UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 20182019
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 000-19969
ARCBEST CORPORATION
(Exact name of registrant as specified in its charter)
| | |
Delaware (State or other jurisdiction of | | 71-0673405 (I.R.S. Employer Identification No.) |
8401 McClure Drive
Fort Smith, Arkansas72916
(479) (479) 785-6000
(Address, including zip code, and telephone number, including
area code, of the registrant’s principal executive offices)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock $0.01 Par Value | ARCB | Nasdaq |
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☐No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | ||||
| Large accelerated filer | | Accelerated filer | | |||
| Non-accelerated filer ☐ | | Smaller reporting company ☐ | | |||
|
| Emerging growth company ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | |
Class | Outstanding at August | |
Common Stock, $0.01 par value | |
|
ARCBEST CORPORATION
INDEX
| | | |
| Page | ||
| | |
|
| |||
| | ||
| | | |
| | ||
| | | |
| Consolidated Balance Sheets — June 30, | ||
| 3 | ||
| | | |
| |||
| 4 | ||
| | | |
| |||
| 5 | ||
| | | |
| |||
| 6 | ||
| | | |
| |||
| 7 | ||
| | | |
| | 8 | |
| | | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 31 | |
| | | |
| 50 | ||
| | | |
| 50 | ||
| | | |
| | ||
| | | |
| 51 | ||
| | | |
| 51 | ||
| | | |
| 51 | ||
| | | |
| 51 | ||
| | | |
| 51 | ||
| | | |
| 51 | ||
| | | |
| 52 | ||
| | | |
53 |
PART I.
FINANCIAL INFORMATION
ARCBEST CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
| June 30 |
| December 31 |
| ||
|
| 2018 |
| 2017 |
| ||
|
| (Unaudited) |
|
|
|
| |
|
| (in thousands, except share data) |
| ||||
ASSETS |
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 159,307 |
| $ | 120,772 |
|
Short-term investments |
|
| 68,013 |
|
| 56,401 |
|
Accounts receivable, less allowances (2018 – $8,057; 2017 – $7,657) |
|
| 309,112 |
|
| 279,074 |
|
Other accounts receivable, less allowances (2018 – $952; 2017 – $921) |
|
| 19,548 |
|
| 19,491 |
|
Prepaid expenses |
|
| 19,912 |
|
| 22,183 |
|
Prepaid and refundable income taxes |
|
| 4,665 |
|
| 12,296 |
|
Other |
|
| 9,509 |
|
| 12,132 |
|
TOTAL CURRENT ASSETS |
|
| 590,066 |
|
| 522,349 |
|
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
|
|
|
|
Land and structures |
|
| 338,902 |
|
| 344,224 |
|
Revenue equipment |
|
| 818,674 |
|
| 793,523 |
|
Service, office, and other equipment |
|
| 190,109 |
|
| 179,950 |
|
Software |
|
| 131,139 |
|
| 129,589 |
|
Leasehold improvements |
|
| 9,131 |
|
| 8,888 |
|
|
|
| 1,487,955 |
|
| 1,456,174 |
|
Less allowances for depreciation and amortization |
|
| 896,738 |
|
| 865,010 |
|
PROPERTY, PLANT AND EQUIPMENT, net |
|
| 591,217 |
|
| 591,164 |
|
GOODWILL |
|
| 108,320 |
|
| 108,320 |
|
INTANGIBLE ASSETS, net |
|
| 71,206 |
|
| 73,469 |
|
DEFERRED INCOME TAXES |
|
| 6,226 |
|
| 5,965 |
|
OTHER LONG-TERM ASSETS |
|
| 65,261 |
|
| 64,374 |
|
TOTAL ASSETS |
| $ | 1,432,296 |
| $ | 1,365,641 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
Accounts payable |
| $ | 176,034 |
| $ | 129,099 |
|
Income taxes payable |
|
| 511 |
|
| 324 |
|
Accrued expenses |
|
| 221,880 |
|
| 211,237 |
|
Current portion of long-term debt |
|
| 51,562 |
|
| 61,930 |
|
TOTAL CURRENT LIABILITIES |
|
| 449,987 |
|
| 402,590 |
|
LONG-TERM DEBT, less current portion |
|
| 198,070 |
|
| 206,989 |
|
PENSION AND POSTRETIREMENT LIABILITIES |
|
| 36,169 |
|
| 39,827 |
|
OTHER LONG-TERM LIABILITIES |
|
| 38,456 |
|
| 15,616 |
|
DEFERRED INCOME TAXES |
|
| 41,099 |
|
| 49,157 |
|
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
Common stock, $0.01 par value, authorized 70,000,000 shares; issued 2018: 28,541,578 shares; 2017: 28,495,628 shares |
|
| 285 |
|
| 285 |
|
Additional paid-in capital |
|
| 322,895 |
|
| 319,436 |
|
Retained earnings |
|
| 449,442 |
|
| 438,379 |
|
Treasury stock, at cost, 2018: 2,857,460 shares; 2017: 2,851,578 shares |
|
| (86,265) |
|
| (86,064) |
|
Accumulated other comprehensive loss |
|
| (17,842) |
|
| (20,574) |
|
TOTAL STOCKHOLDERS’ EQUITY |
|
| 668,515 |
|
| 651,462 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 1,432,296 |
| $ | 1,365,641 |
|
| | | | | | | |
| | June 30 | | December 31 | | ||
|
| 2019 |
| 2018 |
| ||
| | (Unaudited) | | | | | |
| | (in thousands, except share data) | | ||||
ASSETS | | | | | | | |
CURRENT ASSETS | | | | | | | |
Cash and cash equivalents | | $ | 181,731 | | $ | 190,186 | |
Short-term investments | |
| 117,657 | |
| 106,806 | |
Accounts receivable, less allowances (2019 – $6,238; 2018 – $7,380) | |
| 296,090 | |
| 297,051 | |
Other accounts receivable, less allowances (2019 – $463; 2018 – $806) | |
| 17,207 | |
| 19,146 | |
Prepaid expenses | |
| 28,546 | |
| 25,304 | |
Prepaid and refundable income taxes | |
| 5,237 | |
| 1,726 | |
Other | |
| 4,982 | |
| 9,007 | |
TOTAL CURRENT ASSETS | |
| 651,450 | |
| 649,226 | |
PROPERTY, PLANT AND EQUIPMENT | | | | | | | |
Land and structures | |
| 339,255 | |
| 339,640 | |
Revenue equipment | |
| 888,588 | |
| 858,251 | |
Service, office, and other equipment | |
| 218,131 | |
| 199,230 | |
Software | |
| 143,181 | |
| 138,517 | |
Leasehold improvements | |
| 10,058 | |
| 9,365 | |
| |
| 1,599,213 | |
| 1,545,003 | |
Less allowances for depreciation and amortization | |
| 947,264 | |
| 913,815 | |
PROPERTY, PLANT AND EQUIPMENT, net | |
| 651,949 | |
| 631,188 | |
GOODWILL | |
| 108,320 | |
| 108,320 | |
INTANGIBLE ASSETS, net | |
| 66,700 | |
| 68,949 | |
OPERATING RIGHT-OF-USE ASSETS | | | 68,810 | | | — | |
DEFERRED INCOME TAXES | |
| 6,296 | |
| 7,468 | |
OTHER LONG-TERM ASSETS | |
| 80,402 | |
| 74,080 | |
TOTAL ASSETS | | $ | 1,633,927 | | $ | 1,539,231 | |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | |
CURRENT LIABILITIES | | | | | | | |
Accounts payable | | $ | 166,829 | | $ | 143,785 | |
Income taxes payable | |
| 1,942 | |
| 1,688 | |
Accrued expenses | |
| 228,994 | |
| 243,111 | |
Current portion of long-term debt | |
| 47,205 | |
| 54,075 | |
Current portion of operating lease liabilities | | | 18,273 | | | — | |
Current portion of pension and postretirement liabilities | | | 8,231 | | | 8,659 | |
TOTAL CURRENT LIABILITIES | |
| 471,474 | |
| 451,318 | |
LONG-TERM DEBT, less current portion | |
| 235,001 | |
| 237,600 | |
OPERATING LEASE LIABILITIES, less current portion | | | 54,040 | | | — | |
PENSION AND POSTRETIREMENT LIABILITIES, less current portion | |
| 31,874 | |
| 31,504 | |
OTHER LONG-TERM LIABILITIES | |
| 37,268 | |
| 44,686 | |
DEFERRED INCOME TAXES | |
| 61,111 | |
| 56,441 | |
STOCKHOLDERS’ EQUITY | | | | | | | |
Common stock, $0.01 par value, authorized 70,000,000 shares; issued 2019: 28,786,473 shares, 2018: 28,684,779 shares | |
| 288 | |
| 287 | |
Additional paid-in capital | |
| 329,388 | |
| 325,712 | |
Retained earnings | |
| 526,551 | |
| 501,389 | |
Treasury stock, at cost, 2019: 3,266,169 shares; 2018: 3,097,634 shares | |
| (100,639) | |
| (95,468) | |
Accumulated other comprehensive loss | |
| (12,429) | |
| (14,238) | |
TOTAL STOCKHOLDERS’ EQUITY | |
| 743,159 | |
| 717,682 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,633,927 | | $ | 1,539,231 | |
See notes to consolidated financial statements.
3
ARCBEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30 |
| June 30 |
| ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
|
| (Unaudited) |
| ||||||||||
|
| (in thousands, except share and per share data) |
| ||||||||||
REVENUES |
| $ | 793,350 |
| $ | 720,368 |
| $ | 1,493,351 |
| $ | 1,371,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
| 790,194 |
|
| 694,601 |
|
| 1,477,470 |
|
| 1,355,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME |
|
| 3,156 |
|
| 25,767 |
|
| 15,881 |
|
| 15,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (COSTS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
| 714 |
|
| 285 |
|
| 1,240 |
|
| 559 |
|
Interest and other related financing costs |
|
| (2,013) |
|
| (1,389) |
|
| (4,072) |
|
| (2,704) |
|
Other, net |
|
| (1,123) |
|
| (528) |
|
| (3,324) |
|
| (2,234) |
|
|
|
| (2,422) |
|
| (1,632) |
|
| (6,156) |
|
| (4,379) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES |
|
| 734 |
|
| 24,135 |
|
| 9,725 |
|
| 11,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX PROVISION (BENEFIT) |
|
| (499) |
|
| 8,358 |
|
| (1,462) |
|
| 3,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
| $ | 1,233 |
| $ | 15,777 |
| $ | 11,187 |
| $ | 8,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.05 |
| $ | 0.61 |
| $ | 0.43 |
| $ | 0.32 |
|
Diluted |
| $ | 0.05 |
| $ | 0.60 |
| $ | 0.42 |
| $ | 0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE COMMON SHARES OUTSTANDING |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 25,670,325 |
|
| 25,767,791 |
|
| 25,656,674 |
|
| 25,726,363 |
|
Diluted |
|
| 26,699,549 |
|
| 26,291,641 |
|
| 26,653,282 |
|
| 26,378,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH DIVIDENDS DECLARED PER COMMON SHARE |
| $ | 0.08 |
| $ | 0.08 |
| $ | 0.16 |
| $ | 0.16 |
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | ||||||||
| | June 30 | | June 30 | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
| | (Unaudited) | | ||||||||||
| | (in thousands, except share and per share data) | | ||||||||||
REVENUES | | $ | 771,490 | | $ | 793,350 | | $ | 1,483,329 | | $ | 1,493,351 | |
| | | | | | | | | | | | | |
OPERATING EXPENSES | |
| 736,290 | | | 790,194 | |
| 1,439,538 | | | 1,477,470 | |
| | | | | | | | | | | | | |
OPERATING INCOME | |
| 35,200 | |
| 3,156 | |
| 43,791 | |
| 15,881 | |
| | | | | | | | | | | | | |
OTHER INCOME (COSTS) | | | | | | | | | | | | | |
Interest and dividend income | |
| 1,616 | |
| 714 | |
| 3,094 | |
| 1,240 | |
Interest and other related financing costs | |
| (2,811) | |
| (2,013) | |
| (5,693) | |
| (4,072) | |
Other, net | |
| (445) | |
| (1,123) | |
| (1,036) | |
| (3,324) | |
| |
| (1,640) | |
| (2,422) | |
| (3,635) | |
| (6,156) | |
| | | | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | |
| 33,560 | |
| 734 | |
| 40,156 | |
| 9,725 | |
| | | | | | | | | | | | | |
INCOME TAX PROVISION (BENEFIT) | |
| 9,184 | |
| (499) | |
| 10,892 | |
| (1,462) | |
| | | | | | | | | | | | | |
NET INCOME | | $ | 24,376 | | $ | 1,233 | | $ | 29,264 | | $ | 11,187 | |
| | | | | | | | | | | | | |
EARNINGS PER COMMON SHARE | | | | | | | | | | | | | |
Basic | | $ | 0.95 | | $ | 0.05 | | $ | 1.14 | | $ | 0.43 | |
Diluted | | $ | 0.92 | | $ | 0.05 | | $ | 1.10 | | $ | 0.42 | |
| | | | | | | | | | | | | |
AVERAGE COMMON SHARES OUTSTANDING | | | | | | | | | | | | | |
Basic | |
| 25,554,286 | |
| 25,670,325 | |
| 25,562,306 | |
| 25,656,674 | |
Diluted | |
| 26,431,592 | |
| 26,699,549 | |
| 26,483,011 | |
| 26,653,282 | |
| | | | | | | | | | | | | |
CASH DIVIDENDS DECLARED PER COMMON SHARE | | $ | 0.08 | | $ | 0.08 | | $ | 0.16 | | $ | 0.16 | |
See notes to consolidated financial statements.
4
ARCBEST CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30 |
| June 30 |
| ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
|
| (Unaudited) |
| ||||||||||
|
| (in thousands) |
| ||||||||||
NET INCOME |
| $ | 1,233 |
| $ | 15,777 |
| $ | 11,187 |
| $ | 8,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and other postretirement benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain (loss), net of tax of: (2018 – Three-month period $450, Six-month period $1,349; 2017 – Three-month period $64, Six-month period $999) |
|
| 1,300 |
|
| (98) |
|
| 3,890 |
|
| (1,569) |
|
Pension settlement expense, net of tax of: (2018 – Three-month period $111, Six-month period $279; 2017 – Three-month period $290, Six-month period $1,051) |
|
| 320 |
|
| 454 |
|
| 806 |
|
| 1,650 |
|
Amortization of unrecognized net periodic benefit costs, net of tax of: (2018 – Three-month period $171, Six-month period $390; 2017 – Three-month period $352, Six-month period $753) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
| 511 |
|
| 581 |
|
| 1,160 |
|
| 1,241 |
|
Prior service credit |
|
| (18) |
|
| (29) |
|
| (35) |
|
| (58) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap and foreign currency translation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized income on interest rate swap, net of tax of: (2018 – Three-month period $7, Six-month period $275; 2017 – Three-month period $52, Six-month period $140) |
|
| 343 |
|
| 81 |
|
| 779 |
|
| 216 |
|
Change in foreign currency translation, net of tax of: (2018 – Three-month period $78, Six month-period $103; 2017 – Three-month period $134, Six-month period $58) |
|
| (220) |
|
| (208) |
|
| (292) |
|
| (89) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME, net of tax |
|
| 2,236 |
|
| 781 |
|
| 6,308 |
|
| 1,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME |
| $ | 3,469 |
| $ | 16,558 |
| $ | 17,495 |
| $ | 9,761 |
|
| | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | ||||||||
| | June 30 | | June 30 | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
| | (Unaudited) | | ||||||||||
| | (in thousands) | | ||||||||||
NET INCOME | | $ | 24,376 | | $ | 1,233 | | $ | 29,264 | | $ | 11,187 | |
| | | | | | | | | | | | | |
OTHER COMPREHENSIVE INCOME, net of tax | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Pension and other postretirement benefit plans: | | | | | | | | | | | | | |
Net actuarial loss, net of tax of: (2019 – Three-month period $20, Six-month period $210; 2018 – Three-month period $450, Six-month period $1,349) | |
| (58) | |
| 1,300 | |
| 603 | |
| 3,890 | |
Pension settlement expense, net of tax of: (2019 – Three-month period $72, Six-month period $421; 2018 – Three-month period $111, Six-month period $279) | |
| 206 | |
| 320 | |
| 1,213 | |
| 806 | |
Amortization of unrecognized net periodic benefit costs, net of tax of: (2019 – Three-month period $77, Six-month period $177; 2018 – Three-month period $171, Six-month period $390) | | | | | | | | | | | | | |
Net actuarial loss | |
| 229 | |
| 511 | |
| 524 | |
| 1,160 | |
Prior service credit | |
| (6) | |
| (18) | |
| (12) | |
| (35) | |
| | | | | | | | | | | | | |
Interest rate swap and foreign currency translation: | | | | | | | | | | | | | |
Change in unrealized income (loss) on interest rate swap, net of tax of: (2019 – Three-month period $187, Six-month period $305; 2018 – Three-month period $7, Six-month period $275) | | | (528) | | | 343 | | | (860) | | | 779 | |
Change in foreign currency translation, net of tax of: (2019 – Three-month period $41, Six-month period $120; 2018 – Three-month period $78, Six-month period $103) | |
| 116 | |
| (220) | |
| 341 | |
| (292) | |
| | | | | | | | | | | | | |
OTHER COMPREHENSIVE INCOME, net of tax | |
| (41) | |
| 2,236 | |
| 1,809 | |
| 6,308 | |
| | | | | | | | | | | | | |
TOTAL COMPREHENSIVE INCOME | | $ | 24,335 | | $ | 3,469 | | $ | 31,073 | | $ | 17,495 | |
See notes to consolidated financial statements.
5
ARCBEST CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
| |
|
|
|
|
|
|
| Additional |
|
|
|
|
|
|
|
|
| Other |
|
|
|
| ||
|
| Common Stock |
| Paid-In |
| Retained |
| Treasury Stock |
| Comprehensive |
| Total |
| ||||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Shares |
| Amount |
| Loss |
| Equity |
| ||||||
|
| (Unaudited) |
| ||||||||||||||||||||
|
| (in thousands) |
| ||||||||||||||||||||
Balance at December 31, 2017 |
| 28,496 |
| $ | 285 |
| $ | 319,436 |
| $ | 438,379 |
| 2,852 |
| $ | (86,064) |
| $ | (20,574) |
| $ | 651,462 |
|
Adjustments to beginning retained earnings for adoption of accounting standards: |
|
|
|
|
|
|
|
|
|
| 3,992 |
|
|
|
|
|
|
| (3,576) |
|
| 416 |
|
Balance at January 1, 2018 |
| 28,496 |
|
| 285 |
|
| 319,436 |
|
| 442,371 |
| 2,852 |
|
| (86,064) |
|
| (24,150) |
|
| 651,878 |
|
Net income |
|
|
|
|
|
|
|
|
|
| 11,187 |
|
|
|
|
|
|
|
|
|
| 11,187 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 6,308 |
|
| 6,308 |
|
Issuance of common stock under share-based compensation plans |
| 46 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
Tax effect of share-based compensation plans |
|
|
|
|
|
|
| (85) |
|
|
|
|
|
|
|
|
|
|
|
|
| (85) |
|
Share-based compensation expense |
|
|
|
|
|
|
| 3,544 |
|
|
|
|
|
|
|
|
|
|
|
|
| 3,544 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
| 5 |
|
| (201) |
|
|
|
|
| (201) |
|
Dividends declared on common stock |
|
|
|
|
|
|
|
|
|
| (4,116) |
|
|
|
|
|
|
|
|
|
| (4,116) |
|
Balance at June 30, 2018 |
| 28,542 |
| $ | 285 |
| $ | 322,895 |
| $ | 449,442 |
| 2,857 |
| $ | (86,265) |
| $ | (17,842) |
| $ | 668,515 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended and Six Months Ended June 30, 2019 | | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | Accumulated | | | | | |
| | | | | | | Additional | | | | | | | | | | Other | | | | | ||
| | Common Stock |
| Paid-In | | Retained | | Treasury Stock |
| Comprehensive | | Total | | ||||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Shares |
| Amount |
| Loss |
| Equity |
| ||||||
| | (Unaudited) | | ||||||||||||||||||||
| | (in thousands) | | ||||||||||||||||||||
Balance at December 31, 2018 |
| 28,685 | | $ | 287 | | $ | 325,712 | | $ | 501,389 |
| 3,098 | | $ | (95,468) | | $ | (14,238) | | $ | 717,682 | |
Net income | | | | | | | | | |
| 4,888 | | | | | | | | | |
| 4,888 | |
Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | |
| 1,850 | |
| 1,850 | |
Tax effect of share-based compensation plans | | | | | | |
| (8) | | | | | | | | | | | | |
| (8) | |
Share-based compensation expense | | | | | | |
| 2,058 | | | | | | | | | | | | |
| 2,058 | |
Purchase of treasury stock | | | | | | | | | | | | | 74 | | | (2,663) | | | | | | (2,663) | |
Dividends declared on common stock | | | | | | | | | |
| (2,052) | | | | | | | | | |
| (2,052) | |
Balance at March 31, 2019 |
| 28,685 | | $ | 287 | | $ | 327,762 | | $ | 504,225 |
| 3,172 | | $ | (98,131) | | $ | (12,388) | | $ | 721,755 | |
Net income | | | | | | | | | |
| 24,376 | | | | | | | | | |
| 24,376 | |
Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | |
| (41) | |
| (41) | |
Issuance of common stock under share-based compensation plans |
| 101 | |
| 1 | |
| (1) | | | | | | | | | | | | |
| — | |
Tax effect of share-based compensation plans | | | | | | |
| (1,174) | | | | | | | | | | | | |
| (1,174) | |
Share-based compensation expense | | | | | | |
| 2,801 | | | | | | | | | | | | |
| 2,801 | |
Purchase of treasury stock | | | | | | | | | | | | | 94 | | | (2,508) | | | | | | (2,508) | |
Dividends declared on common stock | | | | | | | | | |
| (2,050) | | | | | | | | | |
| (2,050) | |
Balance at June 30, 2019 |
| 28,786 | | $ | 288 | | $ | 329,388 | | $ | 526,551 |
| 3,266 | | $ | (100,639) | | $ | (12,429) | | $ | 743,159 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended and Six Months Ended June 30, 2018 | | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | Accumulated | | | | | |
| | | | | | | Additional | | | | | | | | | | Other | | | | | ||
| | Common Stock |
| Paid-In | | Retained | | Treasury Stock |
| Comprehensive | | Total | | ||||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Shares |
| Amount |
| Loss |
| Equity | | ||||||
| | (Unaudited) | | ||||||||||||||||||||
| | (in thousands) | | ||||||||||||||||||||
Balance at December 31, 2017 |
| 28,496 | | $ | 285 | | $ | 319,436 | | $ | 438,379 |
| 2,852 | | $ | (86,064) | | $ | (20,574) | | $ | 651,462 | |
Adjustments to beginning retained earnings for adoption of accounting standards | | | | | | | | | | | 3,992 | | | | | | | | (3,576) | | | 416 | |
Balance at January 1, 2018 | | 28,496 | | | 285 | | | 319,436 | | | 442,371 | | 2,852 | | | (86,064) | | | (24,150) | | | 651,878 | |
Net income | | | | | | | | | |
| 9,954 | | | | | | | | | |
| 9,954 | |
Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | | | 4,072 | | | 4,072 | |
Issuance of common stock under share-based compensation plans | | 3 | |
| — | | | — | | | | | | | | | | | | | | — | |
Tax effect of share-based compensation plans | | | | | | | | (41) | | | | | | | | | | | | | | (41) | |
Share-based compensation expense | | | | | | | | 1,870 | | | | | | | | | | | | | | 1,870 | |
Purchase of treasury stock | | | | | | | | | | | | | 5 | | | (201) | | | | | | (201) | |
Dividends declared on common stock | | | | | | | | | |
| (2,058) | | | | | | | | | | | (2,058) | |
Balance at March 31, 2018 |
| 28,499 | | $ | 285 | | $ | 321,265 | | $ | 450,267 |
| 2,857 | | $ | (86,265) | | $ | (20,078) | | $ | 665,474 | |
Net income | | | | | | | | | |
| 1,233 | | | | | | | | | |
| 1,233 | |
Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | | | 2,236 | | | 2,236 | |
Issuance of common stock under share-based compensation plans | | 43 | |
| — | | | — | | | | | | | | | | | | | | — | |
Tax effect of share-based compensation plans | | | | | | | | (44) | | | | | | | | | | | | | | (44) | |
Share-based compensation expense | | | | | | | | 1,674 | | | | | | | | | | | | | | 1,674 | |
Dividends declared on common stock | | | | | | | | | |
| (2,058) | | | | | | | | | | | (2,058) | |
Balance at June 30, 2018 |
| 28,542 | | $ | 285 | | $ | 322,895 | | $ | 449,442 |
| 2,857 | | $ | (86,265) | | $ | (17,842) | | $ | 668,515 | |
See notes to consolidated financial statements.
