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Arkansas Best 10-K 2009 Documents found in this filing:Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-K
for the fiscal year December 31, 2008.
for the transition period from to .
Commission file number 0-19969
ARKANSAS BEST CORPORATION
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code 479-785-6000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
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. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. o
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 the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
The aggregate market value of the Common Stock held by nonaffiliates of the registrant as of June
30, 2008, was $847,307,108.
The number of shares of Common Stock, $.01 par value, outstanding as of February 18, 2009, was
25,295,221.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed pursuant to Regulation 14A of
the Securities Exchange Act of 1934 in connection with the registrant’s Annual Stockholders’
Meeting to be held April 21, 2009, are incorporated by reference in Part III of this Form 10-K.
ARKANSAS BEST CORPORATION
FORM 10-K TABLE OF CONTENTS
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PART I
Forward-Looking Statements
This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of
the federal securities laws. All statements, other than statements of historical fact, included or
incorporated by reference in this Form 10-K, including, but not limited to, those under “Business”
in Item 1, “Risk Factors” in Item 1A, “Legal Proceedings” in Item 3 and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in Item 7, are forward-looking
statements. These statements are based on management’s belief and assumptions using currently
available information and expectations as of the date hereof, are not guarantees of future
performance and involve certain risks and uncertainties. Although we believe that the expectations
reflected in these forward-looking statements are reasonable, we cannot assure you that our
expectations will prove to be correct. Therefore, actual outcomes and results could materially
differ from what is expressed, implied or forecast in these statements. Any differences could be
caused by a number of factors including, but not limited to:
Cautionary statements identifying important factors that could cause actual results to differ
materially from our expectations are set forth in this Form 10-K, including, without limitation, in
conjunction with the forward-looking statements included or incorporated by reference in this Form
10-K that are referred to above. When considering forward-looking statements, you should keep in
mind the risk factors and other cautionary statements set forth in this Form 10-K in “Risk Factors”
under Item 1A. All forward-looking statements included or incorporated by reference in this Form
10-K and all subsequent written or oral forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety by the cautionary statements. The
forward-looking statements speak only as of the date made and, other than as required by law, we
undertake no obligation to publicly update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
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ITEM 1. BUSINESS
(a) General Development of Business
Corporate Profile
Arkansas Best Corporation (the “Company”), a Delaware corporation, 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 affiliated
subsidiaries of the Company (collectively “ABF”).
Historical Background
The Company was publicly owned from 1966 until 1988, when it was acquired in a leveraged buyout by
a corporation organized by Kelso & Company, L.P. (“Kelso”).
In 1992, the Company completed a public offering of its Common Stock, par value $.01 (the “Common
Stock”). The Company also repurchased substantially all of the remaining shares of Common Stock
beneficially owned by Kelso, thus ending Kelso’s investment in the Company.
In 1993, the Company completed a public offering of 1,495,000 shares of $2.875 Series A Cumulative
Convertible Exchangeable Preferred Stock (“Preferred Stock”). The Company’s Preferred Stock was
traded on The Nasdaq National Market under the symbol “ABFSP.” On July 10, 2000, the Company
purchased 105,000 shares of its Preferred Stock at $37.375 per share, for a total cost of $3.9
million. All of the shares purchased were retired. On August 13, 2001, the Company announced the
call for redemption of the 1,390,000 shares of Preferred Stock that remained outstanding. At the
end of the extended redemption period on September 14, 2001, 1,382,650 shares of the Preferred
Stock were converted to 3,511,439 shares of Common Stock. The remaining 7,350 shares of Preferred
Stock were redeemed at the redemption price of $50.58 per share for a total cost of $0.4 million.
The Company delisted its Preferred Stock from trading on The Nasdaq National Market on
September 12, 2001.
In 1995, pursuant to a tender offer, a wholly owned subsidiary of the Company purchased the
outstanding shares of common stock of WorldWay Corporation (“WorldWay”), for a total purchase price
of approximately $76.0 million. WorldWay was a publicly held company engaged through its
subsidiaries in motor carrier freight transportation.
In 1999, the Company acquired 2,457,000 shares of Treadco, Inc. common stock for $23.7 million via
a cash tender offer pursuant to a definitive merger agreement. As a result of the transaction,
Treadco became a wholly owned subsidiary of the Company. On September 13, 2000, Treadco entered
into a joint venture agreement with The Goodyear Tire & Rubber Company (“Goodyear”) to contribute
its business to a new limited liability company called Wingfoot Commercial Tire Systems, LLC
(“Wingfoot”). On April 28, 2003, the Company sold its 19.0% ownership interest in Wingfoot to
Goodyear for $71.3 million.
In 2001, the Company sold the stock of G.I. Trucking Company, a wholly owned subsidiary of the
Company acquired as part of the WorldWay transaction, for $40.5 million to a company formed by the
senior executives of G.I. Trucking Company and Estes Express Lines.
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ITEM 1. BUSINESS — continued
In 2003, Clipper Exxpress Company (“Clipper”), a wholly owned subsidiary of the Company acquired in
1994, sold all customer and vendor lists related to Clipper’s less-than-truckload (“LTL”) freight
business to Hercules Forwarding, Inc. of Vernon, California, for $2.7 million. With this sale,
Clipper exited the LTL business.
On June 15, 2006, the Company sold Clipper to a division of Wheels Group for $21.5 million. With
this sale, the Company exited the intermodal transportation business. (See Note P to the
consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.)
(b) Financial Information about Industry Segments
The response to this portion of Item 1 is included in Note L to the consolidated financial
statements included in Part II, Item 8 of this Annual Report on Form 10-K.
(c) Narrative Description of Business
General
The Company has one reportable operating segment – ABF. Note L to the consolidated financial
statements included in Part II, Item 8 of this Annual Report on Form 10-K contains additional
information regarding the Company’s operating segment for the year ended December 31, 2008.
Employees
At December 31, 2008, the Company and its subsidiaries had a total of 10,968 active employees of
which approximately 72% were members of labor unions.
Motor Carrier Freight Transportation
Less-Than-Truckload Motor Carrier Operations
General
The Company’s LTL motor carrier operations are conducted through ABF; ABF Freight System (B.C.),
Ltd.; ABF Freight System Canada, Ltd.; ABF Cartage, Inc.; and Land-Marine Cargo, Inc. (collectively
“ABF”).
LTL carriers service shipping customers by transporting a wide variety of large and small shipments
to geographically dispersed destinations. Typically, shipments are picked up at customers’ places
of business and consolidated at a local terminal. Shipments are consolidated by destination for
transportation by intercity units to their destination cities or to distribution centers. At
distribution centers, shipments from various terminals can be reconsolidated for other distribution
centers or, more typically, local terminals. Once delivered to a local terminal, a shipment is
delivered to the customer by local trucks operating from the terminal. In some cases, when one
large shipment or a sufficient number of different shipments at one origin terminal are going to a
common destination, they can be combined to make a full trailer load. A trailer is then dispatched
to that destination without rehandling. In addition to the traditional long-haul model, the Company
has implemented a regional network to facilitate its customers’ next-day and second-day delivery
needs. Development and expansion of the regional network required added labor flexibility,
strategically positioned freight exchange points and increased door capacity at a number of
key locations. Through a multi-phased program, ABF’s regional network now
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ITEM 1. BUSINESS — continued
covers the eastern
two-thirds of the United States. Marketing of the regional initiative was initiated in August 2006
in the East Coast states and in January 2007 in the South and Central regions. Further operational
changes, which were implemented in August 2008 and marketed beginning in September 2008, reduced
transit times in the regional network and in certain of ABF’s long-haul lanes. The expansion of the
regional network to the Western region of the United States may be implemented in 2009.
Competition, Pricing and Industry Factors
The trucking industry is highly competitive. The Company’s LTL motor carrier subsidiaries actively
compete for freight business with other national, regional and local motor carriers and, to a
lesser extent, with private carriage, freight forwarders, railroads and airlines. Competition is
based primarily on personal relationships, price and service. Competition for freight revenue,
however, has resulted in discounting which effectively reduces prices paid by shippers. In an
effort to maintain and improve its market share, the Company’s LTL motor carrier subsidiaries offer
and negotiate various discounts. ABF charges a fuel surcharge based upon changes in diesel fuel
prices compared to a national index. Throughout 2008, the fuel surcharge mechanism continued to
have strong market acceptance among ABF customers, although certain nonstandard arrangements with
some of ABF’s customers have limited the amount of fuel surcharge recovered.
The trucking industry, including the Company’s LTL motor carrier subsidiaries, is directly affected
by the state of the residential and commercial construction, manufacturing and retail sectors of
the North American economy. The trucking industry faces rising costs including government
regulations on safety, equipment design and maintenance, driver utilization and fuel economy. The
trucking 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. In addition, seasonal fluctuations also affect tonnage to be transported. Freight
shipments, operating costs and earnings also are affected adversely by inclement weather
conditions.
ABF competes with nonunion and union LTL carriers. Competitors include YRC (a combination of
companies previously known as Yellow Transportation and Roadway) and YRC Regional Transportation
(operated by YRC Worldwide, Inc.); FedEx Freight and FedEx National LTL (operated by FedEx
Corporation); UPS Freight (operated by UPS, Inc.); Con-way Freight (operated by Con-way, Inc.); Old
Dominion Freight Line, Inc.; Saia, Inc. and Vitran Corporation, Inc.
The final hours of service rules regulating driving time for commercial truck drivers, announced by
the U.S. Department of Transportation (“DOT”) in April 2003, became effective in January 2009. The
rules, which were implemented by ABF in January 2004, allow a driver to drive up to 11 hours within
a 14-hour nonextendable window from the start of the workday, following at least 10 consecutive
hours off duty. The hours of service rules have been challenged in federal court, and future
modifications to the rules, if any, may impact ABF’s operating practices. The operational impact of
these rules on ABF’s over-the-road linehaul relay network has been to provide modest opportunity to
increase driver and equipment utilization and improve transit times. The rules also have allowed
LTL carriers, such as ABF, to adjust their over-the-road linehaul relay network to take advantage
of the 11 hours of drive time during a tour of duty. Impacts on the truckload industry have
included a decline in driver utilization and flexibility and, as a result, truckload carriers have
increased charges for stop-off and detention services, making LTL carriers somewhat more
competitive on many larger shipments.
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ITEM 1. BUSINESS — continued
Insurance, Safety and Security
Generally, claims exposure in the motor carrier industry consists of cargo loss and damage,
third-party casualty and workers’ compensation. The Company’s motor carrier subsidiaries are
effectively self-insured for the first $1.0 million of each cargo loss, $1.0 million of each
workers’ compensation loss and generally $1.0 million of each third-party casualty loss. The
Company maintains insurance which it believes is adequate to cover losses in excess of such
self-insured amounts. However, the Company has experienced situations where excess insurance
carriers have become insolvent (see Note O to the consolidated financial statements included in
Part II, Item 8 of this Annual Report on Form 10-K). The Company pays assessments and fees to state
guaranty funds in states where it has workers’ compensation self-insurance authority. In some of
these states, depending on each state’s rules, the guaranty funds may pay excess claims if the
insurer cannot due to insolvency. However, there can be no certainty of the solvency of individual
state guaranty funds (see Note O to the consolidated financial statements included in Part II, Item
8 of this Annual Report on Form 10-K). The Company has been able to obtain what it believes to be
adequate coverage for 2009 and is not aware of problems in the foreseeable future which would
significantly impair its ability to obtain adequate coverage at market rates for its motor carrier
operations.
Since 2001, ABF has been subject to cargo security and transportation regulations issued by the
Transportation Security Administration. Since 2002, ABF has been subject to regulations issued by
the Department of Homeland Security. ABF is not able to accurately predict how past or future
events will affect government regulations and the transportation industry. ABF believes that any
additional security measures that may be required by future regulations could result in additional
costs; however, other carriers would be similarly affected.
ABF Freight System, Inc.
Headquartered in Fort Smith, Arkansas, ABF is the largest subsidiary of the Company. ABF accounted
for 96% of the Company’s consolidated revenues for 2008. ABF is one of North America’s largest LTL
motor carriers. ABF provides direct service to more than 98% of U.S. cities having a population of
30,000 or more. ABF provides interstate and intrastate direct service to more than 41,000
communities through 286 service centers in all 50 states, Canada, Guam, Puerto Rico and the U.S.
Virgin Islands. Through arrangements with trucking companies in Mexico, ABF provides motor carrier
services to customers in that country as well. ABF has been in continuous service since 1923. ABF
was incorporated in Delaware in 1982 and is the successor to Arkansas Motor Freight, a business
originally organized in 1935. Arkansas Motor Freight was the successor to a business originally
organized in 1923.
ABF offers national, inter-regional and regional transportation of general commodities through
standard, expedited and guaranteed LTL services. General commodities include all freight except
hazardous waste, dangerous explosives, commodities of exceptionally high value and commodities in
bulk. ABF’s shipments of general commodities differ from shipments of bulk raw materials, which are
commonly transported by railroad, truckload tank car, pipeline and water carrier.
General commodities transported by ABF include, among other things, food, textiles, apparel,
furniture, appliances, chemicals, nonbulk petroleum products, rubber, plastics, metal and metal
products, wood, glass, automotive parts, machinery and miscellaneous manufactured products. During
the year ended December 31, 2008, no single customer accounted for more than 3.0% of ABF’s
revenues, and the ten largest customers accounted for 7.2% of ABF’s revenues.
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ITEM 1. BUSINESS — continued
Employees
At December 31, 2008, ABF had a total of 10,512 active employees. Employee compensation and related
costs are the largest components of ABF’s operating expenses. In 2008, such costs amounted to
approximately 60% of ABF’s revenues. Approximately 75% of ABF’s employees are covered under a
collective bargaining agreement with the International Brotherhood of Teamsters (“IBT”). ABF’s
current five-year agreement with the IBT expires on March 31, 2013. The agreement provides for
compounded annual contractual wage and benefit increases of approximately 4%, subject to wage rate
cost-of-living adjustments, which includes ABF contributions to various multiemployer plans
maintained for the benefit of its employees who are members of the IBT. Amendments to the Employee
Retirement Income Security Act of 1974 (“ERISA”), pursuant to the Multiemployer Pension Plan
Amendments Act of 1980 (the “MPPA Act”), substantially expanded the potential liabilities of
employers who participate in such plans. Under ERISA, as amended by the MPPA Act, an employer who
contributes to a multiemployer pension plan and the members of such employer’s controlled group are
jointly and severally liable for their share of the plan’s unfunded vested liabilities in the event
the employer ceases to have an obligation to contribute to the plan or substantially reduces its
contributions to the plan (i.e., in the event of plan termination or withdrawal by the Company from
the multiemployer plans). See Note I to the consolidated financial statements included in Part II,
Item 8 of this Annual Report on Form 10-K for more specific disclosures regarding the multiemployer
plans.
Three of the largest LTL carriers are unionized and generally pay comparable amounts for wages and
benefits. However, certain unionized competitors of ABF were recently granted wage concessions
which could effectively lower their cost structures beginning in 2009 and as a result may
potentially increase pricing competition in the LTL market. Union companies typically have similar
wage costs and significantly higher fringe benefit costs compared to nonunion companies. The
Company believes that union companies also experience lower employee turnover, higher productivity,
lower loss and damage claims and lower accident rates compared to some nonunion firms. Due to its
national reputation, its working conditions and its wages and benefits, ABF has not historically
experienced any significant long-term difficulty in attracting or retaining qualified employees,
although short-term difficulties have been encountered in certain situations.
Environmental and Other Government Regulations
The Company is subject to federal, state and local environmental laws and regulations relating to,
among other things: emissions control, transportation of hazardous materials, contingency planning
for spills of petroleum products, disposal of waste oil, and underground storage tanks. New tractor
engine design requirements mandated by the Environmental Protection Agency (“EPA”) intended to
reduce emissions became effective on January 1, 2007, and more restrictive EPA emission-control
design requirements will take effect in 2010. The Company’s subsidiaries store fuel for use in
tractors and trucks in 71 underground tanks located in 23 states. Maintenance of such tanks is
regulated at the federal and, in some cases, state levels. The Company believes that it is in
substantial compliance with 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 under the Comprehensive Environmental
Response Compensation and Liability Act, or other federal or state environmental statutes, at
several hazardous waste sites.
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ITEM 1. BUSINESS — continued
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 $103,000 over the last ten years, primarily at seven sites) or believes its
obligations, other than those specifically accrued for with respect to such sites, would involve
immaterial monetary liability, although there can be no assurances in this regard.
At December 31, 2008 and 2007, the Company’s reserve for estimated environmental clean-up costs of
properties currently or previously operated by the Company totaled $1.1 million, which is included
in accrued expenses in the accompanying consolidated balance sheets. Amounts accrued reflect
management’s best estimate of the Company’s future undiscounted exposure related to identified
properties based on current environmental regulations. It is anticipated that the resolution of the
Company’s environmental matters could take place over several years. The Company’s estimate is
based on management’s experience with similar environmental matters and on testing performed at
certain sites.
Discontinued Operations – Intermodal Operations
The Company’s intermodal transportation operations were conducted through Clipper. On June 15,
2006, Clipper was sold and has been reported as discontinued operations in the accompanying
consolidated financial statements. (See Note P to the consolidated financial statements included in
Part II, Item 8 of this Annual Report on Form 10-K.)
(d) Financial Information About Geographic Areas
Classifications of operations or revenues by geographic location beyond the descriptions previously
provided are impractical and therefore are not provided. The Company’s foreign operations are not
significant.
