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 |
For the quarterly period ended June 30, 20192020
☐ | 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, Arkansas 72916
(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 every Interactive Data File required to be submitted 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 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 |
Common Stock, $0.01 par value | |
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ARCBEST CORPORATION
INDEX
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| Consolidated Balance Sheets — June 30, | | 3 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARCBEST CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| | June 30 | | December 31 | | | June 30 | | December 31 | | ||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
| | (Unaudited) | | | | | | (Unaudited) | | | | | ||
| | (in thousands, except share data) | | | (in thousands, except share data) | | ||||||||
ASSETS | | | | | | | | | | | | | | |
CURRENT ASSETS | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 181,731 | | $ | 190,186 | | | $ | 406,290 | | $ | 201,909 | |
Short-term investments | |
| 117,657 | |
| 106,806 | | |
| 167,719 | |
| 116,579 | |
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 | | |||||||
Accounts receivable, less allowances (2020 – $7,130; 2019 – $5,448) | |
| 273,135 | |
| 282,579 | | |||||||
Other accounts receivable, less allowances (2020 – $661; 2019 – $476) | |
| 16,812 | |
| 18,774 | | |||||||
Prepaid expenses | |
| 28,546 | |
| 25,304 | | |
| 28,928 | |
| 30,377 | |
Prepaid and refundable income taxes | |
| 5,237 | |
| 1,726 | | |
| 4,236 | |
| 9,439 | |
Other | |
| 4,982 | |
| 9,007 | | |
| 4,923 | |
| 4,745 | |
TOTAL CURRENT ASSETS | |
| 651,450 | |
| 649,226 | | |
| 902,043 | |
| 664,402 | |
PROPERTY, PLANT AND EQUIPMENT | | | | | | | | | | | | | | |
Land and structures | |
| 339,255 | |
| 339,640 | | |
| 344,951 | |
| 342,122 | |
Revenue equipment | |
| 888,588 | |
| 858,251 | | |
| 891,029 | |
| 896,020 | |
Service, office, and other equipment | |
| 218,131 | |
| 199,230 | | |
| 232,058 | |
| 233,354 | |
Software | |
| 143,181 | |
| 138,517 | | |
| 155,411 | |
| 151,068 | |
Leasehold improvements | |
| 10,058 | |
| 9,365 | | |
| 11,821 | |
| 10,383 | |
| |
| 1,599,213 | |
| 1,545,003 | | |
| 1,635,270 | |
| 1,632,947 | |
Less allowances for depreciation and amortization | |
| 947,264 | |
| 913,815 | | |
| 974,464 | |
| 949,355 | |
PROPERTY, PLANT AND EQUIPMENT, net | |
| 651,949 | |
| 631,188 | | |
| 660,806 | |
| 683,592 | |
GOODWILL | |
| 108,320 | |
| 108,320 | | |
| 88,320 | |
| 88,320 | |
INTANGIBLE ASSETS, net | |
| 66,700 | |
| 68,949 | | |
| 56,915 | |
| 58,832 | |
OPERATING RIGHT-OF-USE ASSETS | | | 68,810 | | | — | | | | 81,069 | | | 68,470 | |
DEFERRED INCOME TAXES | |
| 6,296 | |
| 7,468 | | |
| 7,507 | |
| 7,725 | |
OTHER LONG-TERM ASSETS | |
| 80,402 | |
| 74,080 | | |
| 74,100 | |
| 79,866 | |
TOTAL ASSETS | | $ | 1,633,927 | | $ | 1,539,231 | | | $ | 1,870,760 | | $ | 1,651,207 | |
| | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | |
CURRENT LIABILITIES | | | | | | | | | | | | | | |
Accounts payable | | $ | 166,829 | | $ | 143,785 | | | $ | 140,632 | | $ | 134,374 | |
Income taxes payable | |
| 1,942 | |
| 1,688 | | |
| 3,181 | |
| 12 | |
Accrued expenses | |
| 228,994 | |
| 243,111 | | |
| 217,020 | |
| 232,321 | |
Current portion of long-term debt | |
| 47,205 | |
| 54,075 | | |
| 59,050 | |
| 57,305 | |
Current portion of operating lease liabilities | | | 18,273 | | | — | | | | 19,769 | | | 20,265 | |
Current portion of pension and postretirement liabilities | | | 8,231 | | | 8,659 | | |||||||
TOTAL CURRENT LIABILITIES | |
| 471,474 | |
| 451,318 | | |
| 439,652 | |
| 444,277 | |
LONG-TERM DEBT, less current portion | |
| 235,001 | |
| 237,600 | | |
| 473,850 | |
| 266,214 | |
OPERATING LEASE LIABILITIES, less current portion | | | 54,040 | | | — | | | | 65,249 | | | 52,277 | |
PENSION AND POSTRETIREMENT LIABILITIES, less current portion | |
| 31,874 | |
| 31,504 | | |||||||
POSTRETIREMENT LIABILITIES, less current portion | |
| 20,448 | |
| 20,294 | | |||||||
OTHER LONG-TERM LIABILITIES | |
| 37,268 | |
| 44,686 | | |
| 36,077 | |
| 38,892 | |
DEFERRED INCOME TAXES | |
| 61,111 | |
| 56,441 | | |
| 60,393 | |
| 66,210 | |
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 | | |||||||
Common stock, $0.01 par value, authorized 70,000,000 shares; issued 2020: 28,958,258 shares, 2019: 28,810,902 shares | |
| 290 | |
| 288 | | |||||||
Additional paid-in capital | |
| 329,388 | |
| 325,712 | | |
| 337,942 | |
| 333,943 | |
Retained earnings | |
| 526,551 | |
| 501,389 | | |
| 546,689 | |
| 533,187 | |
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) | | |||||||
Treasury stock, at cost, 2020: 3,554,639 shares; 2019: 3,404,639 shares | |
| (107,740) | |
| (104,578) | | |||||||
Accumulated other comprehensive income (loss) | |
| (2,090) | |
| 203 | | |||||||
TOTAL STOCKHOLDERS’ EQUITY | |
| 743,159 | |
| 717,682 | | |
| 775,091 | |
| 763,043 | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,633,927 | | $ | 1,539,231 | | | $ | 1,870,760 | | $ | 1,651,207 | |
See notes to consolidated financial statements.
3
ARCBEST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | | Three Months Ended | | Six Months Ended | | ||||||||||||||||
| | June 30 | | June 30 | | | June 30 | | June 30 | | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||||
| | (Unaudited) | | | (Unaudited) | | ||||||||||||||||||||
| | (in thousands, except share and per share data) | | | (in thousands, except share and per share data) | | ||||||||||||||||||||
REVENUES | | $ | 771,490 | | $ | 793,350 | | $ | 1,483,329 | | $ | 1,493,351 | | | $ | 627,370 | | $ | 771,490 | | $ | 1,328,769 | | $ | 1,483,329 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
OPERATING EXPENSES | |
| 736,290 | | | 790,194 | |
| 1,439,538 | | | 1,477,470 | | |
| 606,945 | | | 736,290 | |
| 1,300,525 | | | 1,439,538 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
OPERATING INCOME | |
| 35,200 | |
| 3,156 | |
| 43,791 | |
| 15,881 | | |
| 20,425 | |
| 35,200 | |
| 28,244 | |
| 43,791 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
OTHER INCOME (COSTS) | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest and dividend income | |
| 1,616 | |
| 714 | |
| 3,094 | |
| 1,240 | | |
| 991 | |
| 1,616 | |
| 2,366 | |
| 3,094 | |
Interest and other related financing costs | |
| (2,811) | |
| (2,013) | |
| (5,693) | |
| (4,072) | | |
| (3,378) | |
| (2,811) | |
| (6,325) | |
| (5,693) | |
Other, net | |
| (445) | |
| (1,123) | |
| (1,036) | |
| (3,324) | | |
| 2,696 | |
| (445) | |
| (1,166) | |
| (1,036) | |
| |
| (1,640) | |
| (2,422) | |
| (3,635) | |
| (6,156) | | |
| 309 | |
| (1,640) | |
| (5,125) | |
| (3,635) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
INCOME BEFORE INCOME TAXES | |
| 33,560 | |
| 734 | |
| 40,156 | |
| 9,725 | | |
| 20,734 | |
| 33,560 | |
| 23,119 | |
| 40,156 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
INCOME TAX PROVISION (BENEFIT) | |
| 9,184 | |
| (499) | |
| 10,892 | |
| (1,462) | | |||||||||||||
INCOME TAX PROVISION | |
| 4,854 | |
| 9,184 | |
| 5,337 | |
| 10,892 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
NET INCOME | | $ | 24,376 | | $ | 1,233 | | $ | 29,264 | | $ | 11,187 | | | $ | 15,880 | | $ | 24,376 | | $ | 17,782 | | $ | 29,264 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
EARNINGS PER COMMON SHARE | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.95 | | $ | 0.05 | | $ | 1.14 | | $ | 0.43 | | | $ | 0.62 | | $ | 0.95 | | $ | 0.70 | | $ | 1.14 | |
Diluted | | $ | 0.92 | | $ | 0.05 | | $ | 1.10 | | $ | 0.42 | | | $ | 0.61 | | $ | 0.92 | | $ | 0.68 | | $ | 1.10 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
AVERAGE COMMON SHARES OUTSTANDING | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | |
| 25,554,286 | |
| 25,670,325 | |
| 25,562,306 | |
| 25,656,674 | | |
| 25,463,559 | |
| 25,554,286 | |
| 25,468,624 | |
| 25,562,306 | |
Diluted | |
| 26,431,592 | |
| 26,699,549 | |
| 26,483,011 | |
| 26,653,282 | | |
| 26,217,957 | |
| 26,431,592 | |
| 26,252,486 | |
| 26,483,011 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
CASH DIVIDENDS DECLARED PER COMMON SHARE | | $ | 0.08 | | $ | 0.08 | | $ | 0.16 | | $ | 0.16 | | | $ | 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 | | ||||||||
|
| 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 | |
| | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | ||||||||
| | June 30 | | June 30 | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (Unaudited) | | ||||||||||
| | (in thousands) | | ||||||||||
NET INCOME | | $ | 15,880 | | $ | 24,376 | | $ | 17,782 | | $ | 29,264 | |
| | | | | | | | | | | | | |
OTHER COMPREHENSIVE INCOME (LOSS), net of tax | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Pension and other postretirement benefit plans: | | | | | | | | | | | | | |
Net actuarial gain (loss), net of tax of: (2020 – Three-month period $—, Six-month period $3; 2019 – Three-month period $20, Six-month period $210) | |
| — | |
| (58) | |
| (8) | |
| 603 | |
Pension settlement expense, net of tax of: (2020 – Three-month period $—, Six-month period $23; 2019 – Three-month period $72, Six-month period $421) | |
| — | |
| 206 | |
| 66 | |
| 1,213 | |
Amortization of unrecognized net periodic benefit cost (credit), net of tax of: (2020 – Three-month period $39, Six-month period $76; 2019 – Three-month period $77, Six-month period $177) | | | | | | | | | | | | | |
Net actuarial (gain) loss | |
| (109) | |
| 229 | |
| (217) | |
| 524 | |
Prior service credit | |
| — | |
| (6) | |
| — | |
| (12) | |
| | | | | | | | | | | | | |
Interest rate swap and foreign currency translation: | | | | | | | | | | | | | |
Change in unrealized loss on interest rate swap, net of tax of: (2020 – Three-month period $766, Six-month period $414; 2019 – Three-month period $187, Six-month period $305) | | | (174) | | | (528) | | | (1,171) | | | (860) | |
Change in foreign currency translation, net of tax of: (2020 – Three-month period $842, Six-month period $340; 2019 – Three-month period $41, Six-month period $120) | |
| 457 | |
| 116 | |
| (963) | |
| 341 | |
| | | | | | | | | | | | | |
OTHER COMPREHENSIVE INCOME (LOSS), net of tax | |
| 174 | |
| (41) | |
| (2,293) | |
| 1,809 | |
| | | | | | | | | | | | | |
TOTAL COMPREHENSIVE INCOME | | $ | 16,054 | | $ | 24,335 | | $ | 15,489 | | $ | 31,073 | |
See notes to consolidated financial statements.
5
ARCBEST CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2020 | | ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | Accumulated | | | | | |
| | | | | | | Additional | | | | | | | | | | Other | | | | | ||
| | Common Stock |
| Paid-In | | Retained | | Treasury Stock |
| Comprehensive | | Total | | ||||||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Shares |
| Amount |
| Income (Loss) |
| Equity |
| ||||||
| | (Unaudited) | | ||||||||||||||||||||
| | (in thousands) | | ||||||||||||||||||||
Balance at December 31, 2019 | | 28,811 | | $ | 288 | | $ | 333,943 | | $ | 533,187 |
| 3,405 | | $ | (104,578) | | $ | 203 | | $ | 763,043 | |
Adjustments to beginning retained earnings for adoption of accounting standard (see Note A) | | | | | | | | | | | (198) | | | | | | | | | | | (198) | |
Balance at January 1, 2020 |
| 28,811 | | | 288 | | | 333,943 | | | 532,989 | | 3,405 | | | (104,578) | | | 203 | | | 762,845 | |
Net income | | | | | | | | | |
| 1,902 | | | | | | | | | |
| 1,902 | |
Other comprehensive loss, net of tax | | | | | | | | | | | | | | | | | |
| (2,467) | |
| (2,467) | |
Issuance of common stock under share-based compensation plans |
| 6 | |
| | |
| | | | | | | | | | | | | |
| | |
Tax effect of share-based compensation plans | | | | | | |
| (60) | | | | | | | | | | | | |
| (60) | |
Share-based compensation expense | | | | | | |
| 2,181 | | | | | | | | | | | | |
| 2,181 | |
Purchase of treasury stock | | | | | | | | | | | | | 150 | | | (3,162) | | | | | | (3,162) | |
Dividends declared on common stock | | | | | | | | | |
| (2,033) | | | | | | | | | |
| (2,033) | |
Balance at March 31, 2020 |
| 28,817 | | $ | 288 | | $ | 336,064 | | $ | 532,858 |
| 3,555 | | $ | (107,740) | | $ | (2,264) | | $ | 759,206 | |
Net income | | | | | | | | | |
| 15,880 | | | | | | | | | |
| 15,880 | |
Other comprehensive income, net of tax | | | | | | | | | | | | | | | | | |
| 174 | |
| 174 | |
Issuance of common stock under share-based compensation plans |
| 141 | |
| 2 | |
| (2) | | | | | | | | | | | | |
| — | |
Tax effect of share-based compensation plans | | | | | | |
| (1,010) | | | | | | | | | | | | |
| (1,010) | |
Share-based compensation expense | | | | | | |
| 2,890 | | | | | | | | | | | | |
| 2,890 | |
Dividends declared on common stock | | | | | | | | | |
| (2,049) | | | | | | | | | |
| (2,049) | |
Balance at June 30, 2020 |
| 28,958 | | $ | 290 | | $ | 337,942 | | $ | 546,689 |
| 3,555 | | $ | (107,740) | | $ | (2,090) | | $ | 775,091 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
| Income (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 loss, 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 | |
See notes to consolidated financial statements.
6
ARCBEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | |
| | 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 | | $ | — | |
| | | | | | | |
| | | | | | | | |
| | Six Months Ended | | | ||||
| | June 30 | | | ||||
|
| 2020 |
| 2019 |
| | ||
| | (Unaudited) | | | ||||
| | (in thousands) | | | ||||
OPERATING ACTIVITIES | | | | | | | | |
Net income | | $ | 17,782 | | $ | 29,264 | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | |
| 56,140 | |
| 51,722 | | |
Amortization of intangibles | |
| 1,959 | |
| 2,249 | | |
Pension settlement expense | |
| 89 | |
| 1,634 | | |
Share-based compensation expense | |
| 5,071 | |
| 4,859 | | |
Provision for losses on accounts receivable | |
| 999 | |
| 621 | | |
Change in deferred income taxes | |
| (5,170) | |
| 5,124 | | |
Gain on sale of property and equipment and lease termination | |
| (3,581) | |
| (1,469) | | |
Changes in operating assets and liabilities: | | | | | | | | |
Receivables | |
| 9,626 | |
| 1,781 | | |
Prepaid expenses | |
| 1,444 | |
| (3,323) | | |
Other assets | |
| 4,358 | |
| (2,798) | | |
Income taxes | |
| 8,413 | |
| (3,042) | | |
Operating right-of-use assets and lease liabilities, net | | | (230) | | | 159 | | |
Accounts payable, accrued expenses, and other liabilities | |
| (14,833) | |
| (6,310) | | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | |
| 82,067 | |
| 80,471 | | |
| | | | | | | | |
INVESTING ACTIVITIES | | | | | | | | |
Purchases of property, plant and equipment, net of financings | |
| (16,209) | |
| (41,909) | | |
Proceeds from sale of property and equipment | |
| 7,670 | |
| 3,798 | | |
Purchases of short-term investments | |
| (97,493) | |
| (43,327) | | |
Proceeds from sale of short-term investments | |
| 46,725 | |
| 33,332 | | |
Capitalization of internally developed software | |
| (6,495) | |
| (5,535) | | |
NET CASH USED IN INVESTING ACTIVITIES | |
| (65,802) | |
| (53,641) | | |
| | | | | | | | |
FINANCING ACTIVITIES | | | | | | | | |
Borrowings under credit facilities | |
| 180,000 | |
| — | | |
Borrowings under accounts receivable securitization program | | | 45,000 | | | — | | |
Proceeds from notes payable | | | — | | | 9,552 | | |
Payments on long-term debt | |
| (29,185) | |
| (29,984) | | |
Net change in book overdrafts | |
| 615 | |
| (4,398) | | |
Payment of common stock dividends | |
| (4,082) | |
| (4,102) | | |
Purchases of treasury stock | | | (3,162) | | | (5,171) | | |
Payments for tax withheld on share-based compensation | |
| (1,070) | |
| (1,182) | | |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | |
| 188,116 | |
| (35,285) | | |
| | | | | | | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | |
| 204,381 | |
| (8,455) | | |
Cash and cash equivalents at beginning of period | |
| 201,909 | |
| 190,186 | | |
CASH AND CASH EQUIVALENTS CASH AT END OF PERIOD | | $ | 406,290 | | $ | 181,731 | | |
| | | | | | | | |
NONCASH INVESTING ACTIVITIES | | | | | | | | |
Equipment financed | | $ | 13,566 | | $ | 10,964 | | |
Accruals for equipment received | | $ | 857 | | $ | 19,402 | | |
Lease liabilities arising from obtaining right-of-use assets | | $ | 23,727 | | $ | 23,049 | | |
| | | | | | | | |
See notes to consolidated financial statements.
7
NOTE A – ORGANIZATION AND DESCRIPTION OF THE BUSINESS AND FINANCIAL STATEMENT PRESENTATION
ArcBest CorporationTM™ (the “Company”) is the parent holding company of freight transportation and integrated logistics businesses providing integrated logisticsinnovative solutions. The Company’s operations are conducted through its three3 reportable operating segments: Asset-Based, which consists of ABF Freight System, Inc. and certain other subsidiaries;subsidiaries (“ABF Freight”); ArcBest,®, the Company’s asset-light logistics operation; and 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 71%70% of the Company’s total revenues before other revenues and intercompany eliminations for the six months ended June 30, 2019.2020. As of June 2019,2020, approximately 82%81% of the Asset-Based segment’s employees were covered under a collective bargaining agreement, the ABF National Master Freight Agreement (the “2018 ABF NMFA”), with the International Brotherhood of Teamsters (the “IBT”), which will remain in effect through June 30, 2023.
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 20182019 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.
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. The Company considered the impact of the novel coronavirus (“COVID-19”) pandemic on the estimates and assumptions used in preparation of the Company’s consolidated financial statements as of and for the three and six months ended June 30, 2020. Given the uncertainties regarding the economic environment and the impact of the COVID-19 pandemic on our business, it is possible that these estimates and assumptions may materially change in future periods.
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 20182019 Annual Report on Form 10-K. The following policies have been updated during the six months ended June 30, 20192020 for the adoption of accounting standard updates disclosed within this Note.
Interest Rate SwapAllowances: DerivativeOn January 1, 2020, the Company adopted ASC Topic 326, Financial Instruments: – Credit Losses, (“ASC Topic 326”), which replaces the incurred loss methodology model with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The Company accounts for its derivative instruments as eithermeasurement of expected credit losses under the CECL methodology is applicable to financial assets or liabilitiesmeasured at amortized cost, including trade receivables and carries them at fair value. The Company has interest rate swap agreements designated as cash flow hedges. The effective portion of the gain or loss on the interest rate swap instruments is reported as unrealized gain or loss as a component of accumulated other comprehensive income or loss, net of tax, in stockholders’ equity and the change in the unrealized gain or loss on the interest rate swaps is reported in other comprehensive income or loss, net of tax, in the consolidated statements of comprehensive income. The unrealized gain or loss is reclassified out of accumulated other comprehensive loss into income 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.receivables.
