10-Q 1 a10-17651_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarter Ended September 30, 2010

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                  to                 

 

Commission file number 000-19969

 

ARKANSAS BEST CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of
incorporation or organization)

 

71-0673405

(I.R.S. Employer Identification No.)

 

3801 Old Greenwood Road

Fort Smith, Arkansas 72903

(479) 785-6000

(Address, including zip code, and telephone number, including

area code, of the registrant’s principal executive offices)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x Yes  o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes  x No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 29, 2010

Common Stock, $0.01 par value

 

25,319,768 shares

 

 

 



Table of Contents

 

ARKANSAS BEST CORPORATION

 

INDEX

 

 

 

Page

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets –
September 30, 2010 and December 31, 2009

3

 

 

 

 

Consolidated Statements of Operations –
For the Three and Nine Months Ended September 30, 2010 and 2009

5

 

 

 

 

Consolidated Statement of Stockholders’ Equity –
For the Nine Months Ended September 30, 2010

6

 

 

 

 

Consolidated Statements of Cash Flows –
For the Nine Months Ended September 30, 2010 and 2009

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

 

 

 

Item 4.

Controls and Procedures

36

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

Item 1A.

Risk Factors

37

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

 

Item 3.

Defaults Upon Senior Securities

37

 

 

 

Item 4.

Removed and Reserved

37

 

 

 

Item 5.

Other Information

37

 

 

 

Item 6.

Exhibits

38

 

 

 

SIGNATURES

 

40

 

 

 

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 



Table of Contents

 

PART I.

FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ARKANSAS BEST CORPORATION

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

 

 

 

 

($ thousands, except share data)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

99,506

 

$

39,332

 

Short-term investment securities

 

45,751

 

93,861

 

Restricted cash equivalents and short-term investments

 

50,755

 

50,857

 

Accounts receivable, less allowances (2010 – $3,378; 2009 – $3,470)

 

145,812

 

115,459

 

Other accounts receivable, less allowances (2010 – $1,283; 2009 – $1,149)

 

7,542

 

6,749

 

Prepaid expenses

 

8,678

 

10,390

 

Deferred income taxes

 

32,817

 

39,035

 

Prepaid and refundable income taxes

 

6,994

 

24,726

 

Other

 

4,532

 

4,333

 

TOTAL CURRENT ASSETS

 

402,387

 

384,742

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT

 

 

 

 

 

Land and structures

 

239,616

 

240,185

 

Revenue equipment

 

529,488

 

514,481

 

Service, office and other equipment

 

159,929

 

157,885

 

Leasehold improvements

 

22,144

 

21,839

 

 

 

951,177

 

934,390

 

Less allowances for depreciation and amortization

 

542,258

 

505,538

 

 

 

408,919

 

428,852

 

 

 

 

 

 

 

OTHER ASSETS

 

53,733

 

55,952

 

 

 

 

 

 

 

 

 

$

865,039

 

$

869,546

 

 

See notes to consolidated financial statements.

 

3



Table of Contents

 

ARKANSAS BEST CORPORATION

CONSOLIDATED BALANCE SHEETS – continued

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

 

 

 

 

($ thousands, except share data)

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Bank overdraft and drafts payable

 

$

11,801

 

$

21,941

 

Accounts payable

 

72,652

 

59,386

 

Income taxes payable

 

409

 

826

 

Accrued expenses

 

149,193

 

150,799

 

Current portion of long-term debt

 

10,844

 

3,603

 

TOTAL CURRENT LIABILITIES

 

244,899

 

236,555

 

 

 

 

 

 

 

LONG-TERM DEBT, less current portion

 

33,802

 

13,373

 

 

 

 

 

 

 

PENSION AND POSTRETIREMENT LIABILITIES

 

68,807

 

67,445

 

 

 

 

 

 

 

OTHER LIABILITIES

 

19,987

 

20,254

 

 

 

 

 

 

 

DEFERRED INCOME TAXES

 

21,295

 

31,023

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock, $0.01 par value, authorized 70,000,000 shares; issued 2010: 26,879,458 shares; 2009: 26,749,265 shares

 

269

 

267

 

Additional paid-in capital

 

278,379

 

274,663

 

Retained earnings

 

296,023

 

327,948

 

Treasury stock, at cost, 1,677,932 shares

 

(57,770

)

(57,770

)

Accumulated other comprehensive loss

 

(40,652

)

(44,212

)

TOTAL STOCKHOLDERS’ EQUITY

 

476,249

 

500,896

 

 

 

 

 

 

 

 

 

$

865,039

 

$

869,546

 

 

See notes to consolidated financial statements.

 

4



Table of Contents

 

ARKANSAS BEST CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

(Unaudited)

 

 

 

($ thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

OPERATING REVENUES

 

$

445,531

 

$

398,957

 

$

1,216,768

 

$

1,101,269

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES AND COSTS

 

447,307

 

411,194

 

1,264,619

 

1,169,405

 

 

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

(1,776

)

(12,237

)

(47,851

)

(68,136

)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

313

 

666

 

920

 

2,399

 

Interest expense and other related financing costs

 

(853

)

(357

)

(1,853

)

(1,041

)

Other, net

 

1,346

 

2,035

 

1,558

 

2,345

 

 

 

806

 

2,344

 

625

 

3,703

 

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAXES

 

(970

)

(9,893

)

(47,226

)

(64,433

)

 

 

 

 

 

 

 

 

 

 

FEDERAL AND STATE INCOME TAXES

 

 

 

 

 

 

 

 

 

Current benefit

 

(1,864

)

(3,302

)

(11,199

)

(25,515

)

Deferred provision (benefit)

 

1,479

 

(1,263

)

(6,722

)

(69

)

 

 

(385

)

(4,565

)

(17,921

)

(25,584

)

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

(585

)

(5,328

)

(29,305

)

(38,849

)

 

 

 

 

 

 

 

 

 

 

LESS:  NONCONTROLLING INTEREST IN NET INCOME OF SUBSIDIARY

 

164

 

245

 

280

 

324

 

 

 

 

 

 

 

 

 

 

 

NET LOSS ATTRIBUTABLE TO ARKANSAS BEST CORPORATION

 

$

(749

)

$

(5,573

)

$

(29,585

)

$

(39,173

)

 

 

 

 

 

 

 

 

 

 

LOSS PER SHARE

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03

)

$

(0.23

)

$

(1.18

)

$

(1.58

)

Diluted

 

(0.03

)

(0.23

)

(1.18

)

(1.58

)

 

 

 

 

 

 

 

 

 

 

AVERAGE COMMON SHARES OUTSTANDING

 

 

 

 

 

 

 

 

 

Basic

 

25,199,123

 

25,047,975

 

25,166,678

 

25,047,270

 

Diluted

 

25,199,123

 

25,047,975

 

25,166,678

 

25,047,270

 

 

 

 

 

 

 

 

 

 

 

CASH DIVIDENDS DECLARED PER COMMON SHARE

 

$

0.03

 

$

0.15

 

$

0.09

 

$

0.45

 

 

See notes to consolidated financial statements.