6
ARCBEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| ||||
|
| June 30 |
| ||||
|
| 2018 |
| 2017 |
| ||
|
| (Unaudited) |
| ||||
|
| (in thousands) |
| ||||
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
Net income |
| $ | 11,187 |
| $ | 8,370 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 51,409 |
|
| 48,332 |
|
Amortization of intangibles |
|
| 2,264 |
|
| 2,271 |
|
Pension settlement expense |
|
| 1,085 |
|
| 2,701 |
|
Share-based compensation expense |
|
| 3,544 |
|
| 3,599 |
|
Provision for losses on accounts receivable |
|
| 1,069 |
|
| 1,053 |
|
Deferred income tax benefit |
|
| (10,818) |
|
| 2,687 |
|
Gain on sale of property and equipment |
|
| (166) |
|
| (412) |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Receivables |
|
| (31,281) |
|
| (21,091) |
|
Prepaid expenses |
|
| 2,393 |
|
| (2,549) |
|
Other assets |
|
| 2,018 |
|
| (3,100) |
|
Income taxes |
|
| 8,024 |
|
| 458 |
|
Multiemployer pension fund withdrawal liability |
|
| 37,922 |
|
| — |
|
Accounts payable, accrued expenses, and other liabilities |
|
| 40,914 |
|
| 9,007 |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
| 119,564 |
|
| 51,326 |
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Purchases of property, plant and equipment, net of financings |
|
| (24,763) |
|
| (27,123) |
|
Proceeds from sale of property and equipment |
|
| 2,074 |
|
| 2,751 |
|
Purchases of short-term investments |
|
| (26,006) |
|
| (6,223) |
|
Proceeds from sale of short-term investments |
|
| 14,647 |
|
| 9,065 |
|
Capitalization of internally developed software |
|
| (5,997) |
|
| (4,323) |
|
NET CASH USED IN INVESTING ACTIVITIES |
|
| (40,045) |
|
| (25,853) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
Borrowings under accounts receivable securitization program |
|
| — |
|
| 10,000 |
|
Payments on long-term debt |
|
| (33,694) |
|
| (34,948) |
|
Net change in book overdrafts |
|
| (2,888) |
|
| (2,478) |
|
Deferred financing costs |
|
| — |
|
| (275) |
|
Payment of common stock dividends |
|
| (4,116) |
|
| (4,144) |
|
Purchases of treasury stock |
|
| (201) |
|
| (3,611) |
|
Payments for tax withheld on share-based compensation |
|
| (85) |
|
| (2,690) |
|
NET CASH USED IN FINANCING ACTIVITIES |
|
| (40,984) |
|
| (38,146) |
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH |
|
| 38,535 |
|
| (12,673) |
|
Cash and cash equivalents and restricted cash at beginning of period |
|
| 120,772 |
|
| 115,242 |
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH AT END OF PERIOD |
| $ | 159,307 |
| $ | 102,569 |
|
|
|
|
|
|
|
|
|
NONCASH INVESTING ACTIVITIES |
|
|
|
|
|
|
|
Equipment financed |
| $ | 14,407 |
| $ | 38,593 |
|
Accruals for equipment received |
| $ | 8,649 |
| $ | 3,179 |
|
| | | | | | | |
| | Six Months Ended | | ||||
| | June 30 | | ||||
|
| 2019 |
| 2018 |
| ||
| | (Unaudited) | | ||||
| | (in thousands) | | ||||
OPERATING ACTIVITIES | | | | | | | |
Net income | | $ | 29,264 | | $ | 11,187 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | |
| 51,722 | |
| 51,409 | |
Amortization of intangibles | |
| 2,249 | |
| 2,264 | |
Pension settlement expense | |
| 1,634 | |
| 1,085 | |
Share-based compensation expense | |
| 4,859 | |
| 3,544 | |
Provision for losses on accounts receivable | |
| 621 | |
| 1,069 | |
Change in deferred income taxes | |
| 5,124 | |
| (10,818) | |
Gain on sale of property and equipment | |
| (1,469) | |
| (166) | |
Changes in operating assets and liabilities: | | | | | | | |
Receivables | |
| 1,781 | |
| (31,281) | |
Prepaid expenses | |
| (3,323) | |
| 2,393 | |
Other assets | |
| (2,798) | |
| 2,018 | |
Income taxes | |
| (3,042) | |
| 8,024 | |
Operating right-of-use assets and lease liabilities, net | | | 159 | | | — | |
Multiemployer pension fund withdrawal liability | | | (289) | | | 37,922 | |
Accounts payable, accrued expenses, and other liabilities | |
| (6,021) | |
| 40,914 | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | |
| 80,471 | |
| 119,564 | |
| | | | | | | |
INVESTING ACTIVITIES | | | | | | | |
Purchases of property, plant and equipment, net of financings | |
| (41,909) | |
| (24,763) | |
Proceeds from sale of property and equipment | |
| 3,798 | |
| 2,074 | |
Purchases of short-term investments | |
| (43,327) | |
| (26,006) | |
Proceeds from sale of short-term investments | |
| 33,332 | |
| 14,647 | |
Capitalization of internally developed software | |
| (5,535) | |
| (5,997) | |
NET CASH USED IN INVESTING ACTIVITIES | |
| (53,641) | |
| (40,045) | |
| | | | | | | |
FINANCING ACTIVITIES | | | | | | | |
Payments on long-term debt | |
| (29,984) | |
| (33,694) | |
Proceeds from notes payable | | | 9,552 | | | — | |
Net change in book overdrafts | |
| (4,398) | |
| (2,888) | |
Payment of common stock dividends | |
| (4,102) | |
| (4,116) | |
Purchases of treasury stock | | | (5,171) | | | (201) | |
Payments for tax withheld on share-based compensation | |
| (1,182) | |
| (85) | |
NET CASH USED IN FINANCING ACTIVITIES | |
| (35,285) | |
| (40,984) | |
| | | | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | |
| (8,455) | |
| 38,535 | |
Cash and cash equivalents at beginning of period | |
| 190,186 | |
| 120,772 | |
CASH AND CASH EQUIVALENTS CASH AT END OF PERIOD | | $ | 181,731 | | $ | 159,307 | |
| | | | | | | |
NONCASH INVESTING ACTIVITIES | | | | | | | |
Equipment financed | | $ | 10,964 | | $ | 14,407 | |
Accruals for equipment received | | $ | 19,402 | | $ | 8,649 | |
Lease liabilities arising from obtaining right-of-use assets | | $ | 23,049 | | $ | — | |
| | | | | | | |
See notes to consolidated financial statements.
7
NOTE A – ORGANIZATIONORGANIZATION AND DESCRIPTION OF THE BUSINESS AND FINANCIAL STATEMENT PRESENTATION
ArcBest CorporationTM (the “Company”) is the parent holding company of businesses providing integrated logistics solutions. The Company’s operations are conducted through its three reportable operating segments: Asset-Based, which consists of ABF Freight System, Inc. and certain other subsidiaries (“ABF Freight”);subsidiaries; ArcBest®, the Company’s asset-light logistics operation; and FleetNet.FleetNet®. References to the Company in this Quarterly Report on Form 10-Q are primarily to the Company and its subsidiaries on a consolidated basis.
The Asset-Based segment represented approximately 69%71% of the Company’s total revenues before other revenues and intercompany eliminations for the six months ended June 30, 2018.2019. As of June 2018,2019, approximately 82% of the Asset-Based segment’s employees were covered under a collective bargaining agreement, the ABF National Master Freight Agreement (the “ABF“2018 ABF NMFA”), with the International Brotherhood of Teamsters (the “IBT”), which was extended through July 31, 2018 to allow for the ratification process of the new agreement to take place. On May 10, 2018, a new collective bargaining agreement, the ABF National Master Freight Agreement (the “2018 ABF NMFA”), was ratified by a majority of ABF’s IBT member employees who chose to vote. A majority of the supplements to the 2018 ABF NMFA also passed. Following ratification of the remaining supplements, the 2018 ABF NMFA was implemented on July 29, 2018, effective retroactive to April 1, 2018, and will remain in effect through June 30, 2023.
The major economic provisions of the 2018 ABF NMFA include restoration of one week of vacation which begins accruing on anniversary dates on or after April 1, 2018, with the new vacation eligibility schedule being the same as the applicable 2008 to 2013 supplemental agreements; wage rate increases in each year of the contract, beginning July 1, 2018; ratification bonuses for qualifying employees; profit-sharing bonuses upon the Asset-Based segment’s achievement of certain annual operating ratios for any full calendar year under the contract; and changes to purchased transportation provisions with certain protections for road drivers as specified in the contract. The 2018 ABF NMFA and the related supplemental agreements provide for contributions to multiemployer pension plans frozen at the current rates for each fund, continuation of existing health coverage, and annual contribution rate increases to multiemployer health and welfare plans maintained for the benefit of ABF's employees who are members of the IBT. Under the 2018 ABF NMFA, the contractual wage and benefits costs, including the ratification bonuses and vacation restoration, are estimated to increase approximately 2.0% on a compounded annual basis through the end of the agreement.
Financial Statement Presentation
The accompanying unaudited 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 “SEC”) 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 20172018 Annual Report on Form 10-K and other current filings with the SEC. In the opinion of management, all adjustments (which are of a normal and recurring nature) considered necessary for a fair presentation have been included.
As previously disclosed in our 2017 Annual Report on Form 10-K, the Company modified the presentation of segment expenses allocated from shared services during the third quarter of 2017. Previously, expenses allocated from company-wide functions were categorized in individual segment expense line items by type of expense. Allocated expenses are now presented on a single shared services line within the Company’s operating segment disclosures. Reclassifications have been made to the prior period operating segment expenses to conform to the current year presentation. There was no impact on each segment’s total expenses as a result of the reclassifications.
8
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 consolidated financial statements and accompanying notes. Actual amounts may differ from those estimates.
Accounting Policies
The Company’s accounting policies are described in Note B to the consolidated financial statements included in Part II, Item 8 of the Company’s 20172018 Annual Report on Form 10-K. The following policies have been updated during the six months ended June 30, 20182019 for the adoption of accounting standard updates disclosed within this Note.
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 is not amortized, but rather is evaluated for impairment annually or more frequently if indicators of impairment exist. The Company’s measurement of goodwill impairment involves a comparison of the estimated fair value of a reporting unit to its carrying value. Fair value is derived using a combination of valuation methods, including earnings before interest, taxes, depreciation, and amortization (EBITDA) and revenue multiples (market approach) and the present value of discounted cash flows (income approach). For annual and interim impairment tests, the Company is required to record an impairment charge, if any, by the amount a reporting unit’s fair value is exceeded by the carrying value of the reporting unit, limited to the carrying value of goodwill included in the reporting unit. The Company’s annual impairment testing is performed as of October 1.
Revenue Recognition: Revenues are recognized when or as control of the promised services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services.
Asset-Based Segment
Asset-Based segment revenues primarily consist of less-than-truckload freight delivery. Performance obligations are satisfied upon final delivery of the freight to the specified destination. Revenue is recognized based on the relative transit time in each reporting period with expenses recognized as incurred. A bill-by-bill analysis is used to establish estimates of revenue in transit for recognition in the appropriate period. Because the bill-by-bill methodology utilizes the approximate location of the shipment in the delivery process to determine the revenue to recognize, management believes it to be a reliable method.
Certain contracts may provide for volume-based or other discounts which are accounted for as variable consideration.Interest Rate SwapDerivative Instruments: The Company estimates these amounts based on the expected discounts earned by customersaccounts for its derivative instruments as either assets or liabilities and revenue is recognized based on the estimates. Revenue adjustments may also occur due to rating or other billing adjustments. The Company estimates revenue adjustments based on historical information and revenue is recognized accordinglycarries them at the time of shipment. Management believes that actual amounts will not vary significantly from estimates of variable consideration.
Revenue, purchased transportation expense, and third-party service expenses are reported on a gross basis for certain shipments and services where the Company utilizes a third-party carrier for pickup, linehaul, delivery of freight, or performance of services but remains primarily responsible for fulfilling delivery to the customer and maintains discretion in setting the price for the services.
ArcBest Segment
ArcBest segment revenues consist primarily of asset-light logistics services using third-party vendors to provide transportation services. ArcBest segment revenue is generally recognized based on the relative transit time in each reporting period using estimated standard delivery times for freight in transit at the end of the reporting period. Purchased transportation expense is recognized as incurred consistent with the recognition of revenue.
Revenue and purchased transportation expense are reported on a gross basis for shipments and services where the Company uses a third-party carrier for pickup and delivery but remains primarily responsible to the customer for delivery and has discretion in setting the price for the service.
9
FleetNet Segment
FleetNet segment revenues consist of service fee revenue, roadside repair revenue and routine maintenance services. Service fee revenue for the FleetNet segment is recognized upon response to the service event. Repair revenue for the FleetNet segment is recognized upon completion of the service by third-party vendors.
Revenue and expense from repair and maintenance services performed by third-party vendors are reported on a gross basis as FleetNet controls the services prior to transfer to the customer and remains primarily responsible to the customer for completion of the services.
Other Recognition and Disclosure
The Company records deferred revenue when cash payments are received or due in advance of performance under the contract. Deferred revenues totaled $3.6 million and $0.6 million at June 30, 2018 and December 31, 2017, respectively, and are recorded in accrued expenses in the consolidated balance sheet.
Payment terms with customers may vary depending on the service provided, location or specific agreement with the customer. The term between invoicing and when payment is due is not significant. For certain services, payment is required before the services are provided to the customer.
The Company expenses sales commissions when incurred because the amortization period is one year or less.
fair value. The Company has elected to apply the practical expedient to not disclose the value of unsatisfied performance obligations for contracts with an original length of one year or less or contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed.
Adopted Accounting Pronouncements
Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, (“ASC Topic 606”) provides a single comprehensive revenue recognition model for all contracts with customers and contains principles to apply to determine the measurement of revenue and the timing of when it is recognized. On January 1, 2018, the Company adopted ASC Topic 606 using the modified retrospective method applied to those contracts which were not completedinterest rate swap agreements designated as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic method of accounting under ASC Topic 605, Revenue Recognition, (“ASC Topic 605”).cash flow hedges. The Company’s major service lines for presentation of disaggregated revenues from contracts with customers are consistent with the Company’s reportable operating segments as presented in Note J.
The primary impact of adopting ASC Topic 606 was to recognize ArcBest segment revenue over time instead of at final deliveryeffective portion of the shipment. As a result, revenue will generally be recorded earlier under ASC Topic 606 compared to ASC Topic 605. Asset-Based and FleetNet segment revenues were not impacted.
The Company recorded a net increase to opening retained earnings of $0.4 milliongain or loss on the interest rate swap instruments is reported as of January 1, 2018 due to the cumulative impact of adopting ASC Topic 606. The impact to revenues for the three and six months ended June 30, 2018 was an increase of $1.1 million and $0.8 million, respectively, and the impact to purchased transportation expense was an increase of $0.8 million and $0.5 million, respectively,unrealized gain or loss as a result of applying ASC Topic 606.
Effective January 1, 2018, the Company adopted an amendment to ASC Topic 715, Compensation – Retirement Benefits, (“ASC Topic 715”) which requires changes to the financial statement presentation of certain components of net periodic benefit cost related to pension and other postretirement benefits accounted for under ASC Topic 715. The amendment requires the service cost component of net periodic benefit cost to continue to be included in the same line item as other compensation costs arising from services rendered by the related employees, but requires the other components of net periodic benefit cost, including pension settlement expense, to be presented separately from the service cost component and outside of the subtotal of income from operations. The provisions of the amendment are required to be applied retrospectively and were effective for the Company beginning January 1, 2018.
10
The Company has not incurred service cost under its nonunion defined benefit pension plan or its supplemental benefit plan (the “SBP”) since the accrual of benefits under the plans were frozen on July 1, 2013 and December 31, 2009, respectively; however, the Company incurs service cost under its postretirement health benefit plan which will continue to be reported within operating expenses in the consolidated statements of operations. The other components of net periodic benefit cost (including pension settlement charges) of the nonunion defined benefit pension plan, the SBP, and the postretirement health benefit plan are reported within the other line item of other income (costs) beginning in first quarter 2018. As a result of retrospectively applying the provisions of the amendment, $1.0 million and $3.4 million was reclassified from operating expenses to other income (costs) for the three and six months ended June 30, 2017, respectively. There was no change to consolidated net income (loss) or earnings (loss) per share as a result of the change in presentation under the new standard.
In February 2018, the Financial Accounting Standards Board (the “FASB”) issued an amendment to ASC Topic 220, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, (“ASC Topic 220”) which allows a reclassification from accumulated other comprehensive income to retained earnings foror loss, net of tax, in stockholders’ equity and the stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Reform Act”). The Company early adopted this amendment for first quarter 2018 and adjusted the tax effect of items within accumulated other comprehensive income to reflect the appropriate tax rate under the Tax Reform Actchange in the period of adoption. As a result of applyingunrealized gain or loss on the provisions of the amendment, the Company elected to reclassify $3.6 million of stranded income tax effects from accumulated other comprehensive loss to retained earnings as of January 1, 2018.
Amounts recognizedinterest rate swaps is reported in other comprehensive income or loss, related tonet of tax, in the Company’s nonunion defined benefit pension plan, supplemental benefit plan, and postretirement health benefit plan are subsequently expensed as componentsconsolidated statements of net periodic benefit cost by amortizing unrecognized net actuarial losses over the average remaining active service period of the plan participants and amortizing unrecognized prior service credits over the remaining years of service until full eligibility of the active participants at the time of the plan amendment which created the prior service credit. A corridor approach is not used for determining the amounts of net actuarial losses to be amortized. Amounts recognized in other comprehensive income or loss related to the change inincome. The unrealized gain or loss on the Company’s interest rate swap agreements areis reclassified out of accumulated other comprehensive loss into income (loss) in the same period or periods during which the hedged transaction affects earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.
EffectiveLeases: The Company leases, under finance and operating lease arrangements, certain facilities used primarily in the Asset-Based segment service center operations, certain revenue equipment used in the ArcBest segment operations, and certain other office equipment. The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases, (“ASC Topic 842”) effective January 1, 2018,2019. In accordance with ASC Topic 842, right-of-use assets and lease liabilities for operating leases are recorded on the balance sheet and the related lease expense is recorded on a straight-line basis over
8
the lease term in operating expenses. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. For financial reporting purposes, right-of-use assets held under finance leases are amortized over their estimated useful lives on the same basis as owned assets, and leasehold improvements associated with assets utilized under finance or operating leases are amortized by the straight-line method over the shorter of the remaining lease term or the asset’s useful life. Amortization of assets under finance leases is included in depreciation expense. Obligations under the finance lease arrangements are included in long-term debt.
The short-term lease exemption was elected under ASC Topic 842 for all classes of assets to include real property, revenue equipment, and service, office, and other equipment. The Company adopted the policy election as a lessee for all classes of assets to account for each lease component and its related non-lease component(s) as a single lease component. In determining the discount rate, the Company early adopteduses the rate implicit in the lease if that rate is readily determinable when entering into a lease as a lessee. If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate, determined by the price of a fully collateralized loan with similar terms based on current market rates.
