of hiring has been slower than preferred, due
to the improvement in the U.S. economy and to ABF's high employee standards
related to safety and work experience. As a result, in 2004 ABF has used a
higher-than-normal percentage of rail for linehaul movements and a greater level
of overtime. ABF's employment efforts have been and are expected to continue to
be successful, although there can be no assurances in this regard.
The new Hours of Service Regulations went into effect on January 4, 2004. With
respect to the regulations, the truckload industry has experienced higher labor
costs associated with driver pay and lower driver utilization, resulting in
higher prices. On September 30, 2004, the U.S. Congress voted to extend the
current Hours of Service Regulations until no later than September 30, 2005
after a mid-July 2004 ruling by the U.S. Court of Appeals for the
District of Columbia that vacated those rules. In response to the July 2004 U.S.
Court of Appeals decision, the Federal Motor Carrier Safety Administration
("FMCSA") has been reviewing and reconsidering the Hours of Service Regulations
and has asked for public comments. On February 9, 2005, the FMCSA Administrator
announced that the Bush Administration will recommend to the U.S. Congress that
it include the current Hours of Service Regulations in this year's highway
reauthorization legislation. The Company believes that the Hours of Service
Regulations have had a positive impact on highway safety and the welfare of its
employees.
ABF has experienced higher fuel prices in recent years. However, ABF charges a
fuel surcharge based on changes in diesel fuel prices compared to a national
index. The ABF fuel surcharge rate in effect is available on the ABF Web site at
www.abf.com.
The Company ended 2004 with no borrowings under its revolving Credit Agreement,
$70.9 million in cash and $468.4 million in stockholders' equity. Because of the
Company's financial position at December 31, 2004, ABF should continue to be in
a position to take advantage of potential growth opportunities in an improving
U.S. economy.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
2004 COMPARED TO 2003
Consolidated revenues for 2004 increased 10.3% and operating income increased
69.9%, compared to 2003, primarily due to revenue growth and improved operating
results at ABF, as discussed below in the ABF section of Management's Discussion
and Analysis.
The following table provides a reconciliation of GAAP net income and diluted
earnings per share for 2004 and 2003. Management believes the non-GAAP financial
measures presented are useful to investors in understanding the Company's
results of operations, because they provide more comparable measures:
-------------------------------------------------
2004 2003
----------------------- -----------------------
EARNINGS EARNINGS
NET PER SHARE NET PER SHARE
INCOME (DILUTED) INCOME (DILUTED)
($ thousands, except per share data)
----------- ---------- ---------- ----------
GAAP income.................................... $ 75,529 $ 2.94 $ 46,110 $ 1.81
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)
Plus Clipper LTL exit costs (see Note D)....... - - 747 0.03
Plus interest rate swap charge (see Note F).... - - 5,364 0.21
----------- ---------- ---------- ----------
Net income, excluding above items.............. $ 75,529 $ 2.94 $ 42,274 $ 1.66
=========== ========== ========== ==========
The increase of 77.1% in diluted earnings per share for 2004, excluding the
above items, reflects primarily improved operating results at ABF, as discussed
below in the ABF section of Management's Discussion and Analysis.
Reliance Insurance Company ("Reliance") was Arkansas Best's excess insurer for
workers' compensation claims above $300,000 for the years 1993 through 1999.
According to an Official Statement by the Pennsylvania Insurance Department on
October 3, 2001, Reliance was determined to be insolvent. 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. For claims
not accepted by state guaranty funds, Arkansas Best has continually maintained
reserves for its estimated exposure to the Reliance liquidation since 2001.
During the second quarter of 2004, Arkansas Best began receiving notices of
rejection from the California Insurance Guarantee Association ("CIGA") on
certain claims previously accepted by this guaranty fund. If these claims are
not covered by the CIGA, they become part of Arkansas Best's exposure to the
Reliance liquidation. As of December 31, 2004, the Company estimated its
workers' compensation claims insured by Reliance to be approximately $8.6
million. Of the $8.6 million of insured Reliance claims, approximately $3.7
million have been accepted by state guaranty funds, leaving the Company with a
net exposure amount of approximately $4.9 million. At December 31, 2004, the
Company had reserved $4.2 million in its financial statements for its estimated
exposure to Reliance. At December 31, 2003, the Company's reserve for Reliance
exposure was $1.6 million. The Company's reserves are determined by reviewing
the most recent financial information available for Reliance from the
Pennsylvania Insurance Department. The Company anticipates receiving either full
reimbursement from state guaranty funds or partial reimbursement through orderly
liquidation; however, this process could take several years.
On August 1, 2001, the Company sold the stock of G.I. Trucking Company ("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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
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 $5.4 million. If all of
the terminal facilities are sold to G.I. Trucking, the Company will recognize a
pre-tax gain of approximately $14.1 million in the period they are sold.
ABF FREIGHT SYSTEM, INC.
Effective June 14, 2004 and July 14, 2003, ABF implemented general rate
increases to cover known and expected cost increases. Typically, the increases
were 5.9% for both periods, although the amounts can vary by lane and shipment
characteristic. ABF's increase in reported revenue per hundredweight, net of
fuel surcharge, for 2004 versus 2003 has been impacted not only by the general
rate increase, but also by changes in profile such as length of haul, weight per
shipment and customer and geographic mix. ABF charges a fuel surcharge, based on
changes in diesel fuel prices compared to an index price. The ABF fuel surcharge
rate in effect is available on the ABF Web site at www.abf.com. The fuel
surcharge in effect averaged 6.2% of revenue for 2004, compared to 3.5% for
2003.
The 2003 statement of income includes a reclassification to report revenue and
purchased transportation expense, on a gross basis, for certain shipments where
ABF utilizes a third-party carrier for pickup or delivery of freight but remains
the primary obligor. The amount reclassified was $27.6 million for 2003. The
comparable amount for 2004 was $28.7 million. There was no impact on ABF's
operating income and only a slight impact on ABF's operating ratio as a result
of this reclassification.
Revenues for 2004 were $1,585.4 million compared to $1,398.0 million for 2003.
ABF generated operating income of $127.8 million for 2004 compared to $77.8
million during 2003, representing an increase of 64.3%.
The following table provides a comparison of key operating statistics for ABF:
2004 2003 % CHANGE
------------- ------------- --------
BILLED REVENUE PER HUNDREDWEIGHT, EXCLUDING FUEL SURCHARGES
LTL (shipments less than 10,000 pounds)................... $ 23.98 $ 23.47 2.2%
TL ....................................................... $ 8.90 $ 8.57 3.9%
Total .................................................... $ 20.91 $ 20.57 1.7%
TONNAGE (TONS)
LTL ...................................................... 2,836,307 2,644,786 7.2%
TL ....................................................... 725,436 639,643 13.4%
------------- ------------- ----
Total .................................................... 3,561,743 3,284,429 8.4%
============= ============= ====
SHIPMENTS PER DSY HOUR...................................... 0.523 0.527 (0.7)%
TOTAL POUNDS-PER-MILE....................................... 19.31 19.21 0.5%
ABF's revenue-per-day increase of 13.0% for 2004 over 2003 is due primarily to
increases in revenue per hundredweight and tonnage.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
For 2004, figures for LTL billed revenue per hundredweight compared to 2003
reflect a firm pricing environment and acceptance of the general rate increase
put in place on June 14, 2004.
As previously discussed, ABF has experienced increases in tonnage levels for
both LTL and truckload during 2004. Management of the Company believes these
increases reflect an improving U.S. economy, particularly in the domestic
manufacturing sector. There were 254 working days in 2004 and 253 working days
in 2003.
ABF's operating ratio improved to 91.9% for 2004 from 94.4% in 2003, reflecting
the operating leverage that results from increased revenues and changes in
certain other operating expense categories as follows:
Salaries and wages expense for 2004 decreased 2.8%, as a percent of revenue,
when compared to 2003, due primarily to 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. With the increase in demand for employees as previously
discussed, ABF has a greater number of newly hired employees who are at the
lower tier of the union scale for wages, which contributes to lower salaries and
wages as a percentage of revenue for 2004 compared to 2003. In addition, ABF has
used a greater level of overtime which lowers fringe benefit costs as a percent
of revenue. The overall decreases in salaries and wages were offset, in part, by
contractual increases under the IBT National Master Freight Agreement. 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 2004, the
annual wage increase occurred on April 1, 2004 and was 2.0%. The annual health,
welfare and pension cost increase occurred on August 1, 2004 and was 6.1%. In
addition, workers' compensation costs were higher in 2004 due primarily to an
increase in the severity of existing claim changes and the associated loss
development.
Supplies and expenses increased 0.3%, as a percent of revenue, when 2004 is
compared to 2003. Fuel costs, on an average price-per-gallon basis, excluding
taxes, increased to an average of $1.26 for 2004, compared to $0.97 for 2003.
The increases in fuel costs are offset, in part, by the fact that a portion of
supplies and expenses are fixed in nature and decrease as a percent of revenue,
with increases in revenue levels.
The 0.8% increase in ABF's rents and purchased transportation costs, as a
percent of revenue, is due primarily to increased rail utilization to 18.5% of
total miles for 2004, compared to 16.2% during 2003. Rail miles have increased
due to tonnage growth in rail lanes and an increase in the use of rail to
accommodate tonnage growth during 2004 while drivers were being hired and
processed. In addition, rail costs per mile have increased 7.4% in 2004 as
compared to 2003.
As previously mentioned, ABF's general rate increase on June 14, 2004 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 continue to be impacted by fluctuating fuel
prices in the future. ABF's fuel surcharge is based on changes in diesel fuel
prices compared to an index. ABF's total insurance costs are dependent on the
insurance markets. ABF's results of operations have been impacted by the wage
and benefit increases associated with the labor agreement with the IBT and will
continue to be impacted by this agreement during the remainder of the contract
term.
CLIPPER
On December 31, 2003, Clipper closed the sale of all customer and vendor lists
related to its LTL freight business (see Note D). With this sale, Clipper exited
the LTL business. Clipper has retained its truckload-related operations
(intermodal, temperature-controlled and brokerage).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The following table provides a reconciliation of GAAP revenues, operating income
(loss) and operating ratios for Clipper for 2004 and 2003. Management believes
the non-GAAP revenues, operating income (loss) and operating ratios are useful
to investors in understanding Clipper's results of operations, excluding its LTL
business, because they provide more comparable measures.