 

5


 


Table of Contents

 

ARKANSAS BEST CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Treasury Stock

 

Comprehensive

 

Total

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Shares

 

Amount

 

Loss

 

Equity

 

 

 

(Unaudited)

 

 

 

($ and shares, thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2009

 

26,749

 

$

267

 

$

274,663

 

$

327,948

 

1,678

 

$

(57,770

)

$

(44,212

)

$

500,896

 

Net loss (excluding noncontrolling interest in net income of subsidiary of $280)

 

 

 

 

 

 

 

(29,585

)

 

 

 

 

 

 

(29,585

)

Change in foreign currency translation, net of tax of $27

 

 

 

 

 

 

 

 

 

 

 

 

 

43

 

43

 

Amortization of unrecognized net periodic benefit costs, net of tax of $2,335:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net actuarial loss

 

 

 

 

 

 

 

 

 

 

 

 

 

3,611

 

3,611

 

Prior service credit

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

(3

)

Net transition obligation

 

 

 

 

 

 

 

 

 

 

 

 

 

62

 

62

 

Pension settlement expense, net of tax of $69

 

 

 

 

 

 

 

 

 

 

 

 

 

109

 

109

 

Unrecognized net actuarial loss, net of tax of $164

 

 

 

 

 

 

 

 

 

 

 

 

 

(261

)

(261

)

Change in fair value of available for sale security, net of tax of $1

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

(1

)

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,025

)

Issuance of common stock under share-based compensation plans

 

130

 

2

 

466

 

 

 

 

 

 

 

 

 

468

 

Tax effect of share-based compensation plans and other

 

 

 

 

 

(941

)

 

 

 

 

 

 

 

 

(941

)

Share-based compensation expense

 

 

 

 

 

4,191

 

 

 

 

 

 

 

 

 

4,191

 

Dividends declared on common stock

 

 

 

 

 

 

 

(2,340

)

 

 

 

 

 

 

(2,340

)

Balances at September 30, 2010

 

26,879

 

$

269

 

$

278,379

 

$

296,023

 

1,678

 

$

(57,770

)

$

(40,652

)

$

476,249

 

 

See notes to consolidated financial statements.

 

6


 


Table of Contents

 

ARKANSAS BEST CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months Ended

 

 

 

September 30

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

 

 

($ thousands)

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net loss

 

$

(29,305

)

$

(38,849

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

53,771

 

56,348

 

Other amortization

 

200

 

220

 

Pension settlement expense

 

178

 

158

 

Share-based compensation expense

 

4,191

 

4,777

 

Provision for losses on accounts receivable

 

453

 

2,432

 

Deferred income tax benefit

 

(6,722

)

(69

)

Gain on sales of assets

 

(142

)

(1,214

)

Excess tax benefits from share-based compensation

 

(83

)

 

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

(31,595

)

(13,587

)

Prepaid expenses

 

1,724

 

2,321

 

Other assets

 

659

 

316

 

Income taxes

 

18,145

 

542

 

Accounts payable, accrued expenses and other liabilities

 

10,399

 

10,469

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

21,873

 

23,864

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

Purchases of property, plant and equipment, net of capital leases

 

(4,322

)

(32,914

)

Proceeds from asset sales

 

3,393

 

3,714

 

Purchases of short-term investment securities

 

(51,065

)

(110,198

)

Proceeds from sales of short-term investment securities

 

99,175

 

96,689

 

Business acquisition, net of cash acquired

 

 

(4,873

)

Capitalization of internally developed software and other

 

(3,265

)

(3,962

)

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

43,916

 

(51,544

)

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

Payments on long-term debt

 

(5,167

)

(1,401

)

Proceeds from issuance of long-term debt

 

11,416

 

 

Net change in bank overdraft

 

(10,140

)

(1,220

)

Change in restricted cash equivalents and short-term investments

 

103

 

 

Deferred financing costs

 

(35

)

(300

)

Payment of common stock dividends

 

(2,340

)

(11,632

)

Excess tax benefits from share-based compensation

 

83

 

 

Proceeds from the exercise of stock options and other

 

465

 

240

 

NET CASH USED IN FINANCING ACTIVITIES

 

(5,615

)

(14,313

)

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

60,174

 

(41,993

)

Cash and cash equivalents at beginning of period

 

39,332

 

100,880

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

99,506

 

$

58,887

 

 

See notes to consolidated financial statements.

 

7



Table of Contents

 

ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

NOTE A – ORGANIZATION AND DESCRIPTION OF THE BUSINESS AND FINANCIAL STATEMENT PRESENTATION

 

Arkansas Best Corporation (the “Company”) is a holding company engaged through its subsidiaries primarily in motor carrier freight transportation. The Company’s principal operations are conducted through ABF Freight System, Inc. and other subsidiaries of the Company that are engaged in motor carrier freight transportation (collectively “ABF”).

 

As of September 2010, 76% of ABF’s employees were covered under a five-year collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”). The agreement with the IBT, which became effective April 1, 2008, provides for compounded annual contractual wage and benefit increases of approximately 4%, subject to wage rate cost-of-living adjustments.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and applicable rules and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim financial information. Accordingly, these interim financial statements do not include all information or footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements and, therefore, should be read in conjunction with the audited financial statements and accompanying notes included in the Company’s 2009 Annual Report on Form 10-K and other current filings with the Commission. In the opinion of management, all adjustments (which are of a normal and recurring nature) considered necessary for a fair presentation have been included. ABF is impacted by seasonal fluctuations which affect tonnage and shipment levels and consequently revenues and operating results. The second and third calendar quarters of each year usually have the highest tonnage levels while the first quarter generally has the lowest, although other factors, including the state of the U.S. and global economies, may influence quarterly tonnage levels. Operating results for the interim periods presented may not necessarily be indicative of the results for the fiscal year.

 

Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosed amounts of contingent liabilities and the reported amounts of revenues and expenses. If the underlying estimates and assumptions upon which the financial statements are based change in future periods, actual amounts may differ from those included in the accompanying consolidated financial statements.

 

8



Table of Contents

 

ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – continued

 

NOTE B – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

 

Financial Instruments

 

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments.

 

Cash and Cash Equivalents: Cash and cash equivalents totaling $99.5 million at September 30, 2010 consisted of $60.0 million of cash deposits recorded at cost plus accrued interest, which approximates fair value, and $39.5 million of money market funds for which quoted prices are used to determine fair value. At December 31, 2009, cash and cash equivalents of $39.3 million consisted primarily of money market funds.

 

Short-Term Investments: Short-term investments totaling $45.8 million and $93.9 million at September 30, 2010 and December 31, 2009, respectively, consisted of certificates of deposit which are recorded at cost plus accrued interest, which approximates fair value.