(e) Available Information
The Company files its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, amendments to those reports, proxy and information statements and other information
electronically with the SEC. All reports and financial information filed with the SEC can be
obtained, free of charge, through the Company’s Web site located at arkbest.com or through the SEC
Web site located at sec.gov as soon as reasonably practical after such material is electronically
filed with the SEC. The information contained on our Web site does not constitute part of this
Annual Report on Form 10-K nor shall it be deemed incorporated by reference into this Annual Report
on Form 10-K.
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ITEM 1A. RISK FACTORS
Each of the following risk factors could adversely affect our business, operating results and
financial condition. Our operations include our primary operating subsidiary, ABF. For 2008, ABF
represented 96% of the Company’s consolidated revenues.
The transportation industry is affected by business risks that are largely out of our control, any
of which could significantly reduce our operating margins and income.
Factors that could have a negative impact on our performance in the future include general economic
factors; loss of key employees; antiterrorism measures; an increasingly competitive freight rate
environment; volatile fuel prices as well as the rates of changes in associated fuel surcharges and
the effect of fuel surcharge changes on securing increases in base freight rates and the inability
to collect fuel surcharges or to obtain sufficient fuel supplies; loss of third-party rail service
providers; increasing capital requirements; increases in new equipment costs and decreases in the
amount we are able to obtain for sales of our used equipment; emissions-control regulations;
decreases in the availability of new equipment; increases in the frequency and/or the severity of
workers’ compensation and/or third-party casualty claims; increases in workers’ compensation and/or
third-party casualty insurance premiums; violation of federal regulations and increasing costs for
compliance with regulations; a workforce stoppage by our employees covered under our collective
bargaining agreement; difficulty in attracting and retaining qualified drivers and/or dockworkers;
increases in the required contributions under our collective bargaining agreements with the IBT for
wage contributions and/or benefits contributions to multiemployer plans; a failure of our
information systems; a violation of an environmental law or regulation; and/or weather or seasonal
fluctuations. The foregoing risks are largely out of our control and any one of these risks could
have a significant adverse effect on our results of operations.
We are subject to general economic factors that are largely beyond our control, any of which could
significantly reduce our operating margins and income.
Our performance is affected by recessionary economic cycles and downturns in customers’ business
cycles and changes in their business practices. The pricing environment generally becomes more
competitive during economic recessions which could adversely affect the profit margin for our
services. Economic conditions could adversely affect our customers’ business levels, the amount of
transportation services they need and their ability to pay for our services. Customers encountering
adverse economic conditions represent a greater potential for uncollectible accounts receivable,
and, as a result, we may be required to increase our allowances for uncollectible accounts
receivable. In addition, customers could reduce the number of carriers they use by selecting
so-called “core carriers” as approved transportation service providers, and in some instances, we
may not be selected.
We are affected by the instability in the financial and credit markets that has created volatility
in various interest rates and returns on invested assets. We have historically been subject to
market risk on all or a part of our borrowings under bank credit lines, which have variable
interest rates. Changes in interest rates may increase our financing costs in the event we need to
borrow against our revolving credit agreement or obtain additional sources of financing. We could
experience losses on investments related to our cash surrender value of variable life insurance
policies which may reduce our net income.
Our nonunion defined benefit pension plan trust also holds investments in equity and debt
securities. Declines in the value of plan assets resulting from the instability in the financial
markets, general economic downturn or other economic factors beyond our control could further
diminish the funded status of the nonunion pension plan and potentially increase our requirement to
make contributions to the plan. Significant plan contribution
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ITEM 1A. RISK FACTORS — continued
requirements could reduce the cash available for working capital and other business needs and
opportunities. An increase in required pension plan contributions may adversely impact our
financial condition and liquidity. Substantial future investment losses on plan assets would also
increase pension expense in the years following the losses. Investment returns that differ from
expected returns are amortized to expense over the remaining active service period of plan
participants. An increase in pension expense may adversely impact our results of operations.
It is not possible to predict the effects of armed conflicts or terrorist attacks and subsequent
events on the economy or on consumer confidence in the United States or the impact, if any, on our
future results of operations or financial condition.
Our management team is an important part of our business and loss of key employees could impair our
success.
We benefit from the leadership and experience of our senior management team and depend on their
continued services to successfully implement our business strategy. The unexpected loss of key
employees could have an adverse effect on our operations and profitability.
Our business could be harmed by antiterrorism measures.
As a result of terrorist attacks on the United States, federal, state and municipal authorities
have implemented and may implement in the future various security measures, including checkpoints
and travel restrictions on large trucks. Although many companies will be adversely affected by any
slowdown in the availability of freight transportation, the negative impact could affect our
business disproportionately. For example, we offer specialized services that guarantee on-time
delivery. If security measures disrupt the timing of deliveries, we could fail to meet the needs of
our customers or could incur increased costs in order to do so.
We operate in a highly competitive industry and our business could suffer if our operating
subsidiaries were unable to adequately address downward pricing pressures and other factors that
could adversely affect their ability to compete with other companies.
Numerous competitive factors could adversely impact our operating results. These factors include:
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ITEM 1A. RISK FACTORS — continued
Market penetration of our service and growth initiatives may take longer than anticipated.
Our continuing development of more second-day service lanes, overnight lanes and same-day service
will require ongoing investment in personnel and infrastructure. In addition, the level of revenues
expected to be generated from these service initiatives may be impacted by actions of our
competitors and by general economic conditions. Depending on the timing and level of revenues
generated from these service initiatives, our results of operations and cash flows may be
negatively impacted.
We depend heavily on the availability of fuel for our trucks. Fuel shortages, increases in fuel
costs and the inability to collect fuel surcharges or obtain sufficient fuel supplies could have a
material adverse effect on our operating results.
The transportation industry is dependent upon the availability of adequate fuel supplies. We have
not experienced a lack of available fuel but could be adversely impacted if a fuel shortage were to
develop. Fuel prices have fluctuated significantly in recent years. For example, the average
monthly price per gallon, excluding taxes, that we paid for fuel in 2008 ranged from $1.75 to
$4.03. We charge a fuel surcharge based on changes in diesel fuel prices compared to a national
index. The 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 Annual Report on Form 10-K nor
shall it be deemed incorporated by reference into this Annual Report on Form 10-K.) 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 higher energy prices on other nonfuel-related expenses is difficult to ascertain.
We cannot predict, with reasonable certainty, future fuel price fluctuations, the impact of higher
energy prices on other cost elements, recoverability of higher fuel costs through fuel surcharges,
the effect of fuel surcharges on our overall rate structure or the total price that we will receive
from our 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. Whether fuel prices fluctuate or remain constant, operating income may be
adversely affected if competitive pressures limit our ability to recover fuel surcharges.
Throughout 2008, the fuel surcharge mechanism continued to have strong market acceptance among our
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 our
overall rate structure, the actual rate paid by customers is governed by market forces based on
value provided to the customer. As fuel prices decline, lower fuel surcharge levels may over time
improve our ability to increase other elements of margin, although there can be no assurances in
this regard. When fuel surcharges constitute a higher proportion of the total freight rate paid,
our customers are less receptive to increases in base freight rates. Prolonged periods of
inadequate base rate improvements could adversely impact operating profit as elements of costs,
including contractual wage rates, continue to increase.
We do not have any long-term fuel purchase contracts or any hedging arrangements to protect against
fuel price increases. Significant changes in diesel fuel prices and the associated fuel surcharge
may increase volatility in our fuel surcharge revenue and fuel-related costs. Volatile fuel prices
will continue to impact the base rate increases we are able to secure and could continue to have an
adverse effect on our operating margin.
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ITEM 1A. RISK FACTORS — continued
We depend on transportation provided by rail services and a disruption of this service could
adversely affect our operations.
In 2008, rail utilization was 11.1% of our total miles. If a disruption in transportation services
from the rail service providers occurred, we could be faced with business interruptions that could
cause us to fail to meet the needs of our customers. If these situations occurred, our results of
operations and cash flows could be adversely impacted.
We have significant ongoing capital requirements that could affect profitability if we were unable
to generate sufficient cash from operations.
We have significant ongoing capital requirements. If we are not able to generate sufficient cash
from operations in the future, our growth could be limited, we could have to utilize our existing
financing arrangements to a greater extent or enter into additional leasing arrangements, or our
revenue equipment may have to be held for longer periods, which would result in increased
maintenance costs. If these situations occurred, there could be an adverse effect on our
profitability.
Increased prices for new revenue equipment and decreases in the value of used revenue equipment
could adversely affect our earnings and cash flows.
Manufacturers have raised the prices of new equipment significantly due to increased costs of
materials and, in part, to offset their costs of compliance with new tractor engine design
requirements mandated by the EPA intended to reduce emissions. New EPA engine design requirements
became effective on January 1, 2007, and more restrictive EPA emission-control design requirements
will take effect in 2010. Further equipment price increases may result from these requirements. If
new equipment prices increase more than anticipated, we could incur higher depreciation and rental
expenses than anticipated. If we were unable to offset any such increases in expenses with freight
rate increases, our results of operations could be adversely affected. If the market value of
revenue equipment being used in our operations were to decrease, we could incur impairment losses
and our cash flows could be adversely affected.
During prolonged periods of decreased tonnage levels, we may make strategic fleet reductions. In
addition, other trucking companies may reduce fleet levels during recessionary economic cycles
which could result in an increase in the supply of used equipment. If market prices for used
revenue equipment decline, we could incur impairment losses on assets held for sale and our cash
flows could be adversely affected.
The engines used in our newer tractors are subject to new emissions-control regulations, which
could substantially increase operating expenses.
Tractor engines that comply with the EPA emission-control design requirements that took effect on
January 1, 2007 are generally less fuel-efficient and have increased maintenance costs compared to
engines in tractors manufactured before these requirements became effective. Although we anticipate
some improvement in fuel economy as a result of the technologies to be implemented for compliance
with the more stringent EPA requirements that are scheduled to be effective in 2010, our costs to
acquire compliant equipment could increase substantially. If we are unable to offset resulting
increases in equipment costs with higher freight rates, our results of operations could be
adversely affected.
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ITEM 1A. RISK FACTORS — continued
Decreases in the availability of new tractors and trailers could have a material adverse effect on
our operating results.
From time to time, some tractor and trailer vendors have reduced their manufacturing output due,
for example, to lower demand for their products in economic downturns or a shortage of component
parts. As conditions change, some of those vendors have had difficulty fulfilling increased demand
for new equipment. An inability to continue to obtain an adequate supply of new tractors or
trailers could have a material adverse effect on our results of operations and financial condition.
We operate in a highly regulated industry and costs of compliance with, or liability for violations
of, existing or future regulations could have a material adverse effect on our operating results.
Various federal and state agencies exercise broad regulatory powers over the transportation
business, generally governing such activities as authorization to engage in motor carrier
operations, safety, contract compliance, insurance requirements and financial reporting. We could
also become subject to new or more restrictive regulations, such as regulations relating to engine
emissions, drivers’ hours of service or ergonomics. Compliance with such regulations could
substantially reduce equipment productivity, and the costs of compliance could increase our
operating expenses.
In January 2004, we implemented the DOT rules regulating driving time for commercial truck drivers.
The rules have had a minimal impact upon our operations. However, future changes in these rules
could materially and adversely affect our operating efficiency and increase costs.
Our drivers and dockworkers also must comply with the safety and fitness regulations promulgated by
the DOT, including those relating to drug and alcohol testing and hours of service. The
Transportation Security Administration of the U.S. Department of Homeland Security has adopted
regulations that require all drivers who carry hazardous materials to undergo background checks by
the Federal Bureau of Investigation when they obtain or renew their licenses.
Failures to comply with DOT safety regulations or downgrades in our safety rating could have a
material adverse impact on our operations or financial condition. A downgrade in our safety rating
could cause us to lose the ability to self-insure. The loss of our ability to self-insure for any
significant period of time could materially increase insurance costs. In addition, we could
experience difficulty in obtaining adequate levels of coverage in that event.
Increases in license and registration fees could also have an adverse effect on our operating
results.
Our operations are subject to various environmental laws and regulations, the violation of which
could result in substantial fines or penalties.
We are subject to various environmental laws and regulations dealing with the handling of hazardous
materials and similar matters. We operate in industrial areas where truck terminals and other
industrial activities are located and where groundwater or other forms of environmental
contamination could occur. We also store fuel in underground tanks at some facilities. Our
operations involve the risks of fuel spillage or leakage, environmental damage and hazardous waste
disposal, among others. If we were involved in a spill or other accident involving hazardous
substances, or if we were found to be in violation of applicable laws or regulations, it could have
a material adverse effect on our business and operating results. If we should fail to comply with
applicable environmental regulations, we could be subject to substantial fines or penalties and to
civil and criminal liability.
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ITEM 1A. RISK FACTORS — continued
Concern over climate change, including the impact of global warming, has led to significant
legislative and regulatory efforts to limit greenhouse gas emissions, and some form of federal
climate change legislation is possible in the relatively near future. Increased regulation
regarding greenhouse gas emissions, including diesel engine emissions, could impose substantial
costs on us that may adversely impact our results of operations. Until the timing, scope and extent
of any future regulation becomes known, we cannot predict its effect on our cost structure or our
operating results.
We may be unsuccessful in realizing all or any part of the anticipated benefits of any future
acquisitions.
We evaluate acquisition candidates from time to time and may acquire assets and businesses that we
believe complement our existing assets and business. Acquisitions may require substantial capital
or the incurrence of substantial indebtedness. If we consummate any future acquisitions, our
capitalization and results of operations may change significantly. The degree of success of
acquisitions will depend, in part, on our ability to realize anticipated cost savings and growth
opportunities. Our success in realizing these benefits and the timing of this realization depends
in part upon the successful change of ownership structure. The difficulties of managing this change
include, among others: unanticipated issues in the assimilation and consolidation of information,
communications and other systems; inefficiencies and difficulties that arise because of
unfamiliarity with potentially new geographic areas and new assets and the businesses associated
with them; retaining customers and key employees; consolidating corporate and administrative
infrastructures; the diversion of management’s attention from ongoing business concerns; the effect
on internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act
of 2002; and unanticipated issues, expenses and liabilities. The diversion of the attention of
management from our current operations to the acquired operations and any difficulties encountered
in combining operations could prevent us from realizing the full benefits anticipated to result
from the acquisitions and could adversely impact our results of operations and financial condition.
Also, following an acquisition, we may discover previously unknown liabilities associated with the
acquired business for which we have no recourse under applicable indemnification provisions.
Ongoing claims expenses could have a material adverse effect on our operating results.
Our self-insurance retention levels are currently $1.0 million for each workers’ compensation loss,
$1.0 million for each cargo loss and generally $1.0 million for each third-party casualty loss. For
medical benefits, we currently self-insure up to $175,000 per person, per claim year. We maintain
insurance for liabilities above the amounts of self-insurance to certain limits. If the frequency
and/or severity of claims increase, our operating results could be adversely affected. The timing
of the incurrence of these costs could significantly and adversely impact our operating results
compared to prior periods. In addition, if we were to lose our ability to self-insure for any
significant period of time, insurance costs could materially increase and we could experience
difficulty in obtaining adequate levels of insurance coverage in that event.
Increased insurance premium costs could have an adverse effect on our operating results.
Our recent insurance renewals did not result in significant changes in premiums; however, insurance
carriers are expected to increase premiums for many companies, including transportation companies,
in the coming years. We could experience additional increases in our insurance premiums in the
future. If our insurance or claims expenses increase and we were unable to offset the increase with
higher freight rates, our earnings could be adversely affected.
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ITEM 1A. RISK FACTORS — continued
We depend on our employees to support our operating business and future growth opportunities. If
our relationship with our employees were to deteriorate, we could be faced with labor disruptions
or stoppages, which could have a material adverse effect on our business, reduce our operating
results and place us at a disadvantage relative to nonunion competitors.
Most of our union employees are covered under a five-year collective bargaining agreement with the
IBT which expires on March 31, 2013. The agreement with the IBT provides for compounded annual
contractual wage and benefit increases of approximately 4%, subject to wage rate cost-of-living
adjustments.
We compete against both union and nonunion LTL carriers. Union companies typically have similar
wage costs and significantly higher fringe benefit costs compared to nonunion companies. We have
not historically experienced any significant long-term difficulty in attracting or retaining
qualified drivers, although short-term difficulties have been encountered in certain situations,
such as periods of significant increases in tonnage levels. Difficulty in attracting and retaining
qualified drivers or increases in compensation or fringe benefit costs could affect our
profitability and our ability to grow. If we were unable to continue to attract and retain
qualified drivers, we could incur higher driver recruiting expenses or a loss of business.
We could be obligated to make additional significant contributions to multiemployer pension plans.
Under the provisions of the Taft-Hartley Act, retirement and health care benefits for our
contractual employees are provided by a number of multiemployer plans. The trust funds for these
plans are administered by trustees, an equal number of whom generally are appointed by the IBT and
certain management carrier organizations or other appointing authorities for employer trustees as
set forth in the fund’s trust agreements. We contribute to these plans monthly based generally on
the time worked by our contractual employees, as specified in the collective bargaining agreement
and other supporting supplemental agreements. We recognize as expense the contractually required
contribution for the period and recognize as a liability any contributions due and unpaid.