For contracts entered into on or after the effective date, an amendmentassessment is made as to whether the contract is, or contains, a lease at the inception of a contract. The assessment is based on: (1) whether the contract involves the use of a distinct identified asset; (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period; and (3) whether the Company has the right to direct the use of the asset. For all operating leases that meet the scope of ASC Topic 350, Intangibles – Goodwill842, a right-of-use asset and Other, Simplifyinga lease liability are recognized. The right-of-use asset is measured as the Test of Goodwill Impairment, which removes Step 2initial amount of the goodwill impairment test. For annual and interim impairment tests,lease liability, plus any initial direct costs incurred, less any prepayments prior to commencement or lease incentives received. The lease liability is initially measured at the Company is required to record an impairment charge, if any, by the amount a reporting unit’s fair value is exceeded by the carryingpresent value of the reporting unit, limited tolease payments, discounted using the carrying value of goodwillinterest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s secured incremental borrowing rate for the same term as the underlying lease. Lease payments included in the reporting unit. The adoptionmeasurement of the amendment didlease liability are comprised of the following: (1) the fixed noncancelable lease payments, (2) payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and (3) payments for early termination options unless it is reasonably certain the lease will not havebe terminated early. Variable lease payments based on an impactindex or rate are initially measured using the index or rate in effect at lease commencement and included in the measurement of the initial lease liability. Additional payments based on the consolidated financial statements forchange in an index or rate are recorded as a period expense when incurred. Lease modifications result in remeasurement of the six months ended June 30, 2018.lease liability.
Adopted Accounting Pronouncements Not Yet Adopted
ASC Topic 842, Leases, (“ASC Topic 842”) which is effective forwas adopted by the Company beginningeffective January 1, 2019, requires lessees to recognize right-of-use assets and lease liabilities for operating leases with terms greater than 12 months.months on the balance sheet. The standard also requires additional qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued an amendment to ASC Topic 842 which provides an optional transition method that will give companies the option to use the effective date as the date of initial application upon transition. The Company plans to elect thiselected the modified retrospective method of applying the transition methodprovisions at the beginning of the period of adoption and, as a result, willhas not adjustadjusted comparative period financial information or makeand has not included the new required lease disclosures for periods before the effective date. Prior period amounts continue to be reported under the Company’s historical accounting in accordance with the previous lease guidance included in ASC Topic 840.
The Company has established an implementation team which is in the process of implementing the new accounting standard, including accumulating necessary information, assessing the current lease portfolio, and implementing software to meet the new reporting requirements. The Company is also evaluating current processes and controls and identifying necessary changes to support the adoption of the new standard. The Company anticipates it will excludeexcluded short-term leases from accounting under ASC Topic 842 and plans to electhas elected the package of practical expedients uponas permitted under the transition guidance, which allowed the Company to not reassess: (1) whether contracts are, or contain, leases; (2) lease classification; and (3) capitalization of initial direct costs. For contracts entered into on or after the effective date, an assessment is made as to whether the contract is, or contains, a lease at the inception of a contract. Consistent with the package of practical expedients elected, leases entered into prior to January 1, 2019, are accounted for under ASC Topic 840 and were not reassessed. For all classes of assets, the policy election was made to account for each lease component and its related non-lease component(s) as a single lease component. The election to not recognize right-of-use assets and lease liabilities for short-term leases that will retainhave a term of 12 months or less did not have a material effect on the right-of-use assets and lease classification and other accounting conclusions madeliabilities.
The majority of the Company’s lease portfolio consists of real property operating leases related to facilities used in the assessmentAsset-Based segment service center operations. The lease portfolio also includes operating leases related to certain revenue equipment used in the ArcBest segment operations as well as a small number of existingoffice equipment finance leases. Management has recorded the right-of-use assets and associated lease contracts. Management expectsliabilities for operating leases on the consolidated
9
balance sheet as of June 30, 2019 in accordance with ASC Topic 842. Finance leases are not material to the consolidated financial statements.
The most significant impact of adopting ASC Topic 842 was the recognition of right-of-use assets and lease liabilities on the balance sheet for operating leases of $58.7 million as of January 1, 2019. The accounting for finance leases (formerly referred to as capital leases prior to the adoption of ASC Topic 842) remained substantially unchanged. The expense recognition for operating leases and finance leases under ASC Topic 842 is substantially consistent with ASC Topic 840 and the impact of the new standard to haveis non-cash in nature. As a materialresult, there is no significant impact on the Company’s consolidated balance sheets related to the addition of the right-of-use asset and associated lease liabilities; however, the impact on the consolidated statementsresults of operations is
11
expected to be minimal, if any. As the impact of this standard is non-cashor cash flows presented in nature, no impact is expected on the Company’s consolidated statements of cash flows.financial statements.
ASC Topic 815, Derivatives and Hedging, which was adopted by the Company on January 1, 2019, was amended to change the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results to simplify hedge accounting treatment and better align an entity’s risk management activities and financial reporting for hedging relationships. ASC Topic 815, as amended, also allows for the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a U.S. benchmark interest rate. The amendment did not have an impact on the consolidated financial statements.
The U.S. Securities and Exchange Commission (the “SEC”) issued Final Rule 33-10618, FAST Act Modernization and Simplification of Regulation S-K, (“Final Rule 33-10618”) in March 2019 to modernize and simplify certain disclosure requirements in Regulation S-K and the related rules and forms. Effective April 2, 2019, the final rule allows registrants to redact confidential information from most exhibits filed with the SEC without filing a confidential treatment request. Effective May 2, 2019, the final rule requires registrants to include the trading symbol for each class of registered securities on the cover page of certain SEC forms. The eXtensible Business Reporting Language (“XBRL”) reporting requirements of the final rule for tagging data on the cover page of certain SEC filings and the use of hyperlinks for information that is incorporated by reference and available on EDGAR became effective for the Company with this Quarterly Report on Form 10-Q.
Accounting Pronouncements Not Yet Adopted
Final Rule 33-10618 includes certain provisions to simplify certain annual disclosure requirements within the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), Risk Factors, and Properties sections of Form 10-K. These provisions, which the Company will adopt for its 2019 Annual Report on Form 10-K, are not expected to have a significant impact on the Company’s consolidated financial statement disclosures.
ASC Subtopic 350-40, Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, (“ASC Subtopic 350-40”) was amended by the FASB in August 2018 and is effective for the Company beginning January 1, 2020. The amendments to ASC Subtopic 350-40 clarify the accounting treatment for implementation costs incurred by the customer in a cloud computing software arrangement. The amendments allow implementation costs of cloud computing arrangements to be capitalized using the same method prescribed by ASC Subtopic 350-40, Internal-Use Software. The amendments to ASC Subtopic 350-40 will be adopted on a prospective basis and are not expected to have an impact on the Company’s consolidated financial statements.
ASC Topic 820, Fair Value Measurement, was amended to modify the disclosure requirements of fair value measurements, primarily impacting the disclosures for Level 3 fair value measurements. The amendment is effective for the Company beginning January 1, 20192020 and is not expected to have a significant impact on the Company’s financial statement disclosures.
ASC Topic 326, Financial Instruments – Credit Losses, (“ASC Topic 326”), was amended to improve the measurement of credit losses on financial instruments, including trade accounts receivable. The amendment is effective for the Company beginning January 1, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements.
Management believes there is no other new accounting guidance issued but not yet effective that is relevant to the Company’s current financial statements.
10
NOTE B – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Financial Instruments
The following table presents the components of cash and cash equivalents and short-term investments:
| | | | | | | |
|
| June 30 |
| December 31 |
| ||
| | 2019 | | 2018 | | ||
| | (in thousands) | | ||||
Cash and cash equivalents | | | | | | | |
Cash deposits(1) | | $ | 145,629 | | $ | 124,938 | |
Variable rate demand notes(1)(2) | |
| 14,536 | |
| 19,786 | |
Money market funds(3) | |
| 21,566 | |
| 42,470 | |
U.S. Treasury securities(4) | | | — | | | 2,992 | |
Total cash and cash equivalents | | $ | 181,731 | | $ | 190,186 | |
| | | | | | | |
Short-term investments | | | | | | | |
Certificates of deposit(1) | | $ | 81,685 | | $ | 82,949 | |
U.S. Treasury securities(4) | | | 35,972 | | | 23,857 | |
Total short-term investments | | $ | 117,657 | | $ | 106,806 | |
|
|
|
|
|
|
|
|
|
| June 30 |
| December 31 |
| ||
|
| 2018 |
| 2017 |
| ||
|
| (in thousands) |
| ||||
Cash and cash equivalents |
|
|
|
|
|
|
|
Cash deposits(1) |
| $ | 106,924 |
| $ | 86,510 |
|
Variable rate demand notes(1)(2) |
|
| 15,041 |
|
| 19,744 |
|
Money market funds(3) |
|
| 37,342 |
|
| 14,518 |
|
Total cash and cash equivalents |
| $ | 159,307 |
| $ | 120,772 |
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
|
|
|
|
|
Certificates of deposit(1) |
| $ | 68,013 |
| $ | 56,401 |
|
(1) |
| Recorded at cost plus accrued interest, which approximates fair value. |
(2) |
| Amounts may be redeemed on a daily basis with the original issuer. |
(3) |
| Recorded at fair value as determined by quoted market prices (see amounts presented in the table of financial assets and liabilities measured at fair value within this Note). |
(4) | Recorded at amortized cost plus accrued interest, which approximates fair value. U.S. Treasury securities with a maturity date within 90 days of the purchase date are classified as cash equivalents. U.S. Treasury securities included in short-term investments are held-to-maturity investments with maturity dates of less than one year. |
The Company’s long-term financial instruments are presented in the table of financial assets and liabilities measured at fair value within this Note.
Concentrations of Credit Risk of Financial Instruments
The Company is potentially subject to concentrations of credit risk related to its cash, cash equivalents, and short-term investments. The Company reduces credit risk by maintaining its cash deposits primarily in FDIC-insured accounts and placing its short-term investments primarily in FDIC-insured certificates of deposit. However, certain cash deposits and certificates of deposit may exceed federally insured limits. At June 30, 20182019 and December 31, 2017,2018, cash, and cash equivalents, and short-term investments totaling $92.6$68.9 million and $61.1$94.7 million, respectively, were notneither FDIC insured.insured nor direct obligations of the U.S. government.
12
Fair Value Disclosure of Financial Instruments
Fair value disclosures are made in accordance with the following hierarchy of valuation techniques based on whether the inputs of market data and market assumptions used to measure fair value are observable or unobservable:
| Level 1 — Quoted prices for identical assets and liabilities in active markets. |
| Level 2 — Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. |
| Level 3 — Unobservable inputs (Company’s market assumptions) that are significant to the valuation model. |
11
Fair value and carrying value disclosures of financial instruments are presented in the following table:
| | | | | | | | | | | | | |
| | June 30 | | December 31 | | ||||||||
|
| 2019 |
| 2018 |
| ||||||||
| | (in thousands) | | ||||||||||
| | | Carrying |
| | Fair |
| | Carrying |
| | Fair | |
| | | Value |
| | Value |
| | Value |
| | Value | |
Credit Facility(1) | | $ | 70,000 | | $ | 70,000 | | $ | 70,000 | | $ | 70,000 | |
Accounts receivable securitization borrowings(2) | | | 40,000 | | | 40,000 | | | 40,000 | | | 40,000 | |
Notes payable(3) | |
| 172,054 | |
| 175,456 | |
| 181,409 | |
| 181,560 | |
| | $ | 282,054 | | $ | 285,456 | | $ | 291,409 | | $ | 291,560 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30 |
| December 31 |
| ||||||||
|
| 2018 |
| 2017 |
| ||||||||
|
| (in thousands) |
| ||||||||||
|
|
| Carrying |
|
| Fair |
|
| Carrying |
|
| Fair |
|
|
|
| Value |
|
| Value |
|
| Value |
|
| Value |
|
Credit Facility(1) |
| $ | 70,000 |
| $ | 70,000 |
| $ | 70,000 |
| $ | 70,000 |
|
Accounts receivable securitization borrowings(2) |
|
| 45,000 |
|
| 45,000 |
|
| 45,000 |
|
| 45,000 |
|
Notes payable(3) |
|
| 134,258 |
|
| 132,522 |
|
| 153,441 |
|
| 152,131 |
|
|
| $ | 249,258 |
| $ | 247,522 |
| $ | 268,441 |
| $ | 267,131 |
|
(1) |
| The revolving credit facility (the “Credit Facility”) carries a variable interest rate based on LIBOR, plus a margin, that is considered to be priced at market for debt instruments having similar terms and collateral requirements (Level 2 of the fair value hierarchy). |
(2) |
| Borrowings under the Company’s accounts receivable securitization program carry a variable interest rate based on LIBOR, plus a margin. The borrowings are considered to be priced at market for debt instruments having similar terms and collateral requirements (Level 2 of the fair value hierarchy). |
(3) |
| Fair value of the notes payable was determined using a present value income approach based on quoted interest rates from lending institutions with which the Company would enter into similar transactions (Level 2 of the fair value hierarchy). |
1312
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the assets and liabilities that are measured at fair value on a recurring basis:
| | | | | | | | | | | | | |
| | June 30, 2019 | | ||||||||||
| | | | | Fair Value Measurements Using | | |||||||
| | | | | Quoted Prices |
| Significant |
| Significant | | |||
|
| | | | In Active | | Observable | | Unobservable | | |||
| | | | | Markets | | Inputs | | Inputs | | |||
| | Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
| | (in thousands) | | ||||||||||
Assets: | | | | | | | | | | | | | |
Money market funds(1) | | $ | 21,566 | | $ | 21,566 | | $ | — | | $ | — | |
Equity, bond, and money market mutual funds held in trust related to the Voluntary Savings Plan(2) | |
| 3,004 | |
| 3,004 | |
| — | |
| — | |
Interest rate swaps(3) | | | 52 | | | — | | | 52 | | | — | |
| | $ | 24,622 | | $ | 24,570 | | $ | 52 | | $ | — | |
Liabilities: | |
| | | | | | | | | | | |
Interest rate swaps(3) | | $ | 548 | | $ | — | | $ | 548 | | $ | — | |
| | | | | | | | | | | | | |
| | December 31, 2018 | | ||||||||||
| | | | | Fair Value Measurements Using | | |||||||
| | | | | Quoted Prices |
| Significant |
| Significant | | |||
|
| | | | In Active | | Observable | | Unobservable | | |||
| | | | | Markets | | Inputs | | Inputs | | |||
| | Total |
| (Level 1) |
| (Level 2) |
| (Level 3) | | ||||
| | (in thousands) | | ||||||||||
Assets: | | | | | | | | | | | | | |
Money market funds(1) | | $ | 42,470 | | $ | 42,470 | | $ | — | | $ | — | |
Equity, bond, and money market mutual funds held in trust related to the Voluntary Savings Plan(2) | |
| 2,342 | |
| 2,342 | |
| — | |
| — | |
Interest rate swaps(3) | | | 801 | | | — | | | 801 | | | — | |
| | $ | 45,613 | | $ | 44,812 | | $ | 801 | | $ | — | |
Liabilities: | |
| | | | | | | | | | | |
Contingent consideration(4) | | $ | 4,472 | | $ | — | | $ | — | | $ | 4,472 | |
| | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2018 |
| ||||||||||
|
|
|
|
| Fair Value Measurements Using |
| |||||||
|
|
|
|
| Quoted Prices |
| Significant |
| Significant |
| |||
|
|
|
|
| In Active |
| Observable |
| Unobservable |
| |||
|
|
|
|
| Markets |
| Inputs |
| Inputs |
| |||
|
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
|
| (in thousands) |
| ||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds(1) |
| $ | 37,342 |
| $ | 37,342 |
| $ | — |
| $ | — |
|
Equity, bond, and money market mutual funds held in trust related to the Voluntary Savings Plan(2) |
|
| 2,453 |
|
| 2,453 |
|
| — |
|
| — |
|
Interest rate swaps(3) |
|
| 1,535 |
|
| — |
|
| 1,535 |
|
| — |
|
|
| $ | 41,330 |
| $ | 39,795 |
| $ | 1,535 |
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration(4) |
| $ | 4,092 |
| $ | — |
| $ | — |
| $ | 4,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 |
| ||||||||||
|
|
|
|
| Fair Value Measurements Using |
| |||||||
|
|
|
|
| Quoted Prices |
| Significant |
| Significant |
| |||
|
|
|
|
| In Active |
| Observable |
| Unobservable |
| |||
|
|
|
|
| Markets |
| Inputs |
| Inputs |
| |||
|
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
|
| (in thousands) |
| ||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds(1) |
| $ | 14,518 |
| $ | 14,518 |
| $ | — |
| $ | — |
|
Equity, bond, and money market mutual funds held in trust related to the Voluntary Savings Plan(2) |
|
| 2,359 |
|
| 2,359 |
|
| — |
|
| — |
|
Interest rate swaps(3) |
|
| 481 |
|
| — |
|
| 481 |
|
| — |
|
|
| $ | 17,358 |
| $ | 16,877 |
| $ | 481 |
| $ | — |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration(4) |
| $ | 6,970 |
| $ | — |
| $ | — |
| $ | 6,970 |
|
(1) |
| Included in cash and cash equivalents. |
(2) |
| Nonqualified deferred compensation plan investments consist of U.S. and international equity mutual funds, government and corporate bond mutual funds, and money market funds which are held in a trust with a third-party brokerage firm. Included in other long-term assets, with a corresponding liability reported within other long-term liabilities. |
(3) |
| Included in other long-term |
(4) |
| Included in accrued |
14
The following table provides the changes in fair value of the liabilities measured at fair value using inputs categorized in Level 3 of the fair value hierarchy:
|
|
|
|
|
|
| Contingent Consideration |
| |
|
| (in thousands) | ||
|
|
|
|
|
Balances at December 31, 2017 |
| $ | 6,970 |
|
Payments(1) |
|
| (3,528) |
|
Change in fair value included in operating expenses |
|
| 650 |
|
Balances at June 30, 2018 |
| $ | 4,092 |
|
|
|
13
NOTE C – GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of net identifiable tangible and intangible assets acquired. Goodwill by reportable operating segment consisted of $107.7 million and $0.6 million reported in the ArcBest and FleetNet segments, respectively, for both June 30, 20182019 and December 31, 2017.2018.
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
|
|
|
| June 30, 2018 |
| December 31, 2017 |
| |||||||||||||||||||||||||||||||||||
|
| Weighted-Average |
|
|
|
| Accumulated |
| Net |
|
|
|
| Accumulated |
| Net |
| |||||||||||||||||||||||||
|
| Amortization Period |
| Cost |
| Amortization |
| Value |
|
| Cost |
| Amortization |
| Value |
| ||||||||||||||||||||||||||
|
| (in years) |
| (in thousands) |
| (in thousands) |
| |||||||||||||||||||||||||||||||||||
| | | | | | | | | | | ��� | | | | | | | | | | | |||||||||||||||||||||
| | | | June 30, 2019 | | December 31, 2018 |
| |||||||||||||||||||||||||||||||||||
| | Weighted-Average | | | | | Accumulated | | Net | | | | | Accumulated | | Net |
| |||||||||||||||||||||||||
|
| Amortization Period |
| Cost |
| Amortization |
| Value |
| | Cost |
| Amortization |
| Value |
| ||||||||||||||||||||||||||
| | (in years) | | (in thousands) | | (in thousands) |
| |||||||||||||||||||||||||||||||||||
Finite-lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | |
Customer relationships |
| 14 |
| $ | 60,431 |
| $ | 21,938 |
| $ | 38,493 |
| $ | 60,431 |
| $ | 19,745 |
| $ | 40,686 |
|
| 14 | | $ | 60,431 | | $ | 26,318 | | $ | 34,113 | | $ | 60,431 | | $ | 24,130 | | $ | 36,301 | |
Driver network |
| 3 |
|
| 3,200 |
|
| 3,200 |
|
| — |
|
| 3,200 |
|
| 3,200 |
|
| — |
| |||||||||||||||||||||
Other |
| 9 |
|
| 1,032 |
|
| 619 |
|
| 413 |
|
| 1,032 |
|
| 549 |
|
| 483 |
| | 9 | | | 1,032 | | | 745 | | | 287 | | | 1,032 | | | 684 | | | 348 | |
|
| 13 |
|
| 64,663 |
|
| 25,757 |
|
| 38,906 |
|
| 64,663 |
|
| 23,494 |
|
| 41,169 |
| |||||||||||||||||||||
|
| 14 | |
| 61,463 | |
| 27,063 | |
| 34,400 | | | 61,463 | |
| 24,814 | |
| 36,649 | | |||||||||||||||||||||
Indefinite-lived intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | |
Trade name |
| N/A |
|
| 32,300 |
|
| N/A |
|
| 32,300 |
|
| 32,300 |
|
| N/A |
|
| 32,300 |
|
| N/A | |
| 32,300 | |
| N/A | |
| 32,300 | | | 32,300 | |
| N/A | |
| 32,300 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| | | |
| | | | | | | | | | | | | | | | | | |||||||||||||||||||||
Total intangible assets |
| N/A |
| $ | 96,963 |
| $ | 25,757 |
| $ | 71,206 |
| $ | 96,963 |
| $ | 23,494 |
| $ | 73,469 |
|
| N/A | | $ | 93,763 | | $ | 27,063 | | $ | 66,700 | | $ | 93,763 | | $ | 24,814 | | $ | 68,949 | |
The future amortization for intangible assets and acquired softwarethrough business acquisitions as of June 30, 2018 were2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Intangible |
| Acquired |
| ||
|
| Total |
| Assets |
| Software(1) |
| |||
|
| (in thousands) |
| |||||||
2018 |
| $ | 3,318 |
| $ | 2,257 |
| $ | 1,061 |
|
2019 |
|
| 5,463 |
|
| 4,482 |
|
| 981 |
|
2020 |
|
| 4,471 |
|
| 4,454 |
|
| 17 |
|
2021 |
|
| 4,418 |
|
| 4,412 |
|
| 6 |
|
2022 |
|
| 4,385 |
|
| 4,385 |
|
| — |
|
Thereafter |
|
| 18,916 |
|
| 18,916 |
|
| — |
|
Total amortization |
| $ | 40,971 |
| $ | 38,906 |
| $ | 2,065 |
|
|
|
| | | | | |
|
|
| Amortization of |
| |
| | | Intangible Assets | | |
| | | (in thousands) | | |
Remainder of 2019 | | | $ | 2,233 | |
2020 | | |
| 4,454 | |
2021 | | |
| 4,412 | |
2022 | | |
| 4,385 | |
2023 | | | | 4,287 | |
Thereafter | | | | 14,629 | |
Total amortization | | | $ | 34,400 | |
15
NOTE D – INCOME TAXES
On December 22, 2017, H.R. 1/Public Law 115-97 which includes tax legislation titled Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. Effective January 1, 2018, the Tax Reform Act reduced the U.S. federal corporate tax rate from 35% to 21%. As a result of the Tax Reform Act, the Company recorded a provisional reduction of net deferred income tax liabilities of approximately $24.5 million at December 31, 2017, pursuant to the provisions of ASC Topic 740, Income Taxes, which requires the impact of tax law changes to be recognized in the period in which the legislation is enacted. An additional provisional reduction of net deferred income tax liabilities of less than $0.1 million and $2.6 million was recognized in the three and six months ended June 30, 2018, respectively. The additional reductions relaterespectively, related to the reversal of temporary differences through the Company’s fiscal tax year end of February 28, 2018. State tax rates vary among states and average approximately 6.0% to 6.5%, although some state rates are higher and a small number of states do not impose an income tax. The effective tax rate was 27.4% and 27.1% for the three and six months ended June 30, 2019, respectively, and the effective tax benefit rate was 68.0% and 15.0% for the three and six months ended June 30, 2018, respectively, compared to an effective tax rate of 34.6% and 27.1% for the three and six months ended June 30, 2017, respectively.