 

Restricted Cash Equivalents and Short-Term Investments: At September 30, 2010 and December 31, 2009, restricted funds of $30.2 million and $48.0 million, respectively, were invested in cash and certificates of deposit and recorded at cost plus accrued interest, which approximates fair value. The remaining balances of $20.6 million at September 30, 2010 and $2.9 million at December 31, 2009 consisted of money market funds which are recorded at fair value as determined by quoted prices. The amounts of cash equivalents and short-term investments restricted for use are subject to change based on the requirements of the Company’s collateralized facilities (see Note D).

 

Long-Term Investments: Long-term investments which are reported at fair value within other long-term assets at September 30, 2010 and December 31, 2009 consisted of mutual fund investments held in trust related to the Company’s Voluntary Savings Plan (“VSP”) and an insured, investment-grade available for sale auction rate debt security. Quoted market prices are used to determine fair values of the mutual fund investments of the VSP, a nonqualified deferred compensation plan. The auction rate debt security, for which the underlying debt instrument matures in 2025, is valued using the income approach with inputs derived from observable market data.

 

Concentrations of Credit Risk of Financial Instruments

 

The Company is potentially subject to concentrations of credit risk related to its cash, cash equivalents and short-term investments. The Company reduces credit risk by placing its cash, cash equivalents and short-term investments with major financial institutions that have high credit ratings and by investing unrestricted short-term investments primarily in FDIC-insured certificates of deposit with varying original maturities of ninety-one days to one year. However, certain cash deposits and certificates of deposit, primarily those pledged as collateral for outstanding letters of credit (see Note D), may exceed federally insured limits. At September 30, 2010 and December 31, 2009, cash and certificates of deposit of $36.0 million and $50.4 million, respectively, exceeded FDIC-insured limits.

 

9



Table of Contents

 

ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – continued

 

Financial Assets Measured at Fair Value

 

Fair value is generally determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements generally involve developing assumptions based on observable market data. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These inputs form a three-level valuation hierarchy as follows:

 

·                  Level 1 –Quoted prices for identical assets and liabilities in active markets.

·                  Level 2 – Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

·                  Level 3 – Unobservable inputs that are significant to the valuation model.

 

The following table presents, for each of the fair value hierarchy levels, the Company’s assets measured at fair value on a recurring basis:

 

 

 

 

 

September 30, 2010

 

 

 

 

 

Fair Value Measurements Using

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

($ thousands)

 

Money market funds(1)

 

$

60,058

 

$

60,058

 

$

 

$

 

Auction rate debt security(2)

 

778

 

 

778

 

 

Equity, bond and money market mutual funds held in trust related to the VSP(3)

 

5,678

 

5,678

 

 

 

 

 

$

66,514

 

$

65,736

 

$

778

 

$

 

 

 

 

 

 

December 31, 2009

 

 

 

 

 

Fair Value Measurements Using

 

 

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

($ thousands)

 

Money market funds(1)

 

$

34,437

 

$

34,437

 

$

 

$

 

Auction rate debt security(2)

 

780

 

 

780

 

 

Equity, bond and money market mutual funds held in trust related to the VSP(3)

 

6,303

 

6,303

 

 

 

 

 

$

41,520

 

$

40,740

 

$

780

 

$

 

 


(1)         Included in cash equivalents and restricted cash equivalents.

(2)         Available for sale security included in other long-term assets. An unrealized gain of $0.1 million, net of taxes, related to the security was included in accumulated other comprehensive loss as of September 30, 2010 and December 31, 2009.

(3)         Consists of U.S. and international equity mutual funds, government and corporate bond mutual funds and money market funds which are held in a trust with a third-party brokerage firm and included in other long-term assets. A corresponding liability is included in other long-term liabilities.

 

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Table of Contents

 

ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – continued

 

NOTE C – INCOME TAXES

 

The effective tax benefit rates for the nine months ended September 30, 2010 and 2009 were 37.9% and 39.7%, respectively. The difference between the Company’s effective tax rate and the federal statutory rate primarily results from the effect of state income taxes, nondeductible expenses, changes in the cash surrender value of life insurance and, for the nine months ended September 30, 2009, the alternative fuel tax credit. The alternative fuel tax credit, which expired December 31, 2009, increased the effective tax benefit rate by 0.9% for the nine months ended September 30, 2009. During the nine months ended September 30, 2010, the Company received refunds of $32.0 million of federal and state taxes paid in prior years primarily for loss carrybacks allowed by the U.S. Internal Revenue Code and paid federal and state income taxes of $2.7 million.

 

NOTE D – LONG-TERM DEBT AND FINANCING ARRANGEMENTS

 

Capital Lease Obligations

 

Long-term debt consisted of capital lease obligations related to revenue equipment (tractors and trailers used primarily in ABF’s operations), real estate and certain office equipment as follows:

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

 

 

($ thousands)

 

 

 

 

 

 

 

Capital lease obligations

 

$

44,646

 

$

16,976

 

Less current portion

 

10,844

 

3,603

 

Long-term debt, less current portion

 

$

33,802

 

$

13,373

 

 

In January 2010, ABF entered into capital lease agreements with 36-month terms to finance $11.4 million of revenue equipment that was acquired in 2009. During the nine months ended September 30, 2010, ABF entered into additional capital lease agreements with 36-month and 60-month terms to finance $21.4 million of revenue equipment acquired in 2010. The capital lease agreements specify the terms of the arrangements, including the monthly base rent and interest rates, and contain rental adjustment clauses for which the maximum amounts have been included in the future minimum payments under the capital leases in the table below.

 

The following is a summary of the future minimum payments under capital leases:

 

 

 

September 30

 

 

 

2010

 

 

 

($ thousands)

 

 

 

 

 

Due in one year or less

 

$

12,669

 

Due after one year through three years

 

31,335

 

Due after three years through five years

 

3,930

 

Due after five years

 

960

 

Total minimum lease payments

 

48,894

 

Less amounts representing interest

 

4,248

 

Present value of net minimum leases included in long-term debt

 

$

44,646

 

 

11


 


Table of Contents

 

ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – continued

 

Assets held under capital leases were included in property, plant and equipment as follows:

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

 

 

($ thousands)

 

 

 

 

 

 

 

Land and structures (terminals)

 

$

1,794

 

$

1,780

 

Revenue equipment

 

47,780

 

14,958

 

Service, office and other equipment

 

622

 

622

 

 

 

50,196

 

17,360

 

Less accumulated amortization(1)

 

6,536

 

538

 

 

 

$

43,660

 

$

16,822

 

 


(1)         Amortization of assets under capital leases is included in depreciation expense.

 

Financing Arrangements

 

The Company has an asset-backed securitization program with SunTrust Bank which provides for cash proceeds of an amount up to $75.0 million. Under this two-year agreement dated December 30, 2009, ABF continuously sells a designated pool of trade accounts receivables to a wholly owned subsidiary which, in turn, may borrow funds on a revolving basis. This wholly-owned consolidated subsidiary is a separate bankruptcy-remote entity and its assets would be available only to satisfy the claims related to the interest in the trade accounts receivables. The Company pays annual fees equal to 0.75% of the unused portion of the accounts receivable facility. This agreement contains representations and warranties, affirmative and negative covenants and events of default that are customary for financings of this type, including maintaining consolidated tangible net worth, as defined, of $375.0 million. As of September 30, 2010, the Company was in compliance with the covenants. There have been no borrowings under this facility during 2010, and the borrowing capacity was at the facility limit of $75.0 million as of September 30, 2010.