In 2006, the Pension Protection Act (the “Act”) became law and together with related regulations
established new minimum funding requirements for multiemployer pension plans. The Act mandates that
multiemployer pension plans that are below certain funding levels or that have projected funding
deficiencies adopt a funding improvement plan or a rehabilitation program to improve the funding
levels over a defined period of time. The Act also accelerates the timing of annual funding notices
and requires additional disclosures from multiemployer pension plans if such plans fall below the
required funding levels. In December 2008, the Worker, Retiree, and Employer Recovery Act of 2008
(the “Recovery Act”) became law. For plan years beginning October 1, 2008 through September 30,
2009, the Recovery Act allows multiemployer plans the option to freeze their funding certification
based on the funding status of the previous plan year. In addition, for multiemployer plans in
endangered or critical status in plan years beginning in 2008 or 2009, the Recovery Act provides a
three-year extension of the plan’s funding improvement or rehabilitation period.
We currently contribute to 26 multiemployer pension plans, which vary in size and in funding
status. In the event of the termination of certain multiemployer pension plans or if ABF were to
withdraw from certain multiemployer pension plans, we would have material liabilities, amounts of
which could be in excess of our ability to adequately finance, for our share of the unfunded vested
liabilities of each such plan. We have not received notification of any plan termination, and we do
not currently intend to withdraw from these plans. Therefore, we believe the occurrence of events
that would require recognition of liabilities for our share of unfunded vested benefits is remote.
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ITEM 1A. RISK FACTORS — continued
Approximately 50% of our multiemployer pension contributions are made to the Central States
Southeast and Southwest Area Pension Fund (the “Central States Pension Fund”). We understand that
the funded percentage of the Central States Pension Fund was 73.2% as of January 1, 2008, but that
the funding percentage has likely significantly decreased during 2008 due to declines in the
overall financial markets. In March 2008, the Central States Pension Fund reported that it adopted
a rehabilitation plan as a result of its actuarial certification for the plan year beginning
January 1, 2008 which, as a result of the Act, placed the Central States Pension Fund in “critical
status.” In 2005, the U.S. Internal Revenue Service extended the period over which the Central States Pension
Fund amortizes unfunded liabilities by ten years. Due to the decline in asset values associated
with the returns in the financial markets during 2008, the funding level of the Central States
Pension Fund for the plan year beginning January 1, 2009 may drop below the targeted funding ratio
set forth as a condition of the ten-year amortization extension. In early 2009, the Central States
Pension Fund requested that the IRS suspend the funded ratio condition of the ten-year amortization
extension. The Central States Pension Fund has communicated to the Company that it believes that
the request for suspension of the funded ratio will be granted due, in part, to the fact that the
amortization extension approved by the IRS in 2005 expressly indicated that modifications of
conditions would be considered in the event of unforeseen market fluctuations which cause the plan
to fail the funded ratio condition for a certain plan year. In the unlikely event the IRS denies
the request to suspend the funded ratio condition of the amortization extension, revocation would
apply retroactively to the 2004 plan year, which would result in a material liability for ABF’s
share of the resulting funding deficiency, the extent of which is currently unknown to the Company.
The Company believes that the occurrence of events that would require recognition of liabilities
for ABF’s share of a funding deficiency is remote.
We anticipate that a number of other plans in which we participate will have to adopt either a
funding improvement plan or a rehabilitation program, depending on their current funding status as
required by the Act. Based upon currently available information, we believe that the contribution
rates under the new collective bargaining agreement will comply with any rehabilitation plan that
may be adopted for the majority of other multiemployer pension plans in which we participate. If
the contribution rates in the collective bargaining agreement fail to meet the requirements
established by the rehabilitation or funding improvement plan required by the Act for underfunded
plans, the Act would impose additional contribution requirements in the form of a surcharge of an
additional 5% to 10%. However, under our five-year collective bargaining agreement that became
effective April 1, 2008, any surcharges that may be required by the Act are covered by the
contractual contribution rate and should not increase our overall contribution obligation. The
plan’s trustees have the ability to take a wide range of actions to improve the funding status of
the plan which include adopting an automatic five-year extension of the amortization period
available under the Act; requesting an additional five-year extension from the IRS; obtaining
changes to or waivers of the requirements used by the plan to calculate funding levels; or
modifying pension benefits.
The underfunded status of many plans in which we participate occurred over many years, and we
believe that an improved funded status will also take time to be achieved. We believe that the
trustees of these funds will take appropriate measures to fulfill their fiduciary duty to preserve
the integrity of the plans utilizing a combination of several possible initiatives as they have
done in the past, although we cannot make any assurances in this regard. While increasing employer
contributions is one potential remedy to address the underfunded status, it is our understanding
that our annual contribution increases are limited to negotiated contribution rates through March
2013 as provided in the current collective bargaining agreement, which also complies with the
Central States Pension Fund’s rehabilitation plan. Other alternatives that may be pursued by the
trustees of underfunded plans include reducing or eliminating certain “adjustable benefits” of the
plan or redesigning the plan structure. Furthermore, additional legislative changes or action taken
by governmental agencies could provide relief.
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ITEM 1A. RISK FACTORS — continued
As previously mentioned, the highly competitive industry in which we operate could impact the
viability of contributing employers. The effect of any one or combination of these business risks,
which are outside our control, has the potential to affect the funding status of the multiemployer
pension plans, potential withdrawal liabilities and our future contribution requirements.
Our information technology systems are subject to certain risks that are beyond our control.
We depend on the proper functioning and availability of our information systems in operating our
business. These systems include our communications and data processing systems. Our information
systems are protected through physical and software safeguards. However, they are still vulnerable
to fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and
similar events. To mitigate the potential for such occurrences to disrupt business operations at
our corporate headquarters, we have implemented various systems including redundant
telecommunication facilities; a fire suppression system to protect our on-site data center; and a
generator that is able to adequately supply power to the headquarters building in the event of
power outages. We have a catastrophic disaster recovery plan and alternate processing capability,
which is designed so that critical data processes should be fully operational within 48 hours. This
plan provides for work space, phones, and desktop computers for employees who are critical to basic
operations within 48 hours of a catastrophe which renders our corporate headquarters unusable. An
emergency communications Web site has also been constructed to provide information to our employees
and customers during such a disaster. We have business interruption insurance, including, in
certain circumstances, insurance against terrorist attacks under the federal Terrorism Risk
Insurance Act of 2002, which would offset losses up to certain coverage limits in the event of a
catastrophe. However, a significant system failure, security breach, disruption by a virus or other
damage could still interrupt or delay our operations, damage our reputation and cause a loss of
customers.
Our results of operations can be impacted by seasonal fluctuations or adverse weather conditions.
We can be impacted by seasonal fluctuations which affect tonnage and shipment levels. Freight
shipments, operating costs and earnings can also be affected adversely by inclement weather
conditions.
We are also subject to risks and uncertainties that affect many other businesses, including:
Any liability resulting from and the cost of defending against class-action litigation, such as
alleged violations of anti-trust laws, wage-and-hour and discrimination claims, and any other legal
proceedings;
Widespread outbreak of an illness or communicable disease or public health crisis; and
Operational or market disruptions arising from natural calamities, such as hurricanes, and from
illegal acts including terrorist attacks.
Our results of operations and financial condition could be adversely affected by an unfavorable
outcome resulting from these risks and uncertainties.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
The Company owns its executive office building in Fort Smith, Arkansas, which contains
approximately 189,000 square feet.
ABF
ABF currently operates out of 276 terminal facilities and 10 distribution centers. ABF owns 123 of
these facilities and leases the remainder from nonaffiliates. ABF’s distribution centers are as
follows:
ITEM 3. LEGAL PROCEEDINGS
Various legal actions, the majority of which arise in the normal course of business, are pending.
None of these legal actions are expected to have a material adverse effect on the Company’s
financial condition, cash flows or results of operations. The Company maintains 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.
On July 30, 2007, Farm Water Technological Services, Inc., d/b/a Water Tech, and C.B.J.T., d/b/a
Agricultural Supply, on behalf of themselves and other plaintiffs, filed a putative class action
lawsuit in the United States District Court for the Southern District of California against the
Company and eleven other companies engaged in the LTL trucking business. This lawsuit alleged that
the carriers violated U.S. antitrust laws regarding fuel surcharges and sought unspecified treble
damages allegedly sustained by class members, along with injunctive relief, attorney’s fees and
costs of litigation. After the original suit was filed, other plaintiffs filed similar cases in
various courts across the country. On December 20, 2007, the United States Judicial Panel on
Multidistrict Litigation entered an order centralizing and transferring the pending lawsuits for
pretrial proceedings to the United States District Court for the Northern District of Georgia (the
“Court”) as requested by the defendants, including the Company. On January 28, 2009, the Court
granted the defendants’ motion to dismiss the case ruling that the plaintiffs’ complaint did not
allege sufficient facts to properly state a claim upon which relief could be granted under the
legal standards applicable to antitrust conspiracy claims. The Court has allowed the plaintiffs
until March 16, 2009 to move to amend their complaint in order to add additional detailed
allegations. The Company cannot predict the final outcome of this matter, including any attempted
appeal of the Court’s ruling by the plaintiffs or any attempt by the plaintiffs to amend their
complaint. However, the Company believes that the allegations in this litigation are without merit
and intends to contest such allegations and defend itself vigorously.
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ITEM 3. LEGAL PROCEEDINGS — continued
If an adverse final outcome were to occur, it could have a material adverse effect on the Company’s
consolidated financial condition, cash flows and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter ended December 31,
2008.
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PART II
Market Information, Dividends and Holders
The Common Stock of Arkansas Best Corporation (the “Company”) trades on The NASDAQ Stock Market LLC
(“NASDAQ”) 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:
At February 18, 2009, there were 25,295,221 shares of the Company’s Common Stock outstanding, which
were held by 342 stockholders of record.
The Company expects to continue to pay quarterly dividends in the foreseeable future, although
there can be no assurances in this regard since future dividends will be at the discretion of the
Board of Directors and will depend upon the Company’s future earnings, capital requirements,
financial condition and other factors. On January 28, 2009, the Board of Directors of the Company
declared a dividend of $0.15 per share to stockholders of record on February 11, 2009.
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Issuer Purchases of Equity Securities
The Company has a program to repurchase its Common Stock in the open market or in privately
negotiated transactions. The Company’s Board of Directors authorized stock repurchases of up to
$25.0 million in 2003 and an additional $50.0 million in 2005. 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.
The following table summarizes the Company’s repurchase activity for the three months ended
December 31, 2008:
The total shares repurchased by the Company, since the inception of the program, have been made at
an average price of $35.11 per share.
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ITEM 6. SELECTED FINANCIAL DATA
The following table includes selected financial and operating data for the Company as of and for
each of the five years in the period ended December 31, 2008. This information should be read in
conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results
of Operations,” and Item 8, “Financial Statements and Supplementary Data,” in Part II of this
Annual Report on Form 10-K.
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Arkansas Best Corporation (the “Company”), a Delaware corporation, 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 affiliated
subsidiaries of the Company (collectively “ABF”).
Critical Accounting Policies
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 under different assumptions or conditions.
The Company’s accounting policies (see Note B to the Company’s consolidated financial statements
included in Part II, Item 8 of this Annual Report on Form 10-K) 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.
Revenue Recognition: Management of the Company utilizes a bill-by-bill analysis to establish
estimates of revenue in transit for recognition in the appropriate 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 Revenue and Expense Recognition for Freight Services in
Process (“EITF 91-9”), 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.
Allowance for Doubtful Accounts: 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 due to 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.
Revenue Equipment: The Company utilizes tractors and trailers in its motor carrier freight
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.
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Goodwill: Goodwill represents the excess of the purchase price in a business combination over the
fair value of net tangible and intangible assets acquired. The Company’s goodwill, which totaled
$63.9 million at December 31, 2008, is attributable to ABF as a result of a 1988 leveraged buyout.
Under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
goodwill amounts are not amortized, but rather are evaluated for impairment annually or more
frequently if indicators of impairment exist.
The goodwill impairment evaluation is performed by comparing the aggregate carrying amount of ABF
to its fair value utilizing a combination of valuation methods, including earnings before interest,
taxes, depreciation and amortization multiples and net income multiples (market approaches) and the
present value of discounted cash flows (income approach). The discounted cash flows model utilized
in the income approach incorporates discount rates and projections of future revenue growth rates,
operating margins and net capital expenditures. The projections used are updated annually and will
change over time based on historical performance and changing business conditions. ABF’s operating
performance is affected by recessionary economic cycles and changes in customers’ business cycles
and in their business practices. Management’s assumptions about fair values require considerable
judgment because changes in broad economic factors and industry factors can result in variable and
volatile fair values. Assumptions with respect to rates used to discount cash flows are dependent
upon market interest rates and the cost of capital for the Company and the industry at a point in
time. Changes in cash flow assumptions or other factors that negatively impact the fair value of
the operations would influence the evaluation and may result in the determination that the goodwill
is impaired. The impact of recognizing an impairment of ABF’s goodwill could be material to the
Company’s financial position, as well as its results of operations. The Company has performed the
annual impairment testing on its ABF goodwill as of January 1, 2009, 2008 and 2007 and found there
to be no impairment at any of these dates.
Nonunion Pension Expense: The Company has a noncontributory defined benefit pension plan covering
substantially all noncontractual employees hired before January 1, 2006. Benefits are generally
based on years of service and employee compensation. The Company’s nonunion pension expense and
liability are estimated based upon a number of assumptions and using the services of a third-party
actuary. The assumptions with the greatest impact on the Company’s expense are the expected return
on plan assets, the discount rate used to discount the plan’s obligations and the assumed
compensation cost increase.
The following table provides the key assumptions the Company used for 2008 compared to those it
anticipates using for 2009 nonunion pension expense:
The assumptions used directly impact the nonunion 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 discount rate is determined by matching projected cash distributions with the
appropriate corporate bond yields in a yield curve analysis. A quarter percentage point decrease in
the discount rate would increase annual nonunion pension expense by $0.3 million on a pre-tax
basis. The Company establishes the expected rate of return on 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. The long-term expected rate of return
utilized in determining the Company’s
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2008 nonunion pension plan expense was not achieved due to
the decline in the overall financial markets during 2008 which was the primary cause of a $54.4
million pre-tax increase in unamortized actuarial losses from December 31, 2007 to December 31,
2008. The expected rate of return on plan assets is a long-term rate and the Company can make no
assurances that the rate will be achieved. A decrease in expected returns on plan assets
increases the Company’s nonunion pension expense. A quarter percentage point decrease in the
expected rate of return on plan assets would increase annual pension expense by approximately $0.4
million on a pre-tax basis. The Company establishes the assumed rate of compensation increase
considering historical changes in compensation combined with an estimate of compensation rates for
the next two years. A quarter percentage point decrease in the rate of compensation increase would
decrease annual pension expense by approximately $0.5 million on a pre-tax basis.
At December 31, 2008, the Company’s nonunion pension plan had $81.8 million in unamortized
actuarial losses, for which the amortization period is approximately nine 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 2009 nonunion pension expense
will include amortization of actuarial losses of approximately $8.8 million. The comparable
amounts for 2008 and 2007 were $3.3 million and $4.2 million, respectively. The Company’s 2009
total nonunion pension expense will be available before its first quarter 2009 Form 10-Q filing
and is expected to be approximately twice the 2008 nonunion pension expense of $9.6 million based
upon currently available information.
Share-Based Compensation: Effective January 1, 2006, the Company adopted the fair value recognition
provisions of FASB Statement No. 123(R), Share-Based Payment (“FAS 123(R)”), using the
modified-prospective transition method, which requires that the fair value of unvested stock
options be recognized in the income statement over the remaining vesting period. See Notes B and J
to the Company’s consolidated financial statements included in Part II, Item 8 of this Annual
Report on Form 10-K for disclosures related to share-based compensation. The grant date fair value
of stock options, which were awarded prior to the adoption of FAS 123(R), was estimated based on a
Black-Scholes-Merton option pricing model that utilizes several assumptions, including expected
volatility, weighted-average life and a risk-free interest rate. Expected volatilities were
estimated using the historical volatility of the Company’s stock, based upon the expected term of
the option. The Company was not aware of information in determining the grant date fair value that
would have indicated that future volatility would be expected to be significantly different than
historical volatility. The expected term of the option was derived from historical data and
represented the period of time that options were estimated to be outstanding. The risk-free
interest rate for periods within the estimated life of the option was based on the U.S. Treasury
Strip rate in effect at the time of the grant. The Company has not granted stock options since
January 2004. Recognition of compensation expense related to the cost of stock options, which was
based on estimated grant date fair values and assumed forfeitures, was completed in December 2008.
Since 2005, the Company has granted restricted stock and restricted stock units under its
share-based compensation program. The Company amortizes the fair value of restricted stock and
restricted stock unit awards, which is based on the closing market price on the date of grant, to
compensation expense generally on a straight-line basis over the vesting period, taking into
consideration an estimate of shares expected to vest.
Insurance Reserves: The Company is self-insured up to certain limits for workers’ compensation and
certain third-party casualty claims. For 2008 and 2007, these limits are $1.0 million for each
workers’ compensation loss and generally $1.0 million for each third-party casualty loss. Workers’
compensation and third-party casualty claims liabilities recorded in the financial statements
totaled $72.3 million and $78.3 million at December 31, 2008 and 2007, respectively. The Company
does not discount its claims liabilities.
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Management estimates the development of the claims by applying the Company’s historical claim
development factors to incurred claim amounts. Actual payments may differ from management’s
estimates as a result of a
number of factors, including increases in medical costs and other
case-specific 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.