Leases: The Company leases, under financemaintains allowances for credit losses (formerly known as the allowance for doubtful accounts) 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.adjustments on its trade receivables. The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases, (“ASC Topic 842”) effective January 1, 2019.estimates the allowance for credit losses based on historical write-offs, factors surrounding the credit risk of specific customers, and forecasts of future economic conditions. In accordance with ASC Topic 842, right-of-use assetsorder to gather information regarding these trends and lease liabilitiesfactors, the Company performs ongoing credit evaluations of customers, an analysis of accounts receivable aging by business segment, and an analysis of future economic conditions at period end. The allowance for operating leases are recordedrevenue adjustments is an estimate based on the balance sheethistorical revenue adjustments and the related lease expense is recorded on a straight-line basis overcurrent information
8
regarding trends and business changes. Actual write-offs or adjustments could differ from the lease term in operating expenses. Included in lease expense are any variable lease payments incurredallowance estimates due to a number of factors, including future changes in the period that were not included inforecasted economic environment or new factors and risks surrounding a particular customer. Accounts receivable are written off when the initial lease liability. For financial reporting purposes, right-of-use assets held under finance leasesaccounts are amortizedturned over their estimated useful livesto a collection agency or when the accounts are determined to be uncollectible. Actual write-offs and adjustments are charged against the allowances for doubtful accounts and revenue adjustments.The allowance for credit losses on the same basis as owned assets,Company’s trade accounts receivable totaled $3.0 million at June 30, 2020 and leasehold improvements associated with assets utilized under finance$1.8 million at December 31, 2019. There were no material write-offs charged against or operating leases are amortized byincreases to the straight-line method overallowance for credit losses during 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,three 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 uses 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 assessment 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 842, a right-of-use asset and a lease liability are recognized. The right-of-use asset is measured as the initial amount of the 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 present value of the lease payments, discounted using the interest 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 measurement of the lease 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 be terminated early. Variable lease payments based on an index 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 change in an index or rate are recorded as a period expense when incurred. Lease modifications result in remeasurement of the lease liability.six months ended June 30, 2020.
Adopted Accounting Pronouncements
ASC Topic 842, which was adopted by the CompanyAs previously discussed within Accounting Policies in this Note, effective January 1, 2019, requires lessees2020, the Company adopted ASC Topic 326, which replaces the incurred loss methodology model with an expected loss methodology referred to recognize right-of-use assetsas the CECL methodology for the Company’s trade receivables and lease liabilities for operating leases with terms greater than 12 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.other receivables. The Company electedadopted ASC Topic 326 with the modified retrospective method of applying the transition provisions at the beginning of the period of adoption and, as a result, has not adjusted comparative period financial information and has not included the new lease disclosuresapproach. Under this approach, results for reporting periods before the effective date. Priorafter January 1, 2020 are presented under ASC Topic 326 while 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.
previously applicable accounting guidance. The Company has excluded short-term leases from accounting under ASC Topic 842 and has elected the packagerecorded a decrease to retained earnings of practical expedients as 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 have a term of 12 months or less did not have a material effect on the right-of-use assets and lease liabilities.
The majority of the Company’s lease portfolio consists of real property operating leases related to facilities used in the Asset-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 office equipment finance leases. Management has recorded the right-of-use assets and associated lease liabilities 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$0.2 million as of January 1, 2019. The accounting2020 for finance leases (formerly referred to as capital leases prior to the adoptioncumulative effect of adopting ASC Topic 842) remained substantially unchanged.326.
On January 1, 2020 the Company adopted 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”) which was amended by the Financial Accounting Standards Board in August 2018. The expense recognitionamendments to ASC Subtopic 350-40 clarify the accounting treatment for operating leasesimplementation 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 were adopted on a prospective basis and finance leases under ASC Topic 842 is substantially consistent with ASC Topic 840 and the impact of the new standard is non-cash in nature. As a result, there is no significantdid not have an impact on the Company’s results of operations or cash flows presented in the Company’s consolidated financial statements.
On January 1, 2020 the Company adopted ASC Topic 815, 820, Derivatives and HedgingFair Value Measurement, which was adopted by the Company on January 1, 2019, was amended to changemodify the designation and measurement guidancedisclosure requirements of fair value measurements, primarily impacting the disclosures 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.Level 3 fair value measurements. The amendment did not have an impact on the consolidatedCompany’s financial statements.statement disclosures as of June 30, 2020.
The U.S. Securities and Exchange Commission (the “SEC”) issued Final Rule 33-10618,amendments to ASC Topic 848, FAST Act Modernization and Simplification of Regulation S-KReference Rate Reform, (“Final Rule 33-10618”ASC Topic 848”) inare effective as of March 201912, 2020 through December 31, 2022 and provide optional expedients and exceptions for applying GAAP to modernizecontracts, hedging relationships, and simplifyother transactions affected by reference rate reform if certain disclosure requirements in Regulation S-Kcriteria are met. The Company did not elect the optional expedients or apply the exceptions allowed by ASC Topic 848 during the six months ended June 30, 2020 and does not expect that 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 filingamendments, if elected, will have a confidential treatment request. Effective May 2, 2019, the final rule requires registrants to include the trading symbol for each class of registered securitiessignificant impact on the cover pageCompany’s consolidated financial statements. The Company’s revolving credit facility (“Credit Facility”) under its Third Amended and Restated Credit Agreement (“Credit Agreement”), accounts receivable securitization program, and interest rate swap agreements utilize interest rates based on LIBOR, which is expected to be phased out by the end of certain SEC forms.2021. The eXtensible Business Reporting Language (“XBRL”) reporting requirements of the final ruleCompany’s Credit Facility and current interest rate swap agreement, which was amended on May 4, 2020 (see Note F), mature on October 1, 2024. The Credit Agreement provides for tagging data on the cover page of certain SEC filings and the use of hyperlinks for information that is incorporated by referencean alternate rate of interest in accordance with the provisions of the agreement and availablethe interest rate on EDGAR became effectivethe swap agreement will change to the rate in the Credit Agreement. Any changes to the terms of our borrowing arrangements which would allow for the Companyuse of an alternative to LIBOR in calculating the interest rate under such arrangements are anticipated to be effective in 2022 upon the Company’s agreement with this Quarterly Report on Form 10-Q.the lenders as to the replacement reference rate.
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, 2020 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 | |
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, 2019 and December 31, 2018, cash, cash equivalents, and short-term investments totaling $68.9 million and $94.7 million, respectively, were neither FDIC insured nor direct obligations of the U.S. government.
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:
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 | |
12
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 | |
| | | | | | | | | | | | | |
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, 2019 and December 31, 2018.
Intangible assets consisted of the following:
| | | | | | | | | | | ��� | | | | | | | | | | |
| | | | 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 | | $ | 26,318 | | $ | 34,113 | | $ | 60,431 | | $ | 24,130 | | $ | 36,301 | |
Other | | 9 | | | 1,032 | | | 745 | | | 287 | | | 1,032 | | | 684 | | | 348 | |
|
| 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 | |
| | | |
| | | | | | | | | | | | | | | | | |
Total intangible assets |
| N/A | | $ | 93,763 | | $ | 27,063 | | $ | 66,700 | | $ | 93,763 | | $ | 24,814 | | $ | 68,949 | |
The future amortization for intangible assets acquired through business acquisitions as of June 30, 2019 was as follows:
| | | | | |
|
|
| 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 | |
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 requireswas amended to simplify the accounting for income taxes to improve consistency of accounting methods and remove certain exceptions. The amendment is effective for the Company beginning January 1, 2021. The Company is currently assessing the impact of tax law changes to be recognized inthis amendment will have on the period in which the legislation is enacted. An additional provisional reduction of net deferred income tax liabilities of $0.1 millionconsolidated financial statements and $2.6 million was recognized in the three and six months ended June 30, 2018, respectively, 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.disclosures.
In addition to the provisional effect on net deferred tax liabilities, the Company recorded a provisional reduction in current income tax expense of $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 fiscal tax year included the effective date of the rate change under the Tax Reform Act, taxes were required to be calculated by applying a blended rate to the taxable income for the taxable year ended 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 21.0% federal statutory rate was
149
appliedManagement believes there is no other new accounting guidance issued but not yet effective that is relevant 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 resulted 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. The 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, the tax benefit from the vesting of stock awards, and changes in the cash surrender value of life insurance.
As of June 30, 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, 2019 and concluded that, other than for certain deferred tax assets related to state 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 $0.1 million at June 30, 2019 and December 31, 2018.
The Company had reserves for uncertain tax positions of $1.0 million at June 30, 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 the adoption of ASC Topic 842.
The Company paid federal, state, and foreign income taxes of $8.9 million during the six months ended June 30, 2019, and paid $2.5 million of foreign and state income taxes during the six months ended June 30, 2018. The Company received refunds of less than $0.1 million of state income taxes and refunds of $1.1 million of federal and state income taxes that were paid in prior years during the six months ended June 30, 2019 and 2018, respectively.current financial statements.
NOTE EB – LEASESFINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Financial Instruments
The Company leases,following table presents the components of cash and cash equivalents and short-term investments:
| | | | | | | |
|
| June 30 |
| December 31 |
| ||
| | 2020 | | 2019 | | ||
| | (in thousands) | | ||||
Cash and cash equivalents | | | | | | | |
Cash deposits(1) | | $ | 353,358 | | $ | 166,619 | |
Variable rate demand notes(1)(2) | |
| 14,929 | |
| 14,750 | |
Money market funds(3) | |
| 38,003 | |
| 20,540 | |
Total cash and cash equivalents | | $ | 406,290 | | $ | 201,909 | |
| | | | | | | |
Short-term investments | | | | | | | |
Certificates of deposit(1) | | $ | 131,413 | | $ | 69,314 | |
U.S. Treasury securities(4) | | | 36,306 | | | 47,265 | |
Total short-term investments | | $ | 167,719 | | $ | 116,579 | |
(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 increase in cash and cash equivalents and short-term investments from December 31, 2019 was due to borrowings 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,Credit Facility and all renewal options that have been exercised or are reasonably certain to be exercisedaccounts receivable securitization program, as of June 30, 2019 are includedfurther disclosed 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.Note F.
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 has a small numberis potentially subject to concentrations of finance leases recorded in property, plant and equipment and long-term debtcredit risk related to structuresits cash, cash equivalents, and office equipment that are immaterial toshort-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, 2020 and December 31, 2019, cash, cash equivalents, and short-term investments totaling $186.1 million and $66.2 million, respectively, were neither FDIC insured nor direct obligations of the consolidated financial statements.U.S. government.
1510
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. |
Fair value and carrying value disclosures of financial instruments are presented in the following table:
| | | | | | | | | | | | | |
| | June 30 | | December 31 | | ||||||||
|
| 2020 |
| 2019 |
| ||||||||
| | (in thousands) | | ||||||||||
| | | Carrying |
| | Fair |
| | Carrying |
| | Fair | |
| | | Value |
| | Value |
| | Value |
| | Value | |
Credit Facility(1) | | $ | 250,000 | | $ | 250,000 | | $ | 70,000 | | $ | 70,000 | |
Accounts receivable securitization borrowings(2) | | | 85,000 | | | 85,000 | | | 40,000 | | | 40,000 | |
Notes payable(3) | |
| 197,888 | |
| 200,581 | |
| 213,504 | |
| 216,432 | |
New England Pension Fund withdrawal liability(4) | | | 21,716 | | | 26,677 | | | 22,018 | | | 24,462 | |
| | $ | 554,604 | | $ | 562,258 | | $ | 345,522 | | $ | 350,894 | |
(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). |
(4) | 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, which resulted in a related withdrawal liability (see in Note I to the consolidated financial statements in Item 8 of the Company’s 2019 Annual Report on Form 10-K). The fair value of the outstanding withdrawal liability is equal to the present value of the future withdrawal liability payments, discounted at an interest rate of 2.3% and 3.4% at June 30, 2020 and December 31, 2019, respectively, determined using the 20-year U.S. Treasury rate plus a spread (Level 2 of the fair value hierarchy). Included in other long-term liabilities with the current portion included in accrued expenses. |
11
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 $5.0millionAssets and $9.5 million, net of sublease income, for the three and six months ended June 30, 2018, respectively.Liabilities Measured at Fair Value on a Recurring Basis
The operating cash flows from operating lease activity were as follows:following table presents the assets and liabilities that are measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | |
| | Six Months Ended | | | June 30, 2020 | | |||||||||||
| | June 30, 2019 | | | | | | Fair Value Measurements Using | | ||||||||
| | (in thousands) | | | | | | Quoted Prices |
| Significant |
| Significant | | ||||
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 | | |||||||||||||
| | | | |
| | | | In Active | | Observable | | Unobservable | | |||
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | (10,815) | | |||||||||||||
| | | | | Markets | | Inputs | | Inputs | | |||||||
| | Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||||||
| | (in thousands) | | ||||||||||||||
Assets: | | | | | | | | | | | | | | ||||
Money market funds(1) | | $ | 38,003 | | $ | 38,003 | | $ | — | | $ | — | | ||||
Equity, bond, and money market mutual funds held in trust related to the Voluntary Savings Plan(2) | |
| 3,105 | |
| 3,105 | |
| — | |
| — | | ||||
| | $ | 41,108 | | $ | 41,108 | | $ | — | | $ | — | | ||||
Liabilities: | |
| | | | | | | | | | | | ||||
Interest rate swaps(3) | | $ | 2,148 | | $ | — | | $ | 2,148 | | $ | — | |
Supplemental balance sheet information related to operating lease liabilities was as follows:
| | | | | | | | | | | | | |
| | December 31, 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) | | $ | 20,540 | | $ | 20,540 | | $ | — | | $ | — | |
Equity, bond, and money market mutual funds held in trust related to the Voluntary Savings Plan(2) | |
| 2,427 | |
| 2,427 | |
| — | |
| — | |
| | $ | 22,967 | | $ | 22,967 | | $ | — | | $ | — | |
Liabilities: | |
| | | | | | | | | | | |
Interest rate swaps(3) | | $ | 563 | | $ | — | | $ | 563 | | $ | — | |
| | | | | | | | | | |
|
| 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% | | | | | | | |
(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 liabilities. The fair values of the interest rate swaps were determined by discounting future cash flows and receipts based on expected interest rates observed in market interest rate curves adjusted for estimated credit valuation considerations reflecting nonperformance risk of the Company and the counterparty, which are considered to be in Level 3 of the fair value hierarchy. The Company assessed Level 3 inputs as insignificant to the valuation at June 30, 2020 and December 31, 2019 and considers the interest rate swap valuations in Level 2 of the fair value hierarchy. |
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 | |
1612
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 $87.7 million and $0.6 million reported in the ArcBest and FleetNet segments, respectively, for both June 30, 2020 and December 31, 2019.
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2020 | | December 31, 2019 |
| ||||||||||||||
| | 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 | | $ | 52,721 | | $ | 28,574 | | $ | 24,147 | | $ | 52,721 | | $ | 26,667 | | $ | 26,054 | |
Other | | 11 | | | 1,335 | | | 867 | | | 468 | | | 1,294 | | | 816 | | | 478 | |
|
| 14 | |
| 54,056 | |
| 29,441 | |
| 24,615 | | | 54,015 | |
| 27,483 | |
| 26,532 | |
Indefinite-lived intangible assets | | | | | | | | | | | | | | | | | | | | | |
Trade name |
| N/A | |
| 32,300 | |
| N/A | |
| 32,300 | | | 32,300 | |
| N/A | |
| 32,300 | |
| | | |
| | | | | | | | | | | | | | | | | |
Total intangible assets |
| N/A | | $ | 86,356 | | $ | 29,441 | | $ | 56,915 | | $ | 86,315 | | $ | 27,483 | | $ | 58,832 | |
The future minimum rental commitments, net of minimum rentals to be received under noncancelable subleases,amortization for intangible assets acquired through business acquisitions as of June 30, 2020 was as follows:
| | | | |
|
| Amortization of |
| |
| | Intangible Assets | | |
| | (in thousands) | | |
Remainder of 2020 | | $ | 1,953 | |
2021 | |
| 3,870 | |
2022 | |
| 3,843 | |
2023 | |
| 3,745 | |
2024 | | | 3,695 | |
Thereafter | | | 7,509 | |
Total amortization | | $ | 24,615 | |
Goodwill and indefinite-lived intangible assets are not amortized, but rather are evaluated for impairment annually or more frequently if indicators of impairment exist. Due to the impact of COVID-19 on business and freight levels, the Company considered several factors to evaluate if it was more likely than not that impairment of these assets existed as of June 30, 2020. In making this analysis, management considered current and forecasted business levels and estimated future cash flows over several years. Management’s assumptions include an expected economic recovery beginning in late 2020 and continuing to recover into 2021. Based on the analysis performed, management determined it was more likely than not that goodwill and indefinite-lived intangible assets were not impaired as of June 30, 2020.
The evaluation of goodwill impairment requires management’s judgment and the use of estimates and assumptions to determine if indicators of impairment exist at an interim date. Assumptions require considerable judgment because changes in broad economic factors and industry factors can result in variable and volatile fair values. Changes in key estimates and assumptions that impact the fair value of the operations, including the impact of COVID-19 on the reporting units, could materially affect future analyses and result in material impairments of goodwill and indefinite-lived intangible assets.
NOTE D – INCOME TAXES
The effective tax rate was 23.4% and 23.1% for the three and six months ended June 30, 2020, respectively. The effective tax rate was 27.4% and 27.1% for the three and six months ended June 30, 2019, respectively. 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.
13
For the three and six months ended June 30, 2020, 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, federal alternative fuel and research and development tax credits, changes in tax valuation allowances, and tax expense from the vesting of stock awards. For the six months ended June 30, 2020, the difference between the Company’s effective tax rate and the federal statutory rate also resulted from the reversal of an uncertain tax position. 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.
As of June 30, 2020, 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, 2020 and concluded that, other than for certain deferred tax assets related to foreign tax credit 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 $0.9 million and $0.7 million at June 30, 2020 and December 31, 20182019, respectively.
The Company had a reserve for all noncancelableuncertain tax positions of $0.9 million at December 31, 2019. The reserve was reversed in the first quarter of 2020 due to the expiration of the statute of limitations.
The Company paid foreign and state income taxes of $2.3 million during the six months ended June 30, 2020 and paid $8.9 million of federal, state, and foreign income taxes during the six months ended June 30, 2019. The Company received refunds of $0.4 million of federal and state income taxes and refunds of less than $0.1 million of state income taxes that were paid in prior years during the six months ended June 30, 2020 and 2019, respectively.