 

The Company has agreements with four financial institutions to provide collateralized facilities for the issuance of letters of credit (“LC Agreements”). The Company issues letters of credit primarily in support of workers’ compensation and third-party casualty claims liabilities in various states in which the Company is self-insured. The Company has up to $90.0 million of availability for the issuance of letters of credit under the LC Agreements of which $75.0 million is committed subject to the Company’s compliance with the requirements of issuance. The LC Agreements require cash or short-term investments to be pledged as collateral for outstanding letters of credit. As of September 30, 2010, the Company had $44.7 million of letters of credit outstanding of which $44.2 million were collateralized by restricted cash equivalents and short-term investments under the LC Agreements.

 

The Company also has a program in place with an insurance carrier for the issuance of surety bonds in support of the self-insured program mentioned in the previous paragraph. As of September 30, 2010, surety bonds outstanding related to the self-insured program totaled $12.6 million collateralized by $6.6 million of restricted short-term investments in certificates of deposit.

 

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Table of Contents

 

ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – continued

 

NOTE E – PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

 

Nonunion Defined Benefit Pension, Supplemental Benefit Pension and Postretirement Health Plans

 

The following is a summary of the components of net periodic benefit cost:

 

 

 

Three Months Ended September 30

 

 

 

Nonunion Defined

 

Supplemental

 

Postretirement

 

 

 

Benefit Pension Plan

 

Benefit Pension Plan

 

Health Benefit Plan

 

 

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

 

 

($ thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

2,235

 

$

2,271

 

$

 

$

135

 

$

35

 

$

42

 

Interest cost

 

2,735

 

3,091

 

101

 

229

 

218

 

278

 

Expected return on plan assets

 

(3,043

)

(2,359

)

 

 

 

 

Transition obligation recognition

 

 

 

 

 

34

 

34

 

Amortization of prior service (credit) cost

 

(2

)

(225

)

 

349

 

 

 

Pension settlement expense

 

 

 

 

 

 

 

Recognized net actuarial loss and other

 

1,898

 

2,360

 

75

 

152

 

4

 

142

 

Net periodic benefit cost

 

$

3,823

 

$

5,138

 

$

176

 

$

865

 

$

291

 

$

496

 

 

 

 

Nine Months Ended September 30

 

 

 

Nonunion Defined

 

Supplemental

 

Postretirement

 

 

 

Benefit Pension Plan

 

Benefit Pension Plan

 

Health Benefit Plan

 

 

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

 

 

($ thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

6,707

 

$

6,812

 

$

 

$

435

 

$

105

 

$

127

 

Interest cost

 

8,203

 

9,271

 

309

 

766

 

653

 

833

 

Expected return on plan assets

 

(9,129

)

(7,076

)

 

 

 

 

Transition obligation recognition

 

 

 

 

 

101

 

101

 

Amortization of prior service (credit) cost

 

(5

)

(673

)

 

1,047

 

 

 

Pension settlement expense

 

 

 

178

 

158

 

 

 

Recognized net actuarial loss and other

 

5,692

 

7,080

 

204

 

422

 

13

 

426

 

Net periodic benefit cost

 

$

11,468

 

$

15,414

 

$

691

 

$

2,828

 

$

872

 

$

1,487

 

 

The Company’s full-year 2010 nonunion defined benefit pension plan expense is estimated to be $15.3 million compared to $20.6 million for the year ended December 31, 2009. Considering the volatility in the overall equity markets during 2010, the expected return on plan assets may not be achieved in the near term. Furthermore, declines in market interest rates during 2010 may result in a lower discount rate used to calculate the projected benefit obligation of the nonunion defined benefit pension plan at year-end, which could result in an increase in the pension liability. As of the plan’s December 31, 2010 measurement date, the impact on the pension liability as a result of the difference between the expected and actual return on plan assets along with changes in the applicable discount rate will be recognized as an actuarial gain or loss at year-end in other comprehensive income, net of taxes.

 

The Company was not required to make a cash contribution to its nonunion defined benefit pension plan; however, the Company made a voluntary tax-deductible contribution of $5.0 million to the plan in the third quarter of 2010. The Company’s nonunion defined benefit pension plan covers substantially all noncontractual employees hired before January 1, 2006. All eligible noncontractual employees hired subsequent to December 31, 2005 participate in a defined contribution plan.

 

13



Table of Contents

 

ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – continued

 

Multiemployer Plans

 

Under the provisions of the Taft-Hartley Act, retirement and health care benefits for ABF’s contractual employees are provided by a number of multiemployer plans. ABF’s contributions to these plans are based generally on the time worked by its contractual employees, as specified in ABF’s five-year collective bargaining agreement that became effective on April 1, 2008 and other supporting supplemental agreements. ABF recognizes as expense the contractually required contribution for the period and recognizes as a liability any contributions due and unpaid.

 

ABF currently contributes to 26 multiemployer pension plans, which vary in size and in funding status. In the event of the termination of a multiemployer pension plan or if ABF were to withdraw from a multiemployer pension plan, ABF would have material liabilities for its share of the unfunded vested liabilities of each such plan. ABF has not received notification of any plan termination, and ABF does not currently intend to withdraw from these plans. Therefore, the Company believes the occurrence of events that would require recognition of liabilities for its share of unfunded vested benefits is remote.

 

Approximately 50% of ABF’s contributions are made to the Central States Southeast and Southwest Area Pension Fund (the “Central States Pension Fund”). The Central States Pension Fund adopted a rehabilitation plan as a result of its actuarial certification for the plan year beginning January 1, 2008 which placed the Central States Pension Fund in “critical status” under the provisions of the Pension Protection Act of 2006. ABF’s current collective bargaining agreement complies with the rehabilitation plan which was adopted by the Central States Pension Fund prior to the April 1, 2008 effective date of the collective bargaining agreement. The Actuarial Certification of Plan Status as of January 1, 2010 certified that the Central States Pension Fund remains in critical status with a funded percentage of 63.1%.

 

The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (the “Pension Relief Act”) was signed into law on June 25, 2010. The Pension Relief Act includes provisions that may provide funding relief for multiemployer pension plans that satisfy certain solvency requirements. The Company has not received information from the multiemployer plan administrators regarding the impact, if any, of the Pension Relief Act on the funding status of the multiemployer pension plans to which ABF contributes. Based on the most recent annual funding notices the Company has received, approximately 60% of ABF’s contributions to multiemployer pension plans, including the Central States Pension Fund discussed above, are made to plans that are in critical status. Due to their funding position, certain plans may not be eligible for funding relief provisions of the Pension Relief Act because of its solvency requirements.