In addition to the provisional effect on net deferred tax liabilities, the Company recorded a provisional reduction in current income tax expense of approximately $1.3 million and $0.1 million at December 31, 2017 and June 30, 2018, respectively, as a result of the Tax Reform Act, to reflect the Company’s use of a fiscal year rather than a calendar year for U.S. income tax filing. Due to the fact that the Company’s current fiscal tax year includesincluded the effective date of the rate change under the Tax Reform Act, taxes arewere required to be calculated by applying a blended rate to the taxable income for the current taxable year endingended February 28, 2018. The blended rate is calculated based on the ratio of days in the fiscal year prior to and after the effective date of the rate change. In computing total tax expense for the three and six months ended June 30, 2018, a 32.74% blended federal statutory rate was applied to the two months ended February 28, 2018, and a projected combined tax rate of 26.5% (based on the21.0% federal statutory rate was
14
applied to the months of March 2018 through June 2018. A federal statutory rate of 21.0% was applied to the three and six months ended June 30, 2019.
The accounting for the income tax effects of the Tax Reform Act was completed as of December 31, 2018, and all amounts recorded were considered final.
For the three and six months ended June 30, 2019, the difference between the Company’s effective tax rate and the federal statutory rate primarily resulted from state income taxes, nondeductible expenses, changes in the cash surrender value of life insurance, and tax expense from the vesting of stock awards. For the six months ended June 30, 2018, the difference between the Company’s effective tax rate and the federal statutory rate primarily resultsresulted from the $2.6 million provisional reduction of net deferred income tax liabilities, as previously discussed, and the $1.2 million alternative fuel tax credit related to the year ended December 31, 2017 which was recognized in first quarter 2018 due to the February 2018 passage of the Bipartisan Budget Act of 2018 which retroactively reinstated the alternative fuel tax credit that had previously expired on December 31, 2016. For the three and six months ended June 30, 2018 and 2017, theThe difference between the Company’s effective tax rate and the federal statutory rate for the three and six months ended June 30, 2018 also resulted from state income taxes, nondeductible expenses, changes in tax valuation allowances, deferred tax benefit related to future state rate changes, the tax benefit from the vesting of stock awards, and changes in the cash surrender value of life insurance.
As of June 30, 2018,2019, the Company’s deferred tax liabilities, which will reverse in future years, exceeded the deferred tax assets. The Company evaluated the total deferred tax assets at June 30, 20182019 and concluded that, other than for certain deferred tax assets related to state net operating loss and contribution carryforwards, the assets did not exceed the amount for which realization is more likely than not. In making this determination, the Company considered the future reversal of existing taxable temporary differences, future taxable income, and tax planning strategies. Valuation allowances for deferred tax assets totaled $0.7 million and $0.8$0.1 million at June 30, 20182019 and December 31, 2017, respectively.2018.
The Company established a reservehad reserves for uncertain tax positions of less than $0.1$1.0 million at December 31, 2016, and maintained the reserve at June 30, 2018,2019 and December 31, 2018.
In first quarter of 2019, the Company recorded a deferred tax asset of approximately $19.0 million related to operating lease liabilities and recorded a deferred tax liability of approximately $19.0 million related to operating lease right-of-use assets due to uncertaintythe adoption of how the IRS will interpret regulations related to research and development credits claimed on the Company’s 2015 federal return. The Company established a reserve for an uncertain tax position of $0.9 million at March 31, 2018, and maintained the reserve at June 30, 2018, due to credits taken on amended federal returns.ASC Topic 842.
The Company paid federal, state, and foreign income taxes of $2.5 million and $0.4$8.9 million during the six months ended June 30, 20182019, and 2017, respectively. Duringpaid $2.5 million of foreign and state income taxes during the six months ended June 30, 2018 and 2017, the2018. The Company received refunds of $1.1 million andless than $0.1 million respectively,of state income taxes and refunds of $1.1 million of federal and state income taxes that were paid in prior years.years during the six months ended June 30, 2019 and 2018, respectively.
NOTE E – LEASES
The Company leases, under finance and operating lease arrangements, certain facilities used primarily in the Asset-Based segment service center operations, certain revenue equipment used in the ArcBest segment operations, and certain other office equipment. Operating leases have remaining terms of less than 10 years, some of which include one or more options to renew, with renewal option terms up to five years, and some of which include options to terminate the leases within the next three years. The right-of-use assets and lease liabilities as of June 30, 2019 do not assume the option to early terminate any of the Company’s leases, and all renewal options that have been exercised or are reasonably certain to be exercised as of June 30, 2019 are included in the right-of-use assets and lease liabilities. Variable lease cost for operating leases consists of subsequent changes in CPI index, rent payments that are based on usage, and other lease related payments subject to change and not considered fixed payments. All fixed lease and non-lease component payments are combined in determining the right-of-use asset and lease liability.
The Company has a small number of finance leases recorded in property, plant and equipment and long-term debt related to structures and office equipment that are immaterial to the consolidated financial statements.
15
The components of operating lease expense were as follows:
| | | | | | | |
| | Three Months Ended | | Six Months Ended | | ||
| | June 30, 2019 | | June 30, 2019 | | ||
| | (in thousands) | | ||||
Operating lease expense | | $ | 5,642 | | $ | 10,981 | |
Variable lease expense | | | 774 | | | 1,613 | |
Sublease income | | | (69) | | | (136) | |
| | | | | | | |
Total operating lease expense | | $ | 6,347 | | $ | 12,458 | |
Rental expense for operating leases, excluding expenses related to leases with initial terms of less than one year, totaled approximately $5.0million and $9.5 million, net of sublease income, for the three and six months ended June 30, 2018, respectively.
The operating cash flows from operating lease activity were as follows:
| | | | |
| | Six Months Ended | | |
| | June 30, 2019 | | |
| | (in thousands) | | |
Noncash change in operating right-of-use assets | | $ | 9,784 | |
Change in operating lease liabilities | | | (9,625) | |
Operating right-use-of-assets and lease liabilities, net | | $ | 159 | |
| | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | (10,815) | |
Supplemental balance sheet information related to operating lease liabilities was as follows:
| | | | | | | | | | |
|
| June 30, 2019 | | |||||||
| | (in thousands, except lease term and discount rate) | | |||||||
| | | | | Land and | | Equipment | | ||
Operating leases | | | Total | | Structures | | and Others | | ||
Operating right-of-use assets (long-term) | | $ | 68,810 | | $ | 67,029 | | $ | 1,781 | |
| | | | | | | | | | |
Operating lease liabilities (current) | | $ | 18,273 | | $ | 17,250 | | $ | 1,023 | |
Operating lease liabilities (long-term) | |
| 54,040 | | | 53,293 | | | 747 | |
Total operating lease liabilities | | $ | 72,313 | | $ | 70,543 | | $ | 1,770 | |
| | | | | | | | | | |
Weighted-average remaining lease term (in years) | | | 5.4 | | | | | | | |
Weighted-average discount rate | | | 3.93% | | | | | | | |
Maturities of operating lease liabilities at June 30, 2019 were as follows:
| | | | | | | | | | |
| | | | | | | | Equipment | | |
| | | | | Land and | | and | | ||
|
| Total |
| Structures |
| Other |
| |||
|
| | | | | | | | | |
Remainder of 2019 | | $ | 10,668 | | $ | 10,126 | | $ | 542 | |
2020 | |
| 19,152 | |
| 18,142 | |
| 1,010 | |
2021 | |
| 14,716 | |
| 14,442 | |
| 274 | |
2022 | |
| 10,372 | |
| 10,372 | |
| — | |
2023 | |
| 7,550 | |
| 7,550 | |
| — | |
Thereafter | |
| 18,109 | |
| 18,109 | |
| — | |
Total lease payments | | | 80,567 | | | 78,741 | | | 1,826 | |
Less imputed interest | | | (8,254) | | | (8,198) | | | (56) | |
Total | | $ | 72,313 | | $ | 70,543 | | $ | 1,770 | |
16
The future minimum rental commitments, net of minimum rentals to be received under noncancelable subleases, as of December 31, 2018 for all noncancelable operating leases were as follows:
| | | | | | | | | | |
| | | | | | | | Equipment | | |
| | | | | Land and | | and | | ||
|
| Total |
| Structures |
| Other | | |||
|
| | | | | | | | | |
2019 | | $ | 19,130 | | $ | 18,067 | | $ | 1,063 | |
2020 | |
| 14,620 | |
| 13,676 | |
| 944 | |
2021 | |
| 10,972 | |
| 10,716 | |
| 256 | |
2022 | |
| 7,125 | |
| 7,125 | |
| — | |
2023 | |
| 4,477 | |
| 4,477 | |
| — | |
Thereafter | |
| 5,850 | |
| 5,850 | |
| — | |
Total | | $ | 62,174 | | $ | 59,911 | | $ | 2,263 | |
NOTE EF – LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-Term Debt Obligations
Long-term debt consisted of borrowings outstanding under the Company’s revolving credit facility and accounts receivable securitization program, both of which are further described in Financing Arrangements within this Note, and notes payable and capitalfinance lease obligations related to the financing of revenue equipment (tractors and trailers used primarily in Asset-Based segment operations), real estate, and certain other equipment as follows:
| | | | | | | |
| | June 30 | | December 31 | | ||
|
| 2019 |
| 2018 |
| ||
| | (in thousands) | | ||||
Credit Facility (interest rate of 3.7%(1) at June 30, 2019) | | $ | 70,000 | | $ | 70,000 | |
Accounts receivable securitization borrowings (interest rate of 3.3% at June 30, 2019) | |
| 40,000 | |
| 40,000 | |
Notes payable (weighted-average interest rate of 3.5% at June 30, 2019) | |
| 172,054 | |
| 181,409 | |
Finance lease obligations (weighted-average interest rate of 5.5% at June 30, 2019) | |
| 152 | |
| 266 | |
| |
| 282,206 | |
| 291,675 | |
Less current portion | |
| 47,205 | |
| 54,075 | |
Long-term debt, less current portion | | $ | 235,001 | | $ | 237,600 | |
|
|
|
|
|
|
|
|
|
| June 30 |
| December 31 |
| ||
|
| 2018 |
| 2017 |
| ||
|
| (in thousands) |
| ||||
Credit Facility (interest rate of 3.6%(1) at June 30, 2018) |
| $ | 70,000 |
| $ | 70,000 |
|
Accounts receivable securitization borrowings (interest rate of 2.9% at June 30, 2018) |
|
| 45,000 |
|
| 45,000 |
|
Notes payable (weighted-average interest rate of 2.9% at June 30, 2018) |
|
| 134,258 |
|
| 153,441 |
|
Capital lease obligations (weighted-average interest rate of 5.6% at June 30, 2018) |
|
| 374 |
|
| 478 |
|
|
|
| 249,632 |
|
| 268,919 |
|
Less current portion |
|
| 51,562 |
|
| 61,930 |
|
Long-term debt, less current portion |
| $ | 198,070 |
| $ | 206,989 |
|
(1) |
| The interest rate swap mitigates interest rate risk by effectively converting $50.0 million of borrowings under the Credit Facility from variable-rate interest to fixed-rate interest with a per annum rate of |
17
Scheduled maturities of long-term debt obligations as of June 30, 20182019 were as follows:
| | | | | | | | | | | | | | | | |
| | | | | | | | Accounts | | | | | | | | |
| | | | | | | | Receivable | | | | | | | | |
| | | | | Credit | | Securitization | | Notes | | Finance Lease | | ||||
|
| Total |
| Facility(1) |
| Program(1) |
| Payable |
| Obligations(2) | | |||||
|
| (in thousands) | | |||||||||||||
Due in one year or less |
| $ | 55,808 |
| $ | 2,230 |
| $ | 1,132 |
| $ | 52,306 | | $ | 140 | |
Due after one year through two years | |
| 50,379 | |
| 1,942 | |
| 968 | |
| 47,462 | |
| 7 | |
Due after two years through three years | |
| 85,385 | |
| 1,965 | |
| 40,243 | |
| 43,172 | |
| 5 | |
Due after three years through four years | |
| 98,514 | |
| 70,033 | |
| — | |
| 28,481 | |
| — | |
Due after four years through five years | |
| 13,035 | |
| — | |
| — | |
| 13,035 | |
| — | |
Due after five years | | | 152 | | | — | | | — | | | 152 | | | — | |
Total payments | |
| 303,273 | |
| 76,170 | |
| 42,343 | |
| 184,608 | |
| 152 | |
Less amounts representing interest | |
| 21,067 | |
| 6,170 | |
| 2,343 | |
| 12,554 | |
| — | |
Long-term debt |
| $ | 282,206 |
| $ | 70,000 |
| $ | 40,000 |
| $ | 172,054 | | $ | 152 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Receivable |
|
|
|
|
|
|
| |
|
|
|
|
| Credit |
| Securitization |
| Notes |
| Capital Lease |
| ||||
|
| Total |
| Facility(1) |
| Program(1) |
| Payable |
| Obligations(2) |
| |||||
|
| (in thousands) |
| |||||||||||||
Due in one year or less |
| $ | 59,036 |
| $ | 2,771 |
| $ | 1,507 |
| $ | 54,521 |
| $ | 237 |
|
Due after one year through two years |
|
| 80,391 |
|
| 3,069 |
|
| 46,271 |
|
| 30,908 |
|
| 143 |
|
Due after two years through three years |
|
| 29,575 |
|
| 3,097 |
|
| — |
|
| 26,471 |
|
| 7 |
|
Due after three years through four years |
|
| 25,258 |
|
| 3,076 |
|
| — |
|
| 22,177 |
|
| 5 |
|
Due after four years through five years |
|
| 77,443 |
|
| 70,050 |
|
| — |
|
| 7,393 |
|
| — |
|
Due after five years |
|
| 225 |
|
| — |
|
| — |
|
| 225 |
|
| — |
|
Total payments |
|
| 271,928 |
|
| 82,063 |
|
| 47,778 |
|
| 141,695 |
|
| 392 |
|
Less amounts representing interest |
|
| 22,296 |
|
| 12,063 |
|
| 2,778 |
|
| 7,437 |
|
| 18 |
|
Long-term debt |
| $ | 249,632 |
| $ | 70,000 |
| $ | 45,000 |
| $ | 134,258 |
| $ | 374 |
|
(1) |
| The future interest payments included in the scheduled maturities due are calculated using variable interest rates based on the LIBOR swap curve, plus the anticipated applicable margin. |
(2) |
| Minimum payments of |
17
Assets securing notes payable or held under capitalfinance leases were included in property, plant and equipment as follows:
| | | | | | | |
| | June 30 | | December 31 | | ||
|
| 2019 |
| 2018 |
| ||
| | (in thousands) |
| ||||
Revenue equipment |
| $ | 245,703 |
| $ | 264,396 | |
Land and structures (service centers) | | | 1,794 | | | 1,794 | |
Software | | | 1,508 | | | 1,484 | |
Service, office, and other equipment | | | 15,492 | | | 5,941 | |
Total assets securing notes payable or held under finance leases | |
| 264,497 | |
| 273,615 | |
Less accumulated depreciation and amortization(1) | |
| 78,113 | |
| 79,961 | |
Net assets securing notes payable or held under finance leases | | $ | 186,384 | | $ | 193,654 | |
|
|
|
|
|
|
|
|
|
| June 30 |
| December 31 |
| ||
|
| 2018 |
| 2017 |
| ||
|
| (in thousands) |
| ||||
Revenue equipment |
| $ | 257,827 |
| $ | 269,950 |
|
Land and structures (service centers) |
|
| 1,794 |
|
| 1,794 |
|
Software |
|
| 486 |
|
| 486 |
|
Service, office, and other equipment |
|
| 101 |
|
| 100 |
|
Total assets securing notes payable or held under capital leases |
|
| 260,208 |
|
| 272,330 |
|
Less accumulated depreciation and amortization(1) |
|
| 92,558 |
|
| 87,691 |
|
Net assets securing notes payable or held under capital leases |
| $ | 167,650 |
| $ | 184,639 |
|
(1) |
| Amortization of assets under held |
Financing Arrangements
Credit Facility
The Company has a revolving credit facility (the “Credit Facility”) under its second amendedSecond Amended and restated credit agreementRestated Credit Agreement (the “Credit Agreement”) with an initial maximum credit amount of $200.0 million, including a swing line facility in an aggregate amount of up to $20.0 million and a letter of credit sub-facility providing for the issuance of letters of credit up to an aggregate amount of $20.0 million. The Company may request additional revolving commitments or incremental term loans thereunder up to an aggregate additional amount of $100.0 million, subject to certain additional conditions as provided in the Credit Agreement. As of June 30, 2018,2019, the Company had available borrowing capacity of $130.0 million under the Credit Facility.
Principal payments under the Credit Facility are due upon maturity of the facility on July 7, 2022; however, borrowings may be repaid, at the Company’s discretion, in whole or in part at any time, without penalty, subject to required notice periods and compliance with minimum prepayment amounts. Borrowings under the Credit Agreement can either be, at the Company’s election: (i) at an alternate base rate (as defined in the Credit Agreement) plus a spread; or (ii) at a Eurodollar rate (as defined in the Credit Agreement) plus a spread. The applicable spread is dependent upon the Company’s adjusted leverage ratioAdjusted Leverage Ratio (as defined in the Credit Agreement). The Credit Agreement contains conditions, representations and
18
warranties, events of default, and indemnification provisions that are customary for financings of this type, including, but not limited to, a minimum interest coverage ratio, a maximum adjusted leverage ratio, and limitations on incurrence of debt, investments, liens on assets, certain sale and leaseback transactions, transactions with affiliates, mergers, consolidations, purchases and sales of assets, and certain restricted payments. The Company was in compliance with the covenants under the Credit Agreement at June 30, 2018.2019.
Interest Rate Swaps
The Company has a five-year interest rate swap agreement with a $50.0 million notional amount maturing on January 2, 2020. The Company receives floating-rate interest amounts based on one-month LIBOR in exchange for fixed-rate interest payments of 1.85% over the life of the agreement. The interest rate swap mitigates interest rate risk by effectively converting $50.0 million of borrowings under the Credit Facility from variable-rate interest to fixed-rate interest with a per annum rate of 3.35%3.10% based on the margin of the Credit Facility as of June 30, 2018.2019. The fair value of the interest rate swap of $0.5$0.1 million and $0.1$0.3 million was recorded in other long-term assets in the consolidated balance sheet at June 30, 20182019 and December 31, 2017,2018, respectively.
18
In June 2017, the Company entered into a forward-starting interest rate swap agreement with a $50.0 million notional amount which will start on January 2, 2020 upon maturity of the current interest rate swap agreement, and mature on June 30, 2022. The Company will receive floating-rate interest amounts based on one-month LIBOR in exchange for fixed-rate interest payments of 1.99% over the life of the agreement. The interest rate swap mitigates interest rate risk by effectively converting $50.0 million of borrowings under the Credit Facility from variable-rate interest to fixed-rate interest with a per annum rate of 3.49%3.24% based on the margin of the Credit Facility as of June 30, 2018.2019. The fair value of the interest rate swap of $1.0$0.5 million was recorded in other long-term liabilities and $0.4$0.5 million was recorded in other long-term assets in the consolidated balance sheet at June 30, 20182019 and December 31, 2017,2018, respectively.
The unrealized gain or loss on the interest rate swap instruments was reported as a component of accumulated other comprehensive loss, net of tax, in stockholders’ equity at June 30, 20182019 and December 31, 2017,2018, and the change in the unrealized income (loss) on the interest rate swaps for the three months and six months ended June 30, 20182019 and 20172018 was reported in other comprehensive loss, net of tax, in the consolidated statements of comprehensive income. The interest rate swaps are subject to certain customary provisions that could allow the counterparty to request immediate paymentsettlement of the fair value liability or asset upon violation of any or all of the provisions. The Company was in compliance with all provisions of the interest rate swap agreements at June 30, 2018.2019.