NOTE E – LEASES
The Company leases, under finance and operating leaseslease 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 components of operating lease expense 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 | |
| | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | ||||||||
| | June 30 | | June 30 | | ||||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | ||||
| | (in thousands) | | ||||||||||
Operating lease expense | | $ | 5,803 | | $ | 5,642 | | $ | 11,599 | | $ | 10,981 | |
Variable lease expense | | | 543 | | | 774 | | | 1,583 | | | 1,613 | |
Sublease income | | | (42) | | | (69) | | | (134) | | | (136) | |
| | | | | | | | | | | | | |
Total operating lease expense | | $ | 6,304 | | $ | 6,347 | | $ | 13,048 | | $ | 12,458 | |
The operating cash flows from operating lease activity were as follows:
| | | | | | | |
| | Six Months Ended | | ||||
| | June 30, 2020 | | June 30, 2019 | | ||
| | (in thousands) | | ||||
Noncash change in operating right-of-use assets | | $ | 11,002 | | $ | 9,784 | |
Change in operating lease liabilities | | | (11,232) | | | (9,625) | |
Operating right-of-use-assets and lease liabilities, net | | $ | (230) | | $ | 159 | |
| | | | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | (11,826) | | $ | (10,815) | |
14
Maturities of operating lease liabilities at June 30, 2020 were as follows:
| | | | | | | | | | |
| | | | | | | | Equipment | | |
| | | | | Land and | | and | | ||
|
| Total |
| Structures(1) |
| Other |
| |||
|
| (in thousands) | | |||||||
Remainder of 2020 | | $ | 11,616 | | $ | 11,139 | | $ | 477 | |
2021 | |
| 20,619 | |
| 20,338 | |
| 281 | |
2022 | |
| 16,462 | |
| 16,451 | |
| 11 | |
2023 | |
| 12,176 | |
| 12,176 | |
| — | |
2024 | |
| 10,185 | |
| 10,185 | |
| — | |
Thereafter | |
| 23,072 | |
| 23,072 | |
| — | |
Total lease payments | | | 94,130 | | | 93,361 | | | 769 | |
Less imputed interest | | | (9,112) | | | (9,102) | | | (10) | |
Total | | $ | 85,018 | | $ | 84,259 | | $ | 759 | |
(1) | Excludes future minimum payments for leases which were executed but had not yet commenced as of June 30, 2020 of $34.7 million and $7.3 million which will be paid over 13 and 10 years, respectively. The Company plans to take possession of these leased spaces in third quarter 2020. |
NOTE F – 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 finance 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, and software as follows:
| | | | | | | | | | | | | | |
| | June 30 | | December 31 | | | June 30 | | December 31 | | ||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
| | (in thousands) | | | (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 | | |||||||
Credit Facility (interest rate of 1.3%(1) at June 30, 2020) | | $ | 250,000 | | $ | 70,000 | | |||||||
Accounts receivable securitization borrowings (interest rate of 1.1% at June 30, 2020) | |
| 85,000 | |
| 40,000 | | |||||||
Notes payable (weighted-average interest rate of 3.2% at June 30, 2020) | |
| 197,888 | |
| 213,504 | | |||||||
Finance lease obligations (weighted-average interest rate of 3.3% at June 30, 2020) | |
| 12 | |
| 15 | | |||||||
| |
| 282,206 | |
| 291,675 | | |
| 532,900 | |
| 323,519 | |
Less current portion | |
| 47,205 | |
| 54,075 | | |
| 59,050 | |
| 57,305 | |
Long-term debt, less current portion | | $ | 235,001 | | $ | 237,600 | | | $ | 473,850 | | $ | 266,214 | |
(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 |
1715
Scheduled maturities of long-term debt obligations as of June 30, 20192020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Accounts | | | | | | | | | | | | | | | Accounts | | | | | | | | ||
| | | | | | | | Receivable | | | | | | | | | | | | | | | Receivable | | | | | | | | ||
| | | | | Credit | | Securitization | | Notes | | Finance Lease | | | | | | Credit | | Securitization | | Notes | | Finance Lease | | ||||||||
|
| Total |
| Facility(1) |
| Program(1) |
| Payable |
| Obligations(2) | |
| Total |
| Facility(1) |
| Program(1) |
| Payable |
| Obligations | | ||||||||||
|
| (in thousands) | |
| (in thousands) | | ||||||||||||||||||||||||||
Due in one year or less |
| $ | 55,808 |
| $ | 2,230 |
| $ | 1,132 |
| $ | 52,306 | | $ | 140 | |
| $ | 68,653 |
| $ | 3,244 |
| $ | 909 |
| $ | 64,493 | | $ | 7 | |
Due after one year through two years | |
| 50,379 | |
| 1,942 | |
| 968 | |
| 47,462 | |
| 7 | | |
| 148,119 | |
| 3,140 | |
| 85,227 | |
| 59,747 | |
| 5 | |
Due after two years through three years | |
| 85,385 | |
| 1,965 | |
| 40,243 | |
| 43,172 | |
| 5 | | |
| 48,443 | |
| 3,256 | |
| — | |
| 45,187 | |
| — | |
Due after three years through four years | |
| 98,514 | |
| 70,033 | |
| — | |
| 28,481 | |
| — | | |
| 33,432 | |
| 3,620 | |
| — | |
| 29,812 | |
| — | |
Due after four years through five years | |
| 13,035 | |
| — | |
| — | |
| 13,035 | |
| — | | |
| 261,215 | |
| 251,000 | |
| — | |
| 10,215 | |
| — | |
Due after five years | | | 152 | | | — | | | — | | | 152 | | | — | | | | 238 | | | — | | | — | | | 238 | | | — | |
Total payments | |
| 303,273 | |
| 76,170 | |
| 42,343 | |
| 184,608 | |
| 152 | | |
| 560,100 | |
| 264,260 | |
| 86,136 | |
| 209,692 | |
| 12 | |
Less amounts representing interest | |
| 21,067 | |
| 6,170 | |
| 2,343 | |
| 12,554 | |
| — | | |
| 27,200 | |
| 14,260 | |
| 1,136 | |
| 11,804 | |
| — | |
Long-term debt |
| $ | 282,206 |
| $ | 70,000 |
| $ | 40,000 |
| $ | 172,054 | | $ | 152 | |
| $ | 532,900 |
| $ | 250,000 |
| $ | 85,000 |
| $ | 197,888 | | $ | 12 | |
(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. |
Assets securing notes payable or held under finance leases were included in property, plant and equipment as follows:
| | | | | | | | | | | | | | |
| | June 30 | | December 31 | | | June 30 | | December 31 | | ||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
| | (in thousands) |
| | (in thousands) |
| ||||||||
Revenue equipment |
| $ | 245,703 |
| $ | 264,396 | |
| $ | 276,574 |
| $ | 265,315 | |
Land and structures (service centers) | | | 1,794 | | | 1,794 | | |||||||
Software | | | 1,508 | | | 1,484 | | | | 2,140 | | | 2,140 | |
Service, office, and other equipment | | | 15,492 | | | 5,941 | | | | 26,270 | | | 26,344 | |
Total assets securing notes payable or held under finance leases | |
| 264,497 | |
| 273,615 | | |
| 304,984 | |
| 293,799 | |
Less accumulated depreciation and amortization(1) | |
| 78,113 | |
| 79,961 | | |
| 91,811 | |
| 71,405 | |
Net assets securing notes payable or held under finance leases | | $ | 186,384 | | $ | 193,654 | | | $ | 213,173 | | $ | 222,394 | |
(1) | Amortization of assets held under |
Financing Arrangements
Credit Facility
The Company has a revolving credit facility (the “Credit Facility”) under its SecondThird Amended and Restated Credit Agreement (the “Credit Agreement”) with an initial maximum credit amount of $200.0$250.0 million, including a swing line facility in an aggregate amount of up to $20.0$25.0 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$125.0 million, subject to certain additional conditions as provided in the Credit Agreement. In March 2020, the Company borrowed an additional $180.0 million under the Credit Facility as a precautionary measure to preserve financial flexibility during the COVID-19 pandemic. As of June 30, 2019,2020, the Company haddoes 0t have any available borrowing capacity under the initial maximum credit amount 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;October 1, 2024; 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 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,
16
consolidations, purchases and sales of assets, and certain restricted payments. The leverage covenant under the Company’s Credit Agreement is based on a net debt calculation and consequently was not immediately impacted by the draw against the Credit Facility in March 2020. The Company was in compliance with the covenants under the Credit Agreement at June 30, 2019.2020.
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 3.10% based on the margin of the Credit Facility as of June 30, 2019. The fair value of the interest rate swap of $0.1 million and $0.3 million was recorded in other long-term assets in the consolidated balance sheet at June 30, 2019 and December 31, 2018, respectively.
In June 2017, the Company entered into a forward-startingan interest rate swap agreement with a $50.0 million notional amount which will startstarted on January 2, 2020 upon maturity of the current interest rate swap agreement, and will mature on June 30, 2022. The Company will receivereceives 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 3.24%3.12% based on the margin of the Credit Facility as of June 30, 2019.2020. The fair value of the interest rate swap of $0.5$1.9 million and $0.6 million was recorded in other long-term liabilities and $0.5 million was recorded in other long-term assets in the consolidated balance sheet at June 30, 20192020 and December 31, 2018,2019, respectively. The Company had a five-year interest rate swap agreement with a $50.0 million notional amount that matured on January 2, 2020 for which less than $0.1 million was recorded in other long-term liabilities in the consolidated balance sheet at December 31, 2019.
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, 20192020 and December 31, 2018,2019, and the change in the unrealized income or loss on the interest rate swaps for the three months and six months ended June 30, 20192020 and 20182019 was reported in other comprehensive loss,income (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 settlement 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, 2019.2020.
On May 4, 2020, the Company extended the term of its $50.0 million notional amount interest rate swap agreement from June 30, 2022 to October 1, 2024. The Company will receive floating-rate interest amounts based on one-month LIBOR in exchange for fixed-rate interest payments of 0.43% beginning on June 30, 2022 throughout the remaining term of the agreement. From June 30, 2022 to October 1, 2024, the extended interest rate swap agreement will effectively convert $50.0 million of borrowings under the Credit Facility from variable-rate interest to fixed-rate interest with a per annum rate of 1.56% based on the margin of the Credit Facility as of June 30, 2020. The fair value of the interest rate swap of $0.2 million was recorded in other long-term liabilities in the consolidated balance sheet at June 30, 2020.
Accounts Receivable Securitization Program
The Company’s accounts receivable securitization program, which matures on October 1, 2021, allows for cash proceeds of $125.0 million to be provided under the program 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. AsIn March 2020, the Company borrowed an additional $45.0 million for a total of $85.0 million outstanding at June 30, 2019, $40.0 million was borrowed2020 under the program.program as a precautionary measure to preserve financial flexibility during the COVID-19 pandemic. The Company was in compliance with the covenants under the accounts receivable securitization program at June 30, 2019.2020.
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, 2019,2020, standby letters of credit of $14.9$12.0 million have been issued under the program, which reduced the available borrowing capacity to $70.1$28.0 million.
1917
On July 31, 2020, the Company repaid $45.0 million of the amounts borrowed under the accounts receivable securitization program in March 2020.
Letter of Credit Agreements and Surety Bond Programs
As of June 30, 2019,2020, the Company had letters of credit outstanding of $15.5$12.6 million (including $14.9$12.0 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, 2019,2020, surety bonds outstanding related to the self-insurance program totaled $48.6$50.9 million.
Notes Payable
The Company has financed the purchase of certain revenue equipment, other equipment, and software through promissory note arrangements, including $20.5$13.6 million for revenue equipment and other equipment during the three months ended June 30, 2019.2020.
Subsequent to June 30, 2019,2020, the Company financed the purchase of an additional $17.2$22.0 million of revenue equipment through promissory note arrangements as of August 1, 2019.2020.
18
NOTE G – 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 | | | Three Months Ended June 30 | | ||||||||||||||||||||||||||||||||
| | Nonunion Defined | | Supplemental | | Postretirement | | | Nonunion Defined | | Supplemental | | Postretirement | | ||||||||||||||||||||||||
| | Benefit Pension Plan | | Benefit Plan | | Health Benefit Plan | | | Benefit Pension Plan | | Benefit Plan | | Health Benefit Plan | | ||||||||||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020(1) |
| 2019 |
| 2020 |
| 2019 |
| 2020(2) |
| 2019 |
| ||||||||||||
| | (in thousands) | | | (in thousands) | | ||||||||||||||||||||||||||||||||
Service cost | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 80 | | $ | 91 | | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 47 | | $ | 80 | |
Interest cost | |
| 168 | |
| 1,108 | |
| 10 | |
| 27 | |
| 303 | |
| 210 | | |
| — | |
| 168 | |
| 2 | |
| 10 | |
| 144 | |
| 303 | |
Expected return on plan assets | |
| 1 | |
| (378) | |
| — | |
| — | |
| — | |
| — | | |
| — | |
| 1 | |
| — | |
| — | |
| — | |
| — | |
Amortization of prior service credit | |
| — | |
| — | |
| — | |
| — | |
| (8) | |
| (24) | | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (8) | |
Pension settlement expense | |
| 278 | |
| 431 | |
| — | |
| — | |
| — | |
| — | | |||||||||||||||||||
Amortization of net actuarial loss(1) | |
| 61 | |
| 592 | |
| 23 | |
| 20 | |
| 224 | |
| 76 | | |||||||||||||||||||
Pension settlement expense(3) | |
| — | |
| 278 | |
| — | |
| — | |
| — | |
| — | | |||||||||||||||||||
Amortization of net actuarial (gain) loss(4) | |
| — | |
| 61 | |
| 1 | |
| 23 | |
| (149) | |
| 224 | | |||||||||||||||||||
Net periodic benefit cost | | $ | 508 | | $ | 1,753 | | $ | 33 | | $ | 47 | | $ | 599 | | $ | 353 | | | $ | — | | $ | 508 | | $ | 3 | | $ | 33 | | $ | 42 | | $ | 599 | |
| | | | | | | | | | | | | | | | | | | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30 | | ||||||||||||||||
| | Nonunion Defined | | Supplemental | | Postretirement | | ||||||||||||
| | Benefit Pension Plan | | Benefit Plan | | Health Benefit Plan | | ||||||||||||
|
| 2020(1) |
| 2019 |
| 2020 |
| 2019 |
| 2020(2) |
| 2019 |
| ||||||
| | (in thousands) | | ||||||||||||||||
Service cost | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 94 | | $ | 160 | |
Interest cost | |
| — | |
| 486 | |
| 5 | |
| 20 | |
| 288 | |
| 606 | |
Expected return on plan assets | |
| — | |
| (89) | |
| — | |
| — | |
| — | |
| — | |
Amortization of prior service credit | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (17) | |
Pension settlement expense(3) | |
| — | |
| 1,634 | |
| 89 | |
| — | |
| — | |
| — | |
Amortization of net actuarial (gain) loss(4) | |
| — | |
| 210 | |
| 5 | |
| 47 | |
| (298) | |
| 449 | |
Net periodic benefit cost | | $ | — | | $ | 2,241 | | $ | 99 | | $ | 67 | | $ | 84 | | $ | 1,198 | |
(1) | Termination of the nonunion defined benefit pension plan was completed in 2019 and the plan was liquidated as of December 31, 2019. |
(2) | Expense for the postretirement health benefit plan is lower for the three and six months ended June 30, 2020, compared to the same periods of 2019, due to the impact of a lower cost prescription drug plan effective January 1, 2020. |
(3) | For the six months ended June 30, 2020, pension settlement expense for the supplemental benefit plan of $0.1 million (pre-tax), or $0.1 million (after-tax), was due to a $0.7 million benefit related to an officer retirement. For the three and six months ended June 30, 2019, pension settlement expense for the nonunion defined benefit pension plan 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, was related to lump-sum distribuitions from the plan of $3.0 million and $17.9 million, respectively. |
(4) | The Company amortizes actuarial gains and 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
In November 2017, an amendment was executed to terminate the nonunion defined benefit pension plan with a termination date of December 31, 2017. In September 2018, the plan received a favorable determination letter from the IRS regarding qualification of the plan termination. Benefit election forms were provided to plan participants during the fourth quarter of 2018 and participants could elect any form of payment allowed by the plan for immediate commencement of payment or defer payment until a later date. The plan began distributing immediate lump sum benefit payments 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 allow additional time for the 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 annuity contract purchases in excess of plan assets.
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 distributions from the plan for the three and six months ended June 30, 2018, 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 preliminary bid for a nonparticipating annuity contract from an insurance company to settle the pension obligation related to the vested benefits of the remaining participants who were receiving monthly benefit payments from the plan or who did not elect to receive a lump sum benefit upon plan termination. Based on the most 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 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 remaining benefit distributions expected to be made from the plan in excess of plan 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 plan assets and settlement of plan obligations for the nonunion defined benefit pension plan is 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 second and third quarters of 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, 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 | |
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.
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
19
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 20182019 Annual Funding Notice for the Central States Pension Plan, the funded percentage of the plan was 27.2%24.8% as of January 1, 2018. ABF Freight received a2019. In the Notice of Critical and Declining Status for the Central States Pension Plan dated March 29, 2019, in which30, 2020, the plan’s actuary certified that, as of January 1, 2019,2020, 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 two2 to one or the plan’s funded percentage is less than 80%.
As more fully described in Note I to the consolidated financial statements in Item 8 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, which resulted in a related withdrawal liability for which ABF Freight recognized a one-time charge of $37.9 million (pre-tax) as 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, 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.
As of June 30, 2019, the outstanding 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 3.6% interest rate determined using the 20-year U.S. Treasury rate plus a spread (Level 2 of the fair value hierarchy).
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 20182019 Annual Report on Form 10-K.
NOTE H – STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive LossIncome (Loss)
Components of accumulated other comprehensive lossincome (loss) were as follows:
| | | | | | | | | | | | | | |
|
| June 30 |
| December 31 | |
| June 30 |
| December 31 | | ||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
| | (in thousands) | | | (in thousands) | | ||||||||
Pre-tax amounts: | | | | | | | | | | | | | | |
Unrecognized net periodic benefit costs | | $ | (8,685) | | $ | (11,821) | | |||||||
Unrecognized net periodic benefit credit | | $ | 2,683 | | $ | 2,898 | | |||||||
Interest rate swap | | | (364) | | | 801 | | | | (2,148) | | | (563) | |
Foreign currency translation | |
| (2,355) | |
| (2,816) | | |
| (3,378) | |
| (2,075) | |
| | | | | | | | | | | | | | |
Total | | $ | (11,404) | | $ | (13,836) | | | $ | (2,843) | | $ | 260 | |
| | | | | | | | | | | | | | |
After-tax amounts: | | | | | | | | | | | | | | |
Unrecognized net periodic benefit costs(1) | | $ | (10,421) | | $ | (12,749) | | |||||||
Unrecognized net periodic benefit credit | | $ | 1,993 | | $ | 2,152 | | |||||||
Interest rate swap | | | (269) | | | 591 | | | | (1,587) | | | (416) | |
Foreign currency translation | |
| (1,739) | |
| (2,080) | | |
| (2,496) | |
| (1,533) | |
| | | | | | | | | | | | | | |
Total | | $ | (12,429) | | $ | (14,238) | | | $ | (2,090) | | $ | 203 | |
2320
The following is a summary of the changes in accumulated other comprehensive loss,income (loss), net of tax, by component for the six months ended June 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | |
| | | | | 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, 2019 | | $ | 203 | | $ | 2,152 | | $ | (416) | | $ | (1,533) | |
| | | | | | | | | | | | | |
Other comprehensive loss before reclassifications | |
| (2,142) | |
| (8) | | | (1,171) | |
| (963) | |
Amounts reclassified from accumulated other comprehensive income | |
| (151) | |
| (151) | | | — | |
| — | |
Net current-period other comprehensive loss | |
| (2,293) | |
| (159) | | | (1,171) | |
| (963) | |
| | | | | | | | | | | | | |
Balances at June 30, 2020 | | $ | (2,090) | | $ | 1,993 | | $ | (1,587) | | $ | (2,496) | |
| | | | | | | | | | | | | |
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) | |
The following is a summary of the significant reclassifications out of accumulated other comprehensive lossincome (loss) by component:
| | | | | | | | | | | | | | |
| | Unrecognized Net Periodic | | | Unrecognized Net Periodic | | ||||||||
| | Benefit Costs(1)(2) |
| | Benefit Credit (Costs)(1)(2) |
| ||||||||
| | Six Months Ended June 30 | | | Six Months Ended June 30 | | ||||||||
|
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||||
| | (in thousands) |
| | (in thousands) |
| ||||||||
Amortization of net actuarial loss | | $ | (706) | | $ | (1,562) | | |||||||
Amortization of net actuarial gain (loss) | | $ | 293 | | $ | (706) | | |||||||
Amortization of prior service credit | | | 17 | |
| 47 | | | | — | |
| 17 | |
Pension settlement expense | | | (1,634) | |
| (1,085) | | |||||||
Pension settlement expense(3) | | | (89) | |
| (1,634) | | |||||||
Total, pre-tax | | | (2,323) | |
| (2,600) | | | | 204 | |
| (2,323) | |
Tax benefit | | | 598 | |
| 669 | | |||||||
Tax benefit (expense) | | | (53) | |
| 598 | | |||||||
Total, net of tax | | $ | (1,725) | | $ | (1,931) | | | $ | 151 | | $ | (1,725) | |
(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 as disclosed in Note G. |
(3) | For the six months ended June 30, 2020, pension settlement expense is related to the supplemental benefit plan (see Note G). |
24
Dividends on Common Stock
The following table is a summary of dividends declared during the applicable quarter:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | | 2020 | | 2019 | | ||||||||||||||||
|
| Per Share |
| Amount |
| Per Share |
| Amount |
|
| Per Share |
| Amount |
| Per Share |
| Amount |
| ||||||||
| | (in thousands, except per share data) | | (in thousands, except per share data) | ||||||||||||||||||||||
First quarter | | $ | 0.08 | | $ | 2,052 | | $ | 0.08 | | $ | 2,058 | | | $ | 0.08 | | $ | 2,033 | | $ | 0.08 | | $ | 2,052 | |
Second quarter | | $ | 0.08 | | $ | 2,050 | | $ | 0.08 | | $ | 2,058 | | | $ | 0.08 | | $ | 2,049 | | $ | 0.08 | | $ | 2,050 | |
On July 25, 2019,24, 2020, the Company’s Board of Directors declared a dividend of $0.08 per share to stockholders of record as of August 9, 2019.7, 2020.
21
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, 2018,2019, the Company had $22.3$13.2 million remaining under the program for repurchases of its common stock. During the six months ended June 30, 2019,2020, the Company purchased 168,535150,000 shares for an aggregate cost of $5.2$3.2 million, leaving $17.1$10.0 million available for repurchase of common stock under the program.
NOTE I – SHARE-BASED COMPENSATION
Stock Awards
As of December 31, 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 Ownership Incentive Plan provides for the granting of 4.0 million shares, which may be awarded as incentive and nonqualified stock options, stock appreciation rights, restricted stock, RSUs, or performance award units. The Company had outstanding RSUs granted under the Ownership Incentive Plan as of June 30, 2019.