 

The multiemployer plan administrators have provided to the Company no other significant changes in information related to multiemployer plans from the information disclosed in the Company’s 2009 Annual Report on Form 10-K.

 

NOTE F – STOCKHOLDERS’ EQUITY

 

For the three months ended September 30, 2010, total comprehensive income was $0.6 million. For the nine months ended September 30, 2010, total comprehensive loss was $26.0 million. Total comprehensive loss for the three and nine months ended September 30, 2009 was $3.7 million and $33.5 million, respectively.

 

14



Table of Contents

 

ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – continued

 

Accumulated Other Comprehensive Loss

 

Components of accumulated other comprehensive loss were as follows:

 

 

 

September 30

 

December 31

 

 

 

2010

 

2009

 

 

 

($ thousands)

 

 

 

 

 

 

 

Pre-tax amounts:

 

 

 

 

 

Foreign currency translation

 

$

(569

)

$

(639

)

Unrecognized net periodic benefit costs

 

(66,158

)

(71,916

)

Increase in fair value of available for sale security

 

180

 

182

 

Total

 

$

(66,547

)

$

(72,373

)

 

 

 

 

 

 

After-tax amounts:

 

 

 

 

 

Foreign currency translation

 

$

(348

)

$

(391

)

Unrecognized net periodic benefit costs

 

(40,422

)

(43,940

)

Increase in fair value of available for sale security

 

118

 

119

 

Total

 

$

(40,652

)

$

(44,212

)

 

Dividends on Common Stock

 

On October 26, 2010, the Company’s Board of Directors declared a dividend of $0.03 per share payable to stockholders of record as of November 9, 2010.

 

The following table is a summary of dividends declared during the applicable quarter:

 

 

 

2010

 

2009

 

 

 

Per Share

 

Amount

 

Per Share

 

Amount

 

 

 

($ thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

0.03

 

$

777

 

$

0.15

 

$

3,847

 

Second quarter

 

$

0.03

 

$

777

 

$

0.15

 

$

3,893

 

Third quarter

 

$

0.03

 

$

786

 

$

0.15

 

$

3,892

 

Fourth quarter (2010 amount estimated)

 

$

0.03

 

$

786

 

$

0.15

 

$

3,891

 

 

NOTE G – EQUITY-BASED COMPENSATION

 

Stock Awards

 

As of September 30, 2010, the Company had outstanding stock options granted under the 1992 Stock Option Plan, the 2000 Non-Qualified Stock Option Plan and the 2002 Stock Option Plan and outstanding restricted stock and restricted stock units granted under the 2005 Ownership Incentive Plan (“the 2005 Plan”). The 1992 Stock Option Plan expired on December 31, 2001. The 2005 Plan superseded the Company’s 2000 Non-Qualified Stock Option Plan and 2002 Stock Option Plan with respect to future awards and originally provided for the granting of 1.5 million shares. In April 2010, shareholders approved an amendment to increase the number of shares that may be issued under the 2005 Plan by 700,000 shares. The awards may be granted as incentive and nonqualified stock options, Stock Appreciation Rights (“SARs”), restricted stock or restricted

 

15



Table of Contents

 

ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – continued

 

stock units. Any outstanding stock options under the 1992, 2000 or 2002 stock option plans which are forfeited or otherwise unexercised will be included in the shares available for grant under the 2005 Plan. As of September 30, 2010, the Company had not elected to treat any exercised options as employer SARs and no employee SARs had been granted. No stock options have been granted since 2004.

 

Restricted Stock

 

A summary of the Company’s restricted stock program, which consists of restricted stock and restricted stock units awarded under the 2005 Plan, is presented below:

 

 

 

 

 

Weighted-Average

 

 

 

 

 

Grant Date

 

 

 

Shares/Units

 

Fair Value

 

 

 

 

 

 

 

Outstanding – January 1, 2010

 

838,304

 

$

32.80

 

Granted

 

312,130

 

22.56

 

Vested

 

(128,003

)

33.49

 

Forfeited

 

(31,073

)

32.46

 

Outstanding – September 30, 2010

 

991,358

 

$

29.49

 

 

Stock Options

 

A summary of the Company’s stock option program is presented below:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

Intrinsic

 

 

 

Shares

 

Average

 

Contractual

 

Value(1)

 

 

 

Under Option

 

Exercise Price

 

Term (Years)

 

($ thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding – January 1, 2010

 

539,857

 

$

26.16

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(30,900

)

15.63

 

 

 

 

 

Forfeited

 

(11,200

)

26.65

 

 

 

 

 

Outstanding – September 30, 2010(2)

 

497,757

 

$

26.80

 

1.9

 

$

2

 

 


(1)         The intrinsic value for each option represents the excess, if any, of the market value of the Company’s Common Stock on September 30, 2010 over the exercise price of the option.

(2)         Options outstanding at September 30, 2010 were vested and available to be exercised.

 

16


 


Table of Contents

 

ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – continued

 

NOTE H – LOSS PER SHARE

 

The following table sets forth the computation of basic and diluted loss per share:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

($ thousands, except share and per share data)

 

Basic loss per share

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss attributable to Arkansas Best Corporation

 

$

(749

)

$

(5,573

)

$

(29,585

)

$

(39,173

)

Effect of unvested restricted stock awards

 

(21

)

(134

)

(38

)

(343

)

Adjusted net loss

 

$

(770

)

$

(5,707

)

$

(29,623

)

$

(39,516

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average shares

 

25,199,123

 

25,047,975

 

25,166,678

 

25,047,270

 

 

 

 

 

 

 

 

 

 

 

Net loss per share

 

$

(0.03

)

$

(0.23

)

$

(1.18

)

$

(1.58

)

 

 

 

 

 

 

 

 

 

 

Diluted loss per share

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net loss attributable to Arkansas Best Corporation

 

$

(749

)

$

(5,573

)

$

(29,585

)

$

(39,173

)

Effect of unvested restricted stock awards

 

(21

)

(134

)

(38

)

(343

)

Adjusted net loss

 

$

(770

)

$

(5,707

)

$

(29,623

)

$

(39,516

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average shares

 

25,199,123

 

25,047,975

 

25,166,678

 

25,047,270

 

Effect of dilutive securities

 

 

 

 

 

Adjusted weighted-average shares and assumed conversions

 

25,199,123

 

25,047,975

 

25,166,678

 

25,047,270

 

 

 

 

 

 

 

 

 

 

 

Net loss per share

 

$

(0.03

)

$

(0.23

)

$

(1.18

)

$

(1.58

)

 

For the nine months ended September 30, 2010 and 2009, outstanding stock awards of 1,489,115 and 1,444,781, respectively, were not included in the diluted loss per share calculations because their inclusion would have the effect of decreasing the loss per share.

 

NOTE I – OPERATING SEGMENT DATA

 

The Company uses the “management approach” to determine its reportable operating segments, as well as to determine the basis of reporting the operating segment information. The management approach focuses on financial information that the Company’s management uses to make decisions about operating matters. Management uses operating revenues, operating expense categories, operating ratios, operating income and key operating statistics to evaluate performance and allocate resources to the Company’s operations. ABF, which provides transportation of general commodities, represents the Company’s only reportable operating segment.

 

The Company eliminates intercompany transactions in consolidation. However, the information used by the Company’s management with respect to its reportable segment is before intersegment eliminations of revenues

 

17



Table of Contents

 

ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – continued

 

and expenses. Intersegment revenues and expenses are not significant. Further classifications of operations or revenues by geographic location are impractical and are, therefore, not provided. The Company’s foreign operations are not significant.

 

The following tables reflect reportable operating segment information for the Company, as well as a reconciliation of reportable segment information to the Company’s consolidated financial statements:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

($ thousands)

 

OPERATING REVENUES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ABF

 

$

409,916

 

$

369,763

 

$

1,122,384

 

$

1,036,681

 

Other revenues and eliminations

 

35,615

 

29,194

 

94,384

 

64,588

 

Total consolidated operating revenues

 

$

445,531

 

$

398,957

 

$

1,216,768

 

$

1,101,269

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES AND COSTS

 

 

 

 

 

 

 

 

 

ABF

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

$

259,613

 

$

248,093

 

$

745,037

 

$

726,817

 

Fuel, supplies and expenses

 

67,045

 

58,758

 

192,686

 

162,019

 

Operating taxes and licenses

 

11,229

 

10,590

 

32,438

 

31,657

 

Insurance

 

4,870

 

6,129

 

14,981

 

16,049

 

Communications and utilities

 

3,830

 

3,455

 

11,008

 

10,989

 

Depreciation and amortization

 

16,992

 

17,638

 

51,698

 

54,109

 

Rents and purchased transportation

 

46,830

 

37,576

 

120,771

 

97,819

 

Gain on sale of property and equipment

 

(74

)

(254

)

(498

)

(1,215

)

Other

 

2,141

 

1,768

 

5,101

 

6,092

 

 

 

412,476

 

383,753

 

1,173,222

 

1,104,336

 

Other expenses and eliminations

 

34,831

 

27,441

 

91,397

 

65,069

 

Total consolidated operating expenses and costs

 

$

447,307

 

$

411,194

 

$

1,264,619

 

$

1,169,405

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)

 

 

 

 

 

 

 

 

 

ABF

 

$

(2,560

)

(13,990

)

$

(50,838

)

$

(67,655

)

Other income (loss) and eliminations

 

784

 

1,753

 

2,987

 

(481

)

Total consolidated operating loss

 

(1,776

)

(12,237

)

(47,851

)

(68,136

)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

313

 

666

 

920

 

2,399

 

Interest expense and other related financing costs

 

(853

)

(357

)

(1,853

)

(1,041

)

Other, net(1)

 

1,346

 

2,035

 

1,558

 

2,345

 

Total consolidated other income

 

806

 

2,344

 

625

 

3,703

 

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAXES

 

$

(970

)

$

(9,893

)

$

(47,226

)

$

(64,433

)

 


(1)   Other, net includes gains on cash surrender value of life insurance policies.

 

18



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ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – continued

 

NOTE J – LEGAL PROCEEDINGS, ENVIRONMENTAL MATTERS AND OTHER EVENTS

 

The Company is involved in various legal actions arising in the ordinary course of business. The Company maintains liability insurance against certain risks arising out of the normal course of its business, subject to certain self-insured retention limits. The Company routinely establishes and reviews the adequacy of reserves for estimated legal, environmental and self-insurance exposures. While management believes that amounts accrued in the consolidated financial statements are adequate, estimates of these liabilities may change as circumstances develop. Considering amounts recorded, these matters are not expected to have a material adverse effect on the Company’s financial condition, cash flows or results of operations.

 

The Company’s subsidiaries store fuel for use in tractors and trucks in 69 underground tanks located in 23 states. Maintenance of such tanks is regulated at the federal and, in some cases, state levels. The Company believes that it is in substantial compliance with 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 and others that it has been identified as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act, or other federal or state environmental statutes, at several hazardous waste sites. After investigating the Company’s or its subsidiaries’ involvement in waste disposal or waste generation at such sites, the Company has either agreed to de minimis settlements (aggregating approximately $0.1 million over the last ten years, primarily at six sites) or believes its obligations, other than those specifically accrued for with respect to such sites, would involve immaterial monetary liability, although there can be no assurances in this regard.

 

At September 30, 2010 and December 31, 2009, the reserve for estimated environmental clean-up costs of properties currently or previously operated by the Company totaling $1.3 million and $1.2 million, respectively, was included in accrued expenses. Amounts accrued reflect management’s best estimate of the future undiscounted exposure related to identified properties based on current environmental regulations. The Company’s estimate is based on management’s experience with similar environmental matters and on testing performed at certain sites.

 

NOTE K – SUBSEQUENT EVENTS

 

In October and November 2010, ABF entered into capital lease agreements to finance $10.5 million of revenue equipment and other equipment. The capital lease agreements specify the monthly base rent and interest rates for the 36-month and 60-month lease terms. The present values of net minimum lease payments will be recorded in long-term debt.

 

On November 1, 2010, ABF Freight System, Inc. filed a grievance with the National Grievance Committee, consisting of union and employer representatives established by the National Master Freight Agreement (the “NMFA”) for resolving national contract disputes, against the following parties: the IBT; the Teamsters National Freight Industry Negotiating Committee; Trucking Management, Inc.; every Teamster Local Union that is party to the NMFA; and YRC Inc., New Penn Motor Express, Inc. and USF Holland, Inc. (collectively “YRC”). A lawsuit was simultaneously filed in the United States District Court for the Western Division of Arkansas (the “Court”) against the parties previously named and Teamster Local Unions 373 and 878 individually and as representatives of a class of Teamsters Local Unions that are parties to the NMFA. The lawsuit seeks

 

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ARKANSAS BEST CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) – continued

 

appointment of a third party neutral tribunal to rule on the grievance in place of the National Grievance Committee or, alternatively, for the Court to rule on the lawsuit.

 

ABF Freight System, Inc. is an equal signatory to the NMFA which, as a national collective bargaining agreement, is designed to establish a single national standard for wages and other employment terms for all employers who are parties to the agreement. However, ABF Freight System, Inc. has not been granted the same wage and benefit concessions under the NMFA as YRC on three separate occasions starting in 2009. The grievance filed by ABF Freight System, Inc. is a claim that the IBT and the other named parties have violated the NMFA. The grievance and lawsuit seek to declare three amendments to the NMFA on behalf of YRC, including the ratification of the third amendment announced on October 30, 2010, null and void. The grievance and lawsuit also seek payment for damages associated with the amendments on behalf of YRC. Although the outcome of these legal proceedings cannot be predicted at this time, management believes the legal actions are necessary for ABF to achieve an equitable cost structure and to compete effectively in the LTL industry.

 

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ITEM 2.                        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) describes the principal factors affecting results of operations, liquidity and capital resources, and critical accounting policies of Arkansas Best Corporation (the “Company”). This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The Company’s 2009 Annual Report on Form 10-K includes additional information about significant accounting policies, practices and the transactions that underlie the Company’s financial results, as well as a detailed discussion of the most significant risks and uncertainties to which its financial and operating results are subject. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

The Company is a holding company engaged through its subsidiaries primarily in motor carrier freight transportation. The Company’s principal operations are conducted through ABF Freight System, Inc. and other subsidiaries of the Company that are engaged in motor carrier freight transportation (collectively “ABF”). ABF, which represented 92% of consolidated revenues for the nine months ended September 30, 2010, is the Company’s only reportable operating segment.

 

Results of Operations

 

Consolidated Results

 

 

 

Three Months Ended September 30

 

 

 

2010

 

2009

 

 

 

($ thousands, except workdays and per share data)

 

 

 

 

 

 

 

WORKDAYS

 

64.0

 

64.0

 

 

 

 

 

 

 

OPERATING REVENUES

 

 

 

 

 

ABF

 

$

409,916

 

$

369,763

 

Other revenues and eliminations

 

35,615

 

29,194

 

 

 

$

445,531

 

$

398,957

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)

 

 

 

 

 

ABF

 

$

(2,560

)

$

(13,990

)

Other and eliminations

 

784

 

1,753

 

 

 

$

(1,776

)

$

(12,237

)

 

 

 

 

 

 

DILUTED LOSS PER SHARE

 

$

(0.03

)

$

(0.23

)

 

21


 


Table of Contents

 

 

 

Nine Months Ended September 30

 

 

 

2010

 

2009

 

 

 

($ thousands, except workdays and per share data)

 

 

 

 

 

 

 

WORKDAYS

 

190.5

 

190.0

 

 

 

 

 

 

 

OPERATING REVENUES

 

 

 

 

 

ABF

 

$

1,122,384

 

$

1,036,681

 

Other revenues and eliminations

 

94,384

 

64,588

 

 

 

$

1,216,768

 

$

1,101,269

 

 

 

 

 

 

 

OPERATING INCOME (LOSS)

 

 

 

 

 

ABF

 

$

(50,838

)

$

(67,655

)

Other and eliminations

 

2,987

 

(481

)

 

 

$

(47,851

)

$

(68,136

)

 

 

 

 

 

 

DILUTED LOSS PER SHARE

 

$

(1.18

)

$

(1.58

)

 

Consolidated revenues for the three and nine months ended September 30, 2010 increased 11.7% and 10.2%, respectively, on a per-day basis compared to the same prior year period, with the increase primarily attributable to ABF operations. Consolidated revenue growth was also impacted by business operations that are reported in the Company’s revenues other than ABF, including increased roadside vehicle assistance services at Fleetnet America, Inc. and the effect of the acquisition, in late second quarter 2009, of a privately-owned logistics business.

 

For the three and nine months ended September 30, 2010, the Company reported consolidated operating losses of $1.8 million and $47.9 million, respectively. Consolidated operating loss for the three and nine months ended September 30, 2010, decreased $10.5 million and $20.3 million, respectively, from the same periods in 2009. The improvements in consolidated operating loss and net loss per share primarily reflect the operations of ABF, as discussed in the following sections of Results of Operations.

 

ABF Overview

 

On an ongoing basis, ABF’s ability to operate profitably and generate cash is impacted by tonnage (defined as gross weight hauled), which influences operating leverage as tonnage levels vary; the pricing environment; customer account mix; and the ability to manage costs effectively, primarily in the area of salaries, wages and benefits (“labor”). ABF’s operating performance is generally evaluated by comparison to prior year periods due to seasonal fluctuations which affect tonnage and shipment levels. The ABF key performance factors and operating results are discussed in the following paragraphs.

 

During the three and nine months ended September 30, 2010, ABF’s revenues increased 10.9% and 8.0%, respectively, on a per-day basis compared to the same periods in 2009. ABF’s third quarter 2010 operating ratio (defined as percent of operating expenses to revenues) improved to 100.6% from 103.8% in the third quarter 2009. For the nine months ended September 30, 2010, ABF’s operating ratio improved to 104.5% from 106.5% in the same period of 2009.

 

ABF’s operations are affected by general economic conditions, as well as a number of other competitive factors that are more fully described in the Business and Risk Factors sections of the Company’s 2009 Annual Report on Form 10-K. The prolonged unfavorable economic environment has adversely impacted the business activities

 

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Table of Contents

 

of ABF’s customers, which has reduced ABF’s tonnage levels and limited ABF’s ability to secure adequate pricing for its services. Year-over-year tonnage began declining in the fourth quarter of 2006, and ABF experienced annual tonnage declines on a per-day basis of 5.3%, 4.2% and 11.4% in 2007, 2008 and 2009, respectively. Although ABF’s year-over-year tonnage trends began improving in the first quarter of 2010, tonnage levels remain depressed with third quarter 2010 tonnage per day 9.1% below third quarter 2006. For the three and nine months ended September 30, 2010, ABF’s tonnage improved 13.9% and 9.9%, respectively, on a per-day basis compared to the same periods of 2009. For the month of October 2010, average daily total tonnage for ABF increased approximately 16% compared to the same period last year. ABF’s management believes the 2010 increase in tonnage is representative of modest year-over-year improvement in general economic conditions as indicated by measures such as the Institute for Supply Management Purchasing Managers’ Index and the seasonally adjusted Industrial Production Index published by the Federal Reserve. Although there are indications of economic factors that could contribute to further year-over-year increases in tonnage, there can be no assurances that ABF will achieve or maintain improvements in operating results based on ABF’s current tonnage levels.

 

The industry pricing environment is another key factor in ABF’s operating performance. The pricing environment, which generally becomes more competitive during periods of lower tonnage levels, influences ABF’s ability to obtain compensatory margins and price increases on customer accounts. ABF’s pricing is typically measured by billed revenue per hundredweight, which is a reasonable, although approximate, measure of price change. This measure is affected by freight profile factors such as average shipment size, average length of haul, freight density and customer and geographic mix. ABF focuses on individual account profitability rather than billed revenue per hundredweight when considering customer account or market evaluations, due to the difficulty in quantifying, with sufficient accuracy, the impact of changes in freight profile characteristics, which is necessary to estimate true price changes. However, total company profitability for ABF is considered together with measures of billed revenue per hundredweight. Total billed revenue per hundredweight decreased 2.5% and 1.5% during the three and nine months ended September 30, 2010, respectively, versus the same periods of 2009. Excluding freight profile changes and increases in fuel surcharges, pricing on ABF’s traditional less-than-truckload (“LTL”) business experienced percentage declines in the low- to mid-single digits during the three and nine months ended September 30, 2010 compared to the same periods of 2009, despite the general rate increase implemented in January 2010. Effective January 11, 2010 and January 5, 2009, ABF implemented nominal general rate increases of 5.70% and 5.79%, respectively, although the amounts vary by lane and shipment characteristics. The January 2010 general rate increase affected approximately 45% of ABF’s business for the nine months ended September 30, 2010, while rate increases on the remaining business are subject to individually negotiated pricing arrangements that are effective at various times throughout the year. Industry pricing has been at historically low levels. During the nine months ended September 30, 2010, the pricing environment was very competitive and management expects the pricing environment to remain competitive throughout the remainder of 2010. The competitive pricing environment has limited ABF’s ability to secure adequate prices to cover increasing operating costs and has adversely impacted ABF’s operating results.