2004 2003
---------------------------------- -----------------------------------
OPERATING OPERATING
INCOME OPERATING INCOME OPERATING
REVENUE (LOSS) RATIO REVENUE (LOSS) RATIO
---------- ---------- --------- ----------- ---------- ---------
($ thousands)
CLIPPER - PRE-TAX
Clipper GAAP amounts.................. $ 95,985 $ 826 99.1% $ 126,768 $ (421) 100.3%
Less Clipper LTL
(excluding LTL exit costs).......... - - - 33,812 (1,356) -
Less Clipper LTL exit costs........... - - - - (1,246) -
---------- ---------- ----- ----------- ---------- -----
Clipper, excluding LTL................ $ 95,985 $ 826 99.1% $ 92,956 $ 2,181 97.7%
========== ========== ===== =========== ========== =====
Excluding LTL, 2004 revenue increased over amounts in 2003 for Clipper's
brokerage and temperature-controlled divisions. This increase was offset, in
part, by lower revenues in the intermodal portion of Clipper's dry-freight
business, resulting from plant closings of a large intermodal customer and
strong pricing competition for available loads.
Clipper's operating ratio deteriorated to 99.1% in 2004, from 97.7% in 2003,
excluding LTL. Because of tight capacity, Clipper's rail suppliers increased
their charges despite providing poor transit performance. As a result, the
profitability of Clipper's intermodal and temperature-controlled divisions
suffered significantly. In addition, tightened truckload capacity negatively
impacted the profitability of Clipper's brokerage division as potential loads
greatly exceeded the number of trucks available to move them. Clipper's
profitability has also been adversely impacted by high fuel and overhead costs.
Clipper continues to adjust its mix of accounts in order to identify those with
the potential for favorable margins.
ACCOUNTS RECEIVABLE, LESS ALLOWANCES
Accounts receivable increased $18.5 million from December 31, 2003 to December
31, 2004, due primarily to increased business levels.
PREPAID EXPENSES
Prepaid expenses increased $7.2 million from December 31, 2003 to December 31,
2004, due primarily to the prepayment of annual insurance premiums for the
Company, which were paid in the fourth quarter of 2004.
ACCOUNTS PAYABLE
Accounts payable increased $7.0 million from December 31, 2003 to December 31,
2004, due primarily to increased business levels.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
INTEREST
Interest expense was $0.2 million for 2004, compared to $3.9 million for 2003.
The decline resulted from lower average debt levels when 2004 is compared to
2003.
INCOME TAXES
The difference between the effective tax rate for 2004 and the federal statutory
rate resulted from state income taxes and nondeductible expenses. The Company's
effective tax rate for 2004 was 40.0%. The Company's tax rate of 38.5% for 2003
reflects a lower tax rate on the Wingfoot gain, because of a higher tax basis
than book basis. The rate without this benefit would have been 40.1%.
At December 31, 2004, the Company had deferred tax assets of $52.7 million, net
of a valuation allowance of $1.0 million, and deferred tax liabilities of $61.9
million. The Company believes that the benefits of the deferred tax assets of
$52.7 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 $61.9 million and the presence of significant taxable income in
2004 and 2003. The valuation allowance has been provided primarily for net
operating loss carryovers in certain states, which may not be realized.
Management intends to evaluate the realizability of net deferred tax assets on a
quarterly basis by assessing the need for any additional valuation allowance.
2003 COMPARED TO 2002
Both consolidated revenues and operating income for 2003 increased 7.3% 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).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
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.
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.
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 3.5% of revenue compared to 2.0% in 2002.
The 2003 and 2002 statements of income include reclassifications to report
revenue and purchased transportation expense, on a gross basis, for certain
shipments where ABF utilizes a third-party carrier for pickup or delivery of
freight but remains the primary obligor. The amounts reclassified were $27.6
million for 2003 and $26.3 million for 2002.
Revenues for 2003 were $1,398.0 million compared to $1,303.4 million during
2002. ABF generated operating income of $77.8 million for 2003 compared to $68.8
million during 2002.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The following table provides a comparison of key operating statistics for ABF:
2003 2002 % CHANGE
------------- ------------- --------
BILLED REVENUE PER HUNDREDWEIGHT, EXCLUDING FUEL SURCHARGES
LTL (shipments less than 10,000 pounds).................. $ 23.47 $ 22.37 4.9%
TL ...................................................... $ 8.57 $ 8.11 5.7%
Total ................................................... $ 20.57 $ 19.51 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)%
TOTAL POUNDS-PER-MILE...................................... 19.21 19.80 (3.0)%
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. After the one-year anniversary of the CF closure, monthly
year-over-year tonnages declined, although declines were less severe during the
fourth quarter of 2003. The September 2003 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.
ABF's improvement in its 2003 operating ratio to 94.4% from 94.7% 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:
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 Motor Freight Carriers
Association ("MFCA") by its membership. ABF is a member of the MFCA. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
Productivity for 2003 was below that of 2002 primarily because of additional
shipment handling and a lower load average 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, was due primarily to an increase in rail utilization to
16.2% of total miles for 2003, compared to 14.4% during 2002. Rail miles
increased due to tonnage growth in rail lanes.
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 $1.2 million and included severance
pay, software and fixed asset abandonment and certain operating lease costs.
Exit costs are reported in operating income.
Clipper's LTL division accounted for approximately 30.0% of total Clipper
revenues. In 2003 and recent years, revenue and operating income of Clipper's
LTL operation suffered, primarily from the negative effects of the U.S. economy
and, in the fourth quarter of 2003, from the announcement of the sale of its
customer and vendor lists to Hercules Forwarding Inc. Clipper retained its
intermodal and temperature-controlled truckload businesses moving on the rail,
as well as its brokerage operation.
During 2003, Clipper's intermodal division experienced significant growth,
30.5%, in shipments as a result of additional lanes awarded to Clipper by a
large-volume customer. Revenue per shipment declined 3.0% as a result of a more
competitive pricing environment. Clipper's temperature-controlled truckload
business experienced a decline in shipments that resulted primarily from low
demand for produce on the East Coast; however, revenue per shipment improved by
7.6%, indicating an improving pricing environment for produce shipments.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
The following table provides a reconciliation of GAAP operating income and
operating ratio for 2003 and 2002. Management believes the non-GAAP operating
income and operating ratio is useful to investors in understanding Clipper's
results of operations, because it provides more comparable measures:
2003 2002
-------------------------- -------------------------
OPERATING OPERATING OPERATING OPERATING
INCOME (LOSS) RATIO INCOME (LOSS) RATIO
-------------- --------- ------------- ---------
($ thousands)
CLIPPER - PRE-TAX
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 resulted 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.
INTEREST
Interest expense was $3.9 million for 2003, compared to $8.1 million for 2002.
The decline resulted from lower average debt levels when 2003 is compared to
2002.
INCOME TAXES
The difference between the effective tax rate for 2003 and the federal statutory
rate resulted from state income taxes and nondeductible expenses. The Company's
tax rate of 38.5% for 2003 reflects a lower tax rate on the Wingfoot gain,
because of a higher tax basis than book basis. The tax rate without this benefit
would have been 40.1%. The Company's tax rate for 2002 was 40.6%.
SEASONALITY
ABF is impacted by seasonal fluctuations, which affect tonnage and shipment
levels. Freight shipments, operating costs and earnings are also affected
adversely by inclement weather conditions. The third calendar quarter of each
year usually has the highest tonnage levels while the first quarter has the
lowest. Clipper's operations are similar to operations at ABF, with revenues
usually being weaker in the first quarter and stronger during the months of June
through October.
EFFECTS OF INFLATION
Management believes that, for the periods presented, inflation has not had a
material effect on our operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - continued
ENVIRONMENTAL MATTERS
The Company's subsidiaries, or lessees, store fuel for use in tractors and
trucks in approximately 77 underground tanks located in 24 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 $109,000 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, 2004 and December 31, 2003, the Company had accrued
approximately $3.3 million and $2.9 million, respectively, to provide for
environmental-related liabilities. The Company's environmental accrual is based
on management's best estimate of the 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. It is anticipated that the resolution of the
Company's environmental matters could take place over several years. Accruals
for environmental liability are included in the balance sheet as accrued
expenses and in other liabilities.
FORWARD-LOOKING STATEMENTS
Statements contained in the Management's Discussion and Analysis section of this
report that are not based on historical facts are "forward-looking statements."
Terms such as "estimate," "forecast," "expect," "predict," "plan," "anticipate,"
"believe," "intend," "should," "would," "scheduled" and similar expressions and
the negatives of such terms are intended to identify forward-looking statements.
Such statements are by their nature subject to uncertainties and 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; union
and nonunion employee wages and benefits; actual costs of continuing investments
in technology; the timing and amount of capital expenditures; competitive
initiatives and pricing pressures; general economic conditions; and other
financial, operational and legal risks and uncertainties detailed from time to
time in the Company's Securities and Exchange Commission ("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 both December 31, 2004 and
2003). 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, 2004,
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) ($0.9) 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, 2004 to terminate
the agreement.
(3) The swap value changed from ($6.3) million at December 31, 2003. The fair
value is impacted by changes in rates of similarly termed Treasury
instruments and payments under the swap agreement.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for all financial instruments, except for the interest
rate swap agreement disclosed above and capitalized leases:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance sheets
for cash and cash equivalents approximates its fair value.
LONG- AND SHORT-TERM DEBT: The carrying amount of the Company's borrowings under
its Revolving Credit Agreement approximates its fair value, since the interest
rate under this agreement is variable. However, at December 31, 2004 and 2003,
the Company had no borrowings under its Revolving Credit Agreement. The fair
value of the Company's other long-term debt was estimated using current market
rates.
The carrying amounts and fair value of the Company's financial instruments at
December 31 are as follows:
2004 2003
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- ------------- -------------
($ thousands)
Cash and cash equivalents...... $ 70,873 $ 70,873 $ 5,251 $ 5,251
Short-term debt................ $ 151 $ 155 $ 133 $ 134
Long-term debt................. $ 1,354 $ 1,374 $ 1,514 $ 1,516
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 2004, outstanding debt obligations under the
Credit Agreement did not exceed $110.0 million. The Company's average borrowings
during 2004 were $0.4 million and average outstanding letters of credit were
$56.6 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. As discussed in Note F, the Company's interest
rate swap matures on April 1, 2005. After April 1, 2005, all borrowings under
the Company's Credit Agreement will be subject to market risk.
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 2004. 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 2004 or 2003.