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 | |
25
NOTE JI – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | | Three Months Ended | | Six Months Ended | | ||||||||||||||||
| | June 30 | | June 30 | | | June 30 | | June 30 | | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||||
| | (in thousands, except share and per share data) | | | (in thousands, except share and per share data) | | ||||||||||||||||||||
Basic | | | | | | | | | | | | | | | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 24,376 | | $ | 1,233 | | $ | 29,264 | | $ | 11,187 | | | $ | 15,880 | | $ | 24,376 | | $ | 17,782 | | $ | 29,264 | |
Effect of unvested restricted stock awards | |
| (11) | |
| (4) | |
| (26) | |
| (31) | | |
| (17) | |
| (11) | |
| (18) | |
| (26) | |
Adjusted net income | | $ | 24,365 | | $ | 1,229 | | $ | 29,238 | | $ | 11,156 | | | $ | 15,863 | | $ | 24,365 | | $ | 17,764 | | $ | 29,238 | |
Denominator: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average shares | |
| 25,554,286 | |
| 25,670,325 | |
| 25,562,306 | |
| 25,656,674 | | |
| 25,463,559 | |
| 25,554,286 | |
| 25,468,624 | |
| 25,562,306 | |
Earnings per common share | | $ | 0.95 | | $ | 0.05 | | $ | 1.14 | | $ | 0.43 | | | $ | 0.62 | | $ | 0.95 | | $ | 0.70 | | $ | 1.14 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Diluted | | | | | | | | | | | | | | | | | | | | | | | | | | |
Numerator: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 24,376 | | $ | 1,233 | | $ | 29,264 | | $ | 11,187 | | | $ | 15,880 | | $ | 24,376 | | $ | 17,782 | | $ | 29,264 | |
Effect of unvested restricted stock awards | |
| (11) | |
| (4) | |
| (25) | |
| (30) | | |
| (17) | |
| (11) | |
| (18) | |
| (25) | |
Adjusted net income | | $ | 24,365 | | $ | 1,229 | | $ | 29,239 | | $ | 11,157 | | | $ | 15,863 | | $ | 24,365 | | $ | 17,764 | | $ | 29,239 | |
Denominator: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted-average shares | |
| 25,554,286 | |
| 25,670,325 | |
| 25,562,306 | |
| 25,656,674 | | |
| 25,463,559 | |
| 25,554,286 | |
| 25,468,624 | |
| 25,562,306 | |
Effect of dilutive securities | |
| 877,306 | |
| 1,029,224 | |
| 920,705 | |
| 996,608 | | |
| 754,398 | |
| 877,306 | |
| 783,862 | |
| 920,705 | |
Adjusted weighted-average shares and assumed conversions | |
| 26,431,592 | |
| 26,699,549 | |
| 26,483,011 | |
| 26,653,282 | | |
| 26,217,957 | |
| 26,431,592 | |
| 26,252,486 | |
| 26,483,011 | |
Earnings per common share | | $ | 0.92 | | $ | 0.05 | | $ | 1.10 | | $ | 0.42 | | | $ | 0.61 | | $ | 0.92 | | $ | 0.68 | | $ | 1.10 | |
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 the three-three and six-monthsix month periods ended June 30, 20192020 and 2018,2019, 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.
NOTE KJ – 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.
The Company began a pilot test program in early 2019 to improve freight handling at ABF Freight. The pilot utilizes patented handling equipment, software, and a patented process to load and unload trailers more rapidly and safely. During the third quarter of 2019, the presentation of operating expenses was modified to present innovative technology costs
22
associated with the pilot test program as a separate operating expense line item for the Asset-Based segment and for the summary of consolidated expenses by category. Previously, innovative technology costs incurred directly by the segment or allocated through shared services were categorized in individual segment expense line items. Certain reclassifications have been made to the prior period operating segment expenses to conform to the current year presentation. There was no impact on total consolidated expenses or total segment 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 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.
26
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 COVID-19 pandemic had a significant negative impact on demand for the Company’s services during the three months ended June 30, 2020, resulting in lower tonnage, shipment, and service event levels and, consequently, lower segment revenues for the second quarter of 2020. As a result, the Company’s operating segment information for the three months ended June 30, 2020 does not reflect typical seasonal trends in business levels as described below for the Company’s reportable operating segments.
The Company’s reportable operating segments are as follows:
● | The Asset-Based segment includes the results of operations of ABF Freight System, Inc. and certain other subsidiaries. The segment operations include national, inter-regional, and regional transportation of general commodities through standard, expedited, and guaranteed LTL services. In addition, the segment operations include freight transportation related to certain consumer household goods self-move services. |
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, available capacity in the market, and the impact of other adverse external events or conditions, including the COVID-19 pandemic as previously described, may influence quarterly freight tonnage levels.
● | 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 distribution, and international freight transportation for air, ocean, and ground. |
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, and the impact of other adverse external events or conditions, including the COVID-19 pandemic as previously described, 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 moving services is typically stronger in the summer months.
23
● | 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 |
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.volume and the impact of other external events or conditions, including the COVID-19 pandemic as previously described.
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.
2724
The following tables reflect reportable operating segment information:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | Three Months Ended | | Six Months Ended |
| ||||||||||||||||
| | June 30 | | June 30 |
| | June 30 | | June 30 |
| ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||||
| | (in thousands) |
| | (in thousands) |
| ||||||||||||||||||||
REVENUES | | | | | | | | | | | | | | | | | | | | | | | | | | |
Asset-Based | | $ | 559,648 | | $ | 559,239 |
| $ | 1,065,727 |
| $ | 1,041,354 | | | $ | 460,070 | | $ | 559,648 |
| $ | 975,783 |
| $ | 1,065,727 | |
ArcBest | |
| 181,173 | |
| 199,987 | |
| 354,377 | |
| 381,920 | | |
| 151,467 | |
| 181,173 | |
| 316,242 | |
| 354,377 | |
FleetNet | |
| 51,722 | |
| 46,792 | |
| 104,981 | |
| 94,551 | | |
| 46,440 | |
| 51,722 | |
| 98,879 | |
| 104,981 | |
Other and eliminations | |
| (21,053) | |
| (12,668) | |
| (41,756) | |
| (24,474) | | |
| (30,607) | |
| (21,053) | |
| (62,135) | |
| (41,756) | |
Total consolidated revenues |
| $ | 771,490 |
| $ | 793,350 |
| $ | 1,483,329 |
| $ | 1,493,351 | |
| $ | 627,370 |
| $ | 771,490 |
| $ | 1,328,769 |
| $ | 1,483,329 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
OPERATING EXPENSES | | | | | | | | | | | | | | | | | | | | | | | | | | |
Asset-Based | | | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries, wages, and benefits | | $ | 297,016 | | $ | 286,750 |
| $ | 577,292 |
| $ | 556,529 | | | $ | 248,995 | | $ | 297,016 |
| $ | 532,833 |
| $ | 577,292 | |
Fuel, supplies, and expenses | |
| 66,853 | |
| 65,040 | |
| 131,580 | |
| 127,233 | | |||||||||||||
Fuel, supplies, and expenses(1) | |
| 45,675 | |
| 65,791 | |
| 106,900 | |
| 129,764 | | |||||||||||||
Operating taxes and licenses | |
| 12,214 | |
| 11,910 | |
| 24,612 | |
| 23,666 | | |
| 11,629 | |
| 12,214 | |
| 24,423 | |
| 24,612 | |
Insurance | |
| 7,598 | |
| 7,979 | |
| 15,589 | |
| 14,607 | | |
| 8,247 | |
| 7,598 | |
| 16,071 | |
| 15,589 | |
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 | | |||||||||||||
Communications and utilities(1) | |
| 4,342 | |
| 4,500 | |
| 9,053 | |
| 9,117 | | |||||||||||||
Depreciation and amortization(1) | |
| 23,327 | |
| 21,633 | |
| 46,597 | |
| 42,594 | | |||||||||||||
Rents and purchased transportation(1) | |
| 46,152 | |
| 56,826 | |
| 101,922 | |
| 106,132 | | |||||||||||||
Shared services(1) | | | 45,605 | | | 55,338 | | | 94,490 | | | 105,633 | | |||||||||||||
Gain on sale of property and equipment | |
| (1,587) | |
| (266) | |
| (1,621) | |
| (399) | | |
| (1,175) | |
| (1,587) | |
| (3,339) | |
| (1,621) | |
Other | |
| 1,404 | |
| 948 | |
| 2,286 | |
| 2,247 | | |||||||||||||
Innovative technology costs(1)(2) | |
| 4,789 | |
| 2,735 | |
| 9,322 | |
| 4,536 | | |||||||||||||
Other(1) | |
| 1,448 | |
| 1,406 | |
| 3,235 | |
| 2,286 | | |||||||||||||
Total Asset-Based | |
| 523,470 | |
| 555,858 | | | 1,015,934 | | | 1,024,571 | | |
| 439,034 | |
| 523,470 | | | 941,507 | | | 1,015,934 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
ArcBest | | | | | | | | | | | | | | | | | | | | | | | | | | |
Purchased transportation | |
| 147,552 | |
| 162,920 | |
| 287,657 | |
| 311,292 | | |
| 125,090 | |
| 147,552 | |
| 262,272 | |
| 287,657 | |
Supplies and expenses | |
| 2,858 | |
| 3,538 | |
| 5,632 | |
| 6,768 | | |
| 1,989 | |
| 2,858 | |
| 4,269 | |
| 5,632 | |
Depreciation and amortization | |
| 3,055 | |
| 3,597 | |
| 6,206 | |
| 7,005 | | |
| 2,449 | |
| 3,055 | |
| 4,919 | |
| 6,206 | |
Shared services | | | 23,141 | | | 23,536 | | | 46,172 | | | 45,404 | | | | 18,840 | | | 23,141 | | | 40,567 | | | 46,172 | |
Other | | | 2,445 | |
| 2,546 | | | 4,858 | | | 4,427 | | | | 1,796 | |
| 2,445 | | | 4,321 | | | 4,858 | |
Restructuring costs(2) | | | — | |
| 143 | | | — | | | 152 | | |||||||||||||
Total ArcBest | |
| 179,051 | |
| 196,280 | |
| 350,525 | |
| 375,048 | | |
| 150,164 | |
| 179,051 | |
| 316,348 | |
| 350,525 | |
| | | | | | | |
| | |
| | | | | | | | | |
| | |
| | |
FleetNet | |
| 50,696 | |
| 45,763 | |
| 102,467 | |
| 92,001 | | |
| 45,658 | |
| 50,696 | |
| 97,057 | |
| 102,467 | |
Other and eliminations | |
| (16,927) | |
| (7,707) |
|
| (29,388) | |
| (14,150) | | |
| (27,911) | |
| (16,927) |
|
| (54,387) | |
| (29,388) | |
Total consolidated operating expenses | | $ | 736,290 | | $ | 790,194 | | $ | 1,439,538 | | $ | 1,477,470 | | | $ | 606,945 | | $ | 736,290 | | $ | 1,300,525 | | $ | 1,439,538 | |
(1) |
(2) |
2825
| | | | | | | | | | | | | | | | | | | | |||||||
| | Three Months Ended | | Six Months Ended |
| | Three Months Ended | | Six Months Ended |
| ||||||||||||||||
| | June 30 | | June 30 | | | June 30 | | June 30 | | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| | 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||||
| | (in thousands) |
| | (in thousands) | | | | | |
| |||||||||||||||
OPERATING INCOME | | | | | | | | | | | | | ||||||||||||||
OPERATING INCOME (LOSS) | | | | | | | | | | | | | ||||||||||||||
Asset-Based | | $ | 36,178 | | $ | 3,381 | | $ | 49,793 | | $ | 16,783 | | | $ | 21,036 | | $ | 36,178 | | $ | 34,276 | | $ | 49,793 | |
ArcBest | |
| 2,122 | |
| 3,707 | |
| 3,852 | |
| 6,872 | | |
| 1,303 | |
| 2,122 | |
| (106) | |
| 3,852 | |
FleetNet | |
| 1,026 | |
| 1,029 | |
| 2,514 | |
| 2,550 | | |
| 782 | |
| 1,026 | |
| 1,822 | |
| 2,514 | |
Other and eliminations | |
| (4,126) | |
| (4,961) | |
| (12,368) | |
| (10,324) | | |
| (2,696) | |
| (4,126) | |
| (7,748) | |
| (12,368) | |
Total consolidated operating income | | $ | 35,200 | | $ | 3,156 | | $ | 43,791 | | $ | 15,881 | | | $ | 20,425 | | $ | 35,200 | | $ | 28,244 | | $ | 43,791 | |
| | | | | | | | | | | | | | | | | | | | | | | | | ||
OTHER INCOME (COSTS) | | | | | | | | | | | | | | | | | | | | | | |||||
Interest and dividend income | | $ | 1,616 | | $ | 714 | | $ | 3,094 | | $ | 1,240 | | | $ | 991 | | $ | 1,616 | | $ | 2,366 | | $ | 3,094 | |
Interest and other related financing costs | |
| (2,811) | |
| (2,013) | |
| (5,693) | |
| (4,072) | | |
| (3,378) | |
| (2,811) | |
| (6,325) | |
| (5,693) | |
Other, net(1) | |
| (445) | |
| (1,123) | |
| (1,036) | |
| (3,324) | | |
| 2,696 | |
| (445) | |
| (1,166) | |
| (1,036) | |
Total other income (costs) | |
| (1,640) | |
| (2,422) | |
| (3,635) | |
| (6,156) | | |
| 309 | |
| (1,640) | |
| (5,125) | |
| (3,635) | |
INCOME BEFORE INCOME TAXES | | $ | 33,560 | | $ | 734 | | $ | 40,156 | | $ | 9,725 | | | $ | 20,734 | | $ | 33,560 | | $ | 23,119 | | $ | 40,156 | |
(1) | Includes the components of net periodic benefit cost other than service cost related to the Company’s nonunion pension, SBP, and postretirement plans (see Note G) and proceeds and changes in cash surrender value of life insurance policies. |
The following table presents operating expenses by category on a consolidated basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Three Months Ended | | Six Months Ended |
|
| Three Months Ended | | Six Months Ended |
| ||||||||||||||||
| | June 30 | | June 30 | | | June 30 | | June 30 | | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||||
|
| (in thousands) | |
| (in thousands) | | | | | | | | ||||||||||||||
OPERATING EXPENSES | | | | | | | | | | | | | | | | | | | | | | | | | | |
Salaries, wages, and benefits | | $ | 361,116 | | $ | 355,913 | | $ | 704,784 | | $ | 684,670 | | | $ | 305,220 | | $ | 361,116 | | $ | 650,166 | | $ | 704,784 | |
Rents, purchased transportation, and other costs of services | |
| 236,053 | |
| 253,540 | |
| 457,078 | |
| 477,296 | | |
| 187,914 | |
| 236,053 | |
| 404,942 | |
| 457,078 | |
Fuel, supplies, and expenses | |
| 80,700 | |
| 84,884 | |
| 160,036 | |
| 163,530 | | |
| 54,838 | |
| 80,700 | |
| 126,611 | |
| 160,036 | |
Depreciation and amortization(1) | |
| 27,434 | |
| 27,187 | |
| 53,971 | |
| 53,673 | | |
| 29,086 | |
| 27,434 | |
| 58,099 | |
| 53,971 | |
Other | |
| 30,987 | |
| 30,408 | |
| 63,669 | |
| 59,663 | | |
| 29,887 | |
| 30,987 | |
| 60,707 | |
| 63,669 | |
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 | | | $ | 606,945 | | $ | 736,290 | | $ | 1,300,525 | | $ | 1,439,538 | |
(1) | Includes amortization of intangible assets. |
NOTE LK – 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 6156 underground tanks located in 1816 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.
26
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, 20192020 and December 31, 2018,2019, 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.$0.5 million and $0.4 million, respectively. 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.
3027
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
ArcBest CorporationTM (together with its subsidiaries, the “Company,” “we,” “us,” and “our”) provides a comprehensive suite of freight transportation services and integrated logistics services to deliver innovative 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®. 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.
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, 2018.2019. Our 20182019 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.
COVID-19
On March 11, 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) a global pandemic. Efforts to control the spread of COVID-19 led governments and other authorities to impose restrictions which resulted in business closures and disrupted global supply chains. In the United States, most states placed restrictions on business operations and issued stay-at-home orders for residents beginning in late March and early April. Although many of these restrictions were eased or lifted throughout the country during May and June, COVID-19 continues to spread, business operations remain challenging, and unemployment is at historically high levels. On June 8, 2020, the National Bureau of Economic Research declared that a recession began in the United States in February 2020. Based on the preliminary estimate released by the Bureau of Economic Analysis on July 30, 2020, the U.S. gross domestic product (the “GDP”) decreased at an annual rate of 32.9% in the second quarter of 2020. This sharp decline in the GDP represents the lowest quarter since the U.S. government began tracking this measure in 1947 and illustrates the difficulty of the economic environment in which we are currently operating.
Business Impact
The COVID-19 pandemic and the measures taken to prevent its spread began to impact our business during late March 2020. The negative impact on demand for our services accelerated as the COVID-19 pandemic continued to disrupt businesses and the economy during the second quarter of 2020, resulting in a decline in our consolidated revenues of 18.7% and 10.4% for the three and six months ended June 30, 2020, respectively, compared to the same periods of 2019, and a decline in second quarter 2020 revenues of 10.6% compared to the first quarter of 2020. Significant declines in our shipment and tonnage levels due to the pandemic resulted in revenue decreases of 17.8% and 8.4% for the Asset-Based segment and 16.4% and 10.8% for the ArcBest segment (ArcBest Asset-Light operations, excluding FleetNet) for the three and six months ended June 30, 2020, respectively, compared to the same periods of 2019.
Our consolidated net income totaled $15.9 million, or $0.61 per diluted share, and $17.8 million, or $0.68 per diluted share, for the three and six months ended June 30, 2020, respectively. Although our net income and earnings per share declined from the same periods of 2019 due to the significant impact of the COVID-19 pandemic on our business levels, our positive earnings in these challenging times were achieved because of the dedication of our employees and prudent business
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decisions, including the cost savings measures we implemented at the beginning of second quarter 2020, as further discussed in the following Business Response section.
In addition to reductions in business levels, the altered marketplace environment has negatively impacted our freight mix and shipment profile. This negative impact is occurring during our typically stronger seasonal period, which is the second and third quarters of the year. The extent of the adverse effect of the COVID-19 pandemic on our business results depends on future developments, including the severity and duration of the pandemic and its overall impact on the economy.
July 2020 Business Update
During July 2020, we continued to experience lower year-over-year demand for our services due to the impact of the COVID-19 pandemic. Asset-Based billed revenues decreased approximately 6% on a per-day basis, compared to July 2019, primarily due to lower shipment and tonnage levels, and revenues per day for our ArcBest segment (ArcBest Asset-Light operations, excluding FleetNet) were approximately 3% below the prior-year period. Our business levels improved sequentially during May, June, and July 2020. On a per-day basis, Asset-Based billed revenues increased approximately 5% and ArcBest segment revenues increased approximately 17% in July 2020, compared to June 2020, reflecting sequential increases in tonnage and shipment levels. Our July 2020 results are further discussed in the July business updates within the Asset-Based Segment Results and Asset-Light Results sections.
Business Response
Business Continuity & Our Employees and Customers
We are continuing the business continuity processes we implemented in March 2020 which focused on maintaining customer service levels while emphasizing the health, welfare, and safety of our employees and our customers. These processes include employee communication on proper hand washing, social distancing, mask wearing, and glove removal; increased cleaning and disinfecting measures; providing masks and gloves to employees; reduced nonessential travel and in-person meetings, including meetings with customers; remote work arrangements for many personnel; health screening questionnaires for personnel working onsite; health screening procedures for critical customer visitors; and promotion of social distancing to every extent possible, including between employees and with customers, as recommended by the Centers for Disease Control and Prevention.
Financial Position and Cash Preservation
As previously announced, in anticipation of lower business levels and the potential for cash flow disruption, we took actions in late March and early April 2020 to preserve cash and lower costs to mitigate the operating and financial impact of the COVID-19 pandemic.
ResultsOn March 26, 2020, we drew down the $180.0 million remaining available borrowing capacity under the initial maximum credit amount of Operationsour revolving credit facility and borrowed $45.0 million under our accounts receivable securitization program. These borrowings were a proactive measure to supplement our already strong cash and short-term investments position and preserve financial flexibility in consideration of general economic and financial market uncertainty resulting from the COVID-19 outbreak. Our consolidated cash, cash equivalents, and short-term investments totaled $574.0 million at June 30, 2020. These amounts, net of debt, increased to a $41.1 million net cash position at June 30, 2020, compared to a $2.9 million net debt position at March 31, 2020, primarily reflecting positive adjusted earnings before interest, taxes, depreciation, and amortization (“Adjusted EBITDA”) and, to a lesser extent, working capital changes for second quarter 2020.
Consolidated ResultsWe lowered our planned capital expenditures for the current year by 30%, including a reduction in revenue equipment purchases of $18.0 million. Total net capital expenditures for 2020 are expected to be in a range of $95 million to $100 million and depreciation and amortization for the year is estimated to be approximately $110 million.
| | | | | | | | | | | | | |
| | 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 | |
In April 2020, we implemented cost reduction actions which included a 15% reduction in the salaries of officers and nonunion employees and similar compensation adjustments for hourly nonunion employees; a 15% reduction in fees paid to members and committee chairpersons of ArcBest’s Board of Directors; implementation of a hiring freeze; suspension of the employer match on our nonunion 401(k) plan; and reduction of advertising, training, travel, and other costs to better align with current business levels. These compensation reductions lowered consolidated operating expenses by
29
approximately $15 million in second quarter 2020, versus second quarter 2019, which is within the range of expected cost savings previously disclosed. Throughout the second quarter of 2020, we also utilized real-time, technology-enabling data to make operational changes in our Asset-Based network, including workforce reductions to better align resources with business levels. We are continually evaluating these operational changes and adjusting to current and anticipated business levels. The cost reductions and operational changes we made in the second quarter contributed to our positive financial results for the three and six months ended June 30, 2020.