 

ABF implemented a nominal general rate increase of 5.90% effective October 1, 2010 to cover known and expected cost increases. Certain industry competitors have also announced price increases with effective dates ranging from late September to early November 2010. ABF’s ability to retain the general rate increase and to increase rates on the remainder of its business is dependent on the competitive pricing environment. Obtaining base rate increases involves a lengthy process to address the pricing and resulting profitability of individual customer accounts. Prolonged periods with insufficient base LTL rate improvements result in higher operating ratios as elements of unit cost, including contractual wage and benefit rates, continue to increase. Although there can be no assurances, management believes that pricing levels may improve based on business conditions ABF

 

23



Table of Contents

 

has experienced since the end of third quarter 2010, which are reflective of continued customer acceptance of the recently-implemented rate increase along with increases in tonnage levels and other industry conditions.

 

The transportation industry is dependent upon the availability of adequate fuel supplies. The Company has not experienced a lack of available fuel but could be adversely impacted if a fuel shortage were to develop. ABF charges a fuel surcharge based on changes in diesel fuel prices compared to a national index. The ABF fuel surcharge rate in effect is available on the ABF Web site at abf.com. (The information contained on the ABF Web site is not a part of this Quarterly Report on Form 10-Q nor shall it be deemed incorporated by reference into this Quarterly Report on Form 10-Q.) Although revenues from fuel surcharges generally more than offset increases in direct diesel fuel costs, other operating costs have been, and may continue to be, impacted by fluctuating fuel prices. The total impact of energy prices on other nonfuel-related expenses is difficult to ascertain. ABF cannot predict, with reasonable certainty, future fuel price fluctuations, the impact of energy prices on other cost elements, recoverability of fuel costs through fuel surcharges, and the effect of fuel surcharges on ABF’s overall rate structure or the total price that ABF will receive from its customers. During periods of changing diesel fuel prices, the fuel surcharge and associated direct diesel fuel costs also vary by different degrees. Depending upon the rates of these changes and the impact on costs in other fuel- and energy-related areas, operating margins could be impacted. Fuel prices have fluctuated significantly in recent years. ABF’s average fuel surcharge rate during the nine months ended September 30, 2010 was 38% above the average rate for the same period of 2009. Whether fuel prices fluctuate or remain constant, ABF’s operating income may be adversely affected if competitive pressures limit its ability to recover fuel surcharges. Throughout the first nine months of 2010, the fuel surcharge mechanism had strong market acceptance among ABF customers, although certain nonstandard arrangements with some of ABF’s customers have limited the amount of fuel surcharge recovered. While the fuel surcharge is one of several components in ABF’s overall rate structure, the actual rate paid by customers is governed by market forces based on value provided to the customer.

 

As a result of the extended recessionary economic environment and its impact on tonnage levels, ABF has implemented cost reduction programs. ABF is generally effective in managing its costs to business levels. However, during prolonged periods of depressed tonnage levels, incremental reductions in labor and other operating costs become increasingly challenging and less effective as a larger proportion of ABF’s operating costs are fixed in nature when maintaining customer service levels. ABF’s ability to effectively manage labor costs, which amounted to 63.3% and 66.4% of ABF’s revenues for the three and nine months ended September 30, 2010, respectively, has a direct impact on its operating performance. Labor costs, including retirement and health care benefits for ABF’s contractual employees that are provided by a number of multiemployer plans (see Note E to the Company’s consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q), are impacted by ABF’s contractual obligations under its current labor agreement primarily with the International Brotherhood of Teamsters (“IBT”). This five-year collective bargaining agreement, the National Master Freight Agreement (the “NMFA”), became effective April 1, 2008 and provides for compounded annual contractual wage and benefit increases of approximately 4%, subject to wage rate cost-of-living adjustments. ABF Freight System, Inc. and the Teamsters National Freight Industry Negotiating Committee of the IBT reached a tentative agreement in April 2010 for a modification of the collective bargaining agreement, which included a proposed 15% wage reduction and a performance-based incentive plan. However, in May 2010, the modification was not ratified by a majority of ABF’s IBT member employees.

 

ABF operates in a highly competitive industry which consists predominantly of nonunion motor carriers. The Company’s nonunion competitors have a lower fringe benefit cost structure, and certain carriers also have lower wage rates for their freight-handling and driving personnel. In addition, wage and benefit concessions granted to

 

24



Table of Contents

 

certain union competitors allow for a lower cost structure than that of ABF. Competitors with lower labor cost structures have reduced freight rates to gain market share, which has further limited ABF’s ability to maintain or increase base freight rates. ABF has continued to address with the IBT the effect of ABF’s wage and benefit cost structure on its operating results. ABF Freight System, Inc. is an equal signatory to the NMFA which, as a national collective bargaining agreement, is designed to establish a single national standard for wages and other employment terms for all employees who are parties to the agreement. However, ABF Freight System, Inc. has not been granted the same wage and benefit concessions under the NMFA as certain union competitors. On November 1, 2010, ABF Freight System, Inc. filed a grievance against the following parties: the IBT; the Teamsters National Freight Industry Negotiating Committee; Trucking Management, Inc.; every Teamster Local Union that is party to the NMFA; and YRC Inc., New Penn Motor Express, Inc. and USF Holland, Inc. (collectively “YRC”). A lawsuit was simultaneously filed against the parties previously named and Teamsters Local Unions 373 and 878 individually and as representatives of a class of Teamsters Local Unions that are parties to the NMFA. (See Note K to the Company’s consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.) The grievance filed by ABF Freight System, Inc. is a claim that the IBT and the other named parties have violated the NMFA. The grievance and lawsuit seek to declare three amendments to the NMFA on behalf of YRC, including the ratification of the third amendment announced on October 30, 2010, null and void. The grievance and lawsuit also seek payment for damages associated with the amendments on behalf of YRC. Although the outcome of these legal proceedings cannot be predicted at this time, management believes the legal actions are necessary for ABF to achieve an equitable cost structure and to compete effectively in the LTL industry.

 

ABF Results

 

The following table sets forth a summary of operating expenses and operating loss as a percentage of revenue for ABF:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30

 

September 30

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

ABF OPERATING EXPENSES AND COSTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and benefits

 

63.3

%

67.1

%