Accounts Receivable Securitization Program
The Company’s accounts receivable securitization program, which matures on AprilOctober 1, 2020,2021, allows for cash proceeds of $125.0 million to be provided under the facilityprogram and has an accordion feature allowing the Company to request additional borrowings up to $25.0 million, subject to certain conditions. Under this program, certain subsidiaries of the Company continuously sell a designated pool of trade accounts receivables to a wholly owned subsidiary which, in turn, may borrow funds on a revolving basis. This wholly owned consolidated subsidiary is a separate bankruptcy-remote entity, and its assets would be available only to satisfy the claims related to the lender’s interest in the trade accounts receivables. Borrowings under the accounts receivable securitization program bear interest based upon LIBOR, plus a margin, and an annual facility fee. The securitization agreement contains representations and warranties, affirmative and negative covenants, and events of default that are customary for financings of this type, including a maximum adjusted leverage ratio covenant. As of June 30, 2018, $45.02019, $40.0 million was borrowed under the program. The Company was in compliance with the covenants under the accounts receivable securitization program at June 30, 2018.2019.
The accounts receivable securitization program includes a provision under which the Company may request and the letter of credit issuer may issue standby letters of credit, primarily in support of workers’ compensation and third-party casualty claims liabilities in various states in which the Company is self-insured. The outstanding standby letters of credit reduce the availability of borrowings under the program. As of June 30, 2018,2019, standby letters of credit of $17.7$14.9 million have been issued under the program, which reduced the available borrowing capacity to $62.3$70.1 million.
In August 2018, the Company amended and extended its accounts receivable securitization program to modify certain covenants and conditions and extend the maturity date19
Letter of Credit Agreements and Surety Bond Programs
As of June 30, 2018,2019, the Company had letters of credit outstanding of $18.3$15.5 million (including $17.7$14.9 million issued under the accounts receivable securitization program). The Company has programs in place with multiple surety companies for the issuance of surety bonds in support of its self-insurance program. As of June 30, 2018,2019, surety bonds outstanding related to the self-insurance program totaled $53.1$48.6 million.
Notes Payable and Capital Leases
The Company has financed the purchase of certain revenue equipment, other equipment, and software through promissory note arrangements, including $14.3 million and $14.4$20.5 million for revenue equipment and softwareother equipment during the three and six months ended June 30, 2018, respectively.2019.
TheSubsequent to June 30, 2019, the Company financed the purchase of an additional $19.9$17.2 million of revenue equipment through promissory note arrangements as of August 1, 2018.2019.
19
NOTE FG – PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Nonunion Defined Benefit Pension, Supplemental Benefit, and Postretirement Health Benefit Plans
The following is a summary of the components of net periodic benefit cost:
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30 | | ||||||||||||||||
| | Nonunion Defined | | Supplemental | | Postretirement | | ||||||||||||
| | Benefit Pension Plan | | Benefit Plan | | Health Benefit Plan | | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||||
| | (in thousands) | | ||||||||||||||||
Service cost | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 80 | | $ | 91 | |
Interest cost | |
| 168 | |
| 1,108 | |
| 10 | |
| 27 | |
| 303 | |
| 210 | |
Expected return on plan assets | |
| 1 | |
| (378) | |
| — | |
| — | |
| — | |
| — | |
Amortization of prior service credit | |
| — | |
| — | |
| — | |
| — | |
| (8) | |
| (24) | |
Pension settlement expense | |
| 278 | |
| 431 | |
| — | |
| — | |
| — | |
| — | |
Amortization of net actuarial loss(1) | |
| 61 | |
| 592 | |
| 23 | |
| 20 | |
| 224 | |
| 76 | |
Net periodic benefit cost | | $ | 508 | | $ | 1,753 | | $ | 33 | | $ | 47 | | $ | 599 | | $ | 353 | |
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30 | | ||||||||||||||||
| | Nonunion Defined | | Supplemental | | Postretirement | | ||||||||||||
| | Benefit Pension Plan | | Benefit Plan | | Health Benefit Plan | | ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||||
| | (in thousands) | | ||||||||||||||||
Service cost | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 160 | | $ | 183 | |
Interest cost | |
| 486 | |
| 2,123 | |
| 20 | |
| 54 | |
| 606 | |
| 419 | |
Expected return on plan assets | |
| (89) | |
| (779) | |
| — | |
| — | |
| — | |
| — | |
Amortization of prior service credit | |
| — | |
| — | |
| — | |
| — | |
| (17) | |
| (47) | |
Pension settlement expense | |
| 1,634 | |
| 1,085 | |
| — | |
| — | |
| — | |
| — | |
Amortization of net actuarial loss(1) | |
| 210 | |
| 1,370 | |
| 47 | |
| 40 | |
| 449 | |
| 152 | |
Net periodic benefit cost | | $ | 2,241 | | $ | 3,799 | | $ | 67 | | $ | 94 | | $ | 1,198 | | $ | 707 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30 |
| ||||||||||||||||
|
| Nonunion Defined |
| Supplemental |
| Postretirement |
| ||||||||||||
|
| Benefit Pension Plan |
| Benefit Plan |
| Health Benefit Plan |
| ||||||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
Service cost |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 91 |
| $ | 122 |
|
Interest cost |
|
| 1,108 |
|
| 1,149 |
|
| 27 |
|
| 25 |
|
| 210 |
|
| 265 |
|
Expected return on plan assets |
|
| (378) |
|
| (2,054) |
|
| — |
|
| — |
|
| — |
|
| — |
|
Amortization of prior service credit |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (24) |
|
| (48) |
|
Pension settlement expense |
|
| 431 |
|
| 744 |
|
| — |
|
| — |
|
| — |
|
| — |
|
Amortization of net actuarial loss(1) |
|
| 592 |
|
| 757 |
|
| 20 |
|
| 21 |
|
| 76 |
|
| 174 |
|
Net periodic benefit cost |
| $ | 1,753 |
| $ | 596 |
| $ | 47 |
| $ | 46 |
| $ | 353 |
| $ | 513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30 |
| ||||||||||||||||
|
| Nonunion Defined |
| Supplemental |
| Postretirement |
| ||||||||||||
|
| Benefit Pension Plan |
| Benefit Plan |
| Health Benefit Plan |
| ||||||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||||
|
| (in thousands) |
| ||||||||||||||||
Service cost |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 183 |
| $ | 244 |
|
Interest cost |
|
| 2,123 |
|
| 2,389 |
|
| 54 |
|
| 51 |
|
| 419 |
|
| 530 |
|
Expected return on plan assets |
|
| (779) |
|
| (4,221) |
|
| — |
|
| — |
|
| — |
|
| — |
|
Amortization of prior service credit |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (47) |
|
| (95) |
|
Pension settlement expense |
|
| 1,085 |
|
| 2,701 |
|
| — |
|
| — |
|
| — |
|
| — |
|
Amortization of net actuarial loss(1) |
|
| 1,370 |
|
| 1,643 |
|
| 40 |
|
| 41 |
|
| 152 |
|
| 347 |
|
Net periodic benefit cost |
| $ | 3,799 |
| $ | 2,512 |
| $ | 94 |
| $ | 92 |
| $ | 707 |
| $ | 1,026 |
|
(1) |
| The Company amortizes actuarial losses over the average remaining active service period of the plan participants and does not use a corridor approach. |
20
Nonunion Defined Benefit Pension Plan
The Company’s nonunion defined benefit pension plan covers substantially all noncontractual employees hired before January 1, 2006. In June 2013, the Company amended the nonunion defined benefit pension plan to freeze the participants’ final average compensation and years of credited service as of July 1, 2013. The plan amendment did not impact the vested benefits of retirees or former employees whose benefits have not yet been paid from the plan. Effective July 1, 2013, participants of the nonunion defined benefit pension plan who were active employees of the Company became eligible for the discretionary defined contribution feature of the Company’s nonunion 401(k) and defined contribution plan in which all eligible noncontractual employees hired subsequent to December 31, 2005 also participate.
In November 2017, an amendment was executed to terminate the nonunion defined benefit pension plan with a termination date of December 31, 2017. TheIn September 2018, the plan has filed forreceived a favorable determination letter from the IRS regarding the qualification of the plan termination. Following receipt of a favorable determination letter, benefitBenefit election forms will bewere provided to plan participants during the fourth quarter of 2018 and they will have an election window in which they can chooseparticipants could elect any form of payment allowed by the plan for immediate commencement of payment or defer payment until a later date. Until a favorable determination letter is received and theThe plan began distributing immediate lump sum benefit election forms are distributed to participants, the methodologies for establishing plan assumptions will continue to be consistent with those used prior to the amendment to terminate the plan. Pension settlement chargespayments related to the plan termination including settlementsin fourth quarter 2018 and continued making these distributions during 2019. The plan received an extension from the Pension Benefit Guaranty Corporation (the “PBGC”) to allow additional time for lump sumthe plan to administer the settlement of the remaining obligation for deferred benefits through the purchase of a nonparticipating annuity contract from an insurance company. The Company will make a cash contribution to the plan for the amount, if any, required to fund benefit distributions and the cost to purchase an annuity contract to settle the pension obligation related to benefits for which participants elect to defer payment until a later date, may occurpurchases in 2018. However, the timingexcess of recognizing these settlements in the consolidated financial statements is highly dependent on when and if the plan receives the favorable determination letter from the IRS.assets.
20
The Company recognized pension settlement expense as a component of net periodic benefit cost of the nonunion defined benefit pension plan for the three and six months ended June 30, 2019 of $0.3 million (pre-tax), or $0.2 million (after-tax), and $1.6 million (pre-tax), or $1.2 million (after-tax), respectively, related to $3.0 million and $17.9 million of lump-sum benefit distributions from the plan for the three and six months ended June 30, 2019, respectively. For the three and six months ended June 30, 2018, pension settlement expense of $0.4 million (pre-tax), or $0.3 million (after-tax), and $1.1 million (pre-tax), or $0.8 million (after-tax), respectively, was recognized related to $3.7 million and $8.5 million of lump-sum benefit distributions from the plan for the three and six months ended June 30, 2018, respectively. For the three and six months ended June 30, 2017, pension settlement expense of $0.7 million (pre-tax), or $0.5 million (after-tax), and $2.7 million (pre-tax), or $1.7 million (after-tax) was recognized related to $4.9 million and $9.7 million of lump-sum distributions from the plan for the three and six months ended June 30, 2017, respectively, which included2018, respectively. Pension settlement charges related to the plan termination, including those related to an annuity contract purchase are expected to occur in 2019.
In August 2019, the nonunion defined benefit pension plan received a $7.6 millionpreliminary bid for a nonparticipating annuity contract purchased from an insurance company during the first quarter 2017 to settle the pension obligation related to the vested benefits of approximately 50 planthe remaining participants and beneficiarieswho were receiving monthly benefit payments atfrom the time ofplan or who did not elect to receive a lump sum benefit upon plan termination. Based on the contract purchase. Upon recognition ofmost recently available actuarial information, including the preliminary bid received in August, nonunion pension settlement expense for the second half of 2019 is estimated to be approximately $2.0 million, or $1.5 million after-tax, and the Company could expect to make a corresponding reduction in the unrecognized net actuarial loss ofcash contribution to the plan is recorded. Theof approximately $7.0 million, which would be deductible for income tax purposes, to fund an annuity contract purchase and the remaining pre-tax unrecognized net actuarial loss will continuebenefit distributions expected to be amortized overmade from the average remaining future yearsplan in excess of serviceplan assets. However, there can be no assurances in regards to the required cash funding or pension settlement charges, as the actual amounts are dependent on various factors and will be determined using updated actuarial data. Liquidation of the active plan participants. The Company will incur additional quarterlyassets and settlement expense related to lump-sum distributions fromof plan obligations for the nonunion defined benefit pension plan duringis expected to be completed in 2019.
The Company’s short-term rate of return assumption, net of estimated expenses expected to be paid from plan assets, utilized in determining nonunion defined benefit pension expense was lowered from 1.4% for first quarter 2019 to 0.0% for the remaindersecond and third quarters of 2018.2019, as estimated expenses expected to be paid from plan assets are expected to offset investment returns on plan assets which were held in money market mutual funds as of June 30, 2019.
21
The following table discloses the changes in benefit obligations and plan assets of the nonunion defined benefit pension plan for the six months ended June 30, 2018:2019:
| | | | |
| | Nonunion Defined | ||
| | Benefit Pension Plan | ||
| | (in thousands) | ||
Change in benefit obligations | | | | |
Benefit obligations at December 31, 2018 | | $ | 33,373 | |
Interest cost | |
| 486 | |
Actuarial gain(1) | |
| (661) | |
Benefits paid | |
| (18,125) | |
Benefit obligations at June 30, 2019 | |
| 15,073 | |
Change in plan assets | | | | |
Fair value of plan assets at December 31, 2018 | |
| 26,646 | |
Actual return on plan assets | |
| 241 | |
Benefits paid | |
| (18,125) | |
Fair value of plan assets at June 30, 2019 | |
| 8,762 | |
Funded status at period end(2) | | $ | (6,311) | |
| | | | |
Accumulated benefit obligation | | $ | 15,073 | |
|
|
|
|
|
|
| Nonunion Defined |
| |
|
| Benefit Pension Plan |
| |
|
| (in thousands) |
| |
Change in benefit obligations |
|
|
|
|
Benefit obligations at December 31, 2017 |
| $ | 137,417 |
|
Interest cost |
|
| 2,123 |
|
Actuarial gain(1) |
|
| (4,924) |
|
Benefits paid |
|
| (8,578) |
|
Benefit obligations at June 30, 2018 |
|
| 126,038 |
|
Change in plan assets |
|
|
|
|
Fair value of plan assets at December 31, 2017 |
|
| 124,831 |
|
Actual return on plan assets |
|
| 1,093 |
|
Benefits paid |
|
| (8,578) |
|
Fair value of plan assets at June 30, 2018 |
|
| 117,346 |
|
Funded status at period end(2) |
| $ | (8,692) |
|
|
|
|
|
|
Accumulated benefit obligation |
| $ | 126,038 |
|
(1) |
|
|
(2) |
|
|
Based upon currently available actuarial information, and except for the impact of funding for plan termination, the Company does not expect to have cash outlays for required minimum contributions to its nonunion defined benefit pension plan in 2018. The plan’s preliminary adjusted funding target attainment percentage (“AFTAP”) is 112.97% as of the January 1, 2018 valuation date. The AFTAP is determined by measurements prescribed by the Internal Revenue Code, which differ from the funding measurements for financial statement reporting purposes.
Multiemployer Plans
ABF Freight System, Inc. and certain other subsidiaries reported in the Company’s Asset-Based operating segment (“ABF Freight”) contribute to multiemployer pension and health and welfare plans, which have been established pursuant to the Taft-Hartley Act, to provide benefits for its contractual employees. ABF Freight’s contributions generally are based on the time worked by its contractual employees, in accordance with the 2018 ABF NMFA and other related supplemental agreements. ABF Freight recognizes as expense the contractually required contributions for each period and recognizes as a liability any contributions due and unpaid.
21
The 25 multiemployer pension plans to which ABF Freight contributes vary greatly in size and in funded status. Contribution obligations to these plans are generally specified in the 2018 ABF NMFA, which will remain in effect through June 30, 2023. The funding obligations to the pension plans are intended to satisfy the requirements imposed by the Pension Protection Act of 2006, which was permanently extended by the Multiemployer Pension Reform Act (the “Reform Act”) included in the Consolidated and Further Continuing Appropriations Act of 2015. Provisions of the Reform Act include, among others, providing qualifying plans the ability to self-correct funding issues, subject to various requirements and restrictions, including applying to the U.S. Department of the Treasury for the reduction of certain accrued benefits. Through the term of its current collective bargaining agreement, ABF Freight’s contribution obligations generally will be satisfied by making the specified contributions when due. However, the Company cannot determine with any certainty the contributions that will be required under future collective bargaining agreements for ABF Freight’s contractual employees. If ABF Freight was to completely withdraw from certain multiemployer pension plans, under current law, ABF Freight would have material liabilities for its share of the unfunded vested liabilities of each such plan.
22
Approximately one half of ABF Freight’s total contributions to multiemployer pension plans are made to the Central States, Southeast and Southwest Areas Pension Plan (the “Central States Pension Plan”). As set forth in the 2018 Annual Funding Notice for the Central States Pension Plan, the funded percentage of the plan was 27.2% as of January 1, 2018. ABF Freight received an Actuarial Certificationa Notice of PlanCritical and Declining Status for the Central States Pension Plan dated March 30, 2018,29, 2019, in which the plan’s actuary certified that, as of January 1, 2018,2019, the plan is in critical and declining status, as defined by the Reform Act. Critical and declining status is applicable to critical status plans that are projected to become insolvent anytime within the next 14 plan years, or if the plan is projected to become insolvent within the next 19 plan years and either the plan’s ratio of inactive participants to active participants exceeds two to one or the plan’s funded percentage is less than 80%.
On July 9,As more fully described in Note I to the consolidated financial statements in Item 8 of the Company’s 2018 ABF Freight reached a tentative agreement with the Teamster bargaining representatives for the Northern and Southern New England Supplemental AgreementsAnnual Report on terms for new supplemental agreements for 2018-2023 (the “New England Supplemental Agreements”). The New England Supplemental Agreements were ratified by the local unions in the region covered by the supplements on July 25, 2018. In accordance with the New England Supplemental Agreements,Form 10-K, ABF Freight’s multiemployer pension plan obligation with the New England Teamsters and Trucking Industry Pension Fund (the “New England Pension Fund”) was restructured under a transition agreement effective on August 1, 2018. The New England Pension Fund is2018, which resulted in a multiemployer pension plan in critical and declining status to which ABF Freight made approximately 3% of its total multiemployer pension contributions in 2017. The New England Pension Fund was previously restructured to utilize a “two pool approach,” which effectively subdivides the plan assets and liabilities between two groups of beneficiaries. In accordance with ABF Freight’s transition agreement with the New England Pension Fund, ABF Freight agreed to withdraw from the original pool to which it has historically been a participant (“Existing Employer Pool”) and transition to the direct attribution liability pool (“New Employer Pool”), which does not have an associated unfunded liability. The terms of the transition are pursuant to the Second Chance Policy on Retroactive Withdrawal Liability, as recently adopted by the New England Pension Fund.
ABF Freight’s transition agreement with the New England Pension Fund triggered arelated withdrawal liability settlementfor which satisfies ABF Freight’s existing potential withdrawal liability obligations to the Existing Employer Pool and minimizes the potential for future increases in withdrawal liability under the New Employer Pool. ABF Freight will transition to the New Employer Pool at a lower pension contribution rate than its current contribution rate under the Existing Employer Pool, and the new contribution rate will be frozen for a period of 10 years.
ABF Freight recognized a one-time charge of $37.9 million (pre-tax) to recordas of June 30, 2018. In accordance with the transition agreement, ABF Freight made an initial lump sum cash payment of $15.1 million in third quarter 2018 and the remainder of the withdrawal liability, inwhich had an initial aggregate present value of $22.8 million, will be settled with monthly payments to the New England Pension Fund over a period of 23 years. In accordance with current tax law, these payments are deductible for income taxes when paid.
As of June 2018 when30, 2019, the transition agreement was determined to be probable. Theoutstanding withdrawal liability totaled $22.3 million, of which $0.6 million and $21.7 million was recorded in accrued expenses and other long-term liabilities, respectively. The fair value of the obligation was $24.4 million at June 30, 2019, which is equal to the present value of the future withdrawal liability payments, discounted at a 4.5%3.6% interest rate. The discount rate was determined using the 20-year U.S. Treasury rate plus a spread which is the rate that would be available to ABF Freight for long-term financing of a similar maturity (Level 2 of the fair value hierarchy). The withdrawal liability will be settled through the initial lump sum cash payment of $15.1 million, which is recorded in accounts payable and is expected to be made in third quarter 2018, plus monthly payments to the New England Pension Fund over a period of 23 years with an aggregate present value of $22.8 million, which is recorded in other long-term liabilities. In accordance with current tax law, these payments are deductible for income taxes when paid.
The multiemployer plan administrators have provided to the Company no other significant changes in information related to multiemployer plans from the information disclosed in the Company’s 20172018 Annual Report on Form 10-K.