REPORT OF ERNST & YOUNG LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Arkansas Best Corporation
We have audited the accompanying consolidated balance sheets of Arkansas Best
Corporation as of December 31, 2004 and 2003, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (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, 2004 and 2003, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Arkansas Best
Corporation's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 16, 2005, expressed an unqualified opinion thereon.
Ernst & Young LLP
Little Rock, Arkansas
February 16, 2005
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
2004 2003
--------------------------------
($ thousands, except share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ...................................... $ 70,873 $ 5,251
Accounts receivable, less allowances
(2004 - $4,425; 2003 - $3,558) ............................... 150,812 132,320
Prepaid expenses ............................................... 15,803 8,600
Deferred income taxes .......................................... 28,617 27,006
Prepaid income taxes............................................ 3,309 -
Other .......................................................... 4,268 3,400
--------------- ---------------
TOTAL CURRENT ASSETS ........................................ 273,682 176,577
PROPERTY, PLANT AND EQUIPMENT
Land and structures ............................................ 229,253 215,476
Revenue equipment .............................................. 395,574 370,102
Service, office and other equipment ............................ 115,407 107,066
Leasehold improvements ......................................... 13,411 13,048
--------------- ---------------
753,645 705,692
Less allowances for depreciation and amortization .............. 383,647 358,564
--------------- ---------------
369,998 347,128
PREPAID PENSION COSTS .............................................. 24,575 32,887
OTHER ASSETS ....................................................... 73,234 68,572
ASSETS HELD FOR SALE ............................................... 1,354 8,183
GOODWILL, less accumulated amortization (2004 and 2003 - $32,037) .. 63,902 63,878
--------------- ---------------
$ 806,745 $ 697,225
=============== ===============
ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
2004 2003
--------------- ---------------
($ thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank overdraft and drafts payable ..................................... $ 15,862 $ 8,861
Accounts payable ...................................................... 62,784 55,764
Income taxes payable................................................... 2,941 2,816
Accrued expenses ...................................................... 148,631 125,148
Current portion of long-term debt ..................................... 388 353
--------------- ---------------
TOTAL CURRENT LIABILITIES .......................................... 230,606 192,942
LONG-TERM DEBT, less current portion ...................................... 1,430 1,826
FAIR VALUE OF INTEREST RATE SWAP .......................................... 873 6,330
OTHER LIABILITIES ......................................................... 67,571 66,284
DEFERRED INCOME TAXES ..................................................... 37,870 29,106
FUTURE MINIMUM RENTAL COMMITMENTS, NET
(2004 - $45,763; 2003 - $49,615) ...................................... - -
OTHER COMMITMENTS AND CONTINGENCIES ....................................... - -
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, authorized 70,000,000 shares;
issued 2004 - 25,805,702 shares; 2003 - 25,295,984 shares........... 258 253
Additional paid-in capital ............................................ 229,661 217,781
Retained earnings ..................................................... 256,129 192,610
Treasury stock, at cost, 2004 - 531,282 shares; 2003 - 259,782 shares.. (13,334) (5,807)
Accumulated other comprehensive loss .................................. (4,319) (4,100)
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY ......................................... 468,395 400,737
--------------- ---------------
$ 806,745 $ 697,225
=============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
2004 2003 2002
--------------- -------------- -------------
($ thousands, except per share data)
OPERATING REVENUES...................................................... $ 1,715,763 $ 1,555,044 $ 1,448,590
OPERATING EXPENSES AND COSTS............................................ 1,591,464 1,481,864 1,380,369
--------------- -------------- -------------
OPERATING INCOME ....................................................... 124,299 73,180 68,221
OTHER INCOME (EXPENSE)
Net gains on sales of property and other ........................... 468 643 3,524
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 .............. 509 (10,257) -
Interest (expense), net of temporary investment income
(2004 - 440; 2003 - $93; 2002 - $209)............................. (159) (3,855) (8,097)
Other, net ......................................................... 856 648 (238)
--------------- -------------- -------------
1,674 1,774 410
--------------- -------------- -------------
INCOME BEFORE INCOME TAXES ............................................. 125,973 74,954 68,631
FEDERAL AND STATE INCOME TAXES
Current ............................................................ 43,131 26,275 19,464
Deferred ........................................................... 7,313 2,569 8,412
--------------- -------------- -------------
50,444 28,844 27,876
--------------- -------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE ....................................... 75,529 46,110 40,755
--------------- -------------- -------------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX BENEFITS OF $13,580 ............................ - - (23,935)
--------------- -------------- -------------
NET INCOME ............................................................. $ 75,529 $ 46,110 $ 16,820
=============== ============== =============
NET INCOME (LOSS) PER SHARE
BASIC:
Income before cumulative effect of change in accounting principle .. $ 3.00 $ 1.85 $ 1.65
Cumulative effect of change in accounting principle, net of tax .... - - (0.97)
--------------- -------------- -------------
NET INCOME PER SHARE (BASIC) ........................................... $ 3.00 $ 1.85 $ 0.68
=============== ============== =============
DILUTED:
Income before cumulative effect of change in accounting principle .. $ 2.94 $ 1.81 $ 1.60
Cumulative effect of change in accounting principle, net of tax .... - - (0.94)
--------------- -------------- -------------
NET INCOME PER SHARE (DILUTED) ......................................... $ 2.94 $ 1.81 $ 0.66
=============== ============== =============
CASH DIVIDENDS PAID PER SHARE .......................................... $ 0.48 $ 0.32 $ -
=============== ============== =============
The accompanying notes are an integral part of the consolidated financial
statements.
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------ -------- PAID-IN RETAINED TREASURY COMPREHENSIVE TOTAL
SHARES AMOUNT CAPITAL EARNINGS STOCK LOSS EQUITY
------ -------- ---------- ----------- --------- ------------- ----------
(thousands)
BALANCES AT JANUARY 1, 2002 ....................... 24,542 $ 245 $ 204,463 $ 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) ................ - 4 - - (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 ....................... 430 5 3,908 - - - 3,913
Tax effect of stock options exercised .......... - 3,224 - - - 3,224
Change in fair value of Treadco
officer stock options ........................ - (32) - - - (32)
------ -------- ---------- ---------- --------- --------- ---------
BALANCES AT DECEMBER 31, 2002 ..................... 24,972 250 211,567 154,455 (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 ....................... 324 3 4,394 - - - 4,397
Tax effect of stock options exercised .......... - 1,820 - - - 1,820
Purchase of treasury stock ..................... - - - (4,852) - (4,852)
Dividends paid on common stock ................. - - (7,955) - - (7,955)
------ -------- ---------- ---------- --------- --------- ---------
BALANCES AT DECEMBER 31, 2003 ..................... 25,296 253 217,781 192,610 (5,807) (4,100) 400,737
Net income ..................................... - - - 75,529 - - 75,529
Change in foreign currency translation,
net of taxes of $8 (b)........................ - - - - - (13) (13)
Change in minimum pension liability,
net of tax benefits of $167 (c)............... - - - - - (206) (206)
---------
Total comprehensive income ................. - - - - - - 75,310
---------
Issuance of common stock ....................... 510 5 8,647 - - - 8,652
Tax effect of stock options exercised .......... - - 3,233 - - - 3,233
Purchase of treasury stock ..................... - - - - (7,527) - (7,527)
Dividends paid on common stock ................. - - - (12,010) - - (12,010)
------ -------- ---------- ---------- --------- --------- ---------
BALANCES AT DECEMBER 31, 2004 ..................... 25,806 $ 258 $ 229,661 $ 256,129 $ (13,334) $ (4,319) $ 468,395
====== ======== ========== ========== ========= ========= =========
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 $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 matures 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 December 31, 2002; $0.2 million, net of tax benefits of $0.2
million, at December 31, 2003; and $0.3 million, net of tax benefits of
$0.2 million, at December 31, 2004.
(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; $3.9 million, net of tax benefits of $2.5 million, at December
31, 2003; and $4.1 million, net of tax benefits of $2.6 million, at
December 31, 2004 (see Note L).
ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
2004 2003 2002
------------ ------------ ----------
($ thousands)
OPERATING ACTIVITIES
Net income ............................................................ $ 75,529 $ 46,110 $ 16,820
Adjustments to reconcile net income to net cash provided by operating
activities:
Change in accounting principle, net of tax ......................... - - 23,935
Depreciation and amortization ...................................... 54,760 51,925 49,219
Other amortization ................................................. 292 332 275
Provision for losses on accounts receivable ........................ 1,411 1,556 1,593
Provision for deferred income taxes ................................ 7,313 2,569 8,412
Fair value of interest rate swap ................................... (5,457) 6,330 -
Gains on sales of assets and other ................................. (2,610) (419) (3,430)
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 .................................................... (19,946) (3,125) (15,914)
Prepaid expenses ............................................... (7,204) (813) (982)
Other assets ................................................... 314 (20,273) (12,631)
Accounts payable, taxes payable,
accrued expenses and other liabilities ....................... 32,570 4,735 21,371
------------ ------------ ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................. 136,972 74,332 88,668
------------ ------------ ----------
INVESTING ACTIVITIES
Purchases of property, plant and equipment,
less capitalized leases and notes payable ........................... (79,533) (68,171) (55,668)
Proceeds from asset sales ............................................. 15,910 7,829 11,874
Proceeds from sale of Wingfoot ........................................ - 71,309 -
Proceeds from sale of Clipper LTL ..................................... - 2,678 -
Capitalization of internally developed software and other ............. (3,973) (3,919) (4,381)
------------ ------------ ----------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES .......................... (67,596) 9,726 (48,175)
------------ ------------ ----------
FINANCING ACTIVITIES
Borrowings under revolving credit facilities .......................... 34,300 273,700 61,200
Payments under revolving credit facilities ............................ (34,300) (383,700) (61,200)
Payments on long-term debt ............................................ (362) (331) (15,191)
Net increase in bank overdraft ........................................ 7,493 813 1,379
Retirement of bonds ................................................... - - (4,983)
Dividends paid on common stock ........................................ (12,010) (7,955) -
Purchase of treasury stock ............................................ (7,527) (4,852) -
Proceeds from the exercise of stock options............................ 8,652 4,396 3,913
Other, net ............................................................ - (522) (827)
------------ ------------ ----------
NET CASH USED BY FINANCING ACTIVITIES ..................................... (3,754) (118,451) (15,709)
------------ ------------ ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... 65,622 (34,393) 24,784
Cash and cash equivalents at beginning of period ...................... 5,251 39,644 14,860
------------ ------------ ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 70,873 $ 5,251 $ 39,644
============ ============ ==========
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 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"); and FleetNet America, Inc. ("FleetNet").
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. ABF is a member of the MFCA.
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 92.4% of the Company's annual revenues for 2004,
had no single customer representing more than 3.0% of its revenues during 2004
and no single customer representing more than 3.0% of its accounts receivable
balance during 2004. 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 or when determined to be uncollectible. 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.
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, 2003 were $8.2 million. During 2004,
additional assets of $6.7 million were identified and reclassified to assets
held for sale. Nonoperating terminals and revenue equipment carried at $13.5
million were sold for gains of $1.5 million, of which $0.3 million related to
real estate and was reported below the operating income line and $1.2 million
was related to equipment and was reported in operating income. Total assets held
for sale at December 31, 2004 were $1.4 million.
At December 31, 2004, 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 - primarily 15 to 20 years; revenue equipment - 3 to 12 years;
other equipment - 3 to 15 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.
GOODWILL: 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).
INCOME TAXES: Deferred income taxes are accounted for under the liability
method. Deferred income taxes relate principally to asset and liability basis
differences resulting from the timing of the depreciation and cost recovery
deductions 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. The Company reports revenue and purchased
transportation expense on a gross basis for certain shipments where ABF utilizes
a third-party carrier for pickup, linehaul or delivery of freight but remains
the primary obligor.
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.
STOCK-BASED COMPENSATION: The Company maintains 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.
The Company 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, required 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
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of employee stock options.
For companies accounting for their stock-based compensation under the APB 25
intrinsic value method, pro forma information regarding net income and earnings
per share is required and is determined as if the Company had accounted for its
employee stock options under the fair value method of FAS 123. The fair value
for these options is estimated at the date of grant, using a Black-Scholes
option pricing model. The Company's pro forma assumptions for 2004, 2003 and
2002 are as follows:
2004 2003 2002
------- ------- -------
Risk-free rates ............ 2.9% 2.7% 4.3%
Volatility.................. 53.6% 56.2% 61.0%
Weighted-average life ...... 4 YEARS 4 years 4 years
Dividend yields ............ 1.7% 1.2% 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 to
stock-based employee compensation:
YEAR ENDED DECEMBER 31
2004 2003 2002
--------------- -------------- --------------
($ thousands, except per share data)
Net income - as reported ............................. $ 75,529 $ 46,110 $ 16,820
Less total stock option expense determined under fair
value-based methods for all awards, net of tax...... (3,058) (2,775) (2,538)
-------------- ------------- --------------
Net income - pro forma ............................... $ 72,471 $ 43,335 $ 14,282
============== ============= ==============
Net income per share - as reported (basic) ........... $ 3.00 $ 1.85 $ 0.68
============== ============= ==============
Net income per share - as reported (diluted) ......... $ 2.94 $ 1.81 $ 0.66
============== ============= ==============
Net income per share - pro forma (basic) ............. $ 2.87 $ 1.74 $ 0.58
============== ============= ==============
Net income per share - pro forma (diluted) ........... $ 2.85 $ 1.73 $ 0.57
============== ============= ==============
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.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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.
The Company recorded estimated liabilities of $0.9 million at both December 31,
2004 and 2003 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 that 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 and Statement No. 149 ("FAS 149"), Amendment
of Statement 133 on Derivative Instruments and Hedging Activities, the Company
recognizes 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.
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.
EXIT OR DISPOSAL ACTIVITIES: The Company accounts for exit costs in accordance
with 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 less-than-truckload ("LTL") division in 2003.
VARIABLE INTEREST ENTITIES: In January 2003, the Financial Accounting Standards
Board issued Interpretation No. 46 ("FIN 46"), Consolidation of Variable
Interest Entities. This Interpretation of Accounting Research
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by
business enterprises of variable interest entities. The Company has no
investments in or known contractual arrangements with variable interest
entities.
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.
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 years'
financial statements to conform to the current year's presentation. The 2003 and
2002 statements of income include reclassifications to report revenue and
purchased transportation expense, on a gross basis, for certain shipments where
ABF utilizes a third-party carrier for pickup or delivery of freight but remains
the primary obligor. The amounts reclassified were $27.6 million for 2003 and
$26.3 million for 2002. The comparable amount for 2004 was $28.7 million.
NOTE C - STOCKHOLDERS' EQUITY
COMMON STOCK: On January 28, 2004, the Company announced that its Board of
Directors approved an increase in the quarterly cash dividend from eight cents
per share to twelve cents per share. The following table is a summary of
dividends declared and/or paid during the applicable quarter:
2004 2003
------------ ------------
Quarterly dividend per common share... $0.12 $0.08
First quarter ........................ $3.0 MILLION $2.0 million
Second quarter........................ $3.0 MILLION $2.0 million
Third quarter......................... $3.0 MILLION $2.0 million
Fourth quarter ....................... $3.0 MILLION $2.0 million
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.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
TREASURY STOCK: On January 23, 2003, the Company's Board of Directors approved
the Company's repurchase from time to time, in the open market or in privately
negotiated transactions, up to a maximum of $25.0 million of the Company's
Common Stock. The repurchases may be made either from the Company's cash
reserves or from other available sources. The following table is a
reconciliation of shares repurchased and amounts paid, under the Board-approved
plan, during the periods reported upon. The repurchased shares were added to the
Company's Treasury Stock.
SHARES AMOUNT
------- -------------
($ thousands)
BALANCE, DECEMBER 31, 2002...... 59,782 $ 955
Treasury stock purchased.... 200,000 4,852
------- ------------
BALANCE, DECEMBER 31, 2003...... 259,782 5,807
Treasury stock purchased.... 271,500 7,527
------- ------------
BALANCE, DECEMBER 31, 2004...... 531,282 $ 13,334
======= ============
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS: The Company maintains three stock
option plans which provide for the granting of options to directors and key
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 is a broad-based plan that allows for the
granting of 1.0 million 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. As of December 31, 2004, the
Company had not exercised any Employer SARs and no Employee SARs had been
granted. 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. The options or SARs granted during 2004 and
2003, under each plan, are as follows:
2004 2003
------- -------
2000 Non-Qualified Stock Option Plan - Options.... 49,000 143,500
2002 Stock Option Plan - Options/Employer SARs ... 277,000 182,500
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:
2004 2003 2002
-------------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- -------------- --------- -------------- --------- --------------
Outstanding - beginning of year .... 1,714,647 $ 19.51 1,768,115 $ 17.44 2,201,214 $ 15.78
Granted ............................ 326,000 29.10 326,000 24.59 7,500 23.53
Exercised ......................... (510,059) 16.98 (339,167) 13.34 (430,599) 9.13
Forfeited .......................... (40,100) 23.32 (40,301) 21.81 (10,000) 14.11
--------- --------- --------- -------- --------- ---------
Outstanding - end of year........... 1,490,488 $ 22.50 1,714,647 $ 19.51 1,768,115 $ 17.44
========= ========= ========= ======== ========= =========
Exercisable - end of year........... 595,174 $ 18.13 713,586 $ 15.99 684,411 $ 13.34
========= ========= ========= ======== ========= =========
Estimated weighted-average fair
value per share of options granted
to employees during the year (1).. $ 11.52 $ 10.39 $ 11.86
========= ======== =========
(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.
The following table summarizes information concerning currently outstanding and
exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------- -----------------------------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
EXERCISE PRICES DECEMBER 31, 2004 LIFE PRICE DECEMBER 31, 2004 PRICE
- --------------- ----------------- ----------- ------------ ----------------- ------------
$4 - $6 20,000 2.2 $ 5.64 20,000 $ 5.64
$6 - $8 94,900 2.6 7.33 94,900 7.33
$8 - $10 12,000 4.1 8.39 12,000 8.39
$10 - $12 7,500 3.0 10.25 7,500 10.25
$12 - $14 241,678 5.0 13.54 154,010 13.50
$14 - $16 24,000 5.3 14.99 19,200 14.99
$22 - $24 7,500 7.3 23.53 3,000 23.53
$24 - $26 543,513 6.9 24.48 165,777 24.43
$26 - $28 20,000 6.0 26.81 12,000 26.81
$28 - $30 519,397 8.2 28.69 106,787 28.05
--------- --- ----------- ------- ----------
1,490,488 6.6 $ 22.50 595,174 $ 18.13
========= === =========== ======= ==========
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 included severance pay, software and fixed asset abandonment and
certain operating lease costs. These exit costs are reported above the operating
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
income line. 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 maturity 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 both December 31, 2004 and 2003) 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 the majority of
the interest rate swap ceased to qualify as a cash flow hedge. Accordingly, the
negative fair value of the swap on March 19, 2003 of $8.5 million (pre-tax), or
$5.2 million net of taxes, was reclassified from accumulated other comprehensive
loss into earnings on the income statement during the first quarter of 2003. The
transaction closed on April 28, 2003 and management used the proceeds received
from Goodyear to pay down its Credit Agreement borrowings below the $110.0
million level. During the second quarter of 2003, the Company reclassified the
remaining negative fair value of the swap of $0.4 million (pre-tax), or $0.2
million net of taxes, from accumulated other comprehensive loss into earnings on
the income statement. Changes in the fair value of the interest rate swap since
March 19, 2003 have been accounted for in the Company's income statement. Future
changes in the fair value of the interest rate swap will be accounted for
through the income statement until the interest rate swap matures on April 1,
2005, unless the Company terminates the arrangement prior to that date. The fair
value of the interest rate swap at December 31, 2004 is a liability of $0.9
million.
The Company reported no gain or loss during 2004, 2003 or 2002 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 a 1988 Leveraged
Buyout ("LBO") related to ABF, and $37.5 million related to the 1994 acquisition
of Clipper. During the first
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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 resulted from the change in method of determining recoverable
goodwill from using undiscounted cash flows, as prescribed by Statement of
Financial Accounting Standards No. 121 ("FAS 121") Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of, to the fair
value method, as prescribed by FAS 142, determined by using a combination of
valuation methods, including EBITDA and net income multiples and the present
value of discounted cash flows. The Company has performed the annual impairment
testing on its ABF goodwill based upon operations and fair value at January 1,
2005, 2004 and 2003 and found there to be no impairment at any of these dates.