Recent Accounting Pronouncements
In February 2008, the FASB
issued FASB Staff Position FAS 157-2, Effective Date of FASB
Statement 157 (“FSP 157-2”), which provides a
one-year deferral of the effective date of Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (“FAS 157”) for nonfinancial assets and liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least annually. FAS 157
clarifies the definition of fair value, establishes a framework for measuring fair value and
expands the disclosures on fair value assumptions. In accordance with FSP 157-2, the application of
FAS 157 to nonfinancial assets and liabilities was effective for the Company beginning January
1, 2009. The Company does not expect the application of FAS 157 to its nonfinancial assets and
liabilities to have a material effect on its consolidated financial statements.
Liquidity and Capital Resources
The Company’s primary sources of liquidity are cash generated by operations, short-term investments
and borrowing capacity under its revolving credit agreement.
Cash Flow and Short-Term Investments: Components of cash and cash equivalents and short-term
investments at December 31 were as follows:
During the first quarter of 2008, the Company transitioned out of its short-term investments in
auction rate debt and preferred equity securities, resulting in the sale of $78.6 million of
short-term investments with no realized gains or losses. As of December 31, 2008, short-term
investments consist of FDIC-insured certificates of deposit, which are recorded at cost plus
accrued interest. Money market funds are recorded at fair value based on quoted market prices.
During 2008, cash provided from operations of $105.3 million, proceeds from asset sales of $17.1
million and proceeds from stock option exercises of $3.0 million were used to purchase revenue
equipment (tractors and trailers used primarily in ABF’s operations) and other property and
equipment totaling $58.7 million and pay dividends on Common Stock of $15.3 million. The decline in
cash provided by operations during 2008 compared
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to 2007 primarily reflects the impact of the
weaker freight tonnage environment on ABF’s operating income. In addition, contributions to the
nonunion pension plan were $25.0 million in 2008 versus $5.0 million in 2007.
During 2007, cash provided from operations of $143.1 million, proceeds from asset sales of $12.1
million and proceeds from stock option exercises of $2.7 million were used to purchase revenue
equipment and other property and equipment totaling $96.7 million, make payments on long-term debt
of $1.4 million, purchase 125,000 shares
of the Company’s Common Stock for $4.9 million and pay
dividends on Common Stock of $15.2 million. The decline in cash provided by operations during 2007
compared to 2006 primarily reflects the impact of the weaker freight tonnage environment on ABF’s
operating income.
During 2006, cash provided from operations of $168.5 million, proceeds from the sale of Clipper
Exxpress Company (“Clipper”) of $21.5 million and proceeds from asset sales of $11.9 million were
used to purchase revenue equipment and other property and equipment totaling $147.5 million, pay
dividends on Common Stock of $15.3 million and purchase 650,000 shares of the Company’s Common
Stock for $26.9 million.
Credit Agreement: The Company has a revolving credit agreement (the “Credit Agreement”) dated May
4, 2007, with a syndicate of financial institutions. The Credit Agreement, which has a maturity
date of May 4, 2012, provides for up to $325.0 million of revolving credit loans (including a
$150.0 million sublimit for letters of credit). The Credit Agreement allows the Company to request
extensions of the maturity date for a period not to exceed two years, subject to approval of a
majority of the participating financial institutions. The Credit Agreement also allows the Company
to request an increase in the amount of revolving credit loans of up to $200.0 million to an
aggregate amount of $525.0 million, to the extent commitments are received from participating
lenders.
Interest rates under the Credit Agreement are at variable rates as defined by the Credit Agreement.
The Credit Agreement contains a pricing grid, based on the Company’s senior debt ratings, that
determines its Eurodollar margin, facility fees, utilization fees and letter of credit fees. As of
February 20, 2009, the Company has a senior unsecured debt rating of BBB+ with a stable outlook by
Standard & Poor’s Rating Service and a senior unsecured debt rating of Baa2 with a stable outlook
by Moody’s Investors Service, Inc. The Company has no downward rating triggers that would
accelerate the maturity of amounts drawn under the Credit Agreement. The Credit Agreement requires
the payment of a utilization fee if the borrowings under the Credit Agreement exceed 50% of the
facility amount. The Credit Agreement contains various customary covenants, which limit, among
other things, indebtedness and dispositions of assets and which require the Company to maintain
compliance with certain quarterly financial ratios. As of December 31, 2008, the Company was in
compliance with the covenants.
Borrowing capacity under the Credit Agreement is presented below:
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Contractual Obligations: The following table provides the aggregate annual contractual obligations
of the Company including debt, capital and operating lease obligations, purchase obligations and
near-term estimated benefit plan distributions as of December 31, 2008:
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Effective January 1, 2006, the Compensation Committee of the Company’s Board of Directors
elected to close the supplemental pension benefit plan and deferred salary agreement
programs to new entrants. In place of these programs, officers appointed after 2005
participate in a long-term cash incentive plan that is based 60% on the Company’s three-year
average return on capital employed and 40% on the Company achieving specified levels of
profitability or earnings per share growth, as defined in the plan.
The Company does not expect to have required minimum contributions, but could make
tax-deductible contributions to its nonunion pension plan in 2009. Based upon current
information, the Company anticipates making 2009 contributions of up to $25.0 million, which
would not exceed the maximum tax-deductible contributions. As of December 31, 2008, the
nonunion pension plan was underfunded by $51.4 million on a projected benefit obligation
basis (see Note I to the Company’s consolidated financial statements included in Part II,
Item 8 of this Annual Report on Form 10-K).
ABF contributes to multiemployer health, welfare and pension plans based on the time worked
by its contractual employees, as specified in the collective bargaining agreement and other
supporting supplemental agreements (see Note I to the Company’s consolidated financial
statements included in Part II, Item 8 of this Annual Report on Form 10-K).
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Capital Expenditures: The following table sets forth the Company’s historical capital expenditures,
net of proceeds from asset sales, for the periods indicated below:
The amounts presented in the table above include purchases financed with capital leases of $0.3
million in 2008 and $1.5 million in 2007. No capital lease obligations were incurred in 2006.
ABF’s 2008 net capital expenditures were below 2007 levels primarily reflecting $14.9 million less
spending on road trailers and $9.8 million less spending on road tractors, with the remaining
decrease due to lower expenditures related to city delivery and other equipment.
In 2007, ABF spent $18.0 million less on additions and replacements of road tractors and city
delivery equipment than in 2006. ABF’s lower net capital expenditures in 2007 compared to 2006
were also impacted by rail trailer purchases of $11.4 million in 2006.
In 2009, the Company estimates net capital expenditures to be in a range of approximately $45.0
million to $50.0 million, which relates primarily to ABF. The low end of this expected 2009 range
consists of road and city equipment replacements of approximately $40.0 million and real estate
and other capital expenditures (including dock/yard equipment and technology) of approximately
$5.0 million. The 2009 plan does not include an expansion in the road tractor and doubles-trailer
fleets. The Company has the flexibility to adjust planned 2009 capital expenditures as business
levels dictate. There is the potential for additional 2009 capital expenditures above the low-end
figure of $45.0 million. These expenditures could include purchases for real estate, if needs and
opportunities arise.
Depreciation and amortization expense is estimated to be approximately $70.0 million to $75.0
million in 2009.
Other Liquidity Information: The Company has generated between $105.3 million and $168.5 million of
operating cash flow annually for the years 2006 through 2008. Management believes cash generated by
operations, cash and cash equivalents, short-term investments, and amounts available under the
existing Credit Agreement will be sufficient for the foreseeable future to finance the Company’s
lease commitments; letter of credit commitments; quarterly dividends; stock repurchases; nonunion
benefit plan contributions; unfunded supplemental pension benefits; capital expenditures; health,
welfare and pension contributions under collective bargaining agreements; and other expenditures.
The recent disruption in the credit markets has had a significant adverse impact on a number of
financial institutions. At this point in time, the Company’s liquidity has not been significantly
impacted by the current credit environment, and due, in part, to the Credit Agreement maturing in
May 2012, management does not expect that liquidity will be materially impacted in the near future.
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The Company expects to continue to pay quarterly dividends in the foreseeable future, although
there can be no assurances in this regard since future dividends are dependent upon future
earnings, capital requirements, the Company’s financial condition and other factors.
Financial Instruments: The Company has not historically entered into financial instruments for
trading purposes, nor has the Company historically engaged in a program for fuel price hedging. No
such instruments were outstanding as of December 31, 2008 or 2007.
Off-Balance-Sheet Arrangements
The Company’s off-balance-sheet arrangements include future minimum rental commitments, net of
noncancelable subleases, of $40.0 million under operating lease agreements (see Note F to the
Company’s consolidated financial statements included in Part II, Item 8 of this Annual Report on
Form 10-K). 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.
Results of Operations
Executive Overview
Arkansas Best Corporation 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 affiliated subsidiaries of the Company (collectively “ABF”). ABF
represented 96% of the Company’s consolidated revenues for the year ended December 31, 2008.
On an ongoing basis, ABF’s ability to operate profitably and generate cash is impacted by tonnage
(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 operations are affected by general economic conditions, as well as a number of other
competitive factors that are more fully described in the General Development of Business and Risk
Factors sections of this Annual Report on Form 10-K. As evidenced by economic measures, including
the Institute for Supply Management Manufacturing Index, the American Trucking Associations’
Tonnage-Weighted Industrial Production Index and housing starts, the instability in the global
financial and credit markets combined with its influence on business and consumer confidence levels
has contributed to an unfavorable economic environment. The economic downturn has adversely
impacted our customers’ business activities which has had a corresponding adverse effect on ABF’s
tonnage levels and limited ABF’s ability to secure adequate pricing for its services. In the fourth
quarter of 2008, the Company reported a consolidated net loss of $11.0 million after taxes,
primarily reflecting the operating results of ABF which were impacted by an 11.5% decline in
tonnage per day compared to the fourth quarter of 2007. As a result of the prolonged period of an
unfavorable economic environment and the rapid decline in tonnage experienced in the fourth
quarter, ABF has implemented cost reduction programs. Incremental reductions in labor and other
operating costs become increasingly challenging and less effective as ABF maintains service levels
and continues its focus on serving the regional markets. Furthermore, a larger proportion of ABF’s
costs are fixed in nature when maintaining customer service levels. ABF is generally effective in
managing its costs to business levels. However, the historically severe declines in tonnage levels
that occurred in the fourth quarter of 2008 and continued through mid-February 2009 had a
significant impact on ABF’s operating
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results due to ABF’s inability to correspondingly adjust its
cost structure throughout the ABF system. ABF’s operating results will continue to be adversely
impacted if tonnage remains at these levels.
During the year ended December 31, 2008, ABF’s revenues decreased 0.9% on a per-day basis compared
to 2007. ABF’s 2007 revenues decreased 3.5% on a per-day basis compared to 2006 revenues. These
revenue declines primarily reflect decreases in tonnage levels and changes in revenue per
hundredweight, including fuel surcharges. Tonnage per day for the year ended December 31, 2008
decreased by 4.2% compared to 2007, preceded by a 5.3% decline in tonnage per day from 2006. ABF’s
2008 operating ratio increased to 97.2% from
95.2% in 2007 and 93.2% in 2006. The ABF operating results are more fully discussed below in the
ABF sections of Management’s Discussion and Analysis.
ABF has experienced significant fluctuations in year-over-year tonnage levels in recent years.
During 2007, tonnage per day declined 5.3% below the same period in 2006. Year-over-year tonnage
levels stabilized somewhat from the fourth quarter of 2007 through the first half of 2008.
However, ABF’s year-over-year monthly tonnage levels declined at an increasing rate during the
second half of 2008, with a decrease of 5.1% and 11.5% in total third quarter and fourth quarter
tonnage per day, respectfully. Tonnage declines accelerated throughout each month of the fourth
quarter 2008. ABF’s management believes that recent tonnage trends are representative of the
weakening domestic and global economies due, in part, to turmoil in the financial markets and the
related effects on industrial production and the residential and commercial construction and
retail sectors. Quarter-to-date through mid-February 2009, average daily total tonnage for ABF
declined approximately 16% compared to the same period last year. There can be no assurances that
ABF will not experience further declines in tonnage levels due to a number of factors including,
but not limited to, continued weakness in general economic trends. First quarter tonnage levels
are normally lower during January and February while March provides a disproportionately higher
amount of the quarter’s business. The first quarter of each year generally has the highest
operating ratio of the year, although other factors, including the state of the economy, may
influence quarterly comparisons.
The industry pricing environment is another key to ABF’s operating performance. The pricing
environment influences ABF’s ability to obtain compensatory margins and price increases on
customer accounts. ABF’s pricing is typically measured by billed revenue per hundredweight. This
measure is affected by freight profile factors such as average shipment size, average length of
haul, freight density and customer and geographic mix. For many years, consistent freight profile
characteristics made billed revenue per hundredweight changes a reasonable, although approximate,
measure of price change. In the last few years, it has become more difficult to quantify with
sufficient accuracy the impact of changes in freight profile characteristics, which is necessary
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 billed revenue per
hundredweight. The pricing environment generally becomes more competitive during periods of lower
tonnage levels. Throughout 2008, the pricing environment was competitive. Total billed revenue per
hundredweight increased 3.4% during 2008 versus 2007 primarily due to fuel surcharges resulting
from higher fuel-related costs. The increase in 2008 follows a 1.9% increase in billed revenue per
hundredweight in 2007 versus 2006. During 2008, ABF also experienced freight profile changes that
impacted the reported billed revenue per hundredweight, as further discussed in the ABF section of
2008 compared to 2007 results. Excluding freight profile changes and the changes in fuel
surcharges, pricing on ABF’s traditional less-than-truckload (“LTL”) business improved only
slightly in 2008. The fuel surcharge constituted a higher proportion of the total freight rate
during the majority of 2008, as further discussed in the following paragraph. Management believes
that higher fuel surcharges, along with the competitive environment, prevented ABF from securing
adequate increases in base LTL rates. Obtaining overall base rate increases involves a
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lengthy
process to address the pricing and resulting profitability of individual customer accounts.
Prolonged periods with insufficient base LTL rate improvements result in operating ratio
deterioration as elements of unit cost, including contractual wage rates, continue to increase.
Management expects the pricing environment in 2009 to remain competitive, although there can be no
assurances in this regard. Effective January 5, 2009, ABF implemented a general rate increase of
5.79% to cover known and expected cost increases, although the amounts vary by lane and shipment
characteristic. The 2009 general rate increase, which is in line with increases announced by other
LTL carriers, was implemented four weeks earlier than the 2008 increase. The general rate increase
affected approximately 45% of ABF’s business, and rate increases on the remaining business are
subject to individual negotiations. 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.
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 Annual Report
on Form 10-K nor shall it be deemed incorporated by reference into this Annual Report on Form
10-K.) 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 higher energy prices on other nonfuel-related expenses is difficult to
ascertain. ABF cannot predict, with reasonable certainty, future fuel price fluctuations, the
impact of higher energy prices on other cost elements, recoverability of higher fuel costs through
fuel surcharges, 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. 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 2008, 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. ABF experienced significantly higher fuel prices in the first
ten months of 2008 compared to the same period in 2007. Beginning in the middle of July 2008, fuel
prices began to steadily decline, and as of mid-February 2009, the fuel surcharge was approximately
26 revenue percentage points below the third quarter peak reached in July 2008. As fuel prices
decline, lower fuel surcharge levels may, over time, improve ABF’s ability to increase other
elements of margin, although there can be no assurances in this regard. However, as mentioned in
the previous paragraph, pricing on ABF’s base LTL business improved only slightly in 2008 compared
to 2007 due to the competitive environment and the effect of volatile fuel prices and associated
fuel surcharges on the total price received from customers.
Labor costs are impacted by ABF’s contractual obligations under its labor agreement primarily with
the International Brotherhood of Teamsters (“IBT”). The current five-year collective bargaining
agreement, 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. Labor
costs include retirement and health care benefits for ABF’s contractual employees that are
provided by a number of multiemployer plans (see Note I to the accompanying consolidated financial
statements included in Part II, Item 8 of this Annual Report on Form 10-K). ABF’s ability to
effectively manage labor costs, which amounted to 59.7% of ABF’s revenues for 2008, has a direct
impact on its operating performance. ABF is generally effective in managing its labor costs to
business levels, although incremental labor reductions are more challenging during periods of
rapid declines in
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tonnage and over prolonged periods of depressed tonnage levels. Shipments per
dock, street and yard (“DSY”) hour and total pounds per mile are measures ABF uses to assess the
effectiveness of labor costs. Shipments per DSY hour is used to measure effectiveness in ABF’s
local operations, although total pounds per DSY hour is also a relevant measure when the average
shipment size is changing. Total pounds per mile is used by ABF to measure the effectiveness of
its linehaul operations, although this metric is influenced by other factors including freight density, loading efficiency, average length of haul and the degree to which rail service is used.
ABF’s rail utilization and average length of haul have been declining in recent quarters, due in
part to the enhanced regional service offering. As a result, total pounds per mile has become a
less effective measure of the productivity of ABF’s operations and labor costs.
In addition to the traditional long-haul operating model, ABF has implemented a regional network
to facilitate its customers’ next-day and second-day delivery needs. The operational
implementation of the program began in June 2005 in certain ABF facilities in the northeast United
States. Through a multi-phased program, ABF’s regional network now covers the eastern two-thirds
of the United States. Further operational changes, which
were implemented in August 2008 and marketed beginning in September 2008, reduced transit times in
the regional network and in certain of ABF’s long-haul lanes. These changes were facilitated by
ABF’s new labor contract, which became effective April 1, 2008. Management estimates that the
costs of the regional initiative increased ABF’s operating ratio by approximately 1.3 percentage
points in 2008 and 0.9 percentage points in 2007. Anticipated expansion of the regional network to
the western region of the United States, which may be implemented in 2009, and the operational
changes implemented during the third quarter of 2008 in the eastern two-thirds of the United
States will increase the annual cost of operating this program and, depending on revenue levels,
may increase ABF’s operating ratio in 2009 over 2008 levels.