22
NOTE GH – STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss were as follows:
| | | | | | | |
|
| June 30 |
| December 31 | | ||
|
| 2019 |
| 2018 |
| ||
| | (in thousands) | | ||||
Pre-tax amounts: | | | | | | | |
Unrecognized net periodic benefit costs | | $ | (8,685) | | $ | (11,821) | |
Interest rate swap | | | (364) | | | 801 | |
Foreign currency translation | |
| (2,355) | |
| (2,816) | |
| | | | | | | |
Total | | $ | (11,404) | | $ | (13,836) | |
| | | | | | | |
After-tax amounts: | | | | | | | |
Unrecognized net periodic benefit costs(1) | | $ | (10,421) | | $ | (12,749) | |
Interest rate swap | | | (269) | | | 591 | |
Foreign currency translation | |
| (1,739) | |
| (2,080) | |
| | | | | | | |
Total | | $ | (12,429) | | $ | (14,238) | |
|
|
|
|
|
|
|
|
|
| June 30 |
| December 31 |
| ||
|
| 2018 |
| 2017 |
| ||
|
| (in thousands) |
| ||||
Pre-tax amounts: |
|
|
|
|
|
|
|
Unrecognized net periodic benefit costs |
| $ | (17,929) |
| $ | (25,768) |
|
Interest rate swap |
|
| 1,535 |
|
| 481 |
|
Foreign currency translation |
|
| (2,289) |
|
| (1,894) |
|
|
|
|
|
|
|
|
|
Total |
| $ | (18,683) |
| $ | (27,181) |
|
|
|
|
|
|
|
|
|
After-tax amounts: |
|
|
|
|
|
|
|
Unrecognized net periodic benefit costs |
| $ | (17,285) |
| $ | (19,715) |
|
Interest rate swap |
|
| 1,134 |
|
| 292 |
|
Foreign currency translation |
|
| (1,691) |
|
| (1,151) |
|
|
|
|
|
|
|
|
|
Total |
| $ | (17,842) |
| $ | (20,574) |
|
(1) | Includes $4.0 million related to a previous valuation allowance on deferred tax assets for nonunion defined benefit pension liabilities which will be reversed to retained earnings upon extinguishment of the nonunion defined benefit pension plan expected to occur in 2019. The reclassification of stranded income tax effects related to this item is not permitted by ASC Topic 220 which the Company adopted as of January 1, 2018. |
23
The following is a summary of the changes in accumulated other comprehensive loss, net of tax, by component for the six months ended June 30, 20182019 and 2017:2018:
| | | | | | | | | | | | | |
| | | | | Unrecognized | | | Interest |
| Foreign | | ||
| | | | | Net Periodic | | | Rate | | Currency | | ||
|
| Total |
| Benefit Costs |
| | Swap |
| Translation | | |||
| | (in thousands) | | ||||||||||
Balances at December 31, 2018 | | $ | (14,238) | | $ | (12,749) | | $ | 591 | | $ | (2,080) | |
| | | | | | | | | | | | | |
Other comprehensive income (loss) before reclassifications | | | 84 | | | 603 | | | (860) | | | 341 | |
Amounts reclassified from accumulated other comprehensive loss | | | 1,725 | | | 1,725 | | | — | | | — | |
Net current-period other comprehensive income (loss) | | | 1,809 | | | 2,328 | | | (860) | | | 341 | |
| | | | | | | | | | | | | |
Balances at June 30, 2019 | | $ | (12,429) | | $ | (10,421) | | $ | (269) | | $ | (1,739) | |
| | | | | | | | | | | | | |
Balances at December 31, 2017 | | $ | (20,574) | | $ | (19,715) | | $ | 292 | | $ | (1,151) | |
Adjustment to beginning balance of accumulated other comprehensive loss for adoption of accounting standard(1) | | | (3,576) | | | (3,391) | | | 63 | | | (248) | |
Balances at January 1, 2018 | | | (24,150) | | | (23,106) | | | 355 | | | (1,399) | |
| | | | | | | | | | | | | |
Other comprehensive income (loss) before reclassifications | |
| 4,377 | |
| 3,890 | | | 779 | |
| (292) | |
Amounts reclassified from accumulated other comprehensive loss | |
| 1,931 | |
| 1,931 | | | — | |
| — | |
Net current-period other comprehensive income (loss) | |
| 6,308 | |
| 5,821 | | | 779 | |
| (292) | |
| | | | | | | | | | | | | |
Balances at June 30, 2018 | | $ | (17,842) | | $ | (17,285) | | $ | 1,134 | | $ | (1,691) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrecognized |
|
| Interest |
| Foreign |
| ||
|
|
|
|
| Net Periodic |
|
| Rate |
| Currency |
| ||
|
| Total |
| Benefit Costs |
|
| Swap |
| Translation |
| |||
|
| (in thousands) |
| ||||||||||
Balances at December 31, 2017 |
| $ | (20,574) |
| $ | (19,715) |
| $ | 292 |
| $ | (1,151) |
|
Adjustment to beginning balance of accumulated other comprehensive loss for adoption of accounting standard(1) |
|
| (3,576) |
|
| (3,391) |
|
| 63 |
|
| (248) |
|
Balances at January 1, 2018 |
|
| (24,150) |
|
| (23,106) |
|
| 355 |
|
| (1,399) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications |
|
| 4,377 |
|
| 3,890 |
|
| 779 |
|
| (292) |
|
Amounts reclassified from accumulated other comprehensive loss |
|
| 1,931 |
|
| 1,931 |
|
| — |
|
| — |
|
Net current-period other comprehensive income (loss) |
|
| 6,308 |
|
| 5,821 |
|
| 779 |
|
| (292) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2018 |
| $ | (17,842) |
| $ | (17,285) |
| $ | 1,134 |
| $ | (1,691) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2016 |
| $ | (23,417) |
| $ | (21,886) |
| $ | (329) |
| $ | (1,202) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications |
|
| (1,442) |
|
| (1,569) |
|
| 216 |
|
| (89) |
|
Amounts reclassified from accumulated other comprehensive loss |
|
| 2,833 |
|
| 2,833 |
|
| — |
|
| — |
|
Net current-period other comprehensive income |
|
| 1,391 |
|
| 1,264 |
|
| 216 |
|
| (89) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2017 |
| $ | (22,026) |
| $ | (20,622) |
| $ | (113) |
| $ | (1,291) |
|
(1) |
| The Company elected to reclassify the stranded income tax effects in accumulated other comprehensive loss to retained earnings as of January 1, 2018 as a result of adopting an amendment to ASC Topic 220 |
23
The following is a summary of the significant reclassifications out of accumulated other comprehensive loss by component:
| | | | | | | |
| | Unrecognized Net Periodic | | ||||
| | Benefit Costs(1)(2) |
| ||||
| | Six Months Ended June 30 | | ||||
|
| 2019 |
| 2018 |
| ||
| | (in thousands) |
| ||||
Amortization of net actuarial loss | | $ | (706) | | $ | (1,562) | |
Amortization of prior service credit | | | 17 | |
| 47 | |
Pension settlement expense | | | (1,634) | |
| (1,085) | |
Total, pre-tax | | | (2,323) | |
| (2,600) | |
Tax benefit | | | 598 | |
| 669 | |
Total, net of tax | | $ | (1,725) | | $ | (1,931) | |
|
|
|
|
|
|
|
|
|
| Unrecognized Net Periodic |
| ||||
|
| Benefit Costs(1)(2) |
| ||||
|
| Six Months Ended June 30 |
| ||||
|
| 2018 |
| 2017 |
| ||
|
| (in thousands) |
| ||||
Amortization of net actuarial loss |
| $ | (1,562) |
| $ | (2,031) |
|
Amortization of prior service credit |
|
| 47 |
|
| 95 |
|
Pension settlement expense |
|
| (1,085) |
|
| (2,701) |
|
Total, pre-tax |
|
| (2,600) |
|
| (4,637) |
|
Tax benefit |
|
| 669 |
|
| 1,804 |
|
Total, net of tax |
| $ | (1,931) |
| $ | (2,833) |
|
(1) |
| Amounts in parentheses indicate increases in expense or loss. |
(2) |
| These components of accumulated other comprehensive loss are included in the computation of net periodic benefit cost (see Note |
24
Dividends on Common Stock
The following table is a summary of dividends declared during the applicable quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| 2018 |
| 2017 |
| |||||||||||||||||||||
|
| Per Share |
| Amount |
| Per Share |
| Amount |
| |||||||||||||||||
|
| (in thousands, except per share data) | ||||||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | 2019 | | 2018 | | |||||||||||||||||||||
|
| Per Share |
| Amount |
| Per Share |
| Amount |
| |||||||||||||||||
| | (in thousands, except per share data) | ||||||||||||||||||||||||
First quarter |
| $ | 0.08 |
| $ | 2,058 |
| $ | 0.08 |
| $ | 2,066 |
| | $ | 0.08 | | $ | 2,052 | | $ | 0.08 | | $ | 2,058 | |
Second quarter |
| $ | 0.08 |
| $ | 2,058 |
| $ | 0.08 |
| $ | 2,078 |
| | $ | 0.08 | | $ | 2,050 | | $ | 0.08 | | $ | 2,058 | |
On July 27, 2018,25, 2019, the Company’s Board of Directors declared a dividend of $0.08 per share to stockholders of record as of August 10, 2018.9, 2019.
Treasury Stock
The Company has a program to repurchase its common stock in the open market or in privately negotiated transactions. 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. As of December 31, 2017,2018, the Company had $31.7$22.3 million remaining under the program for repurchases of its common stock. During the six months ended June 30, 2018,2019, the Company purchased 5,882168,535 shares for an aggregate cost of $0.2$5.2 million, leaving $31.5$17.1 million available for repurchase of common stock under the program.
NOTE HI – SHARE-BASED COMPENSATION
Stock Awards
As of June 30, 2018 and December 31, 2017,2018, the Company had outstanding restricted stock units (“RSUs”) granted under the 2005 Ownership Incentive Plan (the “2005 Plan”). On April 30, 2019, the Company’s stockholders approved the ArcBest Ownership Incentive Plan (the “Ownership Incentive Plan”) to amend and restate the 2005 Plan. The 2005Ownership Incentive Plan as amended, provides for the granting of 3.14.0 million shares, which may be awarded as incentive and nonqualified stock options, stock appreciation rights, restricted stock, RSUs, or restricted stock units (“RSUs”).performance award units. The Company had outstanding RSUs granted under the Ownership Incentive Plan as of June 30, 2019.
24
Restricted Stock Units
A summary of the Company’s restricted stock unit award program is presented below:
| | | | | | |
| | | | Weighted-Average | | |
|
| | | Grant Date | | |
| | Units | | Fair Value | | |
Outstanding – January 1, 2019 | | 1,436,983 | | $ | 25.81 | |
Granted | | 386,520 | | $ | 27.75 | |
Vested | | (142,594) | | $ | 39.87 | |
Forfeited(1) | | (18,456) | | $ | 26.56 | |
Outstanding – June 30, 2019 | | 1,662,453 | | $ | 25.05 | |
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
| |
|
|
|
| Grant Date |
| |
|
| Units |
| Fair Value |
| |
Outstanding – January 1, 2018 |
| 1,459,260 |
| $ | 22.98 |
|
Granted |
| 2,400 |
| $ | 33.85 |
|
Vested |
| (48,039) |
| $ | 22.76 |
|
Forfeited(1) |
| (5,611) |
| $ | 24.27 |
|
Outstanding – June 30, 2018 |
| 1,408,010 |
| $ | 23.00 |
|
(1) |
| Forfeitures are recognized as they occur. |
25
NOTE IJ – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three Months Ended |
| Six Months Ended |
| |||||||||||||||||||||
|
| June 30 |
| June 30 |
| |||||||||||||||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| |||||||||||||||||
|
| (in thousands, except share and per share data) |
| |||||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Three Months Ended | | Six Months Ended | | |||||||||||||||||||||
| | June 30 | | June 30 | | |||||||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| |||||||||||||||||
| | (in thousands, except share and per share data) | | |||||||||||||||||||||||
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Net income |
| $ | 1,233 |
| $ | 15,777 |
| $ | 11,187 |
| $ | 8,370 |
| | $ | 24,376 | | $ | 1,233 | | $ | 29,264 | | $ | 11,187 | |
Effect of unvested restricted stock awards |
|
| (4) |
|
| (65) |
|
| (31) |
|
| (50) |
| |
| (11) | |
| (4) | |
| (26) | |
| (31) | |
Adjusted net income |
| $ | 1,229 |
| $ | 15,712 |
| $ | 11,156 |
| $ | 8,320 |
| | $ | 24,365 | | $ | 1,229 | | $ | 29,238 | | $ | 11,156 | |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Weighted-average shares |
|
| 25,670,325 |
|
| 25,767,791 |
|
| 25,656,674 |
|
| 25,726,363 |
| |
| 25,554,286 | |
| 25,670,325 | |
| 25,562,306 | |
| 25,656,674 | |
Earnings per common share |
| $ | 0.05 |
| $ | 0.61 |
| $ | 0.43 |
| $ | 0.32 |
| | $ | 0.95 | | $ | 0.05 | | $ | 1.14 | | $ | 0.43 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Net income |
| $ | 1,233 |
| $ | 15,777 |
| $ | 11,187 |
| $ | 8,370 |
| | $ | 24,376 | | $ | 1,233 | | $ | 29,264 | | $ | 11,187 | |
Effect of unvested restricted stock awards |
|
| (4) |
|
| (64) |
|
| (30) |
|
| (50) |
| |
| (11) | |
| (4) | |
| (25) | |
| (30) | |
Adjusted net income |
| $ | 1,229 |
| $ | 15,713 |
| $ | 11,157 |
| $ | 8,320 |
| | $ | 24,365 | | $ | 1,229 | | $ | 29,239 | | $ | 11,157 | |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Weighted-average shares |
|
| 25,670,325 |
|
| 25,767,791 |
|
| 25,656,674 |
|
| 25,726,363 |
| |
| 25,554,286 | |
| 25,670,325 | |
| 25,562,306 | |
| 25,656,674 | |
Effect of dilutive securities |
|
| 1,029,224 |
|
| 523,850 |
|
| 996,608 |
|
| 652,073 |
| |
| 877,306 | |
| 1,029,224 | |
| 920,705 | |
| 996,608 | |
Adjusted weighted-average shares and assumed conversions |
|
| 26,699,549 |
|
| 26,291,641 |
|
| 26,653,282 |
|
| 26,378,436 |
| |
| 26,431,592 | |
| 26,699,549 | |
| 26,483,011 | |
| 26,653,282 | |
Earnings per common share |
| $ | 0.05 |
| $ | 0.60 |
| $ | 0.42 |
| $ | 0.32 |
| | $ | 0.92 | | $ | 0.05 | | $ | 1.10 | | $ | 0.42 | |
Under the two-class method of calculating earnings per share, dividends paid and a portion of undistributed net income, but not losses, are allocated to unvested RSUs that receive dividends, which are considered participating securities. Beginning with 2015 grants, the RSU agreements were modified to remove dividend rights; therefore, the RSUs granted subsequent to 2015 are not participating securities. For each of the three- and six-month periods ended June 30, 20172019 and 2018, outstanding stock awards of 0.2 million and 0.1 million, respectively, were not included in the diluted earnings per share calculation because their inclusion would have the effect of increasing the earnings per share.
25
NOTE JK – 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 operating decisions. Management uses revenues, operating expense categories, operating ratios, operating income, and key operating statistics to evaluate performance and allocate resources to the Company’s operations.
As disclosed in the Company’s 2017 10-K, the Company modified the presentation of segment expenses allocated from shared services, during the third quarter of 2017. Previously, expenses related to company-wide functions were allocated to segment expense line items by type of expense. Allocated expenses are now presented on a single shared services line within the Company’s operating segment disclosures. Reclassifications have been made to the prior period operating segment expenses to conform to the current year presentation. There was no impact on each segment’s total expenses as a result of the reclassifications.
Shared services represent costs incurred to support all segments, including sales, pricing, customer service, marketing, capacity sourcing functions, human resources, financial services, information technology, legal, and other company-wide services. Certain overhead costs are not attributable to any segment and remain unallocated in “Other and eliminations.” Included in unallocated costs are expenses related to investor relations, legal, the ArcBest Board of Directors, and certain executive compensation.technology investments. Shared services costs attributable to the operating segments are predominantly allocated based upon estimated and planned resource utilization-related metrics such as estimated shipment levels, number of pricing proposals, or number of personnel supported. The bases for such charges are modified and adjusted by management when necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by the operating segments. Management believes the methods used to allocate expenses are reasonable.
Effective January 1, 2018, the Company retrospectively adopted an amendment to ASC Topic 715 which requires changes to the financial statement presentation26
The Company’s reportable operating segments are impacted by seasonal fluctuations which affect tonnage, shipment or service event levels, and demand for services, as described below; therefore, operating results for the interim periods presented may not necessarily be indicative of the results for the fiscal year.
The Company’s reportable operating segments are as follows:
| The Asset-Based |
Freight shipments and operating costs of the Asset-Based segment can be adversely affected 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 U.S. and global economies, may influence quarterly freight tonnage levels.
26
| The ArcBest segment includes the results of operations of the Company’s service offerings in ground expedite, truckload, truckload-dedicated, intermodal, household goods moving, managed transportation, warehousing and |
ArcBest segment operations are influenced by seasonal fluctuations that impact customers’ supply chains. The second and third calendar quarters of each year usually have the highest shipment levels while the first quarter generally has the lowest, although other factors, including the state of the U.S. and global economies and available capacity in the market, may impact quarterly business levels. Shipments of the ArcBest segment may decline during winter months because of post-holiday slowdowns, but expedite shipments can be subject to short-term increases depending on the impact of weather disruptions to customers’ supply chains. Plant shutdowns during summer months may affect shipments for automotive and manufacturing customers of the ArcBest segment, but severe weather events can result in higher demand for expedite services. Moving services of the ArcBest segment are impacted by seasonal fluctuations, generally resulting in higher business levels in the second and third quarters as the demand for household goods moving services is typically stronger in the summer months.
| FleetNet includes the results of operations of FleetNet America, Inc. and certain other subsidiaries that provide roadside assistance and maintenance management services for commercial vehicles through a network of third-party service providers. FleetNet also provides services to the Asset-Based and ArcBest segments. Approximately 19% and 16% of FleetNet’s revenues for the three and six months ended June 30, 2019, respectively, are for services provided to the Asset-Based and ArcBest segments compared to approximately 3% for the same periods of 2018. |
Emergency roadside service events of the FleetNet segment are favorably impacted by extreme weather conditions that affect commercial vehicle operations, and the segment’s results of operations will be influenced by seasonal variations in service event volume.
The Company’s other business activities and operating segments that are not reportable include ArcBest Corporation and certain other subsidiaries. Certain costs incurred by the parent holding company and the Company’s shared services subsidiary are allocated to the reporting segments. 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.
Further classifications of operations or revenues by geographic location are impracticable and, therefore, are not provided. The Company’s foreign operations are not significant.