Third Quarter 2020 Update
As discussed in this COVID-19 section, our monthly sequential revenues improved in May, June, and July 2020. Our consolidated net cash position improved by $44.0 million from March 31, 2020 to June 30, 2020, and customer account payment trends have stabilized since May 2020. Because of these factors, we repaid $45.0 million of the amounts borrowed under our accounts receivable securitization program on July 31, 2020 and we expect to repay the $180.0 million drawdown on our revolving credit facility during third quarter 2020.
As a result of the positive sequential trends in our business levels through July 2020, we will be reversing some of our cost reductions beginning in the third quarter of 2020, including officer and nonunion employee salaries, the employer match on our nonunion 401(k) plan, and fees for our Board of Directors. On a sequential basis, compared to second quarter 2020, we anticipate the third quarter 2020 expense associated with these cost restorations will be in an approximate range of $10 million to $15 million. As business levels improve, certain operational resources are being added back to the Asset-Based network, and they will continue to be carefully managed to available business. However, our efforts to manage our operational costs may not directly correspond to significant changes in business levels and there can be no assurance that the impact of the COVID-19 pandemic will not have a significant adverse effect on our operating results in future periods.
Risk Factors
As previously disclosed in our Current Report on Form 8-K filed on April 7, 2020, in light of the COVID-19 pandemic, we supplemented our risk factors with the following risk factor:
The widespread outbreak of an illness or any other communicable disease, including the effects of pandemics, or
any other public health crisis, as well as regulatory measures implemented in response to such events, could adversely affect our business, results of operations, financial condition, and cash flows.
As previously disclosed in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020, we also supplemented our risk factors with the new risk factor set forth below:
We, or the third parties upon which we depend to provide services for us, may be adversely affected by external
events from which our business continuity plans may not adequately protect us.
Our new risk factors are fully described in Part II, Item 1A of this Quarterly Report on Form 10-Q. These risk factors should be read in conjunction with the risk factors within “Item 1A. Risk Factors” in our 2019 Annual Report on Form 10-K, including our description of risks related to economic conditions and uncertainties, within the risk factor titled “Our business is cyclical in nature, and we are subject to general economic factors and instability in financial and credit markets that are largely beyond our control, any of which could adversely affect our business, financial condition, and results of operations.”
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Accounting Estimates
In accordance with generally accepted accounting principles, we use projected financial information to determine certain accounting estimates and the values of certain assets included in our consolidated financial statements. As of June 30, 2020, we evaluated our goodwill, intangible assets, operating assets, and deferred tax assets for indicators of impairment and challenged our accounting estimates considering the current economic conditions and lower expected business levels. Certain of these assessments are discussed in the paragraphs below. Given the uncertainties regarding the economic environment and the impact of the COVID-19 pandemic on our business, there can be no assurance that our estimates and assumptions made for purposes of impairment evaluations and accounting estimates will prove to be accurate.
Goodwill and Intangible Asset Impairment Consideration
We have assessed impairment indicators to determine if our asset balances, including goodwill and intangible assets which totaled $145.2 million at June 30, 2020, should be written down based on currently available information. While future impacts of COVID-19 are difficult to forecast, we expect to generate cash flows subsequent to June 30, 2020 which would continue to support the fair value in excess of carrying value for our reporting units and indefinite-life intangible assets. We have determined there have not been any indicators of impairment that would, more likely than not, reduce the fair value of our reporting units or trade name intangible asset below their carrying values and that would require interim tests of impairment. Due to the impact of COVID-19 on business and freight levels, we considered several factors to determine if it was more likely than not that impairment of these assets existed as of June 30, 2020. In making this analysis, management considered current and forecasted business levels and estimated future cash flows over several years. Management’s assumptions include an expected economic recovery beginning in late 2020 and continuing to recover into 2021. Based on our analysis, we determined it was more likely than not that goodwill and indefinite-lived intangible assets were not impaired as of June 30, 2020.
As of June 30, 2020, we believe the values of the intangible assets and goodwill as reported in our consolidated financial statements are appropriate; however, we will continually monitor performance measures and events for any significant changes in impairment indicators. Significant declines in business levels or other changes in cash flow assumptions, including the impact of the COVID-19 pandemic, or other factors that negatively impact the fair value of the operations of our reporting units could result in future impairment and a resulting non-cash write-off of a significant portion of the goodwill and indefinite-lived intangible assets of our ArcBest segment, which would have an adverse effect on our financial condition and operating results.
Allowances on Accounts Receivable
As further described in the Critical Accounting Policies section, we estimate our allowance for credit losses on accounts receivable based on historical trends, factors surrounding the credit risk of specific customers, and forecasts of future economic conditions. We continually update the data we use to ensure that these estimates reflect the most recent trends, factors, forecasts, and other information available; however, actual write-offs or adjustments could differ from our allowance estimates due to a number of factors, including changes in the overall economic environment or factors and risks surrounding a particular customer, both of which have a higher degree of uncertainty at this time due to the impact of the COVID-19 pandemic.
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Results of Operations
Consolidated Results
| | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| ||||||||
| | June 30 | | June 30 | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in thousands, except per share data) |
| ||||||||||
REVENUES | | | | | | | | | | | | | |
Asset-Based | | $ | 460,070 | | $ | 559,648 | | $ | 975,783 | | $ | 1,065,727 | |
| | | | | | | | | | | | | |
ArcBest | |
| 151,467 | |
| 181,173 | |
| 316,242 | |
| 354,377 | |
FleetNet | |
| 46,440 | |
| 51,722 | |
| 98,879 | |
| 104,981 | |
Total Asset-Light | | | 197,907 | | | 232,895 | | | 415,121 | | | 459,358 | |
| | | | | | | | | | | | | |
Other and eliminations | |
| (30,607) | |
| (21,053) | |
| (62,135) | |
| (41,756) | |
Total consolidated revenues | | $ | 627,370 | | $ | 771,490 | | $ | 1,328,769 | | $ | 1,483,329 | |
| | | | | | | | | | | | | |
OPERATING INCOME | | | | | | | | | | | | | |
Asset-Based | | $ | 21,036 | | $ | 36,178 | | $ | 34,276 | | $ | 49,793 | |
| | | | | | | | | | | | | |
ArcBest | |
| 1,303 | |
| 2,122 | |
| (106) | | | 3,852 | |
FleetNet | |
| 782 | |
| 1,026 | |
| 1,822 | | | 2,514 | |
Total Asset-Light | | | 2,085 | | | 3,148 | | | 1,716 | | | 6,366 | |
| | | | | | | | | | | | | |
Other and eliminations | |
| (2,696) | |
| (4,126) | |
| (7,748) | | | (12,368) | |
Total consolidated operating income | | $ | 20,425 | | $ | 35,200 | | $ | 28,244 | | $ | 43,791 | |
| | | | | | | | | | | | | |
NET INCOME | | $ | 15,880 | | $ | 24,376 | | $ | 17,782 | | $ | 29,264 | |
| | | | | | | | | | | | | |
DILUTED EARNINGS PER SHARE | | $ | 0.61 | | $ | 0.92 | | $ | 0.68 | | $ | 1.10 | |
Our consolidated revenues, which totaled $771.5$627.4 million and $1,483.3$1,328.8 million for the three and six months ended June 30, 2019,2020, respectively, decreased 2.8%18.7% and 0.7%10.4%, respectively, compared to the same prior-year periods.periods, as a result of a significant decline in demand for our services due to the impact of the COVID-19 pandemic. The year-over-year decreases in consolidated revenues for the three and six months ended June 30, 2020 reflect a 5.6%decrease in our Asset-Based revenues of 17.8% and 3.6%8.4%, respectively, and a decrease in revenues of our Asset-Light operations (representing the combined operations of our ArcBest and FleetNet segments) of 15.0% and 9.6%, partially offset by a 0.1%respectively, compared to the same prior-year periods. The increased elimination of revenue amounts reported in the “Other and 2.3% increase in our Asset-Basedeliminations” line of consolidated revenues for the three and six months ended June 30, 2019, respectively,2020, compared to the same prior-year periods. Ourperiods of 2019, includes the impact of increased intersegment business levels among our operating segments, reflecting continued integration of our logistics services.
The Asset-Based revenue growth was impacted bydeclines reflect a 4.1%decrease in tonnage per day of 13.8% and 5.9% improvement5.0% and a decrease in yield, as measured by billed revenue per hundredweight, including fuel surcharges, for the three-of 4.0% and six-month periods ended June 30, 2019, respectively, versus the same periods of 2018, partially offset by decreases in total tonnage per day of 3.4% and 3.3%, respectively, primarily due to declines in shipment levels and weight per shipment. The decline in revenues of our Asset-Light operations4.3% for the three and six months ended June 30, 2019,2020, respectively, versus the same periods of 2019. The declines in revenues of our Asset-Light operations reflect a 23.4% and 16.8% decline in shipments per day and a 2.1% and 2.6% decrease in revenue per shipment for the ArcBest segment, for the three and six months ended June 30, 2020, respectively, compared to the same periods of 2018, is primarily due to decreases2019, and a decline 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 improvementtotal service event volume for the FleetNet segment on higher service event volume.segment. On a combined basis, the Asset-Light operating segments generated approximately 29% and 30% of our total revenues before other revenues and intercompany eliminations for the three and six months ended June 30, 2019, respectively.2020.
For the three and six months ended June 30, 2019,2020, consolidated operating income totaled $20.4 million and $28.2 million, compared to $35.2 million and $43.8 million, compared to $3.2 million and $15.9 million, respectively, for the same periods of 2018. Our2019. In addition to the results of our operating segments (further described within the Asset-Based Segment Results and the Asset-Light Results sections of MD&A), the year-over-year comparisons of consolidated operating results were impacted by investments in innovative technology, as described in the following paragraphs, and costs for certain nonunion fringe benefits. Costs related to our defined contribution plan and 401(k) match decreased $2.5 million and $3.9 million, for the three and six months ended
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June 30, 2020, respectively, compared to the same periods of 2019. Nonunion healthcare expenses decreased $1.4 million and $1.7 million for the three and six months ended June 30, 20182020, respectively, versus the same prior-year periods. These decreases in nonunion fringe benefits were impactedpartially offset by a one-time chargeincreases in workers’ compensation and third-party casualty insurance of $37.9$1.0 million (pre-tax), or $28.2and $1.6 million (after-tax) and $1.05 per diluted share for the three-month period ended June 30, 2018, recorded by ABF Freight in second quarter 2018 for a multiemployer pension plan withdrawal liability resulting from the transition agreement 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, 2019,2020, respectively, compared to the same prior-year periods declined primarily due to the lower revenues previously described combined with the matters further described within the discussions of segment results, including business mix changes and expense impacts. Restructuring charges2019.
Innovative technology costs related to the realignment of our organizational structure of $0.3freight handling pilot test program at ABF Freight impacted consolidated results by $4.7 million (pre-tax), or $3.6 million (after-tax) and $0.7$0.14 per diluted share, for second quarter 2020, compared to $3.6 million were reported on a consolidated basis(pre-tax), or $2.8 million (after-tax) and $0.10 per diluted, for second quarter 2019. For the three and six months ended June 30, 2018, respectively, with no comparable2020, these costs recognized duringimpacted consolidated results by $9.3 million (pre-tax), or $7.2 million (after-tax) and $0.27 per diluted share, compared to $6.4 million (pre-tax), or $4.8 million (after-tax) and $0.18 per diluted share, for the same periodsperiod of 2019. The freight handling pilot test program at ABF Freight is discussed in the Asset-Based Operating Income section of Asset-Based Segment Results within Asset-Based Operations.
The loss reported in the “Other and eliminations” line, which totaled $4.1$2.7 million and $12.4$7.7 million for the three and six months ended June 30, 2019,2020, respectively, compared to $5.0$4.1 million and $10.3$12.4 million, respectively, for the same periods of 2018,2019, 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$1.4 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, 2019, the $2.1$4.7 million increasedecrease in the loss reported in “Other and eliminations,”eliminations” for the three and six months ended June 30, 2020, respectively, compared to the same periodperiods of 2018, was primarily due to investments in2019, reflects lower technology partially offset by lower expenses for certain incentive plans. As a result of our ongoing investments in technology, including the designcosts and development of digital business platforms,reduced personnel and the seasonal impact of shared service allocations of other corporate costs, webenefit expenses. We expect the loss reported in “Other and eliminations” for third quarter 20192020 to approximate $5.0$4 million and to be approximately $25.0$17 million for full year 2019.2020.
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 and nonunion defined benefit pension expense, including settlement charges, 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 $0.02 and $0.08 toincreased net income by $2.6 million, or $0.10 per diluted earnings per share, for the three- and six-month periodsthree months ended June 30, 2019, respectively,2020, and contributed $0.03 and $0.04decreased net income by $1.2 million, or $0.05 per diluted per share, for the six months ended June 30, 2020, compared to an increase in net income of $0.5 million, or $0.02 per diluted share, and $2.2 million, or $0.08 per diluted share, respectively, for the same respective prior-year periods.
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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,with no comparable expense for the three and six months ended June 30, 2018, respectively. Pension settlement charges related to the plan2020 as termination including those related to an annuity contract purchase, are expected to occur in 2019. In November 2017, an amendment was executed to terminate our nonunion defined benefit pension plan with a termination date of December 31, 2017. The plan began distributing immediate lump sum benefit payments 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 allow additional time for the plan to administer the settlement of the remaining obligation for deferred benefits through the purchase of a nonparticipating annuity contract from an insurance company. In August 2019, the nonunion defined benefit pension plan received a preliminary bid for a nonparticipating annuity contract from an insurance company. Based on the most recently available actuarial information, including the preliminary bid received in August, nonunion pension settlement expense for the second halfwas completed as 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 remaining benefit distributions expected to be made from the plan in excess of plan 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.
For the six months ended June 30, 2018, consolidated net income and earnings per share were impacted by provisional tax benefits 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”). 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.2019.
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 ourthe 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 SecondThird Amended and Restated Credit Agreement (see Note F to our consolidated financial statements included in Part I, Item 1 of 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.
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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 | |
| | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| ||||||||
| | June 30 | | June 30 | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | (in thousands) |
| ||||||||||
Net income | | $ | 15,880 | | $ | 24,376 | | $ | 17,782 | | $ | 29,264 | |
Interest and other related financing costs | |
| 3,378 | |
| 2,811 | |
| 6,325 | |
| 5,693 | |
Income tax provision | |
| 4,854 | |
| 9,184 | |
| 5,337 | |
| 10,892 | |
Depreciation and amortization | |
| 29,086 | |
| 27,434 | |
| 58,099 | |
| 53,971 | |
Amortization of share-based compensation | |
| 2,890 | |
| 2,801 | |
| 5,071 | |
| 4,859 | |
Amortization of net actuarial (gains) losses of benefit plans and pension settlement expense(1) | |
| (148) | |
| 586 | |
| (204) | |
| 2,340 | |
Consolidated Adjusted EBITDA | | $ | 55,940 | | $ | 67,192 | | $ | 92,410 | | $ | 107,019 | |
(1) |
Asset-Based Operations
Asset-Based Segment Overview
The Asset-Based segment consists of ABF Freight System, Inc., a wholly-ownedwholly 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 20182019 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 20182019 Annual Report on Form 10-K, include:are outlined below. These key indicators are used by management to evaluate segment operating performance and measure the effectiveness of strategic initiatives in the results of our Asset-Based segment. We quantify certain key indictors using key operating statistics which are important measures in analyzing segment operating results from period to period. These statistics are defined within the key indicators below and referred to throughout the discussion of results of our Asset-Based segment:
● |
● |
Pounds or Tonnage – total weight of shipments processed during the period in U.S. pounds or U.S. tons.
Pounds per day or Tonnage per day (average daily shipment weight) – pounds or tonnage divided by the number of workdays in the period.
Shipments per day – total number of shipments moving through the Asset-Based freight network during the period divided by the number of workdays in the period.
Pounds per shipment (weight per shipment) – total pounds divided by the number of shipments during the period.
Average length of haul (miles) – total miles driven divided by the total number of shipments during the period.
34
● |
Billed revenue per hundredweight, including fuel surcharges (yield) – revenue per every 100 pounds of shipment weight, including surcharges related to fuel, systematically calculated as shipments are processed in the Asset-Based freight network. Revenue for undelivered freight is deferred for financial statement purposes in accordance with the Company’s revenue recognition policy. Billed revenue used for calculating revenue per hundredweight measurements is not adjusted for the portion of revenue deferred for financial statement purposes.
● |
34
We also quantify certain key operating statistics which are used by management to evaluate productivity of operations within the Asset-Based freight network and to measure the effectiveness of strategic initiatives to manage the segment’s cost structure from period to period. These measures are defined below and further discussed in the Asset-Based Operating Expenses section within Asset-Based Segment Results:
● | Shipments per DSY hour – total shipments divided by dock, street, and yard (“DSY”) hour to measure labor efficiency in the segment’s local operations. |
● | Pounds per mile – total pounds divided by total miles driven during the period used to measure labor efficiency of linehaul operations, although this metric is influenced by other factors including freight density, loading efficiency, average length of haul, and the degree to which purchased transportation (including rail service) is used. |
Other companies within our industry may present different key performance indicators or operating statistics, or they may calculate their measures differently; therefore, our key performance indicators or operating statistics may not be comparable to similarly titled measures of other companies. Key performance indicators or operating statistics should be viewed in addition to, and not as an alternative for, our reported results. Our key performance indicators or operating statistics should not be construed as better measurements of our results than operating income, operating cash flow, net income, or earnings per share, as determined under GAAP.
As of June 2019,2020, approximately 82%81% 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.agreement. 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. The contractual wage rate under the 2018 ABF NMFA increased 1.6% effective July 1, 2020, and the average health, welfare, and pension benefit contribution rate is expected to increase approximately 1.2% effective primarily on August 1, 2020.