The Company's assets included goodwill of $63.9 million at both December 31,
2004 and 2003. Changes occur in the goodwill asset balance because of ABF's
foreign currency translation adjustments on the portion of the goodwill related
to ABF Canadian operations.
NOTE H - FEDERAL AND STATE INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31
2004 2003
------------ ------------
($ thousands)
Deferred tax liabilities:
Amortization, depreciation and basis differences
for property, plant and equipment and other long-lived assets.. $ 50,905 $ 40,812
Revenue recognition............................................... 6,335 3,929
Prepaid expenses.................................................. 4,668 2,638
------------ ------------
Total deferred tax liabilities.................................. 61,908 47,379
Deferred tax assets:
Accrued expenses.................................................. 48,657 39,723
Fair value of interest rate swap ................................. 344 2,491
Postretirement benefits other than pensions....................... 2,970 2,523
State net operating loss carryovers............................... 1,011 1,273
Other............................................................. 698 613
------------ ------------
Total deferred tax assets....................................... 53,680 46,623
Valuation allowance for deferred tax assets..................... (1,025) (1,344)
------------ ------------
Net deferred tax assets......................................... 52,655 45,279
------------ ------------
Net deferred tax liabilities.......................................... $ 9,253 $ 2,100
============ ============
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Significant components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31
2004 2003 2002
-------------- -------------- -------------
($ thousands)
Current:
Federal....................................... $ 36,233 $ 23,408 $ 17,675
State......................................... 6,898 2,867 1,789
-------------- -------------- -------------
Total current ............................. 43,131 26,275 19,464
-------------- -------------- -------------
Deferred:
Federal....................................... 5,842 1,511 5,266
State......................................... 1,471 1,058 3,146
-------------- -------------- -------------
Total deferred ............................ 7,313 2,569 8,412
-------------- -------------- -------------
Total income tax expense ......................... $ 50,444 $ 28,844 $ 27,876
============== ============== =============
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
2004 2003 2002
-------------- -------------- -------------
($ thousands)
Income tax at the statutory federal rate of 35%... $ 44,091 $ 26,234 $ 24,021
Federal income tax effects of:
State income taxes ........................... (2,929) (1,373) (1,727)
Reduction of valuation allowance ............. (319) (1,130) -
Other nondeductible expenses.................. 1,416 1,322 1,184
Other......................................... (184) (134) (537)
-------------- -------------- -------------
Federal income taxes.............................. 42,075 24,919 22,941
State income taxes................................ 8,369 3,925 4,935
-------------- -------------- -------------
Total income tax expense.......................... $ 50,444 $ 28,844 $ 27,876
============== ============== =============
Effective tax rate................................ 40.0% 38.5% 40.6%
============== ============== =============
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%.
Income taxes of $47.2 million were paid in 2004, $34.8 million were paid in 2003
and $18.6 million were paid in 2002. Income tax refunds amounted to $5.1 million
in 2004, $10.0 million in 2003 and $12.0 million in 2002.
The tax benefit associated with stock options exercised amounted to $1.8 million
for 2003 and $3.2 million for 2002. The benefit reflected in the 2004 financial
statements is $3.2 million; however, this amount could increase as additional
information becomes available to the Company regarding stock sales by employees
during 2004. 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, 2004, the Company had state net operating loss carryovers of
approximately $15.6 million. State net operating loss carryovers expire
generally in five to fifteen years.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
For financial reporting purposes, the Company had a valuation allowance of
approximately $0.9 million for state net operating loss carryovers and $0.1
million for state tax benefits of tax deductible goodwill for which realization
is uncertain. During 2004, the net change in the valuation allowance was a $0.3
million decrease, which related to a decrease in the valuation allowance for
state tax benefits of tax deductible goodwill.
In March 1999, the Tenth Circuit Court of Appeals ruled against another 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 were 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. In April 2004,
the Company reached a settlement of all issues raised in the examinations. The
settlement did not 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 2004 and 2003 and
$13.0 million in 2002.
The Company's primary subsidiary, ABF, maintains ownership of most of its larger
terminals or distribution centers. ABF leases certain terminal facilities, and
Clipper leases its office facilities. The future minimum rental commitments, net
of future minimum rentals to be received under noncancellable subleases, as of
December 31, 2004 for all noncancellable operating leases are as follows:
EQUIPMENT
AND
PERIOD TOTAL TERMINALS OTHER
------------ ------------- ------------
($ thousands)
2005.................... $ 11,377 $ 10,858 $ 519
2006.................... 9,641 9,151 490
2007.................... 8,100 7,668 432
2008.................... 5,848 5,848 -
2009.................... 4,242 4,242 -
Thereafter.............. 6,555 6,555 -
------------ ------------- ------------
$ 45,763 $ 44,322 $ 1,441
============ ============= ============
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 $1.5 million at December 31, 2004.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Commitments to purchase revenue equipment, of which $0.8 million are cancellable
by the Company if certain conditions are met, aggregated approximately $1.7
million at December 31, 2004.
NOTE J - LONG-TERM DEBT AND CREDIT AGREEMENTS
DECEMBER 31
2004 2003
---- ----
($ thousands)
Revolving credit agreement (1) ............... $ - $ -
Capitalized lease obligations (2) ............ 313 532
Other (bears interest at 6.3%)................ 1,505 1,647
------- -------
1,818 2,179
Less current portion ......................... 388 353
------- -------
$ 1,430 $ 1,826
======= =======
(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; Bank of America, N.A. and SunTrust Bank as
Co-Syndication Agents; and Wachovia Bank, National Association as
Documentation Agent. The amendment 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, 2004, there were no outstanding Revolver Advances
and approximately $54.1 million of outstanding letters of credit. At
December 31, 2003, there were no outstanding Revolver Advances and
approximately $58.4 million of outstanding letters of credit.
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 $382.7 million at
December 31, 2004, 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,
2004 was $170.9 million.
The Credit Agreement contains various covenants, which limit, among
other things, indebtedness, distributions, stock repurchases and
dispositions of assets and which require the Company to meet certain
quarterly financial ratio tests. As of December 31, 2004, the
Company was in compliance with the covenants. Interest rates under
the agreement are at variable rates as defined by the Credit
Agreement.
The Company's Credit Agreement contains a pricing grid that
determines its LIBOR margin, facility fees and letter of credit
fees. The pricing grid is based on the Company's senior debt-rating
agency ratings. A change in the Company's senior debt ratings could
potentially impact its Credit Agreement pricing. In addition, if the
Company's senior debt ratings fall below investment grade, the
Company's Credit Agreement provides for limits on additional
permitted indebtedness without lender approval, acquisition
expenditures and capital expenditures. The Company is currently
rated BBB+ by Standard & Poor's Rating Service ("S&P") and Baa3 by
Moody's Investors Service, Inc. The Company has no downward rating
triggers that would accelerate the maturity of its debt. On October
15, 2004, S&P revised its outlook on the Company to positive from
stable. At the same time, S&P affirmed the Company's BBB+ corporate
credit rating. The Company's LIBOR margin and facility fees were
0.775% and 0.225%, respectively, at both December 31, 2004 and 2003.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
(2) Capitalized lease obligations are for computer equipment. These
obligations have a weighted-average interest rate of approximately
7.3%.
The future minimum payments under capitalized leases at December 31,
2004 consisted of the following ($ thousands):
2005....................................... $ 252
2006....................................... 74
2007....................................... 4
2008....................................... -
------
Total minimum lease payments............... 330
Amounts representing interest ............. 17
------
Present value of net minimum leases
included in long-term debt .............. $ 313
======
Assets held under capitalized leases are included in property, plant and
equipment as follows:
DECEMBER 31
2004 2003
---- ----
($ thousands)
Service, office and other equipment ....... $ 1,044 $ 1,044
Less accumulated amortization ............. 760 543
------- -------
$ 284 $ 501
======= =======
There were no capital lease obligations incurred for the year ended
December 31, 2004. Capital lease obligations of $31,000 were incurred for
the year ended December 31, 2003. Capital lease amortization is included
in depreciation expense.
Annual maturities of other long-term debt, excluding capitalized lease
obligations, in 2005 through 2009 are approximately $0.2 million for each year.
Interest paid, including payments made on the interest rate swap, was $5.9
million in 2004, $10.6 million in 2003 and $8.2 million in 2002. The 2003 amount
includes $3.7 million in IRS interest payments. No interest was paid to the IRS
during 2004 and 2002. Interest capitalized totaled approximately $0.2 million in
both 2004 and 2003 and $0.4 million in 2002.
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 both December 31, 2004 and 2003.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The Company has guaranteed approximately $0.3 million that relates to a debt
owed by The Complete Logistics Company ("CLC") to the seller of a company CLC
acquired in 1995. CLC was a wholly owned subsidiary of the Company until 1997,
when it was sold. The Company's exposure to this guarantee declines by $60,000
per year.
NOTE K - ACCRUED EXPENSES
DECEMBER 31
2004 2003
---- ----
($ thousands)
Accrued salaries, wages and incentive plans ..................... $ 30,553 $ 17,831
Accrued vacation pay ............................................ 35,250 33,690
Accrued interest ................................................ 425 517
Taxes other than income ......................................... 7,139 7,123
Loss, injury, damage and workers' compensation claims reserves... 70,254 60,252
Other .......................................................... 5,010 5,735
---------- ---------
$ 148,631 $ 125,148
========== =========
The increase in loss, injury, damage and workers' compensation claims reserves
is due primarily to an increase in required reserves for workers' compensation
claims for ABF. The increase in accrued salaries, wages and incentive plans is
due primarily to an increase in incentive accruals associated with improved net
income and return on capital employed.
NOTE L - EMPLOYEE BENEFIT PLANS
NONUNION DEFINED BENEFIT PENSION, SUPPLEMENTAL PENSION AND POSTRETIREMENT HEALTH
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
supplemental pension plan will pay sums in addition to amounts payable under the
defined benefit plan to eligible participants. Participation in the supplemental
pension 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
supplemental pension plan by the Company's Board of Directors. The supplemental
pension 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 plan includes a provision that benefits accrued under the
supplemental pension 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 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
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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") and Statement No. 132(R) ("FAS
132(R)"), Employers' Disclosures about Pensions and Other Postretirement
Benefits. The Company uses a December 31 measurement date for its nonunion
defined benefit pension plan and its supplemental pension benefit plan. The
postretirement health benefit plan uses a measurement date of January 1.
Effective December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 ("the Prescription Drug Act") was enacted into law.