The Company ended 2008 with $218.7 million of cash, cash equivalents and short-term investments,
$624.7 million in stockholders’ equity and no borrowings under its revolving Credit Agreement.
Because of the Company’s financial position at December 31, 2008, the Company should continue to
be in a position to pursue various initiatives.
2008 Compared to 2007
Consolidated Results
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Consolidated revenues for the year ended December 31, 2008 decreased 0.4% on a per-day basis
compared to 2007. Consolidated operating income for 2008 decreased $36.3 million, or 42.8%,
compared to 2007. Consolidated earnings per share for the year ended December 31, 2008 decreased
49.1% compared to 2007. The decrease in revenues, operating income and earnings per share primarily
reflect the operating results of ABF, as discussed in the ABF section that follows.
The above comparison of consolidated operating income was impacted by pre-tax incremental costs
associated with ABF’s regional market initiative which totaled $22.6 million in 2008 compared to
$15.4 million in 2007. Diluted earnings per share in 2008 include losses of $0.14 per share related
to a $3.6 million decrease in cash surrender value of variable life insurance policies due to the
overall decline in the financial markets, while diluted earnings per share in 2007 include gains of
$0.07 per share related to an increase of $1.7 million in cash surrender value of these variable
life insurance policies.
ABF Freight System, Inc.
The following table sets forth a summary of operating expenses and operating income as a
percentage of revenue for ABF, the Company’s only reportable operating segment:
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The following table provides a comparison of key operating statistics for ABF:
ABF’s revenue for the year ended December 31, 2008 was $1,758.8 million, compared to $1,770.7
million reported in 2007, for a decrease of 0.9% on a per-day basis. The revenue decrease
primarily reflects tonnage declines of 4.2% per day compared to 2007. The impact of the tonnage
decrease on revenue was partially offset by a 3.4% increase in billed revenue per hundredweight
for 2008, as compared to 2007, which was largely attributable to higher fuel surcharges. 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 at abf.com. (The information contained on the ABF
Web site is not a part of this Annual Report on Form 10-K nor shall it be deemed incorporated by
reference into this Annual Report on Form 10-K.)
Effective February 4, 2008 and March 26, 2007, ABF implemented general rate increases to cover
known and expected cost increases. Nominally, the increases were 5.45% and 4.95%, respectively,
although the amounts vary by lane and shipment characteristics. For 2008, approximately 55% of
ABF’s revenue was generated from customers that were not immediately impacted by the general rate
increase due to other pricing arrangements that are effective at various times throughout the
year. ABF’s ability to retain rate increases is dependent on the competitive pricing environment.
ABF’s 3.4% increase in billed revenue per hundredweight for the year ended December 31, 2008
compared to the same period in 2007 was impacted not only by the general rate increase and fuel
surcharge, but also by changes in freight profile such as length of haul, pounds per shipment,
freight density and customer and geographic mix. Total weight per shipment for 2008 increased 3.2%
compared to 2007. ABF’s length of haul decreased 2.6% in 2008 compared to 2007, influenced in part
by the regional freight initiative. In addition, ABF experienced a higher proportion of
truckload-rated shipments, including business in the volume spot market. Increased weight per
shipment, combined with a shorter length of haul and a higher mix of truckload-rated shipments,
has the effect of decreasing the nominal revenue per hundredweight without a commensurate impact
on effective pricing or shipment profitability. For the first ten months of 2008, fuel prices were
substantially above prices in the same period of 2007, and the associated higher fuel surcharges
influenced ABF’s ability to obtain increases in base freight rates. Fuel prices and the associated
fuel surcharges have significantly declined since the middle of July 2008. ABF’s ability to
improve its operating ratio during periods of rapidly declining
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fuel surcharge levels is dependent on securing price increases to cover contractual wage rates and
other inflationary increases in cost elements. The fuel surcharge constituted a higher proportion
of the total freight rate during the majority of 2008. As a result, ABF was unable to secure
adequate increases in base LTL rates. Obtaining overall base rate increases involves a lengthy
process to address the pricing and resulting profitability of individual customer accounts.
Excluding freight profile changes and the increase in fuel surcharges, management believes that
pricing on ABF’s traditional LTL business improved only slightly during 2008 compared to the prior
year period. For the year ended December 31, 2008, billed revenue per hundredweight compared to
the same period in 2007 reflected a competitive pricing environment.
ABF generated operating income of $48.4 million in 2008 versus $84.5 million in 2007, a decrease
of 42.7%. ABF’s 2008 operating ratio increased to 97.2% from 95.2% in 2007. The increase in ABF’s
operating ratio in 2008 was influenced by the decline in tonnage levels mentioned above, as well
as incremental costs associated with investments in the regional service initiative which added
approximately 1.3% to ABF’s operating ratio in 2008 and 0.9% in 2007. The increase in ABF’s
operating ratio reflects the effect of base LTL rates not adequately covering increases in
elements of unit cost, including contractual wage rates, as discussed in the previous paragraph.
ABF’s operating ratio was also impacted by other changes in operating expenses as discussed in the
following paragraphs.
Salaries, wages and benefits expense for the year ended December 31, 2008 decreased 0.9% of
revenues. Portions of salaries, wages and benefits are fixed in nature and decrease, as a percent
of revenue, during periods of higher revenues, including fuel surcharge revenues which ABF
experienced during the majority of 2008 as compared to the prior year period. Salaries, wages and
benefits expense was favorably impacted by managing labor costs to business levels as measured by
pounds per DSY hour and pounds per mile. For 2008, pounds per DSY hour increased 3.4% and pounds
per mile increased 2.3%, compared with the prior year periods, reflecting improved management of
labor costs but also the effect of a 3.2% increase in pounds per shipment and a shorter length of
haul.
In 2008, salaries, wages and benefits was also positively impacted by a $7.8 million reduction in
workers’ compensation costs primarily reflecting fewer new claims, a decline in the frequency of
existing claim changes and the associated loss development on those claims. In addition, the
reduction in workers’ compensation costs was also influenced by lower development factors applied
to existing claims resulting from ABF’s annual first quarter review of historical claims
development. Workers’ compensation costs as a percent of revenue for 2008 were below ABF’s
ten-year historical average.
The decrease in salaries, wages and benefits described above was offset, in part, by contractual
increases under the IBT National Freight Industry Standards Agreement. The annual contractual wage
increases effective on April 1, 2008 and 2007 were 2.2% and 2.3%, respectively. On August 1, 2008
and August 1, 2007, health, welfare and pension benefit costs under the agreement increased 8.1%
and 6.0%, respectively.
Fuel, supplies and expenses increased 2.9% of revenues for 2008 compared to 2007, primarily
reflecting a 37.5% increase in the average price per gallon of diesel fuel.
As previously mentioned in the Executive Overview, ABF put into place a general rate increase on
January 5, 2009, to cover known and expected cost increases during the remainder of 2009. ABF’s
ability to retain this rate increase is dependent on the competitive pricing environment. Certain
unionized competitors of ABF were recently granted wage concessions which could effectively lower
their cost structures beginning in 2009 and as a result may potentially increase pricing
competition in the LTL market. ABF could continue to be
impacted by
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fluctuating fuel prices in the future. ABF’s results of operations have been impacted
by the wage and benefit increases associated with the IBT labor agreement that extends through
March 31, 2013. ABF has implemented cost reduction programs due to the rapid decline in fourth
quarter 2008 tonnage levels combined with the prolonged period of an unfavorable economic
environment. Incremental reductions in labor and other operating costs become increasingly
challenging and less effective as ABF maintains customer service levels and continues its focus on
serving the regional markets. ABF is generally effective in managing its costs to business levels.
However, the historically severe declines in tonnage levels that occurred in the fourth quarter of
2008 and continued through mid-February 2009 had a significant impact on ABF’s operating results
due to ABF’s inability to correspondingly adjust its cost structure throughout the ABF system.
ABF’s operating results will continue to be adversely impacted if tonnage remains at these levels.
ABF’s ability to improve its operating ratio is dependent on securing price increases to cover
contractual wage rates and other inflationary increases in cost elements.
2007 Compared to 2006
Consolidated Results
Consolidated revenues from continuing operations for the year ended December 31, 2007, decreased
2.4% on a per-day basis as compared to 2006. Consolidated operating income from continuing
operations for 2007 decreased $39.8 million, or 32.0%, compared to 2006. Consolidated income from
continuing operations per share for the year ended December 31, 2007, decreased 28.5% compared to
2006. The decreases in revenues, operating income and income from continuing operations primarily
reflect the operating results of ABF as discussed in the ABF section that follows. The decrease in
consolidated operating income was also impacted by pre-tax incremental costs associated with ABF’s
regional market initiative of $15.4 million in 2007 compared to $2.5 million in 2006, partially
offset by the effect of lower pension settlement expense, which on a pre-tax basis totaled $1.7
million in 2007 versus $10.2 million in 2006.
As discussed in Note P to the Company’s consolidated financial statements included in Part II, Item
8 of this Annual Report on Form 10-K, in June 2006, the Company sold Clipper, its intermodal
subsidiary. The
Company’s discontinued operations for 2006 included an after-tax gain of $0.12 per diluted share as
a result of
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the sale. In addition, discontinued operations for 2006 included after-tax income of
$0.02 per diluted share associated with Clipper’s operating results through the closing date of the
sale.
ABF Freight System, Inc.
The following table sets forth a summary of operating expenses and operating income as a
percentage of revenue for ABF, the Company’s only reportable operating segment:
The following table provides a comparison of key operating statistics for ABF:
ABF’s revenue for 2007 was $1,770.7 million, a decrease of $60.6 million compared to $1,831.3
million reported in 2006. ABF’s revenue-per-day decrease of 3.3% in 2007 was primarily
attributable to a decline in tonnage of 5.3%, partially offset by a 1.9% increase in revenue per
hundredweight, including fuel surcharges.
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Effective March 26, 2007 and April 3, 2006, ABF implemented general rate increases to cover known
and expected cost increases. Nominally, the increases were 4.95% and 5.90%, respectively, although
the amounts vary by lane and shipment characteristic. ABF’s increase of 1.9% in revenue per
hundredweight for 2007 versus 2006 was impacted not only by the general rate increase and fuel
surcharge increases, but also by changes in profile such as length of haul, weight per shipment,
freight density and customer and geographic mix. Compared to 2006, total weight per shipment was
relatively consistent and length of haul decreased 1.6%, influenced in part by success with the
regional freight initiative. In addition, ABF experienced a higher proportion of truckload-rated
shipments, including business in the volume spot market.
ABF generated operating income of $84.5 million in 2007, a decrease of 32.4% compared to $125.1
million reported in 2006. ABF’s 2007 operating ratio increased to 95.2% from 93.2% reported in
2006. The increase in ABF’s operating ratio in 2007 was influenced by the decline in tonnage
levels mentioned above, as well as incremental costs associated with investments in the regional
service initiative, which added 0.9% of revenues to ABF’s operating ratio, and other changes in
operating expenses as discussed in the following paragraphs. ABF’s operating expenses include
pension settlement expense of $1.7 million in 2007 and $10.2 million reported in 2006. Pension
settlement expense added 0.1% of revenues to ABF’s operating ratio in 2007 and 0.6% of revenues to
the operating ratio in 2006.
Salaries, wages and benefits expense for 2007 increased 1.7% of revenues compared to 2006.
Portions of salaries, wages and benefits are fixed in nature and increase, as a percent of
revenue, with decreases in revenue levels. The increase in salaries, wages and benefits as a
percentage of revenue also reflects annual contractual increases under the IBT collective
bargaining agreement. The 2007 annual wage adjustment occurred on April 1, 2007, for an increase
of 2.3%, which followed a 2.6% increase on April 1, 2006. On August 1, 2007, health, welfare and
pension benefit costs under this agreement increased 6.0%, which followed a 5.4% increase on
August 1, 2006. The increase in salaries, wages and benefits expense in 2007 compared to 2006
related to contractual wage and benefit increases was partially offset by lower pension settlement
expense in 2007 compared to 2006 as previously discussed.
Salaries, wages and benefits expense is also influenced by managing labor costs with business
levels as measured by the productivity figures reported in the previous tables. For 2007, pounds
per DSY hour decreased 0.9% and pounds per mile decreased 1.4%. These measures reflect the effect
of the tonnage declines experienced in 2007 combined with the addition of new employees to support
ABF’s regional program and initiatives to improve customer service.
Supplies and expenses increased 0.5% of revenues over 2006 but were consistent when compared to
2006 on an absolute dollar basis. The increase in supplies and expenses as a percentage of
revenues was impacted by higher fuel costs, which increased by 8.5% on an average price-per-gallon
basis, excluding taxes, for 2007 compared to 2006. The increase in fuel costs was partially offset
by lower repairs and maintenance costs primarily due to the sale of older trailers in late 2006
and early 2007.
Insurance expense in 2007 declined 0.3% of revenues compared to 2006 due primarily to the lower
severity of third-party casualty claims and a lower cargo claims ratio.
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Depreciation and amortization increased 0.7% of revenues for 2007 compared to 2006. This increase
was due primarily to higher depreciation on road tractors and trailers purchased in 2006 and 2007
influenced by higher unit costs and the effect of replacing older, fully depreciated trailers with
new trailers. The impact of higher depreciation associated with these new units was partially
offset by reduced rail spending that resulted in greater utilization of ABF’s linehaul network, as
discussed in the following paragraph, and by reduced spending on the repair and maintenance of
trailers as previously mentioned.
Rents and purchased transportation decreased 0.8% of revenues for 2007 compared to 2006. This
decrease was due to a decline in rail utilization to 12.7% in 2007 from 15.5% of total miles
reported in the prior year period, reflecting higher utilization of ABF’s linehaul network in
order to improve customer service levels.
Short-Term Investments
Short-term investment securities increased $38.5 million from December 31, 2007 to December 31,
2008 due to cash flow from operations exceeding investing and financing activities. As of December
31, 2008, short-term investment securities consist of FDIC-insured certificates of deposit.
Accounts Receivable
Accounts receivable, less allowances, decreased $30.1 million from December 31, 2007 to December
31, 2008, primarily due to a decrease in revenue levels in December 2008 compared to December
2007.
Prepaid Income Taxes
The $14.0 million increase in prepaid income taxes from December 31, 2007 to December 31, 2008 is
due primarily to tax benefits of a $20 million contribution made in December 2008 to the nonunion
defined benefit pension plan and estimated tax payments made prior to the end of the fourth quarter
of 2008 during which the Company experienced an operating loss.
Other Long-Term Assets
Other long-term assets decreased $20.2 million from December 31, 2007 to December 31, 2008,
primarily due to the sale of assets classified as held for sale as of December 31, 2007 and
distributions from and declines in the market value of assets in the Voluntary Savings Plan.
Accrued Expenses
Accrued expenses decreased $19.1 million from December 31, 2007 to December 31, 2008, primarily due
to distributions of supplemental pension benefits in 2008; lower accruals for wages and incentives;
a reduction in reserves for workers’ compensation; and loss, injury and damage claims resulting
from favorable experience (see Note H to the consolidated financial statements included in Part II,
Item 8 of this Annual Report on Form 10-K).
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Pension and Postretirement Liabilities
Liabilities for pension and postretirement benefits increased $40.6 million from December 31, 2007
to December 31, 2008, due to the decline in funded status of the nonunion pension plan largely
resulting from the decrease in market value of pension plan assets.
Income Taxes
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, alternative fuel tax credits
in 2007 and 2008 and tax-exempt income in 2006 and 2007. The Company’s effective tax rate for 2008
was 41.6% compared to 37.4% for 2007 and 38.8% in 2006. The higher effective tax rate in 2008
versus 2007 primarily reflects the market loss in cash surrender value of variable life insurance
policy investments, which is a nondeductible item, and a lower proportion of tax-exempt income. The
lower effective tax rate in 2007 versus 2006 primarily relates to alternative fuel tax credits
effective for the Company beginning in 2007. Management expects the 2009 effective tax rate to be
at least 42% or higher depending on pre-tax income levels. Management does not expect that the cash
outlays for income taxes will materially exceed income tax expense during the foreseeable future.
At December 31, 2008, the Company had recorded total deferred tax assets of $89.0 million and total
deferred tax liabilities of $77.0 million, resulting in net deferred tax assets of $12.0 million.
Net deferred tax assets include $36.2 million related to unamortized nonunion pension and
postretirement benefit costs which are included in accumulated other comprehensive loss. The
Company has evaluated the need for a valuation allowance for deferred tax assets by considering the
future reversal of existing taxable temporary differences, taxable income in prior carryback years,
and future taxable income. Deferred tax liabilities scheduled to reverse in future years will
offset the majority of deferred tax assets. The Company had taxable income of $88.4 million in 2007
and $122.1 million in 2006. Federal income taxes paid in 2007 and 2006 and, in some cases, state
taxes paid would be available for recovery allowing realization of remaining deferred tax assets to
the extent they exceed deferred tax liabilities. With respect to future taxable income, the Company
has had substantial taxable income in excess of reversing temporary differences in all recent
years. Based on evaluation of relevant factors, management has concluded that an additional
valuation allowance for deferred tax assets is not required at December 31, 2008. The need for
additional valuation allowances will be continually monitored by management.