As more fully described in the Asset-Based Operations section35
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:
| | | | | | | | | |
| | Three Months Ended |
| Six Months Ended |
| ||||
| | June 30 | | June 30 | | ||||
|
| 2019 |
| 2018 | | 2019 | | 2018 | |
Asset-Based Operating Expenses (Operating Ratio) | | | | | | | | | |
Salaries, wages, and benefits |
| 53.1 | % | 51.3 | % | 54.2 | % | 53.5 | % |
Fuel, supplies, and expenses |
| 11.9 | | 11.6 | | 12.3 | | 12.2 | |
Operating taxes and licenses |
| 2.2 | | 2.1 | | 2.3 | | 2.3 | |
Insurance |
| 1.4 | | 1.4 | | 1.5 | | 1.4 | |
Communications and utilities |
| 0.8 | | 0.7 | | 0.9 | | 0.8 | |
Depreciation and amortization |
| 3.9 | | 3.8 | | 4.0 | | 4.1 | |
Rents and purchased transportation |
| 10.3 | | 11.3 | | 10.1 | | 10.5 | |
Shared services |
| 10.0 | | 10.2 | | 10.0 | | 9.8 | |
Multiemployer pension fund withdrawal liability charge(1) | | — | | 6.8 | | — | | 3.6 | |
Gain on sale of property and equipment |
| (0.3) | | — | | (0.2) | | — | |
Other |
| 0.2 | | 0.2 | | 0.2 | | 0.2 | |
|
| 93.5 | % | 99.4 | % | 95.3 | % | 98.4 | % |
| | | | | | | | | |
Asset-Based Operating Income |
| 6.5 | % | 0.6 | % | 4.7 | % | 1.6 | % |
| | | | | | | | | | |
| | Three Months Ended |
| Six Months Ended |
| | ||||
| | June 30 | | June 30 | | | ||||
|
| 2020 |
| 2019 | | 2020 | | 2019 | | |
Asset-Based Operating Expenses (Operating Ratio) | | | | | | | | | | |
Salaries, wages, and benefits |
| 54.1 | % | 53.1 | % | 54.6 | % | 54.2 | % | |
Fuel, supplies, and expenses(1) |
| 9.9 | | 11.7 | | 11.0 | | 12.2 | | |
Operating taxes and licenses |
| 2.5 | | 2.2 | | 2.5 | | 2.3 | | |
Insurance |
| 1.8 | | 1.4 | | 1.6 | | 1.5 | | |
Communications and utilities(1) |
| 1.0 | | 0.8 | | 0.9 | | 0.8 | | |
Depreciation and amortization(1) |
| 5.1 | | 3.9 | | 4.8 | | 4.0 | | |
Rents and purchased transportation(1) |
| 10.0 | | 10.1 | | 10.4 | | 10.0 | | |
Shared services(1) |
| 9.9 | | 9.9 | | 9.7 | | 9.9 | | |
Gain on sale of property and equipment |
| (0.2) | | (0.3) | | (0.3) | | (0.2) | | |
Innovative technology costs(1)(2) | | 1.0 | | 0.5 | | 1.0 | | 0.4 | | |
Other(1) |
| 0.3 | | 0.2 | | 0.3 | | 0.2 | | |
|
| 95.4 | % | 93.5 | % | 96.5 | % | 95.3 | % | |
| | | | | | | | | | |
| | | | | | | | | | |
Asset-Based Operating Income |
| 4.6 | % | 6.5 | % | 3.5 | % | 4.7 | % | |
(1) |
(2) | Represents costs associated with the |
35
The following table provides a comparison of key operating statistics for the Asset-Based segment:segment, as previously defined in the Asset-Based Overview:
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended |
| | ||||||||||||
| | June 30 | | | June 30 | | | ||||||||||||
|
| 2019 |
| 2018 |
| % Change |
| | 2019 |
| 2018 |
| % Change |
| | ||||
Workdays |
| | 63.5 |
| | 64.0 | | | |
| | 126.5 |
| | 127.5 | | | | |
Billed revenue(1) per hundredweight, including fuel surcharges | | $ | 35.11 | | $ | 33.73 |
| 4.1 | % | | $ | 34.90 | | $ | 32.96 |
| 5.9 | % | |
Pounds | |
| 1,608,974,193 | |
| 1,679,165,530 |
| (4.2) | % | |
| 3,069,793,182 | |
| 3,198,278,511 |
| (4.0) | % | |
Pounds per day | |
| 25,338,176 | |
| 26,236,961 |
| (3.4) | % | |
| 24,267,140 | |
| 25,084,537 |
| (3.3) | % | |
Shipments per day | |
| 20,036 | |
| 20,272 |
| (1.2) | % | |
| 19,629 | |
| 19,456 |
| 0.9 | % | |
Shipments per DSY(2) hour | |
| 0.438 | |
| 0.446 |
| (1.8) | % | |
| 0.436 | |
| 0.442 |
| (1.4) | % | |
Pounds per DSY(2) hour | |
| 553.58 | |
| 577.27 |
| (4.1) | % | |
| 538.70 | |
| 570.45 |
| (5.6) | % | |
Pounds per shipment | |
| 1,265 | |
| 1,294 |
| (2.2) | % | |
| 1,236 | |
| 1,289 |
| (4.1) | % | |
Pounds per mile(3) | |
| 19.57 | |
| 19.91 |
| (1.7) | % | |
| 19.46 | |
| 19.99 |
| (2.7) | % | |
Average length of haul (miles) | | | 1,040 | | | 1,048 | | (0.8) | % | | | 1,032 | | | 1,042 | | (1.0) | % | |
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended |
| | ||||||||||||
| | June 30 | | | June 30 | | | ||||||||||||
|
| 2020 |
| 2019 |
| % Change |
| | 2020 |
| 2019 |
| % Change |
| | ||||
Workdays(1) |
| | 63.5 |
| | 63.5 | | | |
| | 127.5 |
| | 126.5 | | | | |
Billed revenue per hundredweight, including fuel surcharges | | $ | 33.69 | | $ | 35.11 |
| (4.0) | % | | $ | 33.41 | | $ | 34.90 |
| (4.3) | % | |
Pounds | |
| 1,386,384,302 | |
| 1,608,974,193 |
| (13.8) | % | |
| 2,939,320,599 | |
| 3,069,793,182 |
| (4.3) | % | |
Pounds per day | |
| 21,832,824 | |
| 25,338,176 |
| (13.8) | % | |
| 23,053,495 | |
| 24,267,140 |
| (5.0) | % | |
Shipments per day | |
| 17,372 | |
| 20,036 |
| (13.3) | % | |
| 18,090 | |
| 19,629 |
| (7.8) | % | |
Shipments per DSY hour | |
| 0.463 | |
| 0.438 |
| 5.7 | % | |
| 0.450 | |
| 0.436 |
| 3.2 | % | |
Pounds per shipment | |
| 1,257 | |
| 1,265 |
| (0.6) | % | |
| 1,274 | |
| 1,236 |
| 3.1 | % | |
Pounds per mile | |
| 20.19 | |
| 19.57 |
| 3.2 | % | |
| 20.02 | |
| 19.46 |
| 2.9 | % | |
Average length of haul (miles) | | | 1,084 | | | 1,040 | | 4.2 | % | | | 1,062 | | | 1,032 | | 2.9 | % | |
(1) |
36
Asset-Based Revenues
Asset-Based revenues for the second quarter of 2020 were negatively impacted by the COVID-19 pandemic which reduced demand for the segment’s services. Asset-Based segment revenues for the three and six months ended June 30, 20192020 totaled $460.1 million and $975.8 million, compared to $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 2018.2019. Billed revenue (as described in footnote (1) to the key operating statistics table) increased 0.5%Asset-Based Segment Overview) decreased 17.3 % and 2.4%9.1% on a per-day basis for the three and six months ended June 30, 2019,2020, respectively, compared to the same prior-year periods. The increasesperiods, primarily reflecting a 13.8% and 5.0% decrease in total billed revenue reflecttonnage per day, respectively, and a 4.1%4.0% and 5.9% increase4.3% decrease in total billed revenue per hundredweight, including fuel surcharges, respectively. The number of workdays was the same in second quarter 2020 and greater by one day in the first half of 2020, versus the same periods of 2019.
On a sequential basis, Asset-Based business levels improved month over month during second quarter 2020. On a per-day basis, Asset-Based billed revenue improved by 8.9% in May versus April and by 12.4% in June versus May. The monthly sequential revenue improvements reflect an increase in tonnage per day of 6.1% and 7.0%, respectively, and an increase in shipments per day of 3.4% and 5.4%, respectively, for the same sequential comparisons.
On a year-over-year basis, the 13.8% and 5.0% decrease in tonnage per day 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,2020, respectively, compared to the same periods of 2018. The number of workdays was fewer by one half of a day in2019, reflects double-digit percentage decreases for second quarter 20192020 in both LTL-rated tonnage and by one daytruckload-rated spot shipments moving in the Asset-Based network. Tonnage comparisons with the previous year have been negatively impacted by the COVID-19 pandemic which disrupted customers’ shipping patterns beginning in late March 2020 and reduced demand throughout second quarter 2020. Total shipments decreased 13.3% and 7.8% on a per-day basis for the three and six months ended June 30, 2019, versus2020, respectively, compared to the same periods of 2019. Lower second quarter 2020 tonnage and shipment levels were driven by a decline in 2018.traditional LTL-rated shipments. The decreases in second quarter 2020 business levels were partially offset by the positive impacts of technology-driven initiatives implemented in the latter part of 2019 designed to fill available Asset-Based equipment capacity with transactional LTL-rated shipments in addition to historical usage of spot truckload-rated shipments. These larger-sized LTL-rated shipments contributed to the 0.9% and 2.3% increases in LTL-rated weight per shipment for the three and six months ended June 30, 2020, respectively, compared to the same periods of 2019.
The increase4.0% and 4.3% decrease in total billed revenue per hundredweight duringfor the three-three and six-month periodssix months ended June 30, 2019,2020, respectively, compared to the same periods of 2018, reflects yield improvement initiatives, including general rate increases, contract renewals,2019, was due to lower fuel surcharge revenues and further implementation of space-based pricing, partially offset bychanges in freight mix and shipment profile reflecting the impact of a higher proportionthe COVID-19 pandemic on the freight environment during second quarter 2020. Excluding the impact of truckload-rated spot business. We have continued to implementtransactional shipments and fuel surcharges, the increase in billed revenue per hundredweight on 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 reflecttraditional LTL-rated freight shipping trends that have evolved in recent years, as more fully describedwas in the Asset-Based Segment Overview withinhigh-single digits. Pricing on traditional published and contractual business reflected solid increases in the Asset-Based Operations sectionmidst of Results of Operationsa rational pricing environment in Item 7 (MD&A) of Part II of our 2018 Annual Report on Form 10-K.the marketplace. The Asset-Based segment implemented nominal general rate increases on its LTL base rate tariffs of 5.9% effective February 24, 2020 and 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, 20192020 increased approximately 3.1%3.2% and 3.6%3.8%, 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.2019.
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% andAsset-Based segment’s 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 shipmentnominal fuel surcharge rate for the three and six months ended June 30, 2019, compared to2020 decreased approximately 400 and 230 basis points, respectively, from the same periods in 2019. During periods of 2018, reflectschanging diesel fuel prices, the effectfuel surcharge and associated direct diesel fuel costs also vary by different degrees. Depending upon the rates of softer economic conditionsthese changes and the impact on shipment size combined with increased capacitycosts in other fuel- and energy-related areas, operating margins could be impacted. Whether fuel prices fluctuate or remain constant, operating results may be adversely affected if competitive pressures limit our ability to recover fuel surcharges. In periods of declining fuel prices, fuel surcharge percentages also decrease, which negatively impacts 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. Totaltotal billed revenue per hundredweight for July 2019 increased approximately 0.5% comparedmeasure and, consequently, revenues, and the revenue decline may be disproportionate to our fuel costs. The segment’s operating results will continue to be impacted by further changes in fuel prices and the July 2018 measure. High-single-digit percentage increases in revenue per hundredweight, excludingrelated 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.surcharges.
Asset-Based Operating Income
The Asset-Based segment generated operating income of $36.2$21.0 million and $49.8$34.3 million for the three and six months ended June 30, 2019,2020, respectively, compared to $3.4 million$36.2 and $16.8$49.8 million, respectively, for the same periods of 2018.2019. The Asset-Based segment operating ratio improvedincreased by 5.91.9 and 3.11.2 percentage points for the three and six months ended June 30, 2019,2020, respectively, over the same prior-year periods.period. The 2018 periods include the $37.9 million one-time charge recognizeddeclines 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 pointsresults for the three and six months
37
ended June 30, 2019, respectively, versus2020, compared to the comparable 2018same prior-year periods, as revenue growth from continued strengthprimarily reflect the previously discussed decreases in account pricing was more thanrevenues, partially 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 forreduction initiatives and operational changes in the Asset-Based segmentnetwork implemented in 2019. ForApril 2020, as previously discussed in our COVID-19 Business Response within 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. General Section of MD&A.
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%54.1% and 54.2%54.6% of Asset-Based segment revenues for the three- and six-month periodsperiod ended June 30, 2019,2020, respectively, compared to 51.3%53.1% and 53.5%54.2%, respectively, for the same periods of 2018, primarily2019. The increases in salaries, wages, and benefits as a percentage of revenue was influenced by the effect of lower revenues, as a portion of operating costs are fixed in nature and increase as a percent of revenue with decreases in revenue levels. Salaries, wages, and benefits decreased $48.0 million and $44.5 million for the three and six months ended June 30, 2020, respectively, compared to the same periods of 2019, reflecting the previously discussed nonunion wage and benefit reductions and Asset-Based workforce reductions in response to the negative impact of COVID-19 on business levels, as well as the impact on labor costs of managing labor hours to the lower shipment levels during the first half of 2020. These decreases in labor costs were partially offset by the 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%1.4% effective July 1, 2018,2019, and the average health, welfare, and pension benefit contribution rate increased approximately 1.3%2.2% 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.2019.
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 and shipment 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, shipmentsShipments per DSY hour declined 1.8%improved 5.7% and 1.4%3.2% and pounds per mile increased 3.2% and 2.9% for the three and six months ended June 30, 2019,2020, respectively, compared to the same prior-year periods.periods of 2019, reflecting efforts to manage costs with shipment levels and the application of data-enabled technologies. A higher number of heavier transactional LTL-rated shipments during the three and six months ended June 30, 2020 contributed to improved operational metrics in the Asset-Based network, compared to the same periods of 2019, as these transactional shipments typically require less handling and utilize available trailer space that would otherwise be moving empty. Productivity was negatively impacted by shipment profile metrics that increased handling costsmeasures also benefited from the effect of customers expanding appointment windows and the effect of less congested roadways as a result of restrictions on business operations and stay-at-home orders issued for LTL shipments. The lower weight per shipment wasresidents in many states beginning in late March and early April 2020. Although many of these restrictions were eased or lifted throughout the country during May and June, traffic levels have not fully returned to pre-COVID-19 levels.
Fuel, supplies, and expenses as a contributing profile factorpercentage of the 4.1%revenue decreased 1.8 and 5.6% decline in pounds per DSY hour1.2 percentage points for the three and six months ended June 30, 2020, respectively, compared to the same periods in 2019, primarily due to lower fuel costs as the Asset-Based segment’s average fuel price per gallon (excluding taxes) decreased approximately 49% and 31% during the three and six months ended June 30, 2020, respectively, compared to the same periods of 2018. Pounds per mile declined 1.7%2019. Fewer miles driven as a result of the decline in business levels in second quarter 2020 also contributed to the year-over-year decreases in fuel, supplies, and 2.7%expenses.
Depreciation and amortization as a percentage of revenue increased 1.2 and 0.8 percentage points for the three and six months ended June 30, 2019,2020, respectively, compared to the same prior-year periods, primarily due to higher costs of 2018, reflecting freight profile effects, including lower weightnew revenue equipment purchases and additional per shipmentunit costs related to electronic logging device (“ELD”) and shorter length of haul on available freight, while also maintaining service delivery schedules.other safety equipment enhancements.
Rents and purchased transportation as a percentage of revenue decreased 1.00.1 percentage points for the three months ended June 30, 2020 and increased 0.4 percentage points for the six months ended June 30, 2020, compared to the same periods of 2019. The changes in rents and purchased transportation as a percentage of revenue were influenced by the effect of lower revenues, as these costs decreased $10.7 million and $4.2 million for the three and six months ended June 30, 2019,2020, respectively, compared to the same periods of 2018,2019, primarily due to lowera decrease in linehaul purchased transportation and reduced utilization of local delivery agents and linehaul purchased transportation asduring the Asset-Based segment focused on optimizing utilizationsecond quarter 2020 period of owned assets and retained additional labor resources to maintain customer service. Thelower tonnage levels. For the six-
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month period ended June 30, 2020, the decrease in purchased transportation costs for second quarter 2019 were also impactedwas partially offset by lowerhigher rail utilization as rail miles decreasedincreased approximately 6%8% 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.prior-year period.
Shared services as a percentage of revenue was comparable between the three-month periods ended June 30, 2020 and 2019, and decreased 0.2 percentage points for the six-month period ended June 30, 2020, compared to the same period of 2019. These costs decreased $9.7 million and $11.1 million for the three and six months ended June 30, 2019,2020, respectively, compared to the same prior-year period,periods of 2019, primarily due to reduced costs associated with lower business levels and 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 saleInnovative technology costs as a percentage of propertyrevenue increased 0.5 and equipment improved the Asset-Based segment’s operating ratio by 0.3 and 0.20.6 percentage points for the three and six months ended June 30, 2019,2020, respectively, compared to the same periods of 2018,2019, primarily due to increased activity for the freight handling pilot test program at ABF Freight. ArcBest Technologies, our wholly owned subsidiary which is focused on the advancement of supply chain execution technologies, began a $1.7pilot test program (the “pilot”) in early 2019 to improve freight handling at ABF Freight. The pilot is in the early stages in a limited number of locations. ABF Freight has leased new facilities in the test pilot regions in Indiana and also at a new Kansas City distribution center location where operations are planned to commence in third quarter 2020. While ArcBest believes the pilot has potential to provide safer and improved freight handling, a number of factors will be involved in determining proof of concept and there can be no assurances that pilot testing will be successful or expand beyond current testing locations. Innovative technology costs related to the freight handling pilot test program at ABF Freight impacted operating results of the Asset-Based segment by $4.8 million gain recognizedand $9.3 million for the three and six months ended June 30, 2020, respectively, compared to $2.7 million and $4.5 million, respectively, for the same periods of 2019. We anticipate innovative technology costs associated with the pilot to impact our Asset-Based operating expenses by approximately $5 million in secondthird quarter 2020, consistent with the third quarter 2019 on the sale of certain real estate previously used by our service center operations.costs.
Asset-Based Segment — July 2020
The monthly sequential improvements in Asset-Based business levels that we experienced in May and June 2020 continued during July 2020. Asset-Based billed revenues increased approximately 5% on a per-day basis in July 2020, compared to June 2020, reflecting sequential increases in average daily total tonnage of approximately 5% and increases in shipments per day of approximately 4%. As a result of the positive sequential trends in our business levels through July 2020, beginning in the third quarter of 2020, we will be reversing some of our cost reduction actions which are discussed in our COVID-19 Business Response within the General section of MD&A. We are continually evaluating the operational changes that we began making in our Asset-Based network in April 2020, including workforce reductions to better align resources with business levels. Certain resources are being added back as business levels improve and we will continue to adjust to current and anticipated business levels. Our efforts to manage operational costs in the Asset-Based network may not directly correspond to significant changes in business levels and there can be no assurance that the impact of the COVID-19 pandemic will not have a significant adverse effect on our operating results.
Compared to the prior-year period, Asset-Based billed revenues for the month of July 2020 decreased approximately 6% on a per-day basis, primarily due to the negative impact of the COVID-19 pandemic on demand for our services. The revenue decline reflects a 4% decrease in average daily total tonnage and a 2% decline in total billed revenue per hundredweight, including fuel surcharges, in July 2020, compared to July 2019.
In July 2020, LTL-rated tonnage increased slightly and truckload-rated spot shipments moving in the Asset-Based network decreased by a double-digit percentage, compared to the same prior-year period. Total shipments per day decreased 5% in July 2020, compared to July 2019. Total weight per shipment increased 1% in July 2020, with the weight per shipment on LTL-rated shipments up approximately 6%, versus the same prior-year period, reflecting the impact of a higher number of heavier transactional LTL-rated shipments and changes in account mix.
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The decrease in total billed revenue per hundredweight for July 2020 reflects lower fuel surcharge revenues and freight mix changes. Although the pricing environment in July 2020 continues to be positive and comparable with previous quarters, a higher number of heavier transactional LTL-rated shipments has a negative impact on yield metrics. Excluding fuel surcharges and the impact of transactional shipments, pricing on traditional published LTL-rated business increased by a percentage in the high-single digits compared to July 2019. Asset-Based revenues for July 2020, compared to 2019, were negatively impacted by lower fuel surcharge revenue due to an approximate 360 basis point decline in the nominal fuel surcharge rate, while total fuel costs were also lower.
Current economic conditions, including the effects of the COVID-19 pandemic, will continue to impact our Asset-Based segment’s tonnage levels and the prices it receives for its services and, as such, there can be no assurance that our Asset-Based segment will maintain or achieve improvements in its current operating results. Our tonnage levels and the pricing we receive for our Asset-Based services may remain at reduced levels. Furthermore, 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 in future periods.
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-endintegrated 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 20182019 Annual Report on Form 10-K. The key indicators necessary to understand our Asset-Light operating results include:are outlined below. These key indicators are used by management to evaluate segment operating performance and measure the effectiveness of strategic initiatives in the results of our Asset-Light segments. We quantify certain key indictors using key operating statistics which are important measures in analyzing segment operating results from period to period. These statistics are defined within the key indicators below and referred to throughout the discussion of results of our Asset-Light operations:
● |
Shipments per day – total shipments (excluding managed transportation solutions as discussed below) divided by the number of working days during the period, compared to the same prior-year period, for the ArcBest segment.
Service events – roadside, preventative maintenance, or total service events during the period, compared to the same prior-year period, for the FleetNet segment.
● |
Revenue per shipment or event – total segment revenue divided by total segment shipments or events during the period (excluding managed transportation solutions for the ArcBest segment as discussed below), compared to the same prior-year period.
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● |
Asset-Light Results
For the three and six months ended June 30, 2019, the combined revenues of our Asset-Light operations totaled $232.9 million and $459.4 million, respectively, compared to $246.8 million and $476.5 million, respectively, for the same periods of 2018. The combined revenues of our Asset-Light operating segments generated approximately 29% and 30% of our total revenues before other revenues and intercompany eliminations for the three and six months ended June 30, 2019, respectively, compared to 31% for both the three and six months ended June 30, 2018.
ArcBest Segment
The following table sets forth a summary of operating expenses and operating incomePurchased transportation costs as a percentage of revenue – the expense incurred for third-party transportation providers to haul or deliver freight during the period, divided by segment revenues for the ArcBest segment:period, expressed as a percentage.
| | | | | | | | | |
| | Three Months Ended |
| Six Months Ended | | ||||
| | June 30 | | June 30 | | ||||
|
| 2019 |
| 2018 | | 2019 |
| 2018 | |
ArcBest Segment Operating Expenses (Operating Ratio) | | | | | | | | | |
Purchased transportation |
| 81.4 | % | 81.5 | % | 81.2 | % | 81.5 | % |
Supplies and expenses |
| 1.6 | | 1.7 | | 1.6 | | 1.8 | |
Depreciation and amortization |
| 1.7 | | 1.8 | | 1.7 | | 1.8 | |
Shared services |
| 12.8 | | 11.7 | | 13.0 | | 11.9 | |
Other |
| 1.3 | | 1.3 | | 1.4 | | 1.2 | |
Restructuring costs |
| — | | 0.1 | | — | | — | |
|
| 98.8 | % | 98.1 | % | 98.9 | % | 98.2 | % |
| | | | | | | | | |
ArcBest Segment Operating Income |
| 1.2 | % | 1.9 | % | 1.1 | % | 1.8 | % |
● | Management of operating costs, primarily in the area of purchased transportation, with the total cost structure primarily measured by: |
A comparisonOperating ratio – the percent of operating expenses to revenue levels.