The Prescription Drug Act introduces a prescription drug benefit under Medicare
Part D, as well as a federal subsidy, to sponsors of retiree health care benefit
plans that provide a benefit that is at least actuarially equivalent to Medicare
Part D.
During May 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position No. 106-2 ("FSP No. 106-2"), Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003. This standard requires sponsors of defined benefit
postretirement health care plans to make a reasonable determination whether (1)
the prescription drug benefits under its plan are actuarially equivalent to
Medicare Part D and thus qualify for the subsidy under the Prescription Drug Act
and (2) the expected subsidy will offset or reduce the employer's share of the
cost of the underlying postretirement prescription drug coverage on which the
subsidy is based. Sponsors whose plans meet both of these criteria are required
to remeasure the accumulated postretirement benefit obligation and net periodic
postretirement benefit expense of their plans to reflect the effects of the
Prescription Drug Act in the first interim or annual reporting period beginning
after June 15, 2004.
During the third quarter of 2004, the Company determined that the prescription
drug benefits provided under its postretirement health care plan were
actuarially equivalent to Medicare Part D and thus would qualify for the subsidy
under the Prescription Drug Act and the expected subsidy would offset its share
of the cost of the underlying drug coverage. The Company adopted the provisions
of FSP No. 106-2 during the third quarter of 2004 and remeasured its accumulated
postretirement benefit obligation and net periodic postretirement benefit
expense as of January 1, 2004. The accumulated postretirement benefit obligation
was reduced by $1.8 million as a result of the subsidy related to benefits
attributed to past service. This reduction in the accumulated postretirement
benefit obligation was recorded as a deferred actuarial gain and will be
amortized over future periods in the same manner as other deferred actuarial
gains or losses. The first and second quarters of 2004 were not restated to
reflect the effect of the subsidy on the measurement of net periodic
postretirement benefit expense because the effect on those interim periods was
immaterial. The effect of the subsidy on the measurement of net periodic
postretirement benefit expense for the year ended December 31, 2004 is as
follows:
YEAR ENDED
DECEMBER 31, 2004
-----------------
($ thousands)
Reduction in service cost ..................... $ 14
Reduction in interest cost .................... 105
Reduction in amortization of actuarial loss.... 217
-----
Total.......................................... $ 336
=====
The Company presently anticipates making eligible gross payments for
prescription drug benefits and receiving the Medicare Part D subsidy on those
payments in 2006 as prescribed in the proposed regulations.
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The following is a summary of the changes in benefit obligations and plan assets
for the Company's nonunion benefit plans:
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------
SUPPLEMENTAL POSTRETIREMENT
PENSION BENEFITS PENSION PLAN BENEFITS HEALTH BENEFITS
2004 2003 2004 2003 2004 2003
--------- --------- -------- --------- -------- --------
($ thousands)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year......... $ 151,124 $ 141,607 $ 22,871 $ 28,726 $ 16,688 $ 16,980
Service cost.................................... 8,490 7,269 742 690 134 119
Interest cost................................... 9,682 9,557 1,220 1,532 847 1,004
Actuarial loss (gain) and other ................ 22,375 7,630 1,841 2,363 (1,327) (623)
Benefits and expenses paid...................... (12,118) (14,939) (3,275) (10,440) (911) (792)
--------- --------- -------- --------- -------- --------
Benefit obligation at end of year............... 179,553 151,124 23,399 22,871 15,431 16,688
--------- --------- -------- --------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 156,897 127,407 - - - -
Actual return on plan assets and other.......... 15,400 29,429 - - - -
Employer contributions.......................... 1,169 15,000 3,275 10,440 911 792
Benefits and expenses paid ..................... (12,118) (14,939) (3,275) (10,440) (911) (792)
--------- --------- -------- --------- -------- --------
Fair value of plan assets at end of year........ 161,348 156,897 - - - -
--------- --------- -------- --------- -------- --------
Funded status................................... (18,205) 5,773 (23,399) (22,871) (15,431) (16,688)
Unrecognized net actuarial loss................. 47,473 32,738 9,668 9,185 6,750 8,881
Unrecognized prior service (benefit) cost....... (4,684) (5,607) 7,634 9,194 37 168
Unrecognized net transition (asset) obligation
and other..................................... (9) (17) (997) (1,253) 1,070 1,205
--------- --------- -------- --------- -------- --------
Net amount recognized........................... $ 24,575 $ 32,887 $ (7,094) $ (5,745) $ (7,574) $ (6,434)
========= ========= ======== ========= ======== ========
Amounts recognized in the balance sheet consist of the following:
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------
SUPPLEMENTAL POSTRETIREMENT
PENSION BENEFITS PENSION PLAN BENEFITS HEALTH BENEFITS
2004 2003 2004 2003 2004 2003
-------- -------- -------- -------- -------- --------
($ thousands)
Prepaid benefit cost ................................. $ 24,575 $ 32,887 $ - $ - $ - $ -
Accrued benefit cost (included in other liabilities) - - (21,412) (21,250) (7,574) (6,434)
Intangible assets (includes prior service cost
in other assets) ................................... - - 7,634 9,194 - -
Accumulated other comprehensive loss -
minimum pension liability (pre-tax) ................ - - 6,684 6,311 - -
-------- -------- -------- -------- -------- --------
Net assets (liabilities) recognized .................. $ 24,575 $ 32,887 $ (7,094) $ (5,745) $ (7,574) $ (6,434)
======== ======== ======== ======== ======== ========
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Other information regarding the Company's defined benefit pension plan is as
follows:
DECEMBER 31
2004 2003
---------- ---------
($ thousands)
Projected benefit obligation .......... $ 179,553 $ 151,124
Accumulated benefit obligation ........ 152,413 122,317
Fair value of plan assets ............. 161,348 156,897
The following is a summary of the components of net periodic benefit cost for
the Company's nonunion benefit plans:
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
SUPPLEMENTAL POSTRETIREMENT
PENSION BENEFITS PENSION PLAN BENEFITS HEALTH BENEFITS
------------------------------ -------------------------------- ------------------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
-------- -------- -------- -------- -------- -------- -------- -------- --------
($ thousands)
COMPONENTS OF NET
PERIODIC BENEFIT COST
Service cost ............. $ 8,490 $ 7,269 $ 6,389 $ 742 $ 690 $ 769 $ 134 $ 119 $ 115
Interest cost ............ 9,682 9,557 9,249 1,220 1,532 1,658 847 1,004 860
Expected return
on plan assets ......... (12,552) (10,083) (11,530) - - - - - -
Transition (asset)
obligation
recognition ............ (8) (8) (8) (256) (256) (256) 135 135 135
Amortization of
prior service (credit)
cost ................... (922) (922) (922) 1,560 1,560 1,560 131 131 131
Recognized net
actuarial loss
and other(1) ........... 4,791 5,317 2,145 1,357 962 578 804 1,055 596
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net periodic
benefit cost ........... $ 9,481 $ 11,130 $ 5,323 $ 4,623 $ 4,488 $ 4,309 $ 2,051 $ 2,444 $ 1,837
======== ======== ======== ======== ======== ======== ======== ======== ========
(1) The Company amortizes actuarial losses over the average remaining active
service period of the plan participants and does not use a corridor
approach.
Additional information regarding the Company's nonunion benefit plans:
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
SUPPLEMENTAL POSTRETIREMENT
PENSION BENEFITS PENSION PLAN BENEFITS HEALTH BENEFITS
------------------------------ -------------------------------- ------------------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
-------- -------- -------- -------- -------- -------- -------- -------- --------
($ thousands)
Increase in minimum
liability included in
other comprehensive
loss (pre-tax) .......... $ - $ - $ - $ 373 $ 538 $ 5,773 $ - $ - $ -
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Assumptions:
Weighted-average assumptions used to determine nonunion benefit obligations were
as follows:
DECEMBER 31
---------------------------------------------------------------
SUPPLEMENTAL POSTRETIREMENT
PENSION BENEFITS PENSION PLAN BENEFITS HEALTH BENEFITS
---------------- --------------------- ---------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Discount rate(1)............... 5.5% 6.0% 5.5% 6.0% 5.5% 6.0%
Rate of compensation increase.. 4.0% 4.0% 4.0% 4.0% - -
(1)The discount rate was determined at December 31, 2004 and 2003,
respectively.
Weighted-average assumptions used to determine net periodic benefit cost for the
Company's nonunion benefit plans were as follows:
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------
SUPPLEMENTAL POSTRETIREMENT
PENSION BENEFITS PENSION PLAN BENEFITS HEALTH BENEFITS
-------------------------- ---------------------- -------------------------
2004 2003 2002 2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ---- ---- ----- ----
Discount rate(2)................ 6.0% 6.9% 7.6% 6.0% 6.9% 7.6% 6.0% 6.9% 7.6%
Expected return on plan assets.. 8.3% 7.9% 9.0% - - - - - -
Rate of compensation increase... 4.0% 4.0% 4.0% 4.0% 4.0% 5.0% - - -
(2)The discount rate was determined at December 31, 2003, 2002 and 2001,
respectively, for the years 2004, 2003 and 2002.
The Company establishes its nonunion pension plan expected long-term rate of
return on assets by considering the 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 nonunion 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.
The Company has established its long-term expected rate of return utilized in
determining its 2005 nonunion pension plan expense as 8.3%, which is consistent
with its expected investment return rate of 8.3% for 2004.
The Company reduced its discount rate for determining benefit obligations from
6.0% for December 31, 2003 to 5.5% for December 31, 2004. The Company's discount
rate for 2004 was determined by projecting cash distributions from its nonunion
pension plan and matching them with the appropriate corporate bond yields in a
yield curve regression analysis. The reduction in the discount rate reflects
lower long-term market interest rates.
Assumed health care cost trend rates for the Company's postretirement health
benefit plan:
DECEMBER 31
2004 2003
---- ----
Health care cost trend rate assumed for next year ....... 10.3% 11.5%
Rate to which the cost trend rate is assumed to
decline (the ultimate trend rate)...................... 5.0% 5.0%
Year that the rate reaches the ultimate trend rate ...... 2013 2012
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 on the Company's
postretirement health benefit plan for the year ended December 31, 2004:
1% 1%
INCREASE DECREASE
-------- --------
($ thousands)
Effect on total of service and interest cost components..... $ 133 $ (111)
Effect on postretirement benefit obligation................. 2,044 (1,719)
The Company's nonunion defined benefit pension plan weighted-average asset
allocation is as follows:
DECEMBER 31
2004 2003
---- ----
EQUITY
Large Cap U.S. Equity........... 36.0% 36.2%
Small Cap Growth................ 7.5% 7.9%
Small Cap Value................. 8.0% 8.3%
International Equity............ 11.2% 12.0%
FIXED INCOME
U.S. Fixed Income............... 37.2% 35.5%
Cash Equivalents.............. 0.1% 0.1%
---- ----
100.0% 100.0%
===== =====
The investment strategy for the Company's nonunion 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, 2004, 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.