27
The following tables reflect reportable operating segment information:
| | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| ||||||||
| | June 30 | | June 30 |
| ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
| | (in thousands) |
| ||||||||||
REVENUES | | | | | | | | | | | | | |
Asset-Based | | $ | 559,648 | | $ | 559,239 |
| $ | 1,065,727 |
| $ | 1,041,354 | |
ArcBest | |
| 181,173 | |
| 199,987 | |
| 354,377 | |
| 381,920 | |
FleetNet | |
| 51,722 | |
| 46,792 | |
| 104,981 | |
| 94,551 | |
Other and eliminations | |
| (21,053) | |
| (12,668) | |
| (41,756) | |
| (24,474) | |
Total consolidated revenues |
| $ | 771,490 |
| $ | 793,350 |
| $ | 1,483,329 |
| $ | 1,493,351 | |
| | | | | | | | | | | | | |
OPERATING EXPENSES | | | | | | | | | | | | | |
Asset-Based | | | | | | | | | | | | | |
Salaries, wages, and benefits | | $ | 297,016 | | $ | 286,750 |
| $ | 577,292 |
| $ | 556,529 | |
Fuel, supplies, and expenses | |
| 66,853 | |
| 65,040 | |
| 131,580 | |
| 127,233 | |
Operating taxes and licenses | |
| 12,214 | |
| 11,910 | |
| 24,612 | |
| 23,666 | |
Insurance | |
| 7,598 | |
| 7,979 | |
| 15,589 | |
| 14,607 | |
Communications and utilities | |
| 4,529 | |
| 4,135 | |
| 9,149 | |
| 8,656 | |
Depreciation and amortization | |
| 21,743 | |
| 21,362 | |
| 42,723 | |
| 42,292 | |
Rents and purchased transportation | |
| 57,687 | |
| 63,253 | |
| 107,599 | |
| 109,386 | |
Shared services | | | 56,013 | | | 56,825 | | | 106,725 | | | 102,432 | |
Multiemployer pension fund withdrawal liability charge(1) | | | — | | | 37,922 | | | — | | | 37,922 | |
Gain on sale of property and equipment | |
| (1,587) | |
| (266) | |
| (1,621) | |
| (399) | |
Other | |
| 1,404 | |
| 948 | |
| 2,286 | |
| 2,247 | |
Total Asset-Based | |
| 523,470 | |
| 555,858 | | | 1,015,934 | | | 1,024,571 | |
| | | | | | | | | | | | | |
ArcBest | | | | | | | | | | | | | |
Purchased transportation | |
| 147,552 | |
| 162,920 | |
| 287,657 | |
| 311,292 | |
Supplies and expenses | |
| 2,858 | |
| 3,538 | |
| 5,632 | |
| 6,768 | |
Depreciation and amortization | |
| 3,055 | |
| 3,597 | |
| 6,206 | |
| 7,005 | |
Shared services | | | 23,141 | | | 23,536 | | | 46,172 | | | 45,404 | |
Other | | | 2,445 | |
| 2,546 | | | 4,858 | | | 4,427 | |
Restructuring costs(2) | | | — | |
| 143 | | | — | | | 152 | |
Total ArcBest | |
| 179,051 | |
| 196,280 | |
| 350,525 | |
| 375,048 | |
| | | | | | | |
| | |
| | |
FleetNet | |
| 50,696 | |
| 45,763 | |
| 102,467 | |
| 92,001 | |
Other and eliminations | |
| (16,927) | |
| (7,707) |
|
| (29,388) | |
| (14,150) | |
Total consolidated operating expenses | | $ | 736,290 | | $ | 790,194 | | $ | 1,439,538 | | $ | 1,477,470 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30 |
| June 30 |
| ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
|
| (in thousands) |
| ||||||||||
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Based |
| $ | 559,239 |
| $ | 514,537 |
| $ | 1,041,354 |
| $ | 978,893 |
|
ArcBest |
|
| 199,987 |
|
| 175,929 |
|
| 381,920 |
|
| 328,805 |
|
FleetNet |
|
| 46,792 |
|
| 36,501 |
|
| 94,551 |
|
| 76,739 |
|
Other and eliminations |
|
| (12,668) |
|
| (6,599) |
|
| (24,474) |
|
| (12,981) |
|
Total consolidated revenues |
| $ | 793,350 |
| $ | 720,368 |
| $ | 1,493,351 |
| $ | 1,371,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Based |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits |
| $ | 286,750 |
| $ | 286,904 |
| $ | 556,529 |
| $ | 566,284 |
|
Fuel, supplies, and expenses |
|
| 65,040 |
|
| 58,541 |
|
| 127,233 |
|
| 116,931 |
|
Operating taxes and licenses |
|
| 11,910 |
|
| 12,191 |
|
| 23,666 |
|
| 24,014 |
|
Insurance |
|
| 7,979 |
|
| 7,602 |
|
| 14,607 |
|
| 14,720 |
|
Communications and utilities |
|
| 4,135 |
|
| 4,168 |
|
| 8,656 |
|
| 8,685 |
|
Depreciation and amortization |
|
| 21,362 |
|
| 20,716 |
|
| 42,292 |
|
| 41,234 |
|
Rents and purchased transportation |
|
| 63,253 |
|
| 53,189 |
|
| 109,386 |
|
| 99,615 |
|
Shared services(2) |
|
| 56,825 |
|
| 46,600 |
|
| 102,432 |
|
| 90,104 |
|
Multiemployer pension fund withdrawal liability charge(3) |
|
| 37,922 |
|
| — |
|
| 37,922 |
|
| — |
|
(Gain) loss on sale of property and equipment |
|
| (266) |
|
| 25 |
|
| (399) |
|
| (592) |
|
Other |
|
| 948 |
|
| 1,673 |
|
| 2,247 |
|
| 3,178 |
|
Restructuring costs(4) |
|
| — |
|
| 33 |
|
| — |
|
| 173 |
|
Total Asset-Based |
|
| 555,858 |
|
| 491,642 |
|
| 1,024,571 |
|
| 964,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ArcBest |
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased transportation |
|
| 162,920 |
|
| 139,432 |
|
| 311,292 |
|
| 261,419 |
|
Supplies and expenses |
|
| 3,538 |
|
| 3,742 |
|
| 6,768 |
|
| 7,412 |
|
Depreciation and amortization |
|
| 3,597 |
|
| 3,230 |
|
| 7,005 |
|
| 6,496 |
|
Shared services(2) |
|
| 23,536 |
|
| 20,658 |
|
| 45,404 |
|
| 40,244 |
|
Other |
|
| 2,546 |
|
| 2,873 |
|
| 4,427 |
|
| 5,338 |
|
Restructuring costs(4) |
|
| 143 |
|
| 65 |
|
| 152 |
|
| 875 |
|
Total ArcBest |
|
| 196,280 |
|
| 170,000 |
|
| 375,048 |
|
| 321,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FleetNet |
|
| 45,763 |
|
| 35,754 |
|
| 92,001 |
|
| 74,971 |
|
Other and eliminations |
|
| (7,707) |
|
| (2,795) |
|
| (14,150) |
|
| (5,512) |
|
Total consolidated operating expenses |
| $ | 790,194 |
| $ | 694,601 |
| $ | 1,477,470 |
| $ | 1,355,589 |
|
(1) |
|
|
|
|
| ABF Freight recorded a one-time charge in |
(2) |
| Restructuring costs relate to the realignment of the Company’s corporate structure |
28
| | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| ||||||||
| | June 30 | | June 30 | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
| | (in thousands) |
| ||||||||||
OPERATING INCOME | | | | | | | | | | | | | |
Asset-Based | | $ | 36,178 | | $ | 3,381 | | $ | 49,793 | | $ | 16,783 | |
ArcBest | |
| 2,122 | |
| 3,707 | |
| 3,852 | |
| 6,872 | |
FleetNet | |
| 1,026 | |
| 1,029 | |
| 2,514 | |
| 2,550 | |
Other and eliminations | |
| (4,126) | |
| (4,961) | |
| (12,368) | |
| (10,324) | |
Total consolidated operating income | | $ | 35,200 | | $ | 3,156 | | $ | 43,791 | | $ | 15,881 | |
| | | | | | | | | | | | | |
OTHER INCOME (COSTS) | | | | | | | | | | | | | |
Interest and dividend income | | $ | 1,616 | | $ | 714 | | $ | 3,094 | | $ | 1,240 | |
Interest and other related financing costs | |
| (2,811) | |
| (2,013) | |
| (5,693) | |
| (4,072) | |
Other, net(1) | |
| (445) | |
| (1,123) | |
| (1,036) | |
| (3,324) | |
Total other income (costs) | |
| (1,640) | |
| (2,422) | |
| (3,635) | |
| (6,156) | |
INCOME BEFORE INCOME TAXES | | $ | 33,560 | | $ | 734 | | $ | 40,156 | | $ | 9,725 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30 |
| June 30 |
| ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
|
| (in thousands) |
| ||||||||||
OPERATING INCOME(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Based |
| $ | 3,381 |
| $ | 22,895 |
| $ | 16,783 |
| $ | 14,547 |
|
ArcBest |
|
| 3,707 |
|
| 5,929 |
|
| 6,872 |
|
| 7,021 |
|
FleetNet |
|
| 1,029 |
|
| 747 |
|
| 2,550 |
|
| 1,768 |
|
Other and eliminations |
|
| (4,961) |
|
| (3,804) |
|
| (10,324) |
|
| (7,469) |
|
Total consolidated operating income |
| $ | 3,156 |
| $ | 25,767 |
| $ | 15,881 |
| $ | 15,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (COSTS) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
| $ | 714 |
| $ | 285 |
| $ | 1,240 |
| $ | 559 |
|
Interest and other related financing costs |
|
| (2,013) |
|
| (1,389) |
|
| (4,072) |
|
| (2,704) |
|
Other, net(1)(2) |
|
| (1,123) |
|
| (528) |
|
| (3,324) |
|
| (2,234) |
|
Total other income (costs) |
|
| (2,422) |
|
| (1,632) |
|
| (6,156) |
|
| (4,379) |
|
INCOME BEFORE INCOME TAXES |
| $ | 734 |
| $ | 24,135 |
| $ | 9,725 |
| $ | 11,488 |
|
(1) |
|
|
|
|
The following table presents operating expenses by category on a consolidated basis:
| | | | | | | | | | | | | |
|
| Three Months Ended | | Six Months Ended |
| ||||||||
| | June 30 | | June 30 | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
|
| (in thousands) | | ||||||||||
OPERATING EXPENSES | | | | | | | | | | | | | |
Salaries, wages, and benefits | | $ | 361,116 | | $ | 355,913 | | $ | 704,784 | | $ | 684,670 | |
Rents, purchased transportation, and other costs of services | |
| 236,053 | |
| 253,540 | |
| 457,078 | |
| 477,296 | |
Fuel, supplies, and expenses | |
| 80,700 | |
| 84,884 | |
| 160,036 | |
| 163,530 | |
Depreciation and amortization(1) | |
| 27,434 | |
| 27,187 | |
| 53,971 | |
| 53,673 | |
Other | |
| 30,987 | |
| 30,408 | |
| 63,669 | |
| 59,663 | |
Multiemployer pension fund withdrawal liability charge(2) | | | — | | | 37,922 | | | — | | | 37,922 | |
Restructuring costs(3) | |
| — | |
| 340 | |
| — | |
| 716 | |
| | $ | 736,290 | | $ | 790,194 | | $ | 1,439,538 | | $ | 1,477,470 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30 |
| June 30 |
| ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
|
| (in thousands) |
| ||||||||||
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, wages, and benefits |
| $ | 355,913 |
| $ | 349,200 |
| $ | 684,670 |
| $ | 681,790 |
|
Rents, purchased transportation, and other costs of services |
|
| 253,540 |
|
| 216,237 |
|
| 477,296 |
|
| 416,108 |
|
Fuel, supplies, and expenses |
|
| 84,884 |
|
| 68,451 |
|
| 163,530 |
|
| 141,113 |
|
Depreciation and amortization(1) |
|
| 27,187 |
|
| 25,209 |
|
| 53,673 |
|
| 50,603 |
|
Other |
|
| 30,408 |
|
| 35,141 |
|
| 59,663 |
|
| 63,981 |
|
Multiemployer pension fund withdrawal liability charge(2) |
|
| 37,922 |
|
| — |
|
| 37,922 |
|
| — |
|
Restructuring costs(3) |
|
| 340 |
|
| 363 |
|
| 716 |
|
| 1,994 |
|
|
| $ | 790,194 |
| $ | 694,601 |
| $ | 1,477,470 |
| $ | 1,355,589 |
|
(1) |
| Includes amortization of intangible assets. |
(2) |
| ABF Freight recorded a one-time charge in |
(3) |
| Restructuring costs relate to the realignment of the Company’s corporate structure |
NOTE K – RESTRUCTURING CHARGES
On November 3, 2016, the Company announced its plan to implement an enhanced market approach to better serve its customers. The enhanced market approach unified the Company’s sales, pricing, customer service, marketing, and capacity sourcing functions effective January 1, 2017, and allows the Company to operate as one logistics provider under the ArcBest brand. As a result of the restructuring, the Company recorded $0.3 million and $0.7 million of restructuring charges in operating expenses during the three and six months ended June 30, 2018, respectively, and recorded $0.4 million and $2.0 million, primarily for employee-related costs, during the three and six months ended June 30, 2017, respectively.
The Company estimates it will incur restructuring charges of approximately $1.0 million during 2018 primarily for consulting fees related to continued integration of systems and processes to further implement its enhanced market approach.
29
NOTE L – LEGAL PROCEEDINGS, ENVIRONMENTAL MATTERS, AND OTHER EVENTS
The Company is involved in various legal actions arising in the ordinary course of business. The Company maintains liability insurance against certain risks arising out of the normal course of its business, subject to certain self-insured retention limits. The Company routinely establishes and reviews the adequacy of reserves for estimated legal, environmental, and self-insurance exposures. While management believes that amounts accrued in the consolidated financial statements are adequate, estimates of these liabilities may change as circumstances develop. Considering amounts recorded, routine legal matters are not expected to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
29
Environmental Matters
The Company’s subsidiaries store fuel for use in tractors and trucks in 6261 underground tanks located in 18 states. Maintenance of such tanks is regulated at the federal and, in most cases, state levels. The Company believes 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 involvement in waste disposal or waste generation at such sites, the Company has either agreed to de minimis settlements or determined that its obligations, other than those specifically accrued with respect to such sites, would involve immaterial monetary liability, although there can be no assurances in this regard.
At June 30, 20182019 and December 31, 2017,2018, the Company’s reserve, which was reported in accrued expenses, for estimated environmental cleanup costs of properties currently or previously operated by the Company totaled $0.6 million and $0.4 million, respectively.million. Amounts accrued reflect management’s best estimate of the future undiscounted exposure related to identified properties based on current environmental regulations, management’s experience with similar environmental matters, and testing performed at certain sites.
30
ITEM 2. MANAGEMENT’S DISCUSSIONDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
General
ArcBest Corporation®TM (together with its subsidiaries, the “Company,” “we,” “us,” and “our”) provides a comprehensive suite of freight transportation services and integrated logistics solutions. Our operations are conducted through our three reportable operating segments: Asset-Based, which consists of ABF Freight System, Inc. and certain other subsidiaries (“ABF Freight”); ArcBest®, our asset-light logistics operation; and FleetNet.FleetNet®. The ArcBest and the FleetNet reportable segments combined represent our Asset-Light operations. References to the Company, including “we,” “us,” and “our,” in this Quarterly Report on Form 10-Q are primarily to the Company and its subsidiaries on a consolidated basis.
As previously disclosed in our 2017 Annual Report on Form 10-K, we modified the presentation of segment expenses allocated from shared services during the third quarter of 2017. Shared services represent costs incurred to support all segments, including sales, pricing, customer service, marketing, capacity sourcing functions, human resources, financial services, information technology, legal, and other company-wide services. Certain overhead costs are not attributable to any segment and remain unallocated in “Other and eliminations.” Previously, expenses related to company-wide functions were allocated to segment expense line items by type of expense. Allocated expenses are now presented on a single shared services line within our operating segment disclosures. Reclassifications have been made to the prior period operating segment expenses to conform to the current year presentation. There was no impact on each segment’s total expenses as a result of the reclassifications. See additional descriptions of our segments and the reclassifications made to certain prior year operating segment data in Note J to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Effective January 1, 2018, the Company retrospectively adopted an amendment to Accounting Standards Codification (“ASC”) Topic 715, Compensation – Retirement Benefits,(“ASC Topic 715”), which requires changes to the financial statement presentation of certain components of net periodic benefit cost related to pension and other postretirement benefits accounted for under ASC Topic 715. As a result of adopting this amendment, the service cost component of net periodic benefit cost continues to be included in operating expenses in our consolidated financial statements, but the other components of net periodic benefit cost, including pension settlement expense, are presented in other income (costs) for the three and six months ended June 30, 2018 and 2017. There was no change to consolidated net income (loss) or earnings (loss) per share as a result of the change in presentation under the new standard. The adoption of this accounting policy is further discussed in Note A to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10‑Q and the detail of our net periodic benefit costs are presented in Note F to the consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q.
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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) describes the principal factors affecting our results of operations, liquidity and capital resources, and critical accounting policies. This discussion should be read in conjunction with the accompanying quarterly unaudited consolidated financial statements and the related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2017.2018. Our 20172018 Annual Report on Form 10-K includes additional information about significant accounting policies, practices, and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties to which our financial and operating results are subject.
31
Labor Contract Agreement
As of June 2018, approximately 82% of our Asset-Based segment’s employees were covered under the ABF National Master Freight Agreement (the “ABF NMFA”), the collective bargaining agreement with the International Brotherhood of Teamsters (the “IBT”) which was extended through July 31, 2018 to allow for the ratification process of the new agreement to take place. On May 10, 2018, a new collective bargaining agreement, the ABF National Master Freight Agreement (the “2018 ABF NMFA”), was ratified by a majority of ABF’s IBT member employees who chose to vote. A majority of the supplements to the 2018 ABF NMFA also passed. Following ratification of the remaining supplements,the 2018 ABF NMFA was implemented on July 29, 2018, effective retroactive to April 1, 2018, and will remain in effect through June 30, 2023.
Results of Operations
Consolidated Results
| | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| ||||||||
| | June 30 | | June 30 | | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||
| | (in thousands, except per share data) |
| ||||||||||
REVENUES | | | | | | | | | | | | | |
Asset-Based | | $ | 559,648 | | $ | 559,239 | | $ | 1,065,727 | | $ | 1,041,354 | |
| | | | | | | | | | | | | |
ArcBest | |
| 181,173 | |
| 199,987 | |
| 354,377 | |
| 381,920 | |
FleetNet | |
| 51,722 | |
| 46,792 | |
| 104,981 | |
| 94,551 | |
Total Asset-Light | | | 232,895 | | | 246,779 | | | 459,358 | | | 476,471 | |
| | | | | | | | | | | | | |
Other and eliminations | |
| (21,053) | |
| (12,668) | |
| (41,756) | |
| (24,474) | |
Total consolidated revenues | | $ | 771,490 | | $ | 793,350 | | $ | 1,483,329 | | $ | 1,493,351 | |
| | | | | | | | | | | | | |
OPERATING INCOME | | | | | | | | | | | | | |
Asset-Based(1) | | $ | 36,178 | | $ | 3,381 | | $ | 49,793 | | | 16,783 | |
| | | | | | | | | | | | | |
ArcBest | |
| 2,122 | |
| 3,707 | |
| 3,852 | | | 6,872 | |
FleetNet | |
| 1,026 | |
| 1,029 | |
| 2,514 | | | 2,550 | |
Total Asset-Light | | | 3,148 | | | 4,736 | | | 6,366 | | | 9,422 | |
| | | | | | | | | | | | | |
Other and eliminations | |
| (4,126) | |
| (4,961) | |
| (12,368) | | | (10,324) | |
Total consolidated operating income | | $ | 35,200 | | $ | 3,156 | | $ | 43,791 | | | 15,881 | |
| | | | | | | | | | | | | |
NET INCOME | | $ | 24,376 | | $ | 1,233 | | $ | 29,264 | | | 11,187 | |
| | | | | | | | | | | | | |
DILUTED EARNINGS PER SHARE | | $ | 0.92 | | $ | 0.05 | | $ | 1.10 | | | 0.42 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30 |
| June 30 |
| ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
|
| (in thousands, except per share data) |
| ||||||||||
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Based |
| $ | 559,239 |
| $ | 514,537 |
| $ | 1,041,354 |
| $ | 978,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ArcBest |
|
| 199,987 |
|
| 175,929 |
|
| 381,920 |
|
| 328,805 |
|
FleetNet |
|
| 46,792 |
|
| 36,501 |
|
| 94,551 |
|
| 76,739 |
|
Total Asset-Light |
|
| 246,779 |
|
| 212,430 |
|
| 476,471 |
|
| 405,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and eliminations |
|
| (12,668) |
|
| (6,599) |
|
| (24,474) |
|
| (12,981) |
|
Total consolidated revenues |
| $ | 793,350 |
| $ | 720,368 |
| $ | 1,493,351 |
| $ | 1,371,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Based(2) |
| $ | 3,381 |
| $ | 22,895 |
| $ | 16,783 |
| $ | 14,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ArcBest |
|
| 3,707 |
|
| 5,929 |
|
| 6,872 |
|
| 7,021 |
|
FleetNet |
|
| 1,029 |
|
| 747 |
|
| 2,550 |
|
| 1,768 |
|
Total Asset-Light |
|
| 4,736 |
|
| 6,676 |
|
| 9,422 |
|
| 8,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other and eliminations |
|
| (4,961) |
|
| (3,804) |
|
| (10,324) |
|
| (7,469) |
|
Total consolidated operating income |
| $ | 3,156 |
| $ | 25,767 |
| $ | 15,881 |
| $ | 15,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
| $ | 1,233 |
| $ | 15,777 |
| $ | 11,187 |
| $ | 8,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE |
| $ | 0.05 |
| $ | 0.60 |
| $ | 0.42 |
| $ | 0.32 |
|
(1) |
|
|
|
|
31
Our consolidated revenues, which totaled $793.4$771.5 million and $1,493.4$1,483.3 million for the three and six months ended June 30, 2018,2019, respectively, increased 10.1%decreased 2.8% and 8.9%0.7% compared to the same prior-year periods. The increasesdecreases in consolidated revenues reflect a 5.6% and 3.6% decrease in revenues of our Asset-Light operations (representing the combined operations of our ArcBest and FleetNet segments), partially offset by a 0.1% and 2.3% increase in our Asset-Based revenues for the three and six months ended June 30, 2018 reflect an 8.7% and 6.4% increase in our Asset-Based revenues,2019, respectively, and a 16.2% and 17.5% increase in revenues of our Asset-Light operations, respectively, which representcompared to the combined operations of our ArcBest and FleetNet segments.same prior-year periods. Our Asset-Based revenue growth reflectswas impacted by a 9.4%4.1% and 9.2%5.9% improvement in yield, as measured by billed revenue per hundredweight, including fuel surcharges, for the three- and six-month periods ended June 30, 2018, respectively, partially offset by a 0.9% and 2.2% decline in total tonnage per day for the three- and six-month periods ended June 30, 2018,2019, respectively, versus the same periods of 2017.
32
The increases in billed revenue per hundredweight for the 2018 periods reflect pricing initiatives. Our Asset-Light revenue growth was3.4% and 3.3%, respectively, primarily due to an increasedeclines in revenueshipment levels and weight per shipment for the ArcBest segment associated with higher market prices resulting from continued tightnessshipment. The decline in available truckload capacity. FleetNet revenues also increasedof our Asset-Light operations for the three and six months ended June 30, 2018, primarily due to higher service event volume2019, compared to the same periods of 2017.2018, is primarily due to decreases in revenue per shipment of 9.8% and 8.3%, respectively, and declines in shipments per day of 1.6% and 1.3%, respectively, for the ArcBest segment, associated with lower market prices and more available capacity in the truckload market compared to the prior-year periods, partially offset by revenue improvement for the FleetNet segment on higher service event volume. On a combined basis, the Asset-Light operating segments generated approximately 31%29% and 30% of our total revenues before other revenues and intercompany eliminations for both the three-three and six-month periodssix months ended June 30, 2018.2019, respectively.
For the three and six months ended June 30, 2018,2019, consolidated operating income totaled $3.2$35.2 million and $15.9$43.8 million, compared to $25.8$3.2 million and $15.9 million, respectively, for the same periods of 2017.2018. Our operating results for the three and six months ended June 30, 2018 were impacted by a one-time charge of $37.9 million (pre-tax), or $28.2 million (after-tax) and $1.05 per diluted share for the three-month period and $1.06 per diluted share for the six-month period,ended June 30, 2018, recorded by ABF Freight in Junesecond quarter 2018 for a multiemployer pension plan withdrawal liability resulting from the transition agreement it entered into with the New England Teamsters and Trucking Industry Pension Fund (the “New England Pension Fund”), as further discussed within the Asset-Based Segment Overview section of Results of Operations. Excluding the impact of this one-time charge, our consolidated operating results for the three and six months ended June 30, 2018,2019, compared to the same prior-year periods, improveddeclined primarily due to the higherlower revenues previously described combined with the matters further described within the discussions of segment results, including business mix changes and cost management. The year-over-year comparisonsexpense impacts. Restructuring charges related to the realignment of consolidated operating results were also impacted by higher expenses for long-term incentive plans, primarily due to shareholder returns relative to peers, which increased $5.7our organizational structure of $0.3 million and $4.7$0.7 million were reported on a consolidated basis for the three and six months ended June 30, 2018, respectively, with no comparable costs recognized during the same periods of 2019.
The loss reported in the “Other and defined contribution plans,eliminations” line, which increased $3.5totaled $4.1 million and $5.0$12.4 million for the three and six months ended June 30, 2018,2019, respectively, compared to the same prior-year periods. The increases in these fringe costs were partially offset by lower nonunion healthcare costs and lower restructuring charges. Nonunion healthcare costs decreased $0.6 million and $3.9 million for the three and six months ended June 30, 2018, compared to the same prior-year periods, primarily due to a decrease in the average cost per health claim. Restructuring charges related to the realignment of our organizational structure totaled $0.3 million and $0.7 million for the three and six months ended June 30, 2018, respectively, compared to $0.4 million and $2.0 million, respectively, for the same periods of 2017.
The loss reported in the “Other and eliminations” line of consolidated operating income which totaled $5.0 million and $10.3 million for the threesame periods of 2018, includes expenses related to investments to develop and design various ArcBest technology and innovations as well as expenses related to shared services for the delivery of comprehensive transportation and logistics services to ArcBest’s customers. The $0.9 million decrease in the loss in “Other and eliminations” in second quarter 2019, compared to second quarter 2018, was primarily due to lower expenses for certain incentive plans, partially offset by investments in technology. For the six months ended June 30, 2018, respectively,2019, the $2.1 million increase in the loss reported in “Other and eliminations,” compared to $3.8 million and $7.5 million, respectively, for the same periodsperiod of 2017, includes $0.2 million and $0.6 million of the previously mentioned restructuring charges related to our enhanced market approach for the three and six months ended June 30, 2018, respectively, compared to restructuring charges of $0.3 million and $0.9 million for the same respective periods of 2017. The “Other and eliminations” line also includes expenses relatedwas primarily due to investments in technology partially offset by lower expenses for improving the delivery of services to ArcBest’s customers, investments in comprehensive transportation and logistics services across multiple operating segments, and other investments in ArcBest technology and innovations.certain incentive plans. As a result of theseour ongoing investments in technology, including the design and development of digital business platforms, and the seasonal impact of shared service allocations of other corporate costs, we expect the loss reported in “Other and eliminations” for third quarter 20182019 to approximate $5.0 million and to be approximately $20.0$25.0 million for full year 2018. 2019.