Presentation and discussion of the key operating statistics of revenue per shipment and shipments per day for the ArcBest segment presented in the following table reflects the segment’s combined operations, excludingexclude statistical data related toof the managed transportation solutions transactions. Growth in managed transportation solutions has increased the number of shipments for these services to approximately one-thirdone half of the ArcBest segment’s total shipments, while the business represents less than 10%20% of segment revenues for the three and six months ended June 30, 2019.2020. Due to the nature of our managed transportation solutions which typically involve a larger number of shipments at a significantly lower revenue per shipment level than the segment’s other service offerings, inclusion of the managed transportation solutions data would result in key operating statistics which are not representative of the operating results of the segment as a whole. As such, the key operating statistics management uses to evaluate performance of the ArcBest segment exclude managed transportation solutionsservices transactions.
Other companies within our industry may present different key performance indicators or they may calculate their key performance indicators differently; therefore, our key performance indicators may not be comparable to similarly titled measures of other companies. Key performance indicators should be viewed in addition to, and not as an alternative for, our reported results. Our key performance indicators should not be construed as better measurements of our results than operating income, operating cash flow, net income, or earnings per share, as determined under GAAP.
Asset-Light Results
Our Asset-Light results for the second quarter of 2020 were impacted by reduced demand as a result of the COVID-19 pandemic. For the three and six months ended June 30, 2020, the combined revenues of our Asset-Light operations totaled $197.9 million and $415.1 million, respectively, compared to $232.9 million and $459.4 million for the same periods of 2019. The combined revenues of our Asset-Light operating segments generated approximately 30% of our total revenues before other revenues and intercompany eliminations for the three and six months ended June 30, 2020, compared to 29% and 30% for the three and six months ended June 30, 2019, respectively.
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ArcBest Segment
The following table sets forth a summary of operating expenses and operating income as a percentage of revenue for the ArcBest segment:
| | | | | | | | | | | | | | | | |
| Year Over Year % Change | | | Three Months Ended |
| Six Months Ended | | | ||||||||
| Three Months Ended | | Six Months Ended | | | June 30 | | June 30 | | | ||||||
| June 30, 2019 | | June 30, 2019 | |
| 2020 |
| 2019 | | 2020 |
| 2019 | | | ||
ArcBest Segment Operating Expenses (Operating Ratio) | | | | | | | | | | | ||||||
Purchased transportation |
| 82.6 | % | 81.4 | % | 82.9 | % | 81.2 | % | | ||||||
Supplies and expenses |
| 1.3 | | 1.6 | | 1.3 | | 1.6 | | | ||||||
Depreciation and amortization |
| 1.6 | | 1.7 | | 1.6 | | 1.7 | | | ||||||
Shared services |
| 12.4 | | 12.8 | | 12.8 | | 13.0 | | | ||||||
Other |
| 1.2 | | 1.3 | | 1.4 | | 1.4 | | | ||||||
| | | | | | |
| 99.1 | % | 98.8 | % | 100.0 | % | 98.9 | % | |
Revenue / Shipment | | (9.8%) | | | (8.3%) | | ||||||||||
| | | | | | | | | | | | | | | | |
Shipments / Day | | (1.6%) | | | (1.3%) | | ||||||||||
ArcBest Segment Operating Income |
| 0.9 | % | 1.2 | % | — | % | 1.1 | % | |
A comparison of key operating statistics for the ArcBest segment, as previously defined in the Asset-Light Overview section, is presented in the following table:
| | | | | | |
| Year Over Year % Change | | ||||
| Three Months Ended | | Six Months Ended | | ||
| June 30, 2020 | | June 30, 2020 | | ||
| | | | | | |
Revenue per shipment | | (2.1%) | | | (2.6%) | |
| | | | | | |
Shipments per day | | (23.4%) | | | (16.8%) | |
ArcBest segment revenues totaled $181.2$151.5 million and $354.4$316.2 million for the three and six months ended June 30, 2019,2020, respectively, compared to $200.0$181.2 million and $381.9to $354.4 million, respectively, for the same periods of 2018.2019. The 9.4%16.4% and 7.2% decrease10.8% respective decreases in revenues reflect reduced demand for the segment’s services, driven by excess truckload capacity combined with a softer economic environment during the first quarter of 2020 and the impact of the COVID-19 pandemic on customer demand during the second quarter of 2020. In late March 2020, the ArcBest segment began experiencing the impact of measures taken to slow the spread of COVID-19, including plant shutdowns of its automotive and manufacturing customers. The impact accelerated in April and continued in May and June 2020, as automotive and manufacturing customers reduced their manufacturing operations. The reduced demand for transportation and logistics services in second quarter 2020 also resulted in lowered revenue per shipment for the three and six months ended June 30, 2019, respectively, compared to2020. The COVID-19 pandemic also lowered demand for Moving services during the same prior-year periods, primarily reflects decreases intypically seasonally stronger second quarter period. The segment’s revenue per shipment associated with lower market prices and fewer shipments on a per-day basis resulting from increased available truckload market capacity in the three and six months ended June 30, 2019, compared to the tighter capacity experienced in the same periods of 2018. More truckload market capacity in 2019decline was the primary driver of reduced market pricing for expedite and truckload brokerage services compared to the strong market for these services in 2018. The revenue declines for our expedite and truckload brokerage services were partially offset by higher demand for managed transportation solutions and the impact of increased tariffs on the segment’s international services for three and six months ended June 30, 2019,2020, compared to the same periods of 2018.2019.
OperatingOur ArcBest segment business levels improved sequentially during each month of second quarter 2020. On a per-day basis, ArcBest segment revenues improved by 12.2% and 6.2% in May and June 2020, respectively, over the previous month, reflecting monthly sequential improvements in daily shipment levels of 16.9% and 10.1%, respectively, for the same periods.
The ArcBest segment generated operating income decreased $1.6of $1.3 million for the three months ended June 30, 2020 and an operating loss of $0.1 million for the six months ended June 30, 2020, compared to operating income of $2.1 million and $3.0$3.9 million for the three and six months ended June 30, 2020 and 2019, respectively, compared to the same periods of 2018, primarily reflecting therespectively. The declines in revenue. operating results primarily reflect the previously discussed decreases in revenues.Purchased transportation costs decreased 0.1increased by 1.2 and 0.31.7 percentage points as a percentage of revenue, for the three and six months ended June 30, 2019,2020, respectively, compared to the same periods of 2018, primarily due2019. Due to reducedchanges in market conditions and freight mix, the prices paid for purchased transportation rates attributabledecreased by a smaller percentage than the prices we secured from customers, resulting in margin compression during the three- and six-month periods ended June 30, 2020, compared to more available truckload capacity and beneficial growththe same periods of 2019. Operating results of the ArcBest
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segment benefited from corporate cost reduction initiatives implemented in April 2020, as previously discussed in our owner-operator fleet.COVID-19 Business Response within the General Section of MD&A. Although the ArcBest segment manages costs with shipment levels, portions of operating costsexpenses are fixed in nature and the adjustments which would otherwisecost reductions can be necessary to align the cost structure to corresponding revenue and shipment levels are limited as the segment strives to maintain customer service. Shared services expenses increased 1.1 percentage points as a percentage of revenue in the three and six months ended June 30, 2019, respectively, compared to the same prior-year periods, primarily due to strategic development of our owner-operator fleet and contract carrier capacity in addition to the effect of intersegment cost allocations that are based on shipment or activity levels which declined less than the reduction in revenue per shipment. Elevated costs associated with long-term investment in our owner-operator fleet and contract carrier capacity will continue for the remainder of the year and we expect these investments to increase ArcBest segment expenses by approximately $0.5 million in both the third and fourth quarters of 2019, compared to the same periods of 2018.
ArcBest Segment Revenues – July 20192020
Revenues ofThe monthly sequential improvements in business levels that our ArcBest segment (ArcBest Asset-Light operations, excluding FleetNet) decreasedexperienced throughout the second quarter of 2020 continued during July 2020. ArcBest segment revenues increased approximately 4.5%17% on a per-day basis in July 2019,2020, compared to June 2020, reflecting a sequential increase in shipments per day (excluding managed transportation shipments) of approximately 11%. As a result of the positive sequential trends in our business levels from May 2020 through July 2018,2020, beginning in the third quarter of 2020, we will be reversing some of our cost reduction actions as previously discussed in our COVID-19 Business Response within the General section of MD&A. Current economic conditions will continue to impact business levels and purchased transportation costs of our ArcBest segment and, as such, there can be no assurance that the impact of the COVID-19 pandemic will not have a significant adverse effect on the operating results of our ArcBest segment.
In July 2020, revenues of our ArcBest segment on a per-day basis were approximately 3% below the prior-year period, reflecting a decline in shipments per day (excluding managed transportation shipments) of approximately 4%. Purchased transportation expense wasrepresented approximately flat between the periods. Available84% of revenues in July 2020, compared to approximately 82% of revenues in July 2019. Purchased transportation rates have increased due to tightened truckload capacity during 2019,in the markets, resulting in overall margin compression for the ArcBest segment in July 2020, compared to the tight capacity environment in 2018, led to lower revenue per shipment and reduced demand for expedite services in July 2019 versus July 2018. Managed transportation solutions continued to have a positive impact on the ArcBest segment’s business in July 2019.
FleetNet Segment
FleetNet’s revenues totaled $51.7$46.4 million and $105.0$98.9 million for the three and six months ended June 30, 2019,2020, respectively, compared to $46.8$51.7 million and $94.6$105.0 million, respectively, for the same periods of 2018.2019. The 10.5%10.2% and 11.0% increase5.8% decrease in revenues for the three and six months ended June 30, 2019,2020, respectively, compared to the same periods of 2018,2019, was driven by higherlower roadside service event volume,volumes resulting primarily due to an increasefrom a reduction in preventative maintenance service events provided to our Asset-Based segment.miles driven by customers as a result of the COVID-19 pandemic.
FleetNet’s operating income totaled $1.0$0.8 million and $1.8 million for each of the three-month periods ended June 30, 2019three and 2018, and totaled $2.5 million and $2.6 million for the six-month periods ended June 30, 20192020, respectively, compared to $1.0 million and 2018, respectively.$2.5 million, respectively, for the same periods of 2019. FleetNet’s operating income margins for the three and six months ended June 30, 2019, compared to the same periods of 2018, were impacted by lower revenue per event on maintenance services combined with increasedfor the three and six months ended June 30, 2020, compared to the same prior-year periods, and by the effect of lower revenues as a portion of operating costs to service the event growth.are fixed in nature and increase as a percent of revenue with decreases in revenue.
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Asset-Light Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”)
We report our financial results in accordance with 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. The use of certain non-GAAP 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 analysisof our Asset-Light businesses, because it excludes amortization of acquired intangibles and software, which are significant expenses resulting from strategic decisions rather than core daily operations. Management also believes Adjusted EBITDA to be relevant and useful information, as EBITDA is a standard measure commonly reported and widely used by analysts, investors, and others to measure financial performance of asset-light businesses and the ability to service debt obligations. 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.
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Asset-Light Adjusted EBITDA
| | | | | | | | | | | | | | | | | | | | | | | ||||
| | Three Months Ended | | Six Months Ended | | | Three Months Ended | | Six Months Ended | | ||||||||||||||||
| | June 30 | | June 30 | | | June 30 | | June 30 | | ||||||||||||||||
|
| 2019 | | 2018 | | 2019 | | 2018 | |
| 2020 | | 2019 | | 2020 | | 2019 | | ||||||||
| | (in thousands) | | | (in thousands) | | ||||||||||||||||||||
ArcBest Segment | | | | | | | | | | | | | | | | | | | | | | | | | ||
Operating Income(1) | | $ | 2,122 | | $ | 3,707 | | $ | 3,852 | | $ | 6,872 | | |||||||||||||
Operating Income (Loss)(1) | | $ | 1,303 | | $ | 2,122 | | $ | (106) | | $ | 3,852 | | |||||||||||||
Depreciation and amortization(2) | | | 3,055 | | | 3,597 | | | 6,206 | | | 7,005 | | | | 2,449 | | | 3,055 | | | 4,919 | | | 6,206 | |
Restructuring charges(3) | | | — | | | 143 | | | — | | | 152 | | |||||||||||||
Adjusted EBITDA | | $ | 5,177 | | $ | 7,447 | | $ | 10,058 | | $ | 14,029 | | | $ | 3,752 | | $ | 5,177 | | $ | 4,813 | | $ | 10,058 | |
| | | | | | | | | ||||||||||||||||||
FleetNet Segment | | | | | | | | | ||||||||||||||||||
Operating Income(1) | | $ | 1,026 | | $ | 1,029 | | $ | 2,514 | | $ | 2,550 | | | $ | 782 | | $ | 1,026 | | $ | 1,822 | | $ | 2,514 | |
Depreciation and amortization | | | 333 | | | 264 | | | 650 | | | 543 | | | | 402 | | | 333 | | | 793 | | | 650 | |
Adjusted EBITDA | | $ | 1,359 | | $ | 1,293 | | $ | 3,164 | | $ | 3,093 | | | $ | 1,184 | | $ | 1,359 | | $ | 2,615 | | $ | 3,164 | |
| | | | | | | | | ||||||||||||||||||
Total Asset-Light | | | | | | | | | | | | | | | | | | | | | | | | | ||
Operating Income(1) | | $ | 3,148 | | $ | 4,736 | | $ | 6,366 | | $ | 9,422 | | | $ | 2,085 | | $ | 3,148 | | $ | 1,716 | | $ | 6,366 | |
Depreciation and amortization | | | 3,388 | | | 3,861 | | | 6,856 | | | 7,548 | | |||||||||||||
Restructuring charges(3) | | | — | | | 143 | | | — | | | 152 | | |||||||||||||
Depreciation and amortization(2) | | | 2,851 | | | 3,388 | | | 5,712 | | | 6,856 | | |||||||||||||
Adjusted EBITDA | | $ | 6,536 | | $ | 8,740 | | $ | 13,222 | | $ | 17,122 | | | $ | 4,936 | | $ | 6,536 | | $ | 7,428 | | $ | 13,222 | |
(1) | The calculation of Adjusted EBITDA as presented in this table begins with operating income, as other income (costs), income taxes, and net income are reported at the consolidated level and not included in the operating segment financial information evaluated by management to make operating decisions. Consolidated Adjusted EBITDA is reconciled to consolidated net income in the Consolidated Results section of Results of Operations. |
(2) | For the ArcBest segment, includes amortization of acquired intangibles of |
Current Economic Conditions
Given the current economic conditions and the continued impact of the COVID-19 pandemic on our business, there can be no assurance that our estimates and assumptions regarding the pricing environment and economic conditions, which are made for purposes of impairment tests related to operating assets and deferred tax assets, will prove to be accurate. Further significant declines in business levels or other changes in cash flow assumptions or other factors that negatively impact the fair value of the operations of our reporting units could result in impairment and a resulting non-cash write-off of a significant portion of the goodwill and intangible assets of our ArcBest segment, which would have an adverse effect on our financial condition and operating results.
Effects of Inflation
Along with changes in the economic environment, there can be no assurances of the potential impact of inflationary conditions on our business. Generally, inflationary increases in labor and fuel costs as they relate to our Asset-Based operations have historically been mostly offset through price increases and fuel surcharges. In periods of increasing fuel prices, the effect of higher associated fuel surcharges on the overall price to the customer influences our ability to obtain increases in base freight rates. In addition, certain nonstandard arrangements with some of our customers have limited the amount of fuel surcharge recovered. The timing and extent of base price increases on our Asset-Based revenues may not correspond with contractual increases in wage rates and other inflationary increases in cost elements and, as a result, could adversely impact our operating results.
Generally, inflationary increases in labor and operating costs regarding our Asset-Light operations have historically been offset through price increases. The pricing environment, however, generally becomes more competitive during economic downturns, which may, as it has in the past, affect the ability to obtain price increases from customers both during and following such periods.
In addition, partly as a result of inflationary pressures, our revenue equipment (tractors and trailers) have been and will very likely continue to be replaced at higher per unit costs, which could result in higher depreciation charges on a per-unit
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basis. We consider these costs in setting our pricing policies, although the overall freight rate structure is governed by market forces based on value provided to the customer. The Asset-Based segment’s ability to fully offset inflationary and contractual cost increases can be challenging during periods of recessionary and uncertain economic conditions.
Environmental and Legal Matters
We are subject to federal, state, and local environmental laws and regulations relating to, among other things: emissions control, transportation or handling of hazardous materials, underground and aboveground storage tanks, stormwater pollution prevention, contingency planning for spills of petroleum products, and disposal of waste oil. We may transport or arrange for the transportation of hazardous materials and explosives, and we operate in industrial areas where truck service centers and other industrial activities are located and where groundwater or other forms of environmental contamination could occur. See Note LK to our consolidated financial statements included in Part I, Item 1 of this Quarterly
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Report on Form 10-Q for further discussion of the environmental matters to which we are subject and the reserves we currently have recorded in our consolidated financial statements for amounts related to such matters.
We are involved in various legal actions, the majority of which arise in the ordinary course of business. We maintain liability insurance against certain risks arising out of the normal course of our business, subject to certain self-insured retention limits. We routinely establish and review 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 our financial condition, results of operations, or cash flows.
Information Technology and Cybersecurity
We depend on the proper functioning, availability, and security of our information systems, including communications, data processing, financial, and operating systems, as well as proprietary software programs that are integral to the efficient operation of our business. Cybersecurity attacks and other cyber incidents that impact the availability, reliability, speed, accuracy, or other proper functioning of these systems or that result in proprietary information or sensitive or confidential data being compromised could have a significant impact on our operations. Any new or enhanced technology that we may develop and implement may also be subject to cybersecurity attacks and may be more prone to related incidents. We also utilize certain software applications provided by third parties andparties; provide underlying data which is utilized byto third parties; grant access to certain of our systems to third parties who provide certain outsourced administrative functions eitheror other services; and increasingly store and transmit data with our customers and third parties by means of connected information technology systems, any of which may increase the risk of a cybersecurity incident. Although we strive to carefully select our third-party vendors, we do not control their actions and any problems caused by or impacting these third parties, including cyber attacks and security breaches at a vendor, could result in claims, litigation, losses, and/or liabilities and adversely affect our ability to provide service to our customers and otherwise conduct our business. Our information systems are protected through physical and software safeguards as well as backup systems considered appropriate by management. However, it is not practicable to protect against the possibility of power loss, telecommunications failures, cybersecurity attacks, and other cyber events in every potential circumstance that may arise. To mitigate the potential for such occurrences at our corporate headquarters,primary data center, we have implemented various systems, including redundant telecommunication facilities; replication of critical data to an offsite location; a fire suppression system to protect our on-site data center; and electrical power protection and generation facilities. We also have a catastrophic disaster recovery plan and alternate processing capability available for our critical data processes in the event of a catastrophe that renders one of our corporate headquartersdata centers unusable. In efforts to protect the health of our employees and comply with social distancing guidelines implemented due to the COVID-19 pandemic, many of our employees are working remotely, which may create increased vulnerability to cybersecurity incidents. We continue to implement strong physical and cybersecurity measures in an attempt to safeguard our systems in order to serve our operational needs in a remote working environment and to provide uninterrupted service to our customers.
Our business interruptionproperty and cyber insurance would offset losses up to certain coverage limits in the event of a catastrophe or certain cyber incidents, including certain business interruption events related to these incidents; however, losses arising from a catastrophe or significant cyber incident would likely exceed our insurance coverage and could have a material adverse impact on our results of operations and financial condition. Furthermore,We do not have insurance coverage specific to losses resulting
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from a pandemic. A significant disruption in our information technology systems or a significant cybercybersecurity incident, including denial of service, system failure, security breach, intentional or inadvertent acts by employees or vendors with access to our systems or data, disruption by malware, or other damage, could interrupt or delay our operations, damage our reputation, cause a loss of customers, cause errors or delays in financial reporting, expose us to a risk of loss or litigation, and/or cause us to incur significant time and expense to remedy such an event. We have experienced incidents involving attempted denial of service attacks, malware attacks, and other events intended to disrupt information systems, wrongfully obtain valuable information, or cause other types of malicious events that could have resulted in harm to our business. To date,our knowledge, the systemsvarious protections we have employed have been effective to date in identifying these types of events at a point when the impact on our business could be minimized. We must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address, and mitigate the risk of unauthorized access, misuse, computer viruses, and other events that could have a security impact. We have made and continue to make significant financial investments in technologies and processes to mitigate these risks. We also provide employee awareness training around phishing, malware, and other cyber risks. Management is not aware of any cybersecurity incident that has had a material effect on our operations, although there can be no assurances that a cyber incident that could have a material impact to our operations could not occur.
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Liquidity and Capital Resources
Our primary sources of liquidity are cash, cash equivalents, and short-term investments, cash generated by operations, and borrowing capacity under our revolving credit facility or accounts receivable securitization program.