Financial reporting income differs significantly from taxable income because of such items as
accelerated depreciation, including bonus depreciation amounts available in recent years, pension
accounting rules, and a significant number of liabilities such as vacation pay, workers’
compensation reserves and other reserves, which generally are only treated as expenses when paid
for tax purposes. In recent years, financial reporting income has exceeded taxable income.
Seasonality
ABF is impacted by seasonal fluctuations, which affect tonnage and shipment levels. Freight
shipments, operating costs and earnings are also affected adversely by inclement weather
conditions. The 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 economy, may influence quarterly freight tonnage levels.
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Effects of Inflation
Management believes that, for the periods presented, inflation has not had a material effect on the
Company’s operating results as inflationary increases in labor and fuel costs, which are discussed
above, have generally been offset through price increases and fuel surcharges. In periods of
increasing fuel prices, the effect of higher associated fuel surcharges on the overall price to the
customer influences ABF’s ability to obtain increases in base freight rates. In subsequent periods
with rapidly declining fuel surcharge levels, the timing and extent of base price increases on
ABF’s revenues may not correspond with contractual increases in wage rates and other inflationary
increases in cost elements and as a result could impact the Company’s operating results. ABF’s
revenue equipment (tractors and trailers used primarily in ABF’s operations) will likely be
replaced during its normal replacement cycles at higher costs which could result in higher
depreciation charges on a per-unit basis. ABF considers these costs in setting its pricing
policies, although ABF’s overall freight rate structure is governed by market forces based on value
provided to the customer.
Environmental Matters
The Company’s subsidiaries store fuel for use in tractors and trucks in 71 underground tanks
located in 23 states. Maintenance of such tanks is regulated at the federal and, in some cases,
state levels. The Company believes that it is in substantial compliance with these regulations. The
Company’s underground storage tanks are required to have leak detection systems. The Company is not
aware of any leaks from such tanks that could reasonably be expected to have a material adverse
effect on the Company.
The Company has received notices from the Environmental Protection Agency and others that it has
been identified as a potentially responsible party under the Comprehensive Environmental Response
Compensation and Liability Act, or other federal or state environmental statutes, at several
hazardous waste sites. After investigating the Company’s or its subsidiaries’ involvement in waste
disposal or waste generation at such sites, the Company has either agreed to de minimis settlements
(aggregating approximately $103,000 over the last ten years, primarily at seven sites) or believes
its obligations, other than those specifically accrued for with respect to such sites, would
involve immaterial monetary liability, although there can be no assurances in this regard.
At December 31, 2008 and 2007, the reserve for estimated environmental clean-up costs of properties
currently or previously operated by the Company totaled $1.1 million, which is included in accrued
expenses in the accompanying consolidated balance sheets. Amounts accrued reflect management’s best
estimate of the future undiscounted exposure related to identified properties based on current
environmental regulations. This estimate is based on management’s experience with similar
environmental matters and on testing performed at certain sites.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in certain interest rates, prices of diesel
fuel, credit ratings, and foreign currency exchange rates. These market risks arise in the normal
course of business, as the Company does not engage in speculative trading activities.
Interest Rate Risk
The instability in the financial and credit markets has created volatility in various interest
rates and returns on invested assets during 2008. At December 31, 2008 and 2007, cash and cash
equivalents and short-term investments subject to fluctuations in interest rates totaled $218.7
million and $173.2 million, respectively. The weighted-average tax equivalent yield on cash
equivalents and short-term investments was 2.8% and 5.8% in 2008 and 2007, respectively. The yield
decline reflects changes in market rates as well as the transition from short-term investments in
auction rate debt and preferred equity securities as of December 31, 2007 to short-term investments
in certificates of deposit and money market funds invested primarily in U.S. government securities
as of December 31, 2008. The weighted-average tax equivalent yield on cash equivalents and
short-term investments was 2.0% at December 31, 2008.
Liabilities associated with the nonunion defined benefit pension plan, the supplemental benefit
pension plan and the postretirement health plan are remeasured on an annual basis based on discount
rates which are determined by matching projected cash distributions from the plans with the
appropriate high-quality corporate bond yields in a yield curve analysis. Changes in high-quality
corporate bond yields will impact interest expense associated with the benefit plans as well as the
amount of liabilities recorded.
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. During 2008 and 2007, the Company incurred
no borrowings and had no outstanding debt obligations other than letters of credit under the Credit
Agreement. However, a one percentage point change in interest rates on Credit Agreement borrowings,
if utilized, would change annual interest cost by $100,000 per $10.0 million of borrowings.
Other Market Risks
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 based on increases in diesel
fuel prices compared to relevant indexes. When fuel surcharges constitute a higher proportion of
the total freight rate paid, our customers are less receptive to increases in base freight rates.
Prolonged periods of inadequate base rate improvements could adversely impact operating profit as
elements of costs, including contractual wage rates, continue to annually increase. The Company has
not historically engaged in a program for fuel price hedging and had no fuel hedging agreements
outstanding at December 31, 2008 and 2007.
The Company is subject to credit risk for its short-term investments; however, this risk is
mitigated by investing in FDIC-insured certificates of deposit with varying original maturities of
ninety-one days to one year. The Company’s investment policy limits the amount of credit exposure
to any one counterparty.
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Equity and fixed income assets held in the Company’s nonunion qualified benefit pension plan trust
are subject to market risk. Declines in the value of plan assets resulting from the instability in
the financial markets, general economic downturn or other economic factors beyond our control
could diminish the funded status of the nonunion pension plan and potentially increase our
requirement to make contributions to the plan. An increase in required pension plan contributions
may adversely impact our financial condition and liquidity. Substantial investment losses on plan
assets will also increase pension expense in the years following the losses. Investment returns
that differ from expected returns are amortized to expense over the remaining active service
period of plan participants (see Note I to the Company’s consolidated financial statements
included in Part II, Item 8 of this Annual Report on Form 10-K). An increase in pension expense
may adversely impact our results of operations. In addition, the cash surrender value of variable
life insurance contracts are subject to equity and fixed income market returns and, consequently,
market risk.
Foreign operations are not significant to the Company’s total revenues or assets, and, accordingly,
the Company does not have a formal foreign currency risk management policy. Revenues from non-U.S.
operations amounted to approximately 2.0% of total revenues for 2008. Foreign currency exchange
rate fluctuations have not had a material impact on the Company and they are not expected to in the
foreseeable future.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Arkansas Best Corporation We have audited the accompanying consolidated balance sheets of Arkansas Best Corporation as of
December 31, 2008 and 2007, and the related consolidated statements of income, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2008. Our
audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These
financial statements and schedule 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 financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Arkansas Best Corporation at December 31, 2008 and
2007, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note I to the consolidated financial statements, effective December 31, 2006, the
Company adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans”.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Arkansas Best Corporation’s internal control over financial reporting as of
December 31, 2008, 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 20, 2009 expressed an unqualified opinion thereon.
Tulsa, Oklahoma
February 20, 2009 48
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ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
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ARKANSAS BEST CORPORATION
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
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ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of the consolidated financial statements.
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ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of the consolidated financial statements.
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ARKANSAS BEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial statements.
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A — ORGANIZATION AND DESCRIPTION OF THE BUSINESS
Arkansas Best Corporation (the “Company”) is a holding company engaged, through its subsidiaries,
primarily in motor carrier freight transportation. The Company’s principal operations are
conducted through ABF Freight System, Inc. and other affiliated subsidiaries of the Company
(collectively “ABF”).
Approximately 75% of ABF’s employees are 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.
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. Cash equivalents, which totaled $95.6 million at
December 31, 2008, consisted of money market funds primarily invested in U.S. government
obligations including U.S. Treasury securities. Interest and dividends related to cash and cash
equivalents are included in interest and dividend income on the Company’s consolidated statements
of income.
Short-Term Investments: Short-term investments consist of FDIC-insured certificates of deposit with
original maturities ranging from ninety-one days to one year. Interest related to these investments
is included in interest and dividend income on the Company’s consolidated statements of income.
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 96% of the
Company’s annual revenues for 2008, had no single customer representing more than 3% of its 2008
revenues or of its accounts receivable balance at December 31, 2008. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral. The Company
maintains 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 accounts are turned 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 for 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.
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued Property, Plant and Equipment Including Repairs and Maintenance: The Company utilizes tractors and
trailers in its motor carrier freight 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, property, plant and equipment 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 — 2 to 15 years; and
leasehold improvements — 4 to 20 years, or over the remaining life of the lease, whichever is
shorter. 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. Exchanges of nonmonetary
assets that have commercial substance are measured based on the fair value of the assets exchanged.
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.
Computer Software Developed or Obtained for Internal Use, Including Web Site Development Costs:
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 4 years. The amount of costs capitalized within any period is
dependent on the nature of software development activities and projects in each period.
Impairment Assessment 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. If such an event or change in circumstances is present, the Company
will 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 records impairment losses 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 cost to sell. Assets held for sale primarily represent ABF’s nonoperating
properties, older revenue equipment and other equipment. Write-downs to fair value less cost to
sell are reported in operating income. Assets held for sale are expected to be disposed of by
selling the properties or assets within the next 12 months. Gains and losses on property and
equipment are reported in operating income.
Assets held for sale are included in other noncurrent assets in the accompanying consolidated
balance sheets. During 2008, property and equipment classified as held for sale and carried at
$11.8 million was sold for net gains totaling $2.8 million. At December 31, 2008, management was
not aware of any events or circumstances indicating the Company’s long-lived assets would not be
recoverable.
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued The following table is a summary of assets held for sale for the years ended December 31:
Asset Retirement Obligations: The Company records estimated liabilities for the cost to remove
underground storage tanks, dispose of tires and return leased real property to its original
condition at the end of a lease term. The liabilities are discounted using the Company’s credit
adjusted risk-free rate. Revisions to these liabilities for such costs may occur due to changes in
the estimates for fuel tank removal costs, tire disposal fees and real property lease restoration
costs, or changes in regulations or agreements affecting these obligations. At December 31, 2008
and 2007, the Company’s estimated asset retirement obligations totaled $2.0 million and $1.8
million, respectively.
Goodwill: Goodwill represents the excess of the purchase price in a business combination over the
fair value of net tangible and intangible assets acquired. Goodwill amounts are not amortized, but
rather are evaluated for impairment annually utilizing a combination of valuation methods including
earnings before interest, taxes, depreciation and amortization multiples, net income multiples and
the present value of discounted cash flows. The Company’s goodwill, which totaled $63.9 million and
$64.0 million at December 31, 2008 and 2007, respectively, is attributable to ABF as a result of a
1988 leveraged buyout. Changes occur in the goodwill asset balance because of ABF’s foreign
currency translation adjustments on the portion of the goodwill related to ABF’s Canadian
operations. The Company has performed the annual impairment testing on its ABF goodwill based upon
operations and fair value at January 1, 2009, 2008 and 2007 and found there to be no impairment at
any of these dates.
Income Taxes: Deferred income taxes are accounted for under the liability method, which takes into
account the differences between the tax basis of the assets and liabilities for financial reporting
purposes and amounts recognized for income tax purposes. 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. On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (“FIN
48”). The adoption of FIN 48 did not have an effect on the Company’s consolidated financial
position and results of operations. The Company’s policy is that interest and penalty amounts
related to income tax matters will continue to be classified as interest expense and operating
expenses, respectively, in the Company’s consolidated statements of income.
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. Amounts in excess of the
self-insured limits are fully insured to levels which management considers appropriate for the
Company’s operations. The Company’s claims liabilities have not been discounted.
The Company records a liability for self-insured workers’ compensation and third-party casualty
claims based on the incurred claim amount plus an estimate of future claim development and a
reserve for claims incurred but not reported. Management estimates the development of the claims by
applying the Company’s historical claim development factors to incurred claim amounts. The Company
is entitled to recover, from insurance carriers and
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued insurance pool arrangements, amounts which have
been previously paid by the Company for claims above the self-insurance retention level. These
amounts are included in other accounts receivable in the accompanying consolidated balance sheets,
net of allowances for potentially unrecoverable amounts.
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.
Insurance-Related Assessments: The Company recorded estimated liabilities for state guaranty fund
assessments and other insurance-related assessments of $0.8 million and $0.9 million at
December 31, 2008 and 2007, respectively. 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.
Nonunion Defined Benefit Pension, Supplemental Pension and Postretirement Health Plans: The
Company accounts for its pension and postretirement plans in accordance with Statement of Financial
Accounting Standards No. 87, Employers’ Accounting for Pensions (“FAS 87”); Statement of Accounting
Standards No. 88, Employers’ Accounting for Settlements and Curtailments of Benefit Pension Plans
and for Termination Benefits (“FAS 88”); Statement of Financial Accounting Standards No. 106,
Employers’ Accounting for Postretirement Benefits Other Than Pensions (“FAS 106”); and Statement of
Financial Accounting Standards No. 132 (“FAS 132”) and Statement No. 132(R), Employers’ Disclosures
about Pensions and Other Postretirement Benefits (“FAS 132(R)”), as amended by Statement of
Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“FAS 158”). The
Company uses December 31 as a measurement date for its nonunion defined benefit pension plan,
supplemental benefit plan and postretirement health benefit plan.
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 or loss separately 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.
Revenue Recognition: Revenue is recognized based on relative transit time in each reporting period
with expenses recognized as incurred. The Company utilizes a bill-by-bill analysis to establish
estimates of revenue in transit for recognition in the appropriate reporting period. 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 Per Share: The calculation of earnings 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.
Share-Based Compensation: Beginning January 1, 2006, the Company’s share-based compensation plans
are accounted for under the provisions of Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment (“FAS 123(R)”). See Note J for further descriptions of the Company’s
share-based compensation plans.
Compensation expense recognized includes the pro rata cost of stock options granted prior to but
not yet vested as of January 1, 2006, based upon the grant date fair value estimated in accordance
with the original provisions of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (“FAS
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued 123”). Tax benefits in excess of the compensation cost recognized
for stock options (“excess tax benefits”) are shown as
financing cash flows.
For share-based awards granted prior to the adoption of FAS 123(R), the Company amortizes the fair
value of the awards to compensation expense on a straight-line basis over the five-year vesting
period and accelerates unrecognized compensation upon a grantee’s death, disability or retirement.
Share-based awards granted or modified subsequent to the adoption of FAS 123(R) are amortized to
compensation expense over the five-year vesting period or the period to which the employee first
becomes eligible for retirement, whichever is shorter, with vesting accelerated upon death or
disability. Compensation expense reflects an estimate of shares expected to be forfeited over the
service period. Estimated forfeitures, which are based on historical experience, are adjusted to
the extent that actual forfeitures differ, or are expected to differ, from these estimates.
The fair value of restricted stock awards is determined based upon the closing market price of the
Company’s Common Stock on the date of grant. The restricted stock awards generally vest at the end
of a five-year period following the date of grant, subject to accelerated vesting due to death,
disability, retirement or change-in-control provisions. The Company issues new shares upon the
granting of restricted stock. However, no new shares are issued upon the granting of restricted
stock units until such units become vested. Dividends or dividend equivalents are paid on all
restricted stock awards during the vesting period.
The Company has not granted stock options since January 2004. The grant date fair value of stock
options was estimated based on a Black-Scholes-Merton option pricing model that utilizes several
assumptions, including expected volatility, weighted-average life and a risk-free interest rate.
Expected volatilities were estimated using the historical volatility of the Company’s stock, based
upon the expected term of the option. The Company was not aware of information in determining the
grant date fair value that would have indicated that future volatility would be expected to be
significantly different than historical volatility. The expected term of the option was derived
from historical data and represents the period of time that options are estimated to be
outstanding. The risk-free interest rate for periods within the estimated life of the option was
based on the U.S. Treasury Strip rate in effect at the time of the grant. Stock options generally
vest in equal amounts over a five-year period and expire ten years from the date of grant. The
Company issues new shares upon the exercise of stock options.
Fair Value Measurements: The Company’s fair value measurements are described further in Note D.
Effective January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 157, Fair Value Measurements (“FAS 157”) with respect to its financial assets and
liabilities that are measured at fair value within the financial statements on a recurring basis.
FAS 157 specifies a hierarchy of valuation techniques for fair value measurements based on whether
the inputs to those valuation techniques are observable or unobservable. In accordance with FASB
Staff Position FAS 157-2, Effective Date of FASB Statement 157 (“FSP 157-2”), the application of
FAS 157 to nonfinancial assets and liabilities was effective for the Company beginning January
1, 2009.
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. 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. The estimated liability is not
reduced for possible recoveries from insurance carriers or other third parties.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued Exit or Disposal Activities: The Company accounts for exit costs in accordance with Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal
Activities (“FAS 146”). As prescribed by FAS 146, liabilities for costs associated with the exit or
disposal activity are recognized when the liability is incurred.
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 its reportable
segment information. The management approach is based on the way management organizes the
reportable 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 amounts may
differ from those estimates included in the accompanying consolidated financial statements.
NOTE C — SHORT-TERM INVESTMENTS
The following is a summary of short-term investments at December 31:
As of December 31, 2008, short-term investments consist of FDIC-insured certificates of deposit.
The Company sold $107.4 million, $348.0 million and $372.3 million in short-term investments during
the years ended December 31, 2008, 2007 and 2006, respectively, with no realized gains or losses.
For the years ended December 31, 2008 and 2007, the weighted-average tax equivalent yield on the
Company’s short-term investments was 3.2% and 5.8%, respectively.
NOTE D — 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, except for capitalized leases.