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
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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 does not expect to have a required minimum contribution to its
nonunion pension plan in 2005. Based upon current information available from the
plan's actuaries, the Company anticipates making the maximum allowable
tax-deductible contribution which is estimated to be between $5.0 million and
$8.0 million in 2005.
At December 31, 2004, the nonunion defined benefit pension plan's assets did not
include any shares of the Company's Common Stock.
Estimated future benefit payments from the Company's nonunion defined benefit
pension, supplemental pension and postretirement health plans, which reflect
expected future service, as appropriate, are as follows:
SUPPLEMENTAL POSTRETIREMENT
PENSION PENSION HEALTH
BENEFITS PLAN BENEFITS BENEFITS
-------- ------------- --------
2005................................. $ 12,118 $ - $ 900
2006................................. 14,166 9,508 763
2007................................. 13,586 1,640 816
2008................................. 13,346 1,934 922
2009................................. 13,227 2,551 937
2010-2014............................ 65,225 9,384 5,430
MULTIEMPLOYER PLANS
Retirement and health care benefits for the Company's contractual employees are
provided by a number of multiemployer funds, under the provisions of the
Taft-Hartley Act. The trust funds are administered by trustees, who generally
are appointed equally by the IBT and certain management carrier organizations
designated in the trust agreements. ABF is not a member of some of the
designated management carrier organizations and is not directly involved in the
administration of the trust funds. ABF contributes to these funds monthly on
behalf of its contractual employees, based upon provisions contained in the
National Master Freight Agreement. The Central States Southeast and Southwest
Area Pension Fund ("Central States"), the multiemployer plan to which ABF makes
approximately 50% 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
accruals and health and welfare benefits provided to Central States
beneficiaries were reduced on January 1, 2004. The Court Order acknowledged the
need for corrective measures to address potential future "Funding Deficiencies"
in the Central States plans. 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 plans'
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. The
Company has not been notified by the Central States Trustees regarding whether
the extension has or has not been granted. During 2004, the IBT and the carrier
management
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
reallocated the $0.60 per hour contribution increase to the Central States
pension fund from the Central States health and welfare fund for the years
beginning August 1, 2004 and 2005. Central States Pension Fund reported earning
investment returns of approximately 25.4% in 2003 and 14.3% in 2004. The Company
has received no other current financial or funding information from Central
States (or any other multiemployer plan) for the period ending December 31,
2004. However, the extension of the amortization period, if granted, the
reallocation of the $0.60 per hour increase to the pension fund from the health
and welfare fund, improved investment returns in 2003 and 2004 along with the
plan changes in pension accruals ordered by the U.S. District Court should
positively impact the funded status of the Central States Pension Plan, as
determined under the ERISA funding standards, although there can be no
assurances in this regard.
On April 10, 2004, the U.S. Congress passed into law the Pension Funding Equity
Act of 2004. This law provides relief to eligible multiemployer plans. The
relief is through an election related to net experience losses for the first
plan year beginning after December 31, 2001. The plan sponsor may elect to
defer, for any plan year after June 30, 2003 and before July 1, 2005, up to 80%
of the amount charged to the funding standard account for net experience losses,
which include investment losses, to any plan year selected by the plan from
either of the two immediately succeeding plan years. Central States Pension Fund
is eligible for relief under the law; however, the Company has not been notified
by the Central States Trustees as to whether or not it will elect to defer net
experience losses under the law.
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, 2004, the Company has a strong financial position with no borrowings under
its Credit Agreement and $468.4 million of Stockholders' Equity. The Company has
no plans to withdraw from the multiemployer plans to which ABF contributes.
ABF's aggregate contributions to the multiemployer health, welfare and pension
plans are as follows:
2004 2003 2002
---- ---- ----
($ thousands)
Health and welfare .................................... $ 97,970 $ 90,427 $ 79,703
Pension ............................................... 82,094 77,110 75,062
---------- ---------- ----------
Total contributions to multiemployer plans.......... $ 180,064 $ 167,537 $ 154,765
========== ========== ==========
DEFERRED COMPENSATION PLANS
The Company has deferred compensation agreements with certain executives for
which liabilities aggregating $5.3 million and $5.1 million as of December 31,
2004 and 2003, 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 $1.9 million and $2.0 million at
December 31, 2004 and 2003, respectively, for future costs under this plan,
reflected as other liabilities in the accompanying consolidated financial
statements.
The Company maintains a Voluntary Savings Plan ("VSP") and the Arkansas Best
Supplemental Benefit Plan Trust ("SBP Trust"). The VSP and SBP Trust are
nonqualified deferred compensation plans for certain
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
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 into the VSP by making an election before the
compensation is payable. Distributions from the Company's supplemental pension
benefit plan and certain deferred compensation arrangements may be deferred by
eligible employees into the SBP Trust by making an election before the
distribution 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. All deferrals, Company match and
investment earnings are considered part of the general assets of the Company
until paid. As of December 31, 2004, the Company has recorded liabilities of
$29.1 million in other liabilities and assets of $29.1 million in other assets
associated with the VSP and SBP Trust. 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 assets associated with the VSP and SBP Trust.
401(K) PLANS
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 nonunion
participant contributions up to a specified compensation limit ranging from 0%
to 6%. The plans also allow for discretionary Company contributions determined
annually. The Company's matching expense for the 401(k) plans totaled $3.9
million for 2004, $3.9 million for 2003 and $3.6 million for 2002.
OTHER PLANS
Other assets include $32.0 million and $25.6 million at December 31, 2004 and
2003, respectively, in cash surrender value of life insurance policies. These
policies are intended to provide funding for long-term nonunion benefit
arrangements such as the Company's supplemental pension benefit plan and certain
deferred compensation plans.
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.
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 two reportable
operating segments: (1) ABF and (2) Clipper (see Note D regarding the sale and
exit of Clipper's LTL division in 2003). 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 97.0% 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,
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
expedited and guaranteed LTL services. Clipper is headquartered in Woodridge,
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 are impractical and, therefore, not provided.
The Company's foreign operations are not significant.
The following tables reflect reportable operating segment information for the
Company, as well as a reconciliation of reportable segment information to the
Company's consolidated operating revenues, operating expenses, operating income
and consolidated income before income taxes:
YEAR ENDED DECEMBER 31
2004 2003 2002
-------------- -------------- --------------
($ thousands)
OPERATING REVENUES
ABF Freight System, Inc.
LTL (shipments less than 10,000 pounds)...................... $ 1,446,771 $ 1,285,216 $ 1,195,996
Truckload ("TL")............................................. 138,613 112,737 107,414
------------- ------------- -------------
Total........................................................ 1,585,384 1,397,953 1,303,410
------------- ------------- -------------
Clipper (see Note D)............................................ 95,985 126,768 118,949
Other revenues and eliminations ................................ 34,394 30,323 26,231
------------- ------------- -------------
Total consolidated operating revenues ....................... $ 1,715,763 $ 1,555,044 $ 1,448,590
============= ============= =============
OPERATING EXPENSES AND COSTS
ABF FREIGHT SYSTEM, INC.
Salaries and wages .......................................... $ 966,977 $ 891,732 $ 845,562
Supplies and expenses ....................................... 206,692 178,002 157,058
Operating taxes and licenses ................................ 42,537 39,662 40,233
Insurance ................................................... 24,268 24,397 24,606
Communications and utilities ................................ 14,160 14,463 13,874
Depreciation and amortization ............................... 47,640 44,383 41,510
Rents and purchased transportation .......................... 153,043 124,039 108,373
Other ....................................................... 3,438 3,817 3,576
(Gain) on sale of equipment ................................. (1,195) (311) (206)
------------- ------------- -------------
1,457,560 1,320,184 1,234,586
------------- ------------- -------------
CLIPPER (see Note D)
Cost of services ............................................ 86,971 109,554 102,152
Selling, administrative and general ......................... 8,174 16,144 15,620
Exit costs - Clipper LTL..................................... - 1,246 -
Loss on sale or impairment of equipment and software ........ 14 245 54
------------- ------------- -------------
95,159 127,189 117,826
------------- ------------- -------------
Other expenses and eliminations ................................ 38,745 34,491 27,957
------------- ------------- -------------
Total consolidated operating expenses and costs ............. $ 1,591,464 $ 1,481,864 $ 1,380,369
============= ============= =============
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
YEAR ENDED DECEMBER 31
2004 2003 2002
---------- ---------- ----------
($ thousands)
OPERATING INCOME (LOSS)
ABF Freight System, Inc. ................................ $ 127,824 $ 77,769 $ 68,824
Clipper (see Note D) .................................... 826 (421) 1,123
Other loss and eliminations ............................. (4,351) (4,168) (1,726)
--------- --------- ---------
Total consolidated operating income .................. $ 124,299 $ 73,180 $ 68,221
========= ========= =========
TOTAL CONSOLIDATED OTHER INCOME (EXPENSE)
Net gains on sales of property and other ............. $ 468 $ 643 $ 3,524
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 509 (10,257) -
Interest (expense), net of temporary investment income (159) (3,855) (8,097)
Other, net ........................................... 856 648 (238)
--------- --------- ---------
1,674 1,774 410
--------- --------- ---------
TOTAL CONSOLIDATED INCOME
BEFORE INCOME TAXES ................................... $ 125,973 $ 74,954 $ 68,631
========= ========= =========
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 (see
Note G).
YEAR ENDED DECEMBER 31
2004 2003 2002
------------- ------------- -------------
($ thousands)
IDENTIFIABLE ASSETS
ABF Freight System, Inc. ...................................... $ 559,252 $ 499,310 $ 487,752
Clipper ....................................................... 25,153 33,685 24,819
Investment in Wingfoot (see Note E) ........................... - - 59,341
Other and eliminations ........................................ 222,340 164,230 184,460
------------- ------------- -------------
Total consolidated identifiable assets ..................... $ 806,745 $ 697,225 $ 756,372
============= ============= =============
CAPITAL EXPENDITURES (GROSS)
ABF Freight System, Inc. ...................................... $ 75,266 $ 51,668 $ 46,823
Clipper ....................................................... 1,428 4,733 94
Other equipment and information technology purchases .......... 2,839 11,801 11,396
------------- ------------- -------------
Total consolidated capital expenditures (gross)............. $ 79,533 $ 68,202 $ 58,313
============= ============= =============
DEPRECIATION AND AMORTIZATION EXPENSE
ABF Freight System, Inc. ...................................... $ 47,640 $ 44,383 $ 41,510
Clipper ....................................................... 1,920 2,006 1,757
Other ......................................................... 5,491 5,868 6,227
------------- ------------- -------------
Total consolidated depreciation and amortization expense ... $ 55,051 $ 52,257 $ 49,494
============= ============= =============
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 both December 31, 2004 and
2003). 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, 2004,
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) ($0.9) 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, 2004 to terminate
the agreement.
(3) The swap value changed from ($6.3) million at December 31, 2003. The fair
value is impacted by changes in rates of similarly termed Treasury
instruments and payments under the swap agreement.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for all financial instruments, except for the interest
rate swap agreement disclosed above and capitalized leases:
CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance sheets
for cash and cash equivalents approximates its fair value.
LONG - AND SHORT-TERM DEBT: The carrying amount of the Company's borrowings
under its Revolving Credit Agreement approximates its fair value, since the
interest rate under this agreement is variable. However, at December 31, 2004
and 2003, the Company had no borrowings under its Revolving Credit Agreement.
The fair value of the Company's other long-term debt was estimated using current
market rates.
The carrying amounts and fair value of the Company's financial instruments at
December 31 are as follows:
2004 2003
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------------------------------------------
($ thousands)
Cash and cash equivalents........................... $ 70,873 $ 70,873 $ 5,251 $ 5,251
Short-term debt..................................... $ 151 $ 155 $ 133 $ 134
Long-term debt...................................... $ 1,354 $ 1,374 $ 1,514 $ 1,516
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
2004 2003 2002
----------------------------------------------
($ thousands, except share and per share data)
NUMERATOR:
Numerator for basic earnings per share -
Income before cumulative effect of change
in accounting principle .................................. $ 75,529 $ 46,110 $ 40,755
Cumulative effect of change in accounting
principle, net of tax .................................... - - (23,935)
------------- -------------- --------------
Numerator for diluted earnings per share -
Net income for common stockholders ....................... $ 75,529 $ 46,110 $ 16,820
============= ============== ==============
DENOMINATOR:
Denominator for basic earnings per share -
Weighted-average shares ................................... 25,208,151 24,914,345 24,746,051
Effect of dilutive securities:
Employee stock options .................................... 466,002 498,270 604,632
------------- -------------- --------------
Denominator for diluted earnings per share -
Adjusted weighted-average shares .......................... 25,674,153 25,412,615 25,350,683
============= ============== ==============
NET INCOME (LOSS) PER SHARE
BASIC:
Income before cumulative effect of change
in accounting principle ................................... $ 3.00 $ 1.85 $ 1.65
Cumulative effect of change in accounting
principle, net of tax ..................................... - - (0.97)
------------- -------------- --------------
NET INCOME PER SHARE ........................................... $ 3.00 $ 1.85 $ 0.68
------------- -------------- --------------
DILUTED:
Income before cumulative effect of change
in accounting principle .................................. $ 2.94 $ 1.81 $ 1.60
Cumulative effect of change in accounting
principle, net of tax...................................... - - (0.94)
------------- -------------- --------------
NET INCOME PER SHARE ........................................... $ 2.94 $ 1.81 $ 0.66
============= ============== ==============
For the year ended December 31, 2004, the Company had no outstanding stock
options granted that were antidilutive. For the years ended December 31, 2003
and 2002, respectively, the Company had outstanding 265,321 and 304,036 in stock
options granted that were antidilutive and, therefore, were not included in the
diluted-earnings-per-share calculations for either period presented.
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 2004 and
2003:
2004
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------------------------
($ thousands, except share and per share data)
Operating revenues .................................. $ 374,844 $ 424,488 $ 461,888 $ 454,539
Operating expenses and costs ........................ 366,554 392,498 417,663 414,750
------------ ------------ ------------ ------------
Operating income ................................... 8,290 31,990 44,225 39,789
Other income (expense) - net ........................ (818) 334 1,191 971
Income taxes......................................... 3,011 13,026 18,047 16,358
------------ ------------ ------------ ------------
Net income .......................................... $ 4,461 $ 19,298 $ 27,369 $ 24,402
============ ============ ============ ============
Net income per share - basic ........................ $ 0.18 $ 0.77 $ 1.09 $ 0.97
============ ============ ============ ============
Average shares outstanding - basic .................. 24,984,285 24,951,173 25,067,784 25,217,419
============ ============ ============ ============
Net income per share - diluted ...................... $ 0.18 $ 0.76 $ 1.07 $ 0.95
============ ============ ============ ============
Average shares outstanding - diluted ................ 25,389,786 25,321,028 25,546,370 25,763,917
============ ============ ============ ============
2003
THREE MONTHS ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------------------------------------------------
($ thousands, except share and per share data)
Operating revenues .................................. $ 366,139 $ 384,795 $ 410,362 $ 393,748
Operating expenses and costs ........................ 356,285 371,255 381,717 372,606
------------ ------------ ------------ -------------
Operating income ................................... 9,854 13,540 28,645 21,142
Other income (expense) - net ........................ (11,088) 10,063 (89) 2,888
Income taxes (benefits) ............................. (500) 8,413 11,580 9,352
------------ ------------ ------------ -------------
Net income (loss) ................................... $ (734) $ 15,190 $ 16,976 $ 14,678
============ ============ ============ =============
Net income (loss) per share - basic ................. $ (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 share - diluted ............... $ (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
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 77 underground tanks located in 24 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 $109,000 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, 2004 and 2003, the Company had accrued approximately $3.3
million and $2.9 million, respectively, to provide for environmental-related
liabilities. The Company's environmental accrual is based on management's best
estimate of the 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.
It is anticipated that the resolution of the Company's environmental matters
could take place over several years. 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") was the Company's excess insurer for
workers' compensation claims above $300,000 for the years 1993 through 1999.
According to an Official Statement by the Pennsylvania Insurance Department on
October 3, 2001, Reliance was determined to be insolvent. 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. For claims
not accepted by state guaranty funds, the Company has continually maintained
reserves for its estimated exposure to the Reliance liquidation since 2001.
During the second quarter of 2004, the Company began receiving notices of
rejection from the California Insurance Guarantee Association ("CIGA") on
certain claims previously accepted by this guaranty fund. If these claims are
not covered by the CIGA, they become part of the Company's exposure to the
Reliance liquidation. As of December 31, 2004, the Company estimated its
workers' compensation claims insured by Reliance to be approximately $8.6
million. Of the $8.6 million of insured Reliance claims, approximately $3.7
million have been accepted by state guaranty funds, leaving the Company with a
net exposure amount of approximately $4.9 million. At December 31, 2004, the
Company had reserved $4.2 million in its financial statements for its estimated
exposure to Reliance. At December 31, 2003, the Company's reserve for Reliance
exposure was $1.6 million. The Company's reserves are determined by reviewing
the most recent financial
ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
information available for Reliance from the Pennsylvania Insurance Department.
The Company anticipates receiving either full reimbursement from state guaranty
funds or partial reimbursement through orderly liquidation; however, this
process could take several years.
Kemper Insurance Companies ("Kemper") insured 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 insurance
coverage. Lumbermen's Mutual Casualty Company, the Kemper company which insures
the Company's excess claims, received going-concern opinions on both its 2003
and 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 $1.9 million
and $1.0 million, respectively, at December 31, 2004 and 2003. At December 31,
2004 and 2003, respectively, the Company had $0.2 million and $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 - RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement No. 123(R) ("FAS 123(R)"),
Share-Based Payment. FAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. This statement is effective for the
Company on July 1, 2005. The negative impact on each of the third and fourth
quarters of 2005 of prior unvested stock option grants is estimated to be
approximately $0.02 per diluted share, net of estimated tax benefits.
In December 2004, the FASB issued Statement No. 153 ("FAS 153"), Exchanges of
Nonmonetary Assets, an Amendment of APB Opinion No. 29. FAS 153 is based on the
principle that exchanges of nonmonetary assets should be measured based on the
fair value of the assets exchanged. This statement is effective for the
Company's nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. FAS 153 is not expected to have a material impact upon the
Company's financial statements or related disclosures.
CONTROLS AND PROCEDURES
ARKANSAS BEST CORPORATION
MANAGEMENT'S ASSESSMENT OF INTERNAL CONTROL
OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. The Company's internal control over financial reporting
includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and the Board of Directors of the Company;
and
(iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree of compliance
with the policies or procedures may deteriorate.
Management conducted its evaluation of the effectiveness of internal controls
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. This evaluation included review of the documentation of controls,
evaluation of the design effectiveness of controls, testing of the operating
effectiveness of controls and a conclusion on this evaluation. Although there
are inherent limitations in the effectiveness of any system of internal controls
over financial reporting, based on our evaluation, we have concluded that our
internal controls over financial reporting were effective as of December 31,
2004.
The Company's registered public accounting firm has issued an attestation report
on management's assessment of the Company's internal control over financial
reporting. This report appears on the following page.
ARKANSAS BEST CORPORATION
(Registrant)
Date: February 16, 2005 /s/ Robert A. Young III
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Robert A. Young III
Chairman of the Board, Chief Executive Officer and Principal
Executive Officer
ARKANSAS BEST CORPORATION
(Registrant)
Date: February 16, 2005 /s/ David E. Loeffler
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David E. Loeffler
Senior Vice President-Chief Financial Officer, Treasurer
and Principal Accounting Officer
CONTROLS AND PROCEDURES - continued
REPORT OF ERNST & YOUNG LLP
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Arkansas Best Corporation
We have audited management's assessment, included in the accompanying
Management's Assessment of Internal Control Over Financial Reporting, that
Arkansas Best Corporation maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Arkansas Best
Corporation's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Arkansas Best Corporation
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Arkansas Best Corporation maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the 2004 consolidated financial
statements of Arkansas Best Corporation and our report dated February 16, 2005,
expressed an unqualified opinion thereon.
Ernst & Young LLP
Little Rock, Arkansas
February 16, 2005