Cash Flow and Short-Term Investments
Components of cash and cash equivalents and short-term investments were as follows:
| | | | | | | | | | | | |
| June 30 | | December 31 |
| June 30 | | December 31 |
| ||||
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| ||||
| (in thousands) |
| (in thousands) |
| ||||||||
Cash and cash equivalents(1) | $ | 181,731 | | $ | 190,186 | | $ | 406,290 | | $ | 201,909 | |
Short-term investments(2) |
| 117,657 | |
| 106,806 | |
| 167,719 | |
| 116,579 | |
Total(3) | $ | 299,388 | | $ | 296,992 | | $ | 574,009 | | $ | 318,488 | |
(1) | Cash equivalents consist of money market funds and variable rate demand |
(2) | Short-term investments consist of certificates of deposit and U.S. Treasury securities. |
(3) | Cash, variable rate demand notes, and certificates of deposit are recorded at cost plus accrued interest, which approximates fair value. Money market funds are recorded at fair value based on quoted prices. U.S. Treasury securities are recorded at amortized cost plus |
Cash, cash equivalents, and short-term investments increased $2.4$255.5 million from December 31, 20182019 to June 30, 2019.2020, primarily due to borrowings under our revolving credit facility and accounts receivable securitization facility totaling $225.0 million. During the six-month period ended June 30, 2019,2020, cash provided by operations was used to repay $20.4$29.2 million of long-term debt, net of proceeds;debt; fund $38.1$8.5 million of capital expenditures, net of proceeds from asset sales (and an additional $11.0$13.6 million of certain Asset-Based revenue equipment was financed with notes payable), net of proceeds from asset sales;; fund $5.5$6.5 million of internally developed software; purchase $5.2 million of treasury stock; and pay dividends of $4.1 million on common stock; and purchase $3.2 million of treasury stock.
Cash provided by operating activities during the six months ended June 30, 20192020 was $80.5$82.1 million compared to cash provided by operating activities of $119.6$80.5 million in the same prior-year period. Net income for the three months ended June 30, 2018, was reduced by a $37.9decreased $11.5 million (pre-tax), or $28.2 million (after-tax), 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 (previously discussed within the Asset-Based Segment Overview section of MD&A Results of Operations). Excluding the effect of establishing the multiemployer pension withdrawal liability, net income declined $10.1 million during the six months ended June 30, 2019 compared to the prior-year period. The $39.1 million decrease in cash provided by operating activities is primarily related to growth in working capital (which resulted in cash outflow), the lower income level and $5.3 million of adjustments to net income for noncash operating expenses and changes in income taxes for the six months ended June 30, 2019,2020, compared to the same period of 2018.
Changes2019. Excluding the decline in working capital, which contributed to $24.2net income, cash provided by operating activities increased $13.1 million of the decrease in operating cash flow, were primarily due to decreases in accrued expenses, accounts payable, and other liabilities, partially offset by a decrease in accounts receivable, for the six months ended June 30, 2019,2020, compared to increases in accounts payable, partially offset by an increase in accounts receivable, for the same period of 2018. For the six months ended June 30, 2019, accrued expenses, accounts payable, and other liabilities decreased primarily due to changes in cash flows for operating leaseassets and liabilities, which were impacted by reduced receivable levels and lower payments made duringin the six months ended June 30, 2019 and higher payouts in first quarter 2019 combined with lower accruals during the six months ended June 30, 2019half of 2020 for certain nonunion performance-based incentive plans, partially offsetplans. Cash provided by higher accruals related to purchased transportationoperating activities included state and labor costs in our segment operations. The increase in accounts payableforeign income tax payments, net of refunds of federal and state income taxes, of $1.9 million for the six months ended June 30, 2018 was primarily due to an increase in the accrual for equipment received and increases in accruals related to purchased transportation and other expenses in our segment operations related to higher business levels in June 2018 compared to December 31, 2017. Accounts receivable decreased as of June 30, 2019, compared to December 31,
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2018, due to improved collection levels, and increased as of June 30, 2018, compared to December 31, 2017, primarily due to higher business levels in June 2018 versus December 2017.
Cash, cash equivalents, and short-term investments increased $50.1 million from December 31, 2017 to June 30, 2018. During the six-month periodsix months ended June 30, 2018, cash provided by operations of $119.6 million was used2020, compared to repay $33.7 million of notes payable; fund $22.7 million of capital expenditures (and an additional $14.4 million of certain Asset-Based revenue equipment was financed with notes payable),federal, state, and foreign income tax payments, net of proceeds from asset sales; and pay dividendsrefunds of $4.1state income taxes, of $8.9 million on common stock.for the six months ended June 30, 2019.
Financing Arrangements
We have a revolving credit facility (the “Credit Facility”) under our Third Amended and Restated Credit Agreement (the “Credit Agreement”) that has an initial maximum credit amount of $250.0 million. We have the option to request additional revolving commitments or incremental term loans thereunder of up to $125.0 million, subject to certain additional conditions as provided in the Credit Agreement. Our accounts receivable securitization program allows for cash proceeds of $125.0 million to be provided under the program and has an accordion feature allowing us to request additional borrowings up to $25.0 million, subject to certain conditions. In March 2020, we drew down the $180.0 million remaining available borrowing capacity under the initial maximum credit amount of our Credit Facility and borrowed $45.0 million under our accounts receivable securitization program, which reduced the initial committed funding capacity available under the facility to $28.0 million. These borrowings were a proactive measure to increase our cash position and preserve financial flexibility in consideration of general economic and financial market uncertainty and the potential for cash flow disruption resulting from the COVID-19 outbreak. These funds supplemented our already strong cash and short-term investments position.
As further discussed in the Results of Operations section of MD&A, our Asset-Based and ArcBest segments experienced monthly sequential improvement in business levels in May, June, and July 2020. Our consolidated net cash position improved by $44.0 million from March 31, 2020 to June 30, 2020, reflecting positive second quarter Adjusted EBITDA, and customer account payment trends have stabilized since May 2020. Based on these factors and our projections of operating results and cash flows from operations for the remainder of 2020, we repaid $45.0 million of the amounts borrowed under our accounts receivable securitization program on July 31, 2020 and we expect to repay the $180.0 million drawdown on our revolving credit facility during third quarter 2020.
On May 4, 2020, we extended the term of our $50.0 million notional amount interest rate swap agreement from June 30, 2022 to October 1, 2024. We will receive floating-rate interest amounts based on one-month LIBOR in exchange for fixed-rate interest payments of 0.43% beginning on June 30, 2022 throughout the remaining term of the agreement. From June 30, 2022 to October 1, 2024, the extended interest rate swap agreement will effectively convert $50.0 million of borrowings under our Credit Facility from variable-rate interest to fixed-rate interest with a per annum rate of 1.56% based on the margin of our Credit Facility as of June 30, 2020.
Our financing arrangements are further discussed in Note F to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Contractual Obligations
We have purchase obligations, consisting of authorizations to purchase and binding agreements with vendors, relating to revenue equipment used in our Asset-Based operations, other equipment, facility improvements, software, certain service contracts, and other items for which amounts were not accrued in the consolidated balance sheet as of June 30, 2019.2020. These purchase obligations totaled $122.2$96.1 million as of June 30, 2019,2020, with $109.0$86.5 million estimated to be paid within the next year, $10.9$8.3 million estimated to be paid in the following two-year period, and $2.3$1.3 million to be paid within five years, provided that vendors complete their commitments to us. PurchaseAs of June 30, 2020, the amount of our purchase obligations forhas increased $62.4 million from December 31, 2019, primarily related to revenue equipment, real estate projects, and other equipmenttechnology advancements which are included in our 20192020 capital expenditure plan. We also have
As of June 30, 2020, contractual obligations for operating leases,lease liabilities, primarily related to our Asset-Based service centers, totaled $94.1 million, including imputed interest. As of June 30, 2020, the Company has undiscounted lease obligations of $42.0 million related to leases which were executed but not yet commenced. The Company plans to take possession of the leased space in third quarter 2020. The scheduled maturities of our operating lease liabilities as of June 30, 2019 which2020 are disclosed in Note E to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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Our contractual obligations related to our notes payable, which provide financing for revenue equipment and software purchases, totaled $184.6$209.7 million, including interest, as of June 30, 2019,2020, a decrease of $10.4$18.2 million from December 31, 2018.2019. The scheduled maturities of our long-term debt obligations as of June 30, 20192020 are disclosed in Note F to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no other material changes in the contractual obligations disclosed in our 20182019 Annual Report on Form 10-K during the six months ended June 30, 2019.2020.
For 2019,As previously announced, our recent actions to preserve cash and lower costs to mitigate the financial impact of the COVID-19 pandemic on our business include a reduction of our 2020 capital expenditure plan by approximately 30%, including a reduction in revenue equipment purchases of $18.0 million. Our total capital expenditures for 2020, including amounts financed, are now estimated to range from $170.0$95 million to $180.0$100 million, net of asset sales. These 20192020 estimated net capital expenditures include revenue equipment purchases of $90.0$64.0 million, primarily for our Asset-Based operations. The remainder of 20192020 expected capital expenditures includesinclude real estate projects, costs of other facility and handling equipment for our Asset-Based operations, including forklifts, and technology investments across the enterprise. We have the flexibility to adjust certain planned 20192020 capital expenditures as business levels dictate. Depreciation and amortization expense, excluding amortization of intangibles, is estimated to be in a range of $110.0 million to $115.0approximately $110 million in 2019.
As previously disclosed within the Consolidated Results section of Results of Operations, our nonunion defined benefit pension plan was terminated with an effective date of December 31, 2017 and the liquidation of plan assets and settlement of plan obligations is expected to be completed in 2019. In August 2019, the plan received a preliminary bid for a nonparticipating annuity contract from an insurance company. Based on the most recently available actuarial information, including the preliminary bid, we estimate making a cash contribution to the plan to fund an annuity contract purchase and the remaining benefit distributions expected to be made from the plan in excess of plan assets of approximately $7.0 million, which would be deductible for income tax purposes, although there can be no assurances in this regard as the actual contribution amount is dependent on various factors and will be determined using updated actuarial data.2020.
ABF Freight System, Inc. and certain other subsidiaries reported in our Asset-Based operating segment contribute to multiemployer health, welfare, and pension plans based generally on the time worked by their contractual employees, as specified in the collective bargaining agreement and other supporting supplemental agreements (see Note G to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q).
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Other Liquidity Information
Cash, cash equivalents,The COVID-19 pandemic has been disruptive to businesses, the economy, and short-term investments totaled $299.4 million at June 30, 2019. General economic conditions,the financial markets, and there is much uncertainty about the severity and duration of its impact. The effects of COVID-19 on the health of our employees and the economy, along with competitive market factors and the related impact on our business, primarily the tonnage and shipment levels and the pricing levels that the Asset-Based segment receiveswe receive for itsour services in future periods, could affect our ability to generate cash from operations and maintain cash, cash equivalents, and short-term investments on hand as operating costs increase. Our revolving credit facility (“As previously mentioned, we proactively drew down the remaining borrowing capacity of our Credit Facility”)Facility and borrowed additional amounts under our Second Amended and Restated Credit Agreement (“Credit Agreement”) and our accounts receivable securitization program provide available sources of liquidity with flexible borrowingin March 2020 to further strengthen our cash position and payment options. We had available borrowing capacity under our Credit Facility and our accounts receivable securitization program of $130.0 million and $70.1 million, respectively, at June 30, 2019. We believe these agreements provide borrowing capacity options necessary for growth of our businesses.preserve financial flexibility. We believe existing cash, cash equivalents, short-term investments, cash generated by operations, and amountsborrowing capacity available under our Credit Agreement or accounts receivable securitization program, which totaled $28.0 million at June 30, 2020, will be sufficient to meetfinance our liquidity needs, including financing potential acquisitionsoperating expenses, fund our ongoing investments in technology, and the repayment ofrepay amounts due under our financing arrangements, for the foreseeable future.arrangements. Notes payable, finance leases, and other secured financing may also be used to fund capital expenditures, provided that such arrangements are available and the terms are acceptable to us.
During 2019, we are continuing to take actions to enhance shareholder value with our quarterly dividend payments and treasury stock purchases. On July 25, 2019,24, 2020, our Board of Directors declared a dividend of $0.08 per share to stockholders of record as of August 9, 2019.7, 2020. We expect to continue to pay quarterly dividends on our common stock in the foreseeable future, although there can be no assurances in this regard since future dividends will be at the discretion of the Board of Directors and are dependent upon our future earnings, capital requirements, and financial condition; contractual restrictions applying to the payment of dividends under our Credit Agreement; and other factors.
We have a program in place to repurchase our 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 cash reserves or other available sources. During the six months ended June 30, 2019,2020, we purchased 168,535150,000 shares of our common stock for an aggregate cost of $5.2$3.2 million, leaving $17.1$10.0 million available for repurchase under the current buyback program.
Our Credit Facility, accounts receivable securitizationAlthough we did not make any treasury stock purchases in the second quarter of 2020, we have maintained our repurchase program and interest rate swap agreements utilize interest rates based on LIBOR. LIBOR is the basic rateour quarterly dividend payments in order to enhance shareholder value. The capital allocated to these programs has been at reasonable levels. We will continue to monitor these programs in consideration of interest used in lending between banks on the London interbank marketcash requirements for our operations relative to potential economic weakness and is widely used as a reference for setting the interest rates on loans globally.In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. The Alternative Reference Rates Committee (the “ARRC”), a steering committee comprised of private-sector entities including large U.S. financial institutions, was jointly convened by the Federal Reserve Board and the Federal Reserve Bank of New York to help ensure a successful transition from LIBOR to an alternative reference rate in the United States. The ARRC selected the Secured Overnight Financing Rate (the “SOFR”) as its preferred replacement for LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in April 2018. The SOFR is calculated by the Federal Reserve Board based on the interest rates banks charge one another in the overnight market, typically called repurchase agreements, and is intended to be a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities.
In October 2018, the FASB amended ASC Topic 815, Derivatives and Hedging, to permit the SOFR Overnight Index Swap (OIS) Rate as a U.S. benchmark interest rate. This amendment was effective for us on January 1, 2019 and it did not have an impact on our consolidated financial statements. We are currently reviewing contract language provided by our lenders which would allow for the use of an alternative to LIBOR in calculating the interest rate under our borrowing arrangements. Any such changes to the terms of our borrowing arrangements are anticipated to be effective in 2022 upon our agreement with the lenders as to the replacement reference rate. We anticipate amending such agreements, as appropriate, in the near future. It is our understanding that replacement of LIBOR with an alternative reference in determining the interest rate under our borrowing arrangements will not have a significant impact on our cost of borrowing; however, there can be no assurances in this regard, as the new rates resulting from the replacement of LIBOR in our borrowing arrangements may not be as favorable to us as those in effect prior to any LIBOR phase-out.uncertainty.
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Financial Instruments
We have not historically entered into financial instruments for trading purposes, nor have we historically engaged in a program for fuel price hedging. No such instruments were outstanding as of June 30, 2019.2020. We have an interest rate swap agreementsagreement in place which areis discussed in Note F to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Balance Sheet Changes
Operating Right-of-UseRight of Use Assets and Operating Lease Liabilities
The $68.8 million increase in operating right-of-useright of use assets of $12.6 million and the increase in operating lease liabilities, including current portion, of $12.5 million from December 31, 20182019 to June 30, 2019 is due to adoption of Accounting Standards Codification Topic 842, Leases, (“ASC Topic 842”) effective January 1, 2019, and represents the recognition of right-of-use assets from operating lease agreements in our consolidated balance sheet.
Accounts Payable
The $23.0 million increase in accounts payable from December 31, 2018 to June 30, 2019, is2020, are primarily due to a $16.6 million increase innew leases and lease renewals during the accrual for equipment received. six months ended June 30, 2020.
Accrued Expenses
Accrued expenses decreased $14.1$15.3 million from December 31, 20182019 to June 30, 2019,2020, primarily due to paymentpayments during the first quarter 20192020 of amounts accrued at December 31, 20182019 for certain incentive accruals related to our improved operating performance and the current portion of long-term incentive plans a portion of which are driven by shareholder returns relative to peers, and contributions to defined contribution plans. The impact of these payments on the decrease in accrued expenses was partially offset by accruals for the incentive plans during 2019, as well as an increase in vacation accruals for union employees related, in part, to the restoration of a week of vacation under the 2018 ABF NMFA, and an increase in the workers’ compensation expense accrual due to higher severity of claims experienced during 2019.
Current Portion of Operating Lease Liabilities and Operating Lease Liabilities
The $18.3 million and $54.0 million increases in current and long-term operating lease liabilities, respectively, from December 31, 2018 to June 30, 2019, are due to the January 1, 2019 adoption of ASC Topic 842 and represent the recognition of liabilities from operating lease agreements in our consolidated balance sheet.
Off-Balance Sheet Arrangements
At June 30, 2019,2020, our off-balance sheet arrangements for purchase obligations totaled $122.2$96.1 million, as previously discussed in the Contractual Obligations section of Liquidity and Capital Resources.
We have no investments, loans, or any other known contractual arrangements with unconsolidated special-purpose entities, variable interest entities, or financial partnerships and have no outstanding loans with executive officers or directors.
Income Taxes
Our effective tax rate was 27.4%23.4% and 27.1%23.1% of pre-tax income for the three and six months ended June 30, 2019. Our effective tax benefit rate was 68.0%2020, respectively, compared to 27.4% and 15.0% of pre-tax income27.1%, respectively, for the three and six months ended June 30, 2018. As a resultsame periods of the Tax Reform Act and our use of a fiscal year rather than a calendar year for U.S. income tax filing, taxes for the tax year ended February 28, 2018 were required to be calculated by applying a blended rate to taxable income. In computing total tax expense for the three and six months ended June 30, 2018, a 32.74% blended rate was applied to the two months ended February 28, 2018, and a 21.0%2019. The federal statutory tax rate was applied tois 21.0%, and the months of March 2018 through June 30, 2018. A federal statutory rate of 21.0% was applied to the three and six months ended June 30, 2019. The average state tax rate, net of the associated federal deduction, is approximately 5%. However, various factors may cause the full-year 20192020 tax rate to vary significantly from the statutory rate. Our full year 2019 tax rate is expected to be approximately 26% to 27%, while the effective rate in any quarter may be impacted by items discrete to that period.
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At December 31, 2017, as a result of the Tax Reform Act, we remeasured deferred federal tax assets and liabilities based on the rate at which they were expected to reverse in the future. Existing deferred tax assets and liabilities at December 31, 2017 that were reasonably estimated to reverse in the tax year ending February 28, 2018 were remeasured at a rate of 32.74%. Existing deferred tax assets and liabilities at December 31, 2017 that were reasonably estimated to reverse after the tax year ending February 28, 2018 were remeasured at a rate of 21.0%. In the first six months of 2018, a provisional reduction of net deferred income tax liabilities was recognized related to the reversal of temporary differences through our tax year end of February 28, 2018. As a result, we recognized a provisional deferred tax benefit of $2.6 million for the six months ended June 30, 2018, which impacted the effective tax benefit rate as noted in the following table. As of December 31, 2018, the accounting for the income tax effects of the Tax Reform Act was complete and all amounts recorded were considered final.
Reconciliation between the effective income tax rate, as computed on income before income taxes, and the statutory federal income tax rate is presented in the following table:
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| | Three Months Ended |
| | Six Months Ended |
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| | June 30 | | | June 30 | | | ||||||||||||||||||
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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| | (in thousands) | | | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax provision at the statutory federal rate(1) | | $ | 7,048 | | 21.0 | % | | $ | 154 | | 21.0 | % | | $ | 8,433 | | 21.0 | % | | $ | 2,042 | | 21.0 | % | |
Federal income tax effects of: | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Impact of the Tax Reform Act on deferred tax | |
| — | | — | % | |
| (50) | | (6.8) | % | |
| — | | — | % | |
| (2,641) | | (27.2) | % | |
Impact of the Tax Reform Act on current tax | |
| — | | — | % | |
| (9) | | (1.2) | % | |
| — | | — | % | |
| (69) | | (0.7) | % | |
Alternative fuel credit(2) | |
| — | | — | % | |
| — | | — | % | |
| — | | — | % | |
| (1,203) | | (12.4) | % | |
Nondeductible expenses and other | |
| 355 | | 1.1 | % | |
| 392 | | 53.5 | % | |
| 836 | | 2.1 | % | |
| 911 | | 9.6 | % | |
Decrease in valuation allowances | |
| — | | — | % | |
| (377) | | (51.4) | % | |
| — | | — | % | |
| (284) | | (2.9) | % | |
Tax expense (benefit) from vested RSUs | |
| 410 | | 1.2 | % | |
| (282) | | (38.5) | % | |
| 408 | | 1.0 | % | |
| (301) | | (3.3) | % | |
Life insurance proceeds and changes in cash surrender value | | | (114) | | (0.3) | % | | | (172) | | (23.5) | % | | | (453) | | (1.1) | % | | | (196) | | (2.0) | % | |
Federal income tax provision (benefit) | | $ | 7,699 | | 23.0 | % | | $ | (344) | | (46.9) | % | | $ | 9,224 | | 23.0 | % | | $ | