ArcBest - 10-Q quarterly report FY

 

 

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See notes to consolidated financial statements.

See notes to consolidated financial statements.

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See notes to consolidated financial statements.

See notes to consolidated financial statements.

Arkansas Best Corporation (the “Company”) is a holding company engaged, through its subsidiaries, primarily in motor carrier transportation operations. The principal subsidiary of the Company is ABF Freight System, Inc. (“ABF”).

Approximately 76% 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 3.8%, subject to wage rate cost-of-living adjustments.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and applicable rules and regulations of the Securities and Exchange Commission (the “Commission”) pertaining to interim financial information. Accordingly, these interim financial statements do not include all information or footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements and, therefore, should be read in conjunction with the audited financial statements and accompanying notes included in the Company’s 2007 Annual Report on Form 10-K and other current filings with the Commission. In the opinion of management, all adjustments (which are of a normal and recurring nature) considered necessary for a fair presentation have been included. ABF is impacted by seasonal fluctuations, which affect tonnage and shipment levels and consequently revenues and operating results. The third calendar quarter of each year usually has the highest tonnage levels while the first quarter generally has the lowest. Operating results for the interim periods presented may not necessarily be indicative of the results for the fiscal year.

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

Certain reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation. The statements of income for the three and six months ended June 30, 2007 include reclassifications to report revenue and purchased transportation expense on a gross basis for certain shipments involving third-party interline carriers and certain brokerage transactions where ABF utilizes a third-party carrier for pickup or delivery of freight but remains the primary obligor to provide services to the customer. The amounts reclassified were $5.5 million and $10.7 million for the three and six months ended June 30, 2007, respectively. There was no impact on ABF’s operating income and only a minor impact on ABF’s operating ratio as a result of this reclassification.

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The following is a summary of short-term investments:

During the first quarter of 2008, the Company transitioned out of investments in auction rate debt and preferred equity securities and into money market funds, which are classified as cash equivalents on the accompanying consolidated balance sheet. During the second quarter of 2008, the Company purchased FDIC-insured certificates of deposit with maturities ranging from ninety-one days to one year.

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

For the three and six months ended June 30, 2008, outstanding stock awards of 173,420 and 229,116, respectively, were antidilutive and not included in the net income per diluted share calculations. For the three and six months ended June 30, 2007, no outstanding stock awards were antidilutive.

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On July 22, 2008, the Company’s Board of Directors declared a dividend of $0.15 per share payable to stockholders of record as of August 5, 2008.

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

Components of accumulated other comprehensive loss are as follows:

As of June 30, 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 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 June 30, 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.

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The following table summarizes the Company’s share-based compensation expense, which has been recognized in the accompanying consolidated financial statements:

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 and Nominating/Corporate Governance Committees of the Company’s Board of Directors are responsible for the granting of all share-based compensation under the 2005 Plan. The Company’s policies state that the grant dates for each award shall generally be five business days following the Company’s first quarter earnings release for a given year. In accordance with these policies, on April 21, 2008, the Compensation and Nominating/Corporate Governance Committees approved an award of 183,380 restricted stock units to be granted on April 30, 2008. On that date, the closing market price of the Company’s stock was $39.48 per share.

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

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

The Company’s full-year 2008 nonunion defined benefit pension plan expense is estimated to be $9.6 million compared to $10.2 million for the year ended December 31, 2007. In April 2008, the Company made a voluntary tax-deductible contribution of $5.0 million to its nonunion defined benefit pension plan. The Company’s nonunion defined benefit pension plan covers substantially all noncontractual employees hired before January 1, 2006. All eligible noncontractual employees hired subsequent to December 31, 2005 participate in a defined contribution plan. As described in the 2007 Annual Report on Form 10-K, the Company’s nonunion pension expense and related asset and liability balances are estimated based on a number of assumptions and using the services of a third-party actuary. In determining the pension liability at June 30, 2008, the Company used an expected return on plan assets of 7.6%, which was established 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. Considering the decline in the overall equity markets during 2008, the expected return on plan assets may not be achieved in the near term, and, therefore, the pension liability recorded as of June 30, 2008 may be different from the pension liability recognized as a result of the annual remeasurement which will occur as of December 31, 2008. In accordance with Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, the impact on the pension liability as a

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result of the difference between the expected and actual return on plan assets will be recognized at year-end in accumulated other comprehensive income, net of taxes.

The Company has an unfunded supplemental benefit pension plan for the purpose of providing additional retirement benefits to certain executive officers of the Company. 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 supplemental benefit pension plan:

During the remainder of 2008, the Company anticipates settling obligations of $2.4 million and recording additional pension settlement expense of approximately $0.6 million on a pre-tax basis, or $0.01 per diluted share, net of taxes. The final settlement amount is dependent upon the pension actuarial valuation, which is based on the applicable discount rate determined at the settlement date. During the last six months of 2007, the Company recorded pension settlement expense of $0.6 million on a pre-tax basis, or $0.01 per diluted share, net of taxes.

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 is not directly involved in the administration of the trust funds. 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 certain multiemployer pension plans.

ABF currently contributes to 27 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

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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 multiemployer pension contributions are made to the Central States Southeast and Southwest Area Pension Fund (“Central States Pension Fund”). The Company believes that the funded percentage of the Central States Pension Fund was 70% to 75% as of December 31, 2007, but that the funding percentage has likely decreased during the first six months of 2008 due to declines in the overall equity 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 placed the Central States Pension Fund in “critical status.” In its five-year collective bargaining agreement that became effective April 1, 2008, ABF has agreed to a schedule of contribution rate increases that complies with the Central States Pension Fund rehabilitation plan. The Company believes 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. 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 any multiemployer pension plan fails to (i) meet minimum funding requirements; (ii) obtain from the IRS an extension in the amortization period or obtain certain changes to or waivers of the requirements used by a particular plan to calculate funding levels; or (iii) reduce pension benefits to a level where the requirements are met, and the agreed-upon contribution rates fail to meet the requirements established by the rehabilitation or funding improvement plan required by the Act for underfunded plans, the Act could impose additional contribution requirements on ABF in the form of a surcharge of an additional five to ten percent. However, under ABF’s five-year collective bargaining agreement that became effective April 1, 2008, any surcharges required by the Act will be included in the contractual contribution rate and should not increase ABF’s overall contribution obligation.

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

The Company eliminates intercompany transactions in consolidation. However, the information used by the Company’s management with respect to its reportable segment is before intercompany eliminations of revenues and expenses. Intercompany 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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The following tables reflect reportable operating segment information for the Company, as well as a reconciliation of reportable segment information to the Company’s consolidated financial statements:

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 consolidated financial condition, cash flows or results of operations.

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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 alleges that the carriers violated U.S. antitrust laws regarding fuel surcharges and seeks 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 as requested by the defendants, including the Company. This class action litigation is in a preliminary stage and the Company cannot predict its outcome, as the litigation process is inherently uncertain. If an adverse outcome were to occur, it could have a material adverse effect on the Company’s consolidated financial condition, cash flows and results of operations. However, the Company believes that the allegations in this litigation are without merit and intends to contest such allegations and defend itself vigorously.

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 minimus settlements (aggregating approximately $103,000 over the last 10 years, primarily at seven sites) or believes its obligations, other than those specifically accrued for with respect to such sites, would involve immaterial monetary liability, although there can be no assurances in this regard.

At June 30, 2008 and December 31, 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. The Company’s estimate is based on management’s experience with similar environmental matters and on testing performed at certain sites.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). This statement clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which provides a one year deferral of the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually.

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. The partial

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adoption of FAS 157 for financial assets and liabilities did not have a material effect on the Company’s consolidated financial statements. The Company does not expect the application of FAS 157 to its nonfinancial assets and nonfinancial liabilities to have a material effect on its consolidated financial statements when that portion of the statement becomes effective for the Company beginning January 1, 2009.

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:

The following table presents, for each of the fair value hierarchy levels, the Company’s assets and liabilities at June 30, 2008 that are measured at fair value on a recurring basis:

Arkansas Best Corporation (the “Company”), a Delaware corporation, is a holding company engaged through its subsidiaries primarily in motor carrier transportation operations. The principal subsidiary of the Company is ABF Freight System, Inc. (“ABF”).

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations describes the principal factors affecting critical accounting policies, liquidity and capital resources, and results of operations of the Company. This discussion should be read in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements and the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. The Company’s 2007 Annual Report on Form 10-K includes additional information about significant accounting policies, practices and the transactions that underlie the Company’s financial results, as well as a detailed discussion of the most significant risks and uncertainties to which its financial and operating results are subject. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The Company’s accounting policies 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 in the Company’s 2007 Annual Report on Form 10-K. There have been no material changes in these critical accounting policies during the six months ended June 30, 2008.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). This statement clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”), which provides a one year deferral of the effective date of FAS 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance with FSP 157-2, 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 effective January 1, 2008 (see Note J to the Company’s accompanying consolidated financial statements). The partial adoption of FAS 157 for financial assets and liabilities did not have a material effect on the Company’s consolidated financial statements. The Company does not expect the application of FAS 157 to its nonfinancial assets and nonfinancial liabilities to have a material effect on its consolidated financial statements when that portion of the statement becomes effective for the Company beginning January 1, 2009.

The Company’s primary sources of liquidity are cash generated by operations and borrowing capacity under its revolving Credit Agreement.

Cash Flow and Short-Term Investments: Components of cash and cash equivalents and short-term investments are 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 and into money market funds, which are classified as cash equivalents, resulting in the sale of $78.6 million of short-term investments with no realized gains or losses. During the second quarter of 2008, the Company purchased FDIC-insured certificates of deposit with maturities ranging from ninety-one days to one year.

During the six months ended June 30, 2008, cash provided from operations of $58.9 million and proceeds from asset sales of $12.8 million were used to purchase revenue equipment (tractors and trailers used primarily in ABF’s operations) and other property and equipment totaling $16.1 million and pay dividends on Common Stock of $7.7 million.

During the six months ended June 30, 2007, cash provided from operations of $56.6 million, proceeds from asset sales of $5.2 million and proceeds from the net sales of short-term investments of $5.3 million were used to purchase revenue equipment and other property and equipment totaling $49.8 million, make payments on long-term debt of $1.3 million, purchase 125,000 shares of the Company’s Common Stock for $4.9 million and pay dividends on Common Stock of $7.6 million.

Credit Agreement: The Company has a revolving credit agreement (the “Credit Agreement”) with a syndicate of 10 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 Company’s borrowing capacity under its revolving Credit Agreement is presented below:

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 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. The Credit Agreement requires the payment of a utilization fee if the borrowings under the Credit Agreement exceed 50% of the facility amount.

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 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 June 30, 2008, the Company was in compliance with the covenants.

Contractual Obligations: The following table provides the aggregate annual contractual obligations of the Company including capital and operating lease obligations, purchase obligations and near-term estimated benefit plan distributions as of June 30, 2008:

The Company does not have required minimum contributions to its qualified nonunion pension plan in 2008, but made a voluntary tax-deductible contribution of $5.0 million in April 2008. The Pension Protection Act of 2006 did not have a material impact on the future required contributions to the Company’s nonunion defined benefit pension plan.

ABF contributes to multiemployer health, welfare and pension plans based generally on the time worked by its contractual employees, as specified in the collective bargaining agreement and other supporting supplemental agreements (see Note G to the Company’s consolidated financial statements).

Other Liquidity Information: 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 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 speculative purposes, nor has the Company historically engaged in hedging fuel prices. No such instruments were outstanding during the six months ended June 30, 2008 or in 2007.

Off-Balance-Sheet Arrangements: The Company’s off-balance-sheet arrangements include future minimum rental commitments, net of noncancelable subleases, of $42.3 million under operating lease agreements. The Company has no investments, loans or any other known contractual arrangements with affiliated special-purpose entities, variable interest entities or financial partnerships.

Arkansas Best Corporation is a holding company engaged through its subsidiaries primarily in motor carrier transportation operations. The principal subsidiary of the Company is ABF Freight System, Inc. (“ABF”) which represented 95.9% of consolidated revenues for the six months ended June 30, 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”).

During the three and six months ended June 30, 2008, ABF’s revenues increased 6.1% and 5.4%, respectively, on a per-day basis compared to the same periods in 2007. The increase in revenues primarily reflects an increase in revenue per hundredweight influenced by higher fuel surcharge. Tonnage per day for the three and six months ended June 30, 2008 was relatively consistent with the same periods in 2007.

ABF’s second quarter 2008 operating ratio increased to 94.7% from 93.2% in the second quarter of 2007. During the six months ended June 30, 2008, ABF’s operating ratio was 95.8%, which was consistent with the operating ratio during the same period in 2007. The ABF operating ratio is more fully discussed below in the ABF section of Management’s Discussion and Analysis.