Cash and Cash Equivalents: Cash and cash equivalents are reported in the consolidated balance
sheets at fair value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued Short-Term Investments: Certificates of deposit are reported in the December 31, 2008 consolidated
balance sheet at cost plus accrued interest, which approximates fair value. Debt and preferred
equity securities are reported at fair value in the consolidated balance sheet at December 31,
2007.
Long-Term Investments: Long-term investments consist of an available for sale auction rate
security, for which the underlying security matures in 2025. The security is reported at fair value
in other long-term assets in the balance sheet at December 31, 2008.
Debt: At December 31, 2008 and 2007, the Company had no borrowings under its revolving Credit
Agreement. Debt reported in the consolidated balance sheets consists of capital lease obligations.
The carrying amounts and fair value of the Company’s financial instruments at December 31 are as
follows:
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. During 2008 and
2007, the Company incurred no borrowings and had no outstanding debt obligations other than letters
of credit under the Credit Agreement.
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
Effective January 1, 2008, the Company adopted the provisions of FAS 157 with respect to its
financial assets and liabilities that are measured at fair value within the financial statements on
a recurring basis. FAS 157 specifies a hierarchy of valuation techniques based on whether the
inputs to those valuation techniques are observable or unobservable. Observable inputs reflect
market data obtained from independent sources, while unobservable inputs reflect the Company’s
market assumptions. The fair value hierarchy specified by FAS 157 is as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued
The following table presents, for each of the fair value hierarchy levels, the Company’s assets at
December 31, 2008 that are measured at fair value on a recurring basis:
NOTE E — FEDERAL AND STATE INCOME TAXES
Significant components of the provision for income taxes for the years ended December 31 are as
follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued 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 deferred tax provision for the years ended December 31 are as
follows:
Significant components of deferred tax assets and liabilities at December 31 are as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued Reconciliation between the effective income tax rate, as computed on income from continuing
operations before income taxes, and the statutory federal income tax rate for the years ended
December 31 is presented in the following table:
Income taxes paid totaled $28.8 million in 2008, $39.6 million in 2007 and $58.0 million in 2006
before income tax refunds of $7.6 million in 2008, $10.6 million in 2007 and $10.6 million in 2006.
The tax benefit for exercised options in 2008 is $1.0 million of which $0.9 million is reflected in
paid-in capital. The paid-in capital benefit could increase as additional information becomes
available to the Company regarding stock sales by employees. The tax benefits associated with stock
options exercised totaled $0.9 million in 2007 and $2.3 million in 2006, which are reflected in
paid-in capital. In 2008, the Company began recognizing the income tax benefits of dividends on
share-based payment awards as an increase in paid-in capital as required under EITF 06-11,
Accounting for Income Tax Benefits of Dividends on Share-Based Payment. The tax benefit of
dividends on share-based payment awards of $0.1 million is reflected in paid-in capital.
The Company had state net operating loss carryovers of approximately $12.1 million at December 31,
2008. These state net operating loss carryovers expire in five years or less. As of December 31,
2008 and 2007, the Company had a valuation allowance of approximately $0.8 million for state net
operating loss carryovers for which realization is not likely. In 2008, the total valuation
allowance was decreased $0.1 million due to the expectation of realization of foreign loss
carryovers.
During 2007, the U.S. Internal Revenue Service (the “IRS”) completed an examination of the
Company’s federal income tax return for 2004, and no changes were made to the Company’s return. The
Company is under examination by certain state taxing authorities. Although the outcome of tax
audits is always uncertain and could result in payment of additional taxes, the Company does not
believe the results of any of these audits will have a material effect on its financial position,
results of operations or cash flows.
Effective January 1, 2007, the Company adopted FIN 48, which establishes the accounting and
disclosure requirements for uncertain tax positions. FIN 48 requires a two-step approach to
evaluate tax positions and determine if they should be recognized. This approach involves
recognizing any tax positions that are “more likely than not” to occur and then measuring those
positions to determine the amounts to be recognized in the financial statements. Federal income tax
returns filed for years through 2004 are closed by the applicable statute
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued of limitations. In
considering the provisions of FIN 48, as applied to the Company’s tax positions, the Company has
determined that no reserves for uncertain tax positions are required at December 31, 2008 and 2007
or during the years then ended. The Company is not aware of any matters that would cause a
significant change in this determination in 2009.
Interest expense related to amended state income tax returns yet to be filed was less than $0.1
million for the year ended December 31, 2008. At both December 31, 2008 and 2007, the accrued
interest liability, which related to state income taxes to be paid on amended returns, totaled $1.0
million. No interest was paid related to federal income taxes during 2008, 2007 or 2006.
NOTE F — OPERATING LEASES AND COMMITMENTS
While the Company maintains ownership of most of its larger terminals and distribution centers,
certain facilities and equipment are leased. Rental expense totaled $16.2 million in 2008, $14.7
million in 2007, and $14.3 million in 2006.
The future minimum rental commitments, net of minimum rentals to be received under noncancelable
subleases, as of December 31, 2008, for all noncancelable operating leases are as follows:
Certain of the leases are renewable for additional periods with similar rent payments. In addition
to the above, the Company has guaranteed rent payments through March 2012 totaling $0.8 million for
office space that continues to be leased by Clipper Exxpress Company (“Clipper”), an intermodal
transportation subsidiary that was sold in June 2006. Future minimum rentals to be received under
noncancelable subleases totaled approximately $0.2 million at December 31, 2008.
Commitments to purchase revenue equipment, property and other equipment, which are cancelable by
the Company if certain conditions are met, were approximately $43.9 million at December 31, 2008.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued NOTE G — LONG-TERM DEBT AND CREDIT AGREEMENT
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued The future minimum payments under capitalized leases at December 31, 2008, consisted of the
following:
Assets held under capitalized leases at December 31 are included in property, plant and equipment as follows:
Amortization of assets under capital leases is included in depreciation expense.
The Company paid interest of $0.5 million in 2008, $0.6 million in 2007, and $0.3 million in 2006,
net of capitalized interest which totaled $0.1 million for the year ended December 31, 2008 and
$0.2 million for both of the years ended December 31, 2007 and 2006.
NOTE H — ACCRUED EXPENSES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued NOTE I — 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 hired before January 1, 2006 (see Defined Contribution Plans within this
note). Benefits are generally based on years of service and employee compensation. The Company’s
contributions to the defined benefit pension plan are based upon the minimum funding levels
required under provisions of the Employee Retirement Income Security Act of 1974, with the maximum
contributions not to exceed deductible limits under the U.S. Internal Revenue Code.
The Company also has an unfunded supplemental pension benefit plan (“SBP”) for the purpose of
supplementing benefits under the Company’s defined benefit plan. Under the SBP, the Company will
pay sums in addition to amounts payable under the defined benefit plan to eligible participants.
Participation in the SBP is limited to employees of the Company and ABF who are participants in the
Company’s defined benefit plan and who are designated as participants in the SBP by the Company’s
Board of Directors. The SBP provides that if a timely election is made prior to a participant’s
termination, the participant may elect either a lump-sum payment or a deferral of receipt of the
benefit. The SBP includes a provision that deferred benefits accrued under the SBP will be paid in
the form of a lump sum following a change in control of the Company. The Compensation Committee of
the Company’s Board of Directors elected to close the SBP to new entrants and to place a cap on the
maximum payment per participant to existing participants in the SBP effective January 1, 2006. In
place of the SBP, eligible officers of the Company appointed after 2005 participate in a long-term
cash incentive plan (see Long-Term Cash Incentive Plan within this note).
The Company also sponsors an insured postretirement health benefit plan that provides supplemental
medical benefits, dental benefits, accident insurance and vision care to certain officers of the
Company and certain subsidiaries. The plan is generally noncontributory with the Company paying the
premiums. The prescription drug benefits provided under the Company’s postretirement health benefit
plan are actuarially equivalent to Medicare Part D and thus qualify for the subsidy under the
Prescription Drug Act. The Company made eligible gross payments for prescription drug benefits
throughout 2006 and received the Medicare Part D subsidy on those payments in 2007. The Company has
applied for and expects to receive in 2009 the Medicare Part D subsidy for eligible gross payments
made for prescription drug benefits in 2007.
The Company adopted FAS 158 on December 31, 2006, and as a result, recognized the funded status
(the difference between the fair value of plan assets and the projected benefit obligations) of its
nonunion pension plan, SBP and postretirement health benefit plan in the accompanying balance
sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The
adjustment to accumulated other comprehensive income recorded at adoption of FAS 158 that was
previously netted against the plan’s funded status in the Company’s consolidated balance sheet in
accordance with the provisions of FAS 87 was $55.2 million ($33.8 million, net of taxes). This
amount is being recognized as net periodic benefit cost in the consolidated statements of income
pursuant to the Company’s historical accounting policy for amortizing such amounts. Further,
actuarial gains and losses that arise but which are not included in net periodic benefit cost in
the same periods are recognized as a component of other comprehensive income. Those amounts are
subsequently recognized as a component of net periodic benefit cost on the same basis as the
amounts recognized in accumulated other comprehensive income at adoption of FAS 158.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued The following table discloses the changes in benefit obligations and plan assets of the Company’s
nonunion benefit plans for years ended December 31:
Amounts recognized in the consolidated balance sheets at December 31 consist of the following:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued The following is a summary of the components of net periodic benefit cost for the Company’s
nonunion benefit plans for the years ended December 31:
The Company is required to record pension settlement expense when cash payouts exceed annual
service and interest costs of the related plan. The following is a summary of the obligations
settled and pension settlement expense related to the SBP:
Based on available information, the Company does not anticipate settling pension obligations or
recording pension settlement expense during 2009.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued Included in accumulated other comprehensive loss at December 31 are the following pre-tax amounts
that have not yet been recognized in net periodic benefit cost:
The following amounts, which are included in accumulated other comprehensive loss, are expected to
be recognized as components of net periodic benefit cost in 2009 on a pre-tax basis:
Weighted-average assumptions used to determine nonunion benefit obligations at December 31 were as
follows:
The Company’s discount rate for determining its benefit obligations was estimated by matching
projected cash distributions from each plan with the appropriate corporate bond yields in a yield
curve analysis.
Weighted-average assumptions used to determine net periodic benefit cost for the Company’s nonunion
benefit plans for the years ended December 31 were as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued The assumed health care cost trend rates for the Company’s postretirement health benefit plan at
December 31 are as follows:
The health care cost trend rates have a significant effect on the amounts reported for 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, 2008:
The Company establishes the expected long-term rate of return on nonunion pension plan assets by
considering the historical returns for the current mix of investments. 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’s long-term expected rate of return utilized in determining its 2009
nonunion pension plan expense is expected to be 6.0%.
The weighted-average asset allocation of the Company’s nonunion defined benefit pension plan at
December 31 is summarized in the following table:
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 utilizing target asset allocations for investments. The plan’s long-term
asset allocation policy is intended to achieve a reasonable return, protect or improve the
purchasing power of plan assets and limit the possibility of experiencing a substantial loss over a
one-year period. The plan did not achieve its return objectives in 2008 due to the significant
decline in the overall financial markets during the year.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued At December 31, 2008, the target allocations and acceptable ranges were as follows:
Investment balances and results are reviewed quarterly. Although investment allocations which fall
outside the acceptable range at the end of any quarter are usually rebalanced based on the target
allocation, the Company has the discretion to maintain cash or other short-term investments during
periods of market volatility. The Company made a $20.0 million contribution to the pension trust in
December 2008 which was invested in money market funds as of December 31, 2008 rather than
allocated according to established targets. Target allocations will be reviewed by management and
the plan’s investment advisors in 2009 and may be revised based on that review.
Index funds are primarily used for investments in equity and fixed income securities. Investment
performance is generally compared to the three-to-five year performance of recognized market
indices. Certain types of investments and transactions are prohibited or restricted by the
Company’s written investment policy, including short sales; purchase or sale of futures; options or
derivatives for speculation or leverage; private placements; purchase or sale of commodities; or
illiquid interests in real estate or mortgages.
The Company does not expect to have required minimum contributions, but could make tax-deductible
contributions to its pension plan in 2009. Based upon current information, the Company anticipates
making contributions of up to $25.0 million in 2009, which will not exceed the estimated maximum
tax-deductible contribution.
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:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued Deferred Compensation Plans
The Company has deferred salary agreements with certain executives for which liabilities of $6.4
million and $6.6 million as of December 31, 2008 and 2007, respectively, have been recorded as
accrued expenses and other liabilities in the accompanying consolidated balance sheets. The
deferred salary agreements include a provision that immediately vests all benefits and provides for
a lump-sum payment upon a change in control of the Company. The Compensation Committee of the
Company’s Board of Directors elected to close the deferred salary agreement program to new entrants
effective January 1, 2006. In place of the deferred salary agreement program, officers appointed
after 2005 participate in the Long-Term Cash Incentive Plan (see Long-Term Cash Incentive Plan
within this note).
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 $1.4
million and $1.5 million at December 31, 2008 and 2007, respectively, for future costs under this
plan, which are reflected as other liabilities in the accompanying consolidated balance sheets.
The Company maintains a Voluntary Savings Plan, a nonqualified deferred compensation program for
the benefit of certain executives of the Company and certain subsidiaries. Eligible employees may
defer receipt of a portion of their regular compensation, incentive compensation and other bonuses
into the Voluntary Savings Plan by making an election before the compensation is payable. The
Company credits participants’ accounts with applicable matching contributions and rates of return
based on a portfolio selected by the participants from the investments available in the plan. All
deferrals, Company match and investment earnings are considered part of the general assets of the
Company until paid. Accordingly, the accompanying consolidated balance sheets reflect the
aggregate participant balances as both an asset and a liability of the Company. As of December 31,
2008 and 2007, $7.4 million and $14.8 million, respectively, are included in other assets with a
corresponding amount recorded in other liabilities.
Defined Contribution Plans
The Company and its subsidiaries have various defined contribution 401(k) plans that cover
substantially all of its employees. The plans permit participants to defer a portion of their
salary up to a maximum of 75% as provided in Section 401(k) of the U.S. Internal Revenue Code. The
Company matches 50% of nonunion participant contributions up to the first 6% of annual
compensation. The plans also allow for discretionary Company contributions determined annually. The
Company’s matching expense for the 401(k) plans totaled $4.2 million for 2008 and $4.4 million for
both 2007 and 2006.
In place of the Company’s nonunion defined benefit pension plan, all nonunion employees hired
subsequent to December 31, 2005, participate in a defined contribution plan into which the Company
may make discretionary contributions. Participants will be fully vested in the contributions made
to their account after three years of service. All employees who were participants in the defined
benefit pension plan on December 31, 2005, will continue in that plan. The Company recognized
expense of $1.1 million, $0.8 million and $0.3 million in 2008, 2007 and 2006, respectively,
related to the Company’s contributions to this plan.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued Long-Term Cash Incentive Plan
Pursuant to stockholder approval of the 2005 Ownership Incentive Plan, the Compensation Committee
of the Company’s Board of Directors created a performance-based Long-Term Cash Incentive Plan (the
“C-LTIP”) effective January 2006. Participants in the C-LTIP are officers of the Company or its
subsidiaries who are not participants in the Company’s SBP or deferred salary agreement program.
The C-LTIP incentive, which is generally earned over three years, is based 60% on return on
capital employed and 40% on the Company achieving specified levels of profitability or earnings
per share growth, as defined in the C-LTIP. Minimum levels of return on capital employed and
growth must be achieved for any incentive to be earned. The Company has accrued $0.4 million at
both December 31, 2008 and 2007 for estimated future distributions under the
C-LTIP, which are reflected as accrued expenses and other liabilities in the accompanying
consolidated balance sheets.
Other Plans
Other long-term assets include $36.4 million and $39.7 million at December 31, 2008 and 2007,
respectively, in cash surrender value of variable life insurance policies. These policies are
intended to provide funding for long-term nonunion benefit arrangements such as the Company’s SBP
and certain deferred compensation plans. A portion of the Company’s cash surrender value of
variable life insurance policies are invested in equity and fixed income securities and are,
therefore, subject to market volatility. In 2008, a loss of $3.6 million due to the effect of
declines in the overall financial markets on the cash surrender value of these policies was
recognized in other expense in the accompanying consolidated statement of income. In 2007 and
2006, the Company recognized gains of $1.7 million and $2.8 million, respectively, associated with
changes in the cash surrender value and proceeds from life insurance policies.
Multiemployer Plans
Under the provisions of the Taft-Hartley Act, retirement and health care benefits for ABF’s
contractual employees are provided by a number of multiemployer plans. The trust funds for these
plans are administered by trustees, an equal number of whom generally are appointed by the IBT and
certain management carrier organizations or other appointing authorities for employer trustees, as
set forth in the fund’s trust agreements. ABF contributes to these plans monthly based generally
on the time worked by its contractual employees, as specified in the collective bargaining
agreement 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. The Company intends to meet its obligations to the multiemployer plans under its
collective bargaining agreement with the IBT.
In 2006, the Pension Protection Act (the “Act”) became law and together with related regulations
established new minimum funding requirements for multiemployer pension plans. The Act mandates that
multiemployer pension plans that are below certain funding levels or that have projected funding
deficiencies adopt a funding improvement plan or a rehabilitation program to improve the funding
levels over a defined period of time. The Act also accelerates the timing of annual funding notices
and requires additional disclosures from multiemployer pension plans, if such plans fall below the
required funding levels. In December 2008, the Worker, Retiree, and Employer Recovery Act of 2008
(the “Recovery Act”) became law. For plan years beginning October 1, 2008 through September 30,
2009, the Recovery Act allows multiemployer plans the option to freeze their funding certification
based on the funding status of the previous plan year. In addition, the Recovery Act provides
multiemployer plans in endangered or critical status in plan years beginning in 2008 or 2009 a
three-year extension of the plan’s funding improvement or rehabilitation period.
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued 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 Company understands that the funded
percentage of the Central States Pension Fund was 73.2% as of January 1, 2008, but that the funding
percentage has likely significantly decreased during 2008 due to declines in the overall financial
markets. In March 2008, the Central States Pension Fund reported that it adopted a rehabilitation
plan as a result of its actuarial certification for the plan year beginning January 1, 2008 which,
as a result of the Act, placed the Central States Pension Fund in “critical status.” In 2005, the IRS extended the period over which the Central States Pension Fund amortizes unfunded liabilities by ten years. Due
to the decline in asset values associated with the returns in the financial markets during 2008,
the funding level of the Central States Pension Fund for the plan year beginning January 1, 2009
may drop below the targeted funding ratio set forth as a condition of the ten-year amortization
extension. In early 2009, the Central States Pension Fund requested that the IRS suspend the funded
ratio condition of the ten-year amortization extension. The Central States Pension Fund has
communicated to the Company that it believes that the request for suspension of the funded ratio
will be granted due, in part, to the fact that the amortization extension approved by the IRS in
2005 expressly indicated that modifications of conditions would be considered in the event of
unforeseen market fluctuations which cause the plan to fail the funded ratio condition for a
certain plan year. In the unlikely event the IRS denies the request to suspend the funded ratio
condition of the amortization extension, revocation would apply retroactively to the 2004 plan
year, which would result in a material liability for ABF’s share of the resulting funding
deficiency, the extent of which is currently unknown to the Company. The Company believes that the
occurrence of events that would require recognition of liabilities for ABF’s share of a funding
deficiency is remote.
The Company anticipates that a number of other plans in which ABF participates will have to adopt
either a funding improvement plan or a rehabilitation program, depending on their current funding
status as required by the Act. Based upon currently available information, the Company believes
that the contribution rates under the new collective bargaining agreement will comply with any
rehabilitation plan that may be adopted for the majority of other multiemployer pension plans in
which ABF participates. If the contribution rates in the collective bargaining agreement fail to
meet the requirements established by the rehabilitation or funding improvement plan required by the
Act for underfunded plans, the Act would impose additional contribution requirements on ABF in the
form of a surcharge of an additional 5% to 10%. However, under ABF’s five-year collective
bargaining agreement that became effective April 1, 2008, any surcharges that may be required by
the Act are covered by the contractual contribution rate and should not increase ABF’s overall
contribution obligation. The plan’s trustees have the ability to take a wide range of actions to
improve the funding status of the plan which include adopting an automatic five-year extension of
the amortization period available under the Act; requesting an additional five-year extension from
the IRS; obtaining changes to or waivers of the requirements used by the plan to calculate funding
levels; or modifying pension benefits.
The underfunded status of many plans in which ABF participates occurred over many years, and
management believes that an improved funded status will also take time to be achieved. The Company
believes that the trustees of these funds will take appropriate measures to fulfill their fiduciary
duty to preserve the integrity of the plans utilizing a combination of several possible initiatives
as they have done in the past, although the Company cannot make any assurances in this regard.
While increasing employer contributions is one potential remedy to
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued address the underfunded status,
it is the Company’s understanding that ABF’s annual contribution increases are limited to
negotiated contribution rates through March 2013 as provided in the current collective bargaining
agreement, which also complies with the Central States Pension Fund’s rehabilitation plan. Other
alternatives that may be pursued by the trustees of underfunded plans include reducing or
eliminating certain “adjustable benefits” of the plan or
redesigning the plan structure. Furthermore, additional legislative changes or action taken by
governmental agencies could provide relief.
ABF’s aggregate contributions to the multiemployer health, welfare and pension plans for the years
ended December 31 are as follows:
NOTE J
— STOCKHOLDERS’ EQUITY
Common Stock: The following table is a summary of dividends declared during the applicable quarter:
Stockholders’ Rights Plan: Under the Company’s 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% or more of the outstanding Common Stock of the Company. Under certain
conditions, the rights will entitle holders, other than an acquirer in a nonpermitted transaction,
to purchase shares of Common Stock with a market value of two times the exercise price of the
right. The rights will expire in 2011 unless extended. On May 18, 2007, the Company amended its
stockholders’ rights plan to permit a named stockholder to beneficially own up to 17.999% of the
Company’s Common Stock without causing the rights to become exercisable.
Treasury Stock: The Company has a program to repurchase its Common Stock in the open market or in
privately negotiated transactions. In 2003, the Company’s Board of Directors authorized stock
repurchases of up to $25.0 million and in 2005, an additional $50.0 million was authorized for a
total of $75.0 million. As of December 31, 2008, the Company has purchased 1,618,150 shares for an
aggregate cost of $56.8 million, leaving $18.2 million available for repurchase under the current
buyback program. The program has no expiration date but may be terminated at any time at the Board
of Directors’ discretion. Repurchases may be made using the Company’s cash reserves or other
available sources.
Stock Awards: As of December 31, 2008, 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
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued 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. As of December 31,
2008, the Company had not elected to treat any exercised options as Employer Stock Appreciation
Rights (“SARs”) and no employee SARs had been granted. No stock options have been granted since
2004.
The 2005 Plan supersedes the Company’s 2000 Non-Qualified Stock Option Plan and 2002 Stock Option
Plan with respect to future awards and provides for the granting of 1.5 million shares, which may
be awarded as incentive and nonqualified stock options, SARs, restricted stock or restricted 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.
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:
The Compensation Committee of the Board of Directors granted restricted stock and restricted stock
units under the 2005 Plan during the years ended December 31, 2008, 2007 and 2006 as follows:
The fair value of restricted stock that vested was $1.0 million in 2008, $0.7 million in 2007 and
$1.0 million in 2006.
Unrecognized compensation cost related to restricted stock awards outstanding as of December 31,
2008 was approximately $13.0 million, which is expected to be recognized over a weighted-average
period of 2.8 years.
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued Stock Options
A summary of the Company’s stock option program is presented below:
The following table summarizes additional activity related to the Company’s stock option program
for the years ended December 31:
There was no unrecognized compensation cost related to stock option awards outstanding as of
December 31, 2008.
Accumulated Other Comprehensive Loss: Components of accumulated other comprehensive loss are as
follows at December 31:
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued NOTE K
— EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the
years ended December 31:
For the year ended December 31, 2008, outstanding stock awards of 176,425 were antidilutive and not
included in the net income per diluted share calculations, because their inclusion would have the
effect of increasing the earnings per share amount. The Company had no outstanding stock awards
that were antidilutive during the years ended December 31, 2007 or 2006.
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued NOTE L
— OPERATING SEGMENT DATA
The Company uses the “management approach” to determine its reportable operating segments, as well
as to determine the basis of reporting the operating segment information. The management approach
focuses on financial information that the Company’s management uses to make decisions about
operating matters. Management uses operating revenues, operating expense categories, operating
ratios, operating income and key operating statistics to evaluate performance and allocate
resources to the Company’s operations.
ABF, which provides transportation of general commodities, represents the Company’s only reportable
operating segment. The operations of Clipper, which are reported as discontinued operations in the
accompanying consolidated statements of income, were previously reported as a separate segment
prior to its sale in June 2006.
ABF is headquartered in Fort Smith, Arkansas, and provides direct service to over 98% of the cities
in the United States having a population of 30,000 or more. The operations of ABF include, in the
aggregate, national, inter-regional and regional transportation of general commodities through
standard, expedited and guaranteed LTL services.
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 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 are impractical and are,
therefore, not provided. The Company’s foreign operations are not significant.
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued The following table reflects reportable operating segment information for the Company for the years
ended December 31, as well as a reconciliation of reportable segment information to the Company’s
consolidated operating revenues, operating expenses, operating income and consolidated income from
continuing operations before income taxes:
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued The following table provides 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:
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued NOTE M
— QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The tables below present unaudited quarterly financial information for 2008 and 2007:
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued NOTE N
— 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 and environmental exposures. While management
believes that amounts accrued in the accompanying consolidated financial statements are adequate,
estimates of these liabilities may change as circumstances develop. Considering amounts recorded,
these matters are not expected to have a material adverse effect on the Company’s financial
condition, cash flows or results of operations.
On July 30, 2007, Farm Water Technological Services, Inc., d/b/a Water Tech, and C.B.J.T., d/b/a
Agricultural Supply, on behalf of themselves and other plaintiffs, filed a putative class action
lawsuit in the United States District Court for the Southern District of California against the
Company and eleven other companies engaged in the LTL trucking business. This lawsuit alleged that
the carriers violated U.S. antitrust laws regarding fuel surcharges and sought unspecified treble
damages allegedly sustained by class members, along with injunctive relief, attorney’s fees and
costs of litigation. After the original suit was filed, other plaintiffs filed similar cases in
various courts across the country. On December 20, 2007, the United States Judicial Panel on
Multidistrict Litigation entered an order centralizing and transferring the pending lawsuits for
pretrial proceedings to the United States District Court for the Northern District of Georgia (the
“Court”) as requested by the defendants, including the Company. On January 28, 2009, the Court
granted the defendants’ motion to dismiss the case, ruling that the plaintiffs’ complaint did not
allege sufficient facts to properly state a claim upon which relief could be granted under the
legal standards applicable to antitrust conspiracy claims. The Court has allowed the plaintiffs
until March 16, 2009 to move to amend their complaint in order to add additional detailed
allegations. The Company cannot predict the final outcome of this matter, including any attempted
appeal of the Court’s ruling by the plaintiffs or any attempt by the plaintiffs to amend their
complaint. However, the Company believes that the allegations in this litigation are without merit
and intends to contest such allegations and defend itself vigorously. If an adverse final outcome
were to occur, it could have a material adverse effect on the Company’s consolidated financial
condition, cash flows and results of operations.
The Company’s subsidiaries store fuel for use in tractors and trucks in 71 underground tanks
located in 23 states. Maintenance of such tanks is regulated at the federal and, in some cases,
state levels. The Company believes that it is in substantial compliance with 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 $103,000 over the last ten years, primarily at seven sites) or believes
its obligations, other than those specifically accrued for with respect to such sites, would
involve immaterial monetary liability, although there can be no assurances in this regard.
At December 31, 2008 and 2007, the Company’s reserve for estimated environmental clean-up costs of
properties currently or previously operated by the Company totaled $1.1 million, which is included
in accrued expenses in the accompanying consolidated balance sheets. Amounts accrued reflect
management’s best estimate of the future undiscounted exposure related to identified properties
based on current environmental regulations.
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued The Company’s estimate is based on management’s
experience with similar environmental matters and on testing performed at certain sites.
NOTE O — EXCESS INSURANCE CARRIERS
Reliance Insurance Company (“Reliance”) was the Company’s excess insurer for workers’ compensation
claims above the self-insured retention level of $0.3 million for the 1993 through 1999 policy
years. 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 liabilities since 2001 for its estimated exposure to the Reliance liquidation. 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
above $0.3 million for the 2000 through 2001 policy years. 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 audit opinions
with a going-concern explanatory paragraph on its statutory financial statements issued from 2004
to 2007. 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. Although Kemper
continues to pay amounts owed, the Company is uncertain as to the future impact that Kemper’s
financial condition will have on excess insurance coverage during the 2000 and 2001 policy years.
Based upon Kemper’s available financial information, the Company has recorded an allowance for
uncollectible receivables and additional liabilities for excess claims.
The Company has recorded the following receivables and related allowances at December 31 for
workers’ compensation excess claims paid by the Company but insured by Reliance and Kemper:
The Company has the following liabilities recorded at December 31 for workers’ compensation excess
claims insured by but not expected to be covered by Reliance and Kemper:
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ARKANSAS BEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — continued NOTE P — SALE OF CLIPPER AND DISCONTINUED OPERATIONS
On June 15, 2006, the Company completed the sale of Clipper for $21.5 million in cash. After
recording costs associated with the transaction, the Company recognized a pre-tax gain of $4.9
million or $3.1 million after-tax ($0.12 per diluted share). Pursuant to the sale agreement, the
Company has agreed to indemnify the purchaser upon the occurrence of certain events and has
provided lease guarantees through March 2012 totaling $0.8 million. The accompanying consolidated
statements of income for 2006 reflect Clipper as a discontinued operation. Cash flows associated
with the discontinued operations of Clipper have been combined within operating, investing and
financing cash flows, as appropriate, in the accompanying consolidated statement of cash flows for
2006.
Summarized financial information for Clipper is as follows for the year ended December 31, 2006:
NOTE Q — RECENT ACCOUNTING PRONOUNCEMENTS
In February 2008, the FASB issued FSP 157-2, which provides a one-year deferral of the effective
date of FAS 157 for nonfinancial assets and liabilities, except those that are recognized or
disclosed in the financial statements at fair value at least annually. FAS 157 clarifies the
definition of fair value, establishes a framework for measuring fair value and expands the
disclosures on fair value assumptions. In accordance with FSP 157-2, the application of FAS 157 to
nonfinancial assets and liabilities was effective for the Company beginning January 1, 2009.
The Company does not expect the application of FAS 157 to its nonfinancial assets and liabilities,
such as long-lived assets held and used in operations, assets held for sale, asset retirement
obligations and goodwill, to have a material effect on its consolidated financial statements.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
An evaluation was performed by the Company’s management, including the Company’s CEO and CFO, of
the effectiveness of the design and operation of the Company’s disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the ”Exchange Act”)) as of December 31, 2008. Based on such evaluation, the
Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures were
effective as of December 31, 2008.
There have been no changes in the Company’s internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended
December 31, 2008 that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Management’s assessment of internal control over financial reporting and the report of the
independent registered public accounting firm appear on the following pages.
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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 control 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 control over financial
reporting, based on our evaluation, we have concluded that the Company’s internal control over
financial reporting was effective as of December 31, 2008.
The Company’s independent registered public accounting firm Ernst & Young LLP, who has also audited
the Company’s consolidated financial statements, has issued a report on the Company’s internal
control over financial reporting. This report appears on the following page.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Arkansas Best Corporation We have audited Arkansas Best Corporation’s internal control over financial reporting as of
December 31, 2008, 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 included in the accompanying Management’s Assessment of Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on 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, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
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, Arkansas Best Corporation maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the 2008 consolidated financial statements of Arkansas Best Corporation and
our report dated February 20, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Tulsa, Oklahoma
February 20, 2009 89
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ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The sections entitled “Election of Directors,” “Directors of the Company,” “Governance of the
Company,” “Executive Officers of the Company,” “General Matters” and “Section 16(a) Beneficial
Ownership Reporting Compliance” contained in the Company’s Definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the Company’s
Annual Stockholders’ Meeting to be held April 21, 2009, are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled “Compensation Discussion and Analysis,” “Summary Compensation Table,” “2008
Grants of Plan-Based Awards,” “Outstanding Equity Awards at 2008 Fiscal Year-End,” “2008 Option
Exercises and Stock Vested,” “2008 Pension Benefits,” “2008 Non-Qualified Deferred Compensation,”
“Compensation Committee Interlocks and Insider Participation,” “Potential Payments Upon Termination
or Change in Control,” “2008 Director Compensation Table,” and “Compensation Committee Report”
contained in the Company’s Definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934 in connection with the Company’s Annual Stockholders’ Meeting to be
held April 21, 2009, are incorporated herein by reference.
The sections entitled “Principal Stockholders and Management Ownership” and “2008 Equity
Compensation Plan Information” contained in the Company’s Definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the Company’s
Annual Stockholders’ Meeting to be held April 21, 2009, are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The sections entitled “Certain Transactions and Relationships” and “Governance of the Company”
contained in the Company’s Definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934 in connection with the Company’s Annual Stockholders’ Meeting to be
held April 21, 2009, is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The sections entitled “Principal Accountant Fees and Services” and “Audit Committee Pre-Approval of
Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm”
contained in the Company’s Definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934 in connection with the Company’s Annual Stockholders’ Meeting to be
held April 21, 2009, are incorporated herein by reference.
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PART IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
A list of the financial statements filed as a part of this Annual Report on Form 10-K is set forth
in Part II, Item 8 on page 47 of this Form 10-K and is incorporated by reference.
(a)(2) Financial Statement Schedules
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES ARKANSAS BEST CORPORATION
Note a — Recoveries of amounts previously written off.
Note b — Uncollectible accounts written off. Note c — Debited / (credited) to workers’ compensation expense. NOTE: All information reflected in the above table excludes valuation allowances of discontinued
operations. The consolidated statements of cash flows incorporated by reference include $24,000 in
2006 within the provision for losses on accounts receivable related to discontinued operations that
are not included in Column C in the above table.
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ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES — continued
(a)(3) Exhibits
The exhibits filed with this Annual Report on Form 10-K are listed in the Exhibit Index, which is
submitted as a separate section of this report.
(b) Exhibits
See Item 15(a)(3) above.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
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FORM 10-K — ITEM 15(a)
EXHIBIT INDEX ARKANSAS BEST CORPORATION The following exhibits are filed or furnished with this report or are incorporated by reference to
previously filed material:
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FORM 10-K — ITEM 15(a)
EXHIBIT INDEX ARKANSAS BEST CORPORATION (Continued)
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FORM 10-K — ITEM 15(a)
EXHIBIT INDEX ARKANSAS BEST CORPORATION (Continued)
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FORM 10-K — ITEM 15(a)
EXHIBIT INDEX ARKANSAS BEST CORPORATION (Continued)
97 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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