In addition to the above items, consolidated net income and earnings per share were impacted by nonunion defined benefit pension expense, including settlement charges, and income from changes in the cash surrender value of variable life insurance policies, both of which are reported below the operating income line in the consolidated statements of operations. A portion of our variable life insurance policies have investments, through separate accounts, in equity and fixed income securities and, therefore, are subject to market volatility. Changes in the cash surrender value of life insurance policies contributed $0.03$0.02 and $0.04$0.08 to diluted earnings per share for each of the three- and six-month periods ended June 30, 2018, and contributed $0.02 and $0.04 per diluted share for the three- and six-month periods ended June 30, 2017, respectively.2019, respectively, and contributed $0.03 and $0.04 per diluted per share, for the same respective prior-year periods.
32
Consolidated after-tax pension expense, including settlement charges, recognized for the nonunion defined benefit pension plan totaled $0.4 million, or $0.01 per diluted share, and $1.7 million, or $0.06 per diluted share, for the three and six months ended June 30, 2019, respectively, compared to $1.3 million, or $0.05 per diluted share, and $2.8 million, or $0.11 per diluted share, for the three and six months ended June 30, 2018, respectively, compared to $0.4 million, or $0.01 per diluted share, and $1.5 million, or $0.06 per diluted share, for the three and six months ended June 30, 2017, respectively. These expenses include net periodic benefit costs (as detailed in Note F to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10‑Q), including pensionPension settlement charges duerelated to lump-sum benefit distributions andthe plan termination, including those related to an annuity contract purchase, made by the planare expected to occur in first quarter 2017.2019. In OctoberNovember 2017, our Board of Directors adopted a resolution authorizing the execution of an amendment was executed to terminate theour nonunion defined benefit pension plan and such amendment was executed in November 2017 with a termination date of December 31, 2017. The plan has filed for a determination letter from the
33
Internal Revenue Service (the “IRS”) regarding qualification of the plan termination. Following receipt of a favorable determination letter,began distributing immediate lump sum benefit election forms will be provided to plan participants, and they will have an election window in which they can choose any form of payment allowed by the plan for immediate commencement of payment or defer payment until a later date. Based on currently available information provided by the plan’s actuary, we estimate cash funding of approximately $10.0 million and noncash pension settlement charges of approximately $20.0 million in 2018 to terminate the plan, although there can be no assurances in this regard. The final pension settlement charges and the actual amount we will be required to contributepayments related to the plan termination in fourth quarter 2018 and continued making these distributions during 2019. The plan received an extension from the Pension Benefit Guaranty Corporation (the “PBGC”) to fund benefit distributions in excessallow additional time for the plan to administer the settlement of plan assets cannot be determined at this time, as the actual amounts are dependent on various factors, including final benefit calculations,remaining obligation for deferred benefits through the benefit elections made by plan participants, interest rates, the valuepurchase of plan assets, and the cost to purchase ana nonparticipating annuity contract to settle the pension obligation related to benefits for which participants elect to defer payment until a later date. Although the timing of recognizing pension settlement charges related to plan termination and making contributions required to fund the plan upon termination are highly dependent on when and if we receive the favorable determination letter from the IRS, the settlements and contributions to the plan may occur in 2018.
We expect to continue to recognize pension settlement expense related toan insurance company. In August 2019, the nonunion defined benefit pension plan the amount of which will fluctuate basedreceived a preliminary bid for a nonparticipating annuity contract from an insurance company. Based on the amount of lump-sum benefit distributions paid to participants, actual returns on plan assets, and changesmost recently available actuarial information, including the preliminary bid received in the discount rate used to remeasure the projected benefit obligation of the plan upon settlement. TotalAugust, nonunion pension settlement expense including settlement,for the second half of 2019 is estimated to be approximately $2.0 million, or $1.5 million after-tax, and we estimate making a cash contribution to the plan of approximately $7.0 million, which would be deductible for income tax purposes, to fund an annuity contract purchase and the third quarterremaining benefit distributions expected to be made from the plan in excess of 2018; however,plan assets. However, there can be no assurances in regards to the required cash funding or pension settlement charges, couldas the actual amounts are dependent on various factors and will be higher if eligible plan participants elect to receive a lump sum distribution of their pension benefit ahead of the plan termination.determined using updated actuarial data.
For the six months ended June 30, 2018, consolidated net income and earnings per share were impacted by a provisional tax benefitbenefits of $2.7 million, or $0.10 per diluted share, as a result of recognizing a reasonable estimate of the tax effects of the Tax Cuts and Jobs Act (the “Tax Reform Act, which was signed into law on December 22, 2017 and reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. (The impact of the Tax Reform Act is discussed further in the Income Taxes section of MD&A and in Note D to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10‑Q.Act”). Consolidated net income and earnings per share for the six months ended June 30, 2018 were also impacted by a tax credit of $1.2 million, or $0.05 per diluted share, for the February 2018 retroactive reinstatement of the alternative fuel tax credit related to the year ended December 31, 2017. The tax benefits and credits, including the impact of the Tax Reform Act, as well as other changes in the effective tax rates which impacted consolidated net income and earnings per share for the three and six months ended June 30, 2019 and 2018, are further described within the Income Taxes section of MD&A.
Consolidated Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”)
We report our financial results in accordance with generally accepted accounting principles (“GAAP”). However, management believes that certain non-GAAP performance measures and ratios, such as Adjusted EBITDA, utilized for internal analysis provide analysts, investors, and others the same information that we use internally for purposes of assessing our core operating performance and provides meaningful comparisons between current and prior period results, as well as important information regarding performance trends. Accordingly, using these measures improves comparability in analyzing our performance because it removes the impact of items from operating results that, in management's opinion, do not reflect our core operating performance. Management uses Adjusted EBITDA as a key measure of performance and for business planning. The measure is particularly meaningful for analysis of our operating performance, because it excludes amortization of acquired intangibles and software of our Asset-Light businesses, which are significant expenses resulting from strategic decisions rather than core daily operations. Additionally, Adjusted EBITDA is a primary component of the financial covenants contained in our Second Amended and Restated Credit Agreement (see Financing Arrangements within the Liquidity and Capital Resources sectionNote F to our consolidated financial statements included in Part I, Item 1 of MD&A)this Quarterly Report on Form 10-Q). Other companies may calculate Adjusted EBITDA differently; therefore, our calculation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results. Adjusted EBITDA should not be construed as a better measurement than operating income, operating cash flow, net income, or earnings per share, as determined under GAAP.
3433
Consolidated Adjusted EBITDA
| | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | Three Months Ended | | Six Months Ended |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | June 30 | | June 30 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| | (in thousands) |
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | | $ | 24,376 | | $ | 1,233 | | $ | 29,264 | | $ | 11,187 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest and other related financing costs | |
| 2,811 | |
| 2,013 | |
| 5,693 | |
| 4,072 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income tax provision (benefit)(1) | |
| 9,184 | |
| (499) | |
| 10,892 | |
| (1,462) | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | |
| 27,434 | |
| 27,187 | |
| 53,971 | |
| 53,673 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of share-based compensation | |
| 2,801 | |
| 1,674 | |
| 4,859 | |
| 3,544 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of net actuarial losses of benefit plans and pension settlement expense | |
| 586 | |
| 1,119 | |
| 2,340 | |
| 2,647 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Multiemployer pension fund withdrawal liability charge(2) | | | — | | | 37,922 | | | — | | | 37,922 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring charges(3) | |
| — | |
| 340 | |
| — | |
| 716 | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consolidated Adjusted EBITDA |
| $ | 67,192 | | $ | 70,989 | | $ | 107,019 | | $ | 112,299 | |
|
Asset-Based Operations Asset-Based Segment Overview The Asset-Based segment consists of ABF Freight System, Inc., a wholly-owned subsidiary of ArcBest Corporation, and certain other subsidiaries (“ABF Freight”). Our Asset-Based operations are affected by general economic conditions, as well as a number of other competitive factors that are more fully described in Item 1 (Business) and in Item 1A (Risk Factors) of Part I of our 2018 Annual Report on Form 10-K. The key indicators necessary to understand the operating results of our Asset-Based segment, which are more fully described in the Asset-Based Segment Overview within the Asset-Based Operations section of Results of Operations in Item 7 (MD&A) of Part II of our 2018 Annual Report on Form 10-K, include:
34 As of June 2019, approximately 82% of our Asset-Based segment’s employees were covered under the ABF National Master Freight Agreement (the “2018 ABF NMFA”), the collective bargaining agreement with the International Brotherhood of Teamsters (the “IBT”), which will remain in effect through June 30, 2023.Under the 2018 ABF NMFA, the contractual wage and benefits costs, including the ratification bonuses and vacation restoration, are estimated to increase approximately 2.0% on a compounded annual basis through the end of the agreement, although the phase-in of an additional week of vacation results in a higher annual percentage increase in the earlier months of the agreement through the fourth quarter of 2019. The contractual wage rate under the 2018 ABF NMFA increased 1.4% effective July 1, 2019, and the average health, welfare, and pension benefit contribution rate is expected to increase approximately 2.2% effective primarily on August 1, 2019. Profit-sharing bonuses based on the Asset-Based segment’s annual operating ratios for any full calendar year under the contract would represent an additional increase in costs under the 2018 ABF NMFA. As more fully described in the Asset-Based Operations section of Results of Operations within MD&A in Item 7 of the Company’s 2018 Annual Report on Form 10-K, ABF Freight’s multiemployer pension plan obligation with the New England Teamsters and Trucking Industry Pension Fund (the “New England Pension Fund”) was restructured under a transition agreement effective on August 1, 2018. The transition agreement resulted in ABF Freight’s withdrawal as a participating employer in the New England Pension Fund and triggered settlement of the related withdrawal liability. ABF Freight simultaneously re-entered the New England Pension Fund as a new participating employer free from any preexisting withdrawal liability and at a lower future contribution rate. ABF Freight recognized a one-time charge of $37.9 million (pre-tax) to record the withdrawal liability as of June 30, 2018, when the transition agreement was determined to be probable. In accordance with the transition agreement, ABF Freight made an initial lump sum cash payment of $15.1 million in third quarter 2018 and the remainder of the withdrawal liability, which had an initial aggregate present value of $22.8 million, will be settled with monthly payments to the New England Pension Fund over a period of 23 years. In accordance with current tax law, these payments are deductible for income taxes when paid. Asset-Based Segment Results The following table sets forth a summary of operating expenses and operating income as a percentage of revenue for the Asset-Based segment:
35 The following table provides a comparison of key operating statistics for the Asset-Based segment:
Asset-Based Revenues Asset-Based segment revenues for the three and six months ended June 30, 2019 totaled $559.6 million and $1,065.7 million, respectively, compared to $559.2 million and $1,041.4 million, respectively, for the same periods of 2018. Billed revenue (as described in footnote (1) to the key operating statistics table) increased 0.5% and 2.4% on a per-day basis for the three and six months ended June 30, 2019, respectively, compared to the same prior-year periods. The increases in total billed revenue reflect a 4.1% and 5.9% increase in total billed revenue per hundredweight, including fuel surcharges, for the three and six months ended June 30, 2019, respectively, partially offset by a 3.4% and 3.3% decrease in tonnage per day, respectively, compared to the same periods of 2018. The number of workdays was fewer by one half of a day in second quarter 2019 and by one day in the six months ended June 30, 2019, versus the same periods in 2018. The increase in total billed revenue per hundredweight during the three- and six-month periods ended June 30, 2019, compared to the same periods of 2018, reflects yield improvement initiatives, including general rate increases, contract renewals, and further implementation of space-based pricing, partially offset by the impact of a higher proportion of truckload-rated spot business. We have continued to implement our space-based pricing program, which we introduced in third quarter 2017, by applying cubic minimum charges (“CMC”) on shipments subject to LTL tariffs to better reflect freight shipping trends that have evolved in recent years, as more fully described in the Asset-Based Segment Overview within the Asset-Based Operations section of Results of Operations in Item 7 (MD&A) of Part II of our 2018 Annual Report on Form 10-K. The Asset-Based segment implemented nominal general rate increases on its LTL base rate tariffs of 5.9% effective February 4, 2019 and April 16, 2018, although the rate changes vary by lane and shipment characteristics. Approximately one third of our Asset-Based business is subject to base LTL tariffs, which are affected by general rate increases, combined with individually negotiated discounts. Rates on the other two thirds of our Asset-Based business, including business priced in the spot market, are subject to individual pricing arrangements that are negotiated at various times throughout the year. Prices on accounts subject to deferred pricing agreements and annually negotiated contracts which were renewed during the three and six months ended June 30, 2019 increased approximately 3.1% and 3.6%, respectively, compared to the same periods of 2018. Excluding changes in fuel surcharges, average pricing on the Asset-Based segment’s LTL-rated business during the three and six months ended June 30, 2019 had high-single-digit percentage increases, compared to the same periods of 2018. Throughout the first six months of 2019, the fuel surcharge mechanism generally continued to have market acceptance among customers; however, certain nonstandard pricing 36 arrangements have limited the amount of fuel surcharge recovered. Our standard fuel surcharge program impacts approximately 35% of Asset-Based shipments and primarily affects noncontractual customers. There can be no assurances that the current pricing trend will continue. The competitive environment could limit the Asset-Based segment from securing adequate increases in base LTL freight rates and could limit the amount of fuel surcharge revenue recovered. The 3.4% decrease in tonnage per day for the three months ended June 30, 2019, compared to the same period of 2018, reflects a mid-single digit percentage decrease in LTL-rated tonnage, partially offset by low-single digit percentage growth in truckload-rated freight. Total shipments per day decreased 1.2% and average weight per shipment declined 2.2% for the three-month period ended June 30, 2019, compared to the same period of 2018. The 3.3% decrease in tonnage per day for the six months ended June 30, 2019, compared to the same period of 2018, reflects lower LTL-rated and truckload-rated tonnage levels. Shipments per day increased 0.9% while average weight per shipment declined 4.1% for the six-month period ended June 30, 2019, compared to the same period of 2018. The lower weight per shipment for the three and six months ended June 30, 2019, compared to the same periods of 2018, reflects the effect of softer economic conditions on shipment size combined with increased capacity in the truckload market which offered more available capacity for customers to utilize truckload carriers for some of their large-sized shipments. In a reversal of the trend our Asset-Based segment has experienced in recent quarters, LTL-rated shipment levels declined in second quarter 2019, while truckload-rated shipment levels increased due to adding more volume-quoted spot shipments to improve the efficiency of our linehaul network. Asset-Based Revenues — July 2019 Asset-Based billed revenues for the month of July 2019 decreased approximately 1.5% compared to July 2018 on a per-day basis. Total tonnage decreased approximately 2.0% per day, reflecting a higher mix of truckload-rated business. In July 2019, truckload-rated tonnage increased by a double-digit percentage, while LTL-rated tonnage decreased by a high-single-digit percentage, compared to the same prior-year period. Total shipments per day decreased approximately 3% in July 2019, compared to July 2018. Total weight per shipment increased approximately 1.0% in July 2019, with the weight per shipment on LTL-rated shipments down approximately 5%, versus the same prior-year period, reflecting changes in account mix. Total billed revenue per hundredweight for July 2019 increased approximately 0.5% compared to the July 2018 measure. High-single-digit percentage increases in revenue per hundredweight, excluding fuel surcharge, for the Asset-Based segment’s LTL-rated business were offset by lower yield on truckload-rated spot shipments moving in the Asset-Based network due to more available truckload market capacity in 2019. Asset-Based Operating Income The Asset-Based segment generated operating income of $36.2 million and $49.8 million for the three and six months ended June 30, 2019, respectively, compared to $3.4 million and $16.8 million, respectively, for the same periods of 2018. The Asset-Based segment operating ratio improved by 5.9 and 3.1 percentage points for the three and six months ended June 30, 2019, respectively, over the same prior-year periods. The 2018 periods include the $37.9 million one-time charge recognized in second quarter 2018 for the multiemployer plan withdrawal liability resulting from the transition agreement ABF Freight entered into with the New England Pension fund, as previously discussed in the Asset-Based Segment Overview. Excluding the one-time charge, the Asset-Based operating ratio increased by 0.9 and 0.5 percentage points for the three and six months ended June 30, 2019, respectively, versus the comparable 2018 periods, as revenue growth from continued strength in account pricing was more than offset by higher operating costs, including investments in technology to create a best-in-class customer experience. Costs related to these technology investments increased Asset-Based operating expenses by approximately $1.0 million and approximately $2.0 million for the three and six months ended June 30, 2019, respectively. We continue to make investments in technology, equipment, facilities, and other areas to address our customers’ evolving needs, and we anticipate the cost of these investments to total approximately $8.0 million for the Asset-Based segment in 2019. For the six-month period ended June 30, 2019, operating income was negatively impacted by approximately $2.0 million due to weather events in first quarter 2019 that reduced business levels and unfavorably impacted labor. The segment’s operating ratio was also impacted by changes in operating expenses as discussed in the following paragraphs. 37 Asset-Based Operating Expenses Labor costs, which are reported in operating expenses as salaries, wages, and benefits, amounted to 53.1% and 54.2% of Asset-Based segment revenues for the three- and six-month periods ended June 30, 2019, compared to 51.3% and 53.5% for the same periods of 2018, primarily reflecting year-over-year increases in contractual wage and benefit contribution rates under the 2018 ABF NMFA. The contractual wage rate under the 2018 ABF NMFA increased 1.2% effective July 1, 2018, and the average health, welfare, and pension benefit contribution rate increased approximately 1.3% effective primarily on August 1, 2018. Expenses related to the restoration of one week of vacation under the 2018 ABF NMFA also increased salaries, wages, and benefits costs by $2.2 million and $4.1 million for the three and six months ended June 30, 2019, respectively, compared to the same periods of 2018. The additional week of vacation under the new labor agreement is accrued as it is earned for anniversary dates that begin on or after April 1, 2018. Salaries, wages, and benefits costs for the three and six months ended June 30, 2019, compared to the same period of 2018, were also impacted by an increase in workers’ compensation expense of $1.8 million and $1.5 million, respectively, primarily due to an increase in severity of claims experience. The segment’s higher labor costs were partially offset by lower expenses for certain nonunion performance-based incentive plans, including long-term incentive plans impacted by shareholder returns relative to peers. Although the Asset-Based segment manages costs with shipment levels, portions of salaries, wages, and benefits are fixed in nature and the adjustments which would otherwise be necessary to align the labor cost structure throughout the system to corresponding tonnage levels are limited as the segment strives to maintain customer service. In the midst of a tight labor market, the Asset-Based segment retained freight handling personnel and drivers in the first half of 2019 to maintain customer service levels, despite lower tonnage levels compared to the same prior-year period. These resources allowed for lower utilization of local delivery agents and linehaul purchased transportation as further described in the following paragraph. Although certain productivity measures were negatively impacted by these strategic decisions, management believes the service emphasis provides opportunity to generate improved yields and business levels. Dock and street productivity metrics for the six-month period ended June 30, 2019 also reflect the negative impact of first quarter severe winter weather events previously described, compared to the same period of 2018. As a result, shipments per DSY hour declined 1.8% and 1.4% for the three and six months ended June 30, 2019, compared to the same prior-year periods. Productivity was negatively impacted by shipment profile metrics that increased handling costs for LTL shipments. The lower weight per shipment was a contributing profile factor of the 4.1% and 5.6% decline in pounds per DSY hour for the three and six months ended June 30, 2019, respectively, compared to the same periods of 2018. Pounds per mile declined 1.7% and 2.7% for the three and six months ended June 30, 2019, respectively, compared to the same periods of 2018, reflecting freight profile effects, including lower weight per shipment and shorter length of haul on available freight, while also maintaining service delivery schedules. Rents and purchased transportation as a percentage of revenue decreased 1.0 and 0.4 percentage points for the three and six months ended June 30, 2019, compared to the same periods of 2018, primarily due to lower utilization of local delivery agents and linehaul purchased transportation as the Asset-Based segment focused on optimizing utilization of owned assets and retained additional labor resources to maintain customer service. The decrease in purchased transportation costs for second quarter 2019 were also impacted by lower rail utilization, as rail miles decreased approximately 6% compared to second quarter 2018. Rail miles were relatively consistent for the six months ended June 30, 2019, compared to the same period of 2018. Shared services as a percentage of revenue decreased 0.2 percentage points for the three months ended June 30, 2019, compared to the same prior-year period, primarily due to lower expenses for certain nonunion performance-based incentive plans, including long-term incentive plans impacted by shareholder returns relative to peers. For the six months ended June 30, 2019, shared services increased 0.2 percentage points primarily due to higher costs related to enhancing the customer experience and initiatives for more streamlined delivery of customer relationship services which reflect investments in digital advertising, technologies, and personnel, partially offset by lower expenses related to certain nonunion performance-based incentive plans. Gain on sale of property and equipment improved the Asset-Based segment’s operating ratio by 0.3 and 0.2 percentage points for the three and six months ended June 30, 2019, compared to the same periods of 2018, due to a $1.7 million gain recognized in second quarter 2019 on the sale of certain real estate previously used by our service center operations. 38 Asset-Light Operations Asset-Light Overview The ArcBest and FleetNet reportable segments, combined, represent our Asset-Light operations. Our Asset-Light operations are a key component of our strategy to offer customers a single source of end-to-end logistics solutions, designed to satisfy the complex supply chain and unique shipping requirements customers encounter. We have unified our sales, pricing, customer service, marketing, and capacity sourcing functions to better serve our customers through delivery of integrated logistics solutions. Our Asset-Light operations are affected by general economic conditions, as well as a number of other competitive factors that are more fully described in Item 1 (Business) and in Item 1A (Risk Factors) of Part I of our 2018 Annual Report on Form 10-K. The key indicators necessary to understand our Asset-Light operating results include:
|