ABF’s ability to maintain or grow existing tonnage levels is impacted by the state of the residential and commercial construction, manufacturing and retail sectors of the North American economy, 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 the Company’s 2007 Annual Report on Form 10-K. ABF has experienced significant fluctuations in year-over-year tonnage levels in recent years. Through the first nine months of 2007, tonnage per day declined 6.2% below the same period in 2006. Although business levels remain depressed, quarterly year-over-year tonnage trends have improved since the third quarter of 2007. Compared to the same prior year periods, ABF’s total tonnage per day decreased during the fourth quarter of 2007 and the first quarter of 2008 by 1.5% and 0.5%, respectively. During the three months ended June 30, 2008, ABF’s total tonnage per day increased by 0.2%. For the month of July 2008, average daily total tonnage for ABF declined approximately 2% compared to the same period last year.

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 profile factors such as average shipment size, average length of haul, freight density and customer and geographic mix. For many years, consistent 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 profile characteristics in order to estimate true price changes. ABF focuses on individual account profitability and rarely considers revenue per hundredweight in its customer account or market evaluations. For ABF, total company profitability must be considered together with measures of billed revenue per hundredweight changes. The pricing environment generally becomes more competitive during periods of lower tonnage levels. During the three and six months ended June 30, 2008, the pricing environment was competitive. Total billed revenue per hundredweight increased 6.0% and 5.5%, respectively, during the three and six months ended June 30, 2008 versus the same periods in 2007 primarily due to fuel surcharges resulting from higher fuel-related costs. ABF also experienced freight profile changes during the six

months ended June 30, 2008 that impacted the reported revenue per hundredweight, as further discussed in the ABF section. Excluding freight profile changes and the increase in fuel surcharges, pricing on ABF’s traditional less-than-truckload business declined slightly in the second quarter of 2008. Management expects the pricing environment in 2008 to remain competitive, although there can be no assurances in this regard.

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. 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. ABF experienced significantly higher fuel prices in the first six months of 2008 compared to the same period in 2007, and as a result, ABF’s cost increases in fuel and other energy-related areas outpaced increases in revenue, including fuel surcharge, which negatively impacted margins. 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. Through the first six months of 2008, the fuel surcharge mechanism continued to have strong market acceptance among ABF customers, although certain nonstandard arrangements have limited the amount of fuel surcharge recovered. 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. 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.

Labor costs are impacted by ABF’s contractual obligations under its labor agreement primarily with the International Brotherhood of Teamsters (“IBT”). The five-year collective bargaining agreement, which became effective April 1, 2008, provides for compounded annual contractual wage and benefit increases of approximately 3.8%, subject to wage rate cost-of-living adjustments. ABF’s ability to effectively manage labor costs, which amounted to approximately 59% of ABF’s revenues for the six months ended June 30, 2008, has a direct impact on its operating performance. Shipments per dock, street and yard (“DSY”) hour and total pounds per mile are measures ABF uses to assess 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 is generally effective in managing its labor costs to business levels. Labor costs include retirement and health care benefits for ABF’s contractual employees that are provided by a number of multiemployer plans (see Note G to the accompanying consolidated financial statements).

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. ABF’s regional network covers the eastern two-thirds of the United States. Further operational changes, which are expected to be implemented during the third quarter of 2008, should reduce transit times in the regional network as well as in certain of ABF’s long-haul lanes. These changes are facilitated by ABF’s new labor contract, which became effective April 1, 2008. Anticipated

expansion of the regional network to the Western region of the United States, which may be implemented in late 2008 or early 2009, and the operational changes in the eastern two-thirds of the United States could impact the annual cost of operating this program.

The Company ended the second quarter 2008 with $225.1 million of cash, cash equivalents and short-term investments, $658.1 million in stockholders’ equity and no borrowings under its revolving Credit Agreement. Because of the Company’s financial position at June 30, 2008, the Company should continue to be in a position to pursue various initiatives.

The above changes in consolidated operating revenue, consolidated operating income and diluted earnings per share primarily reflect the operating results of ABF as discussed in the ABF section below.

The comparisons of diluted earnings per share were also impacted by the following:

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 tables provide a comparison of key operating statistics for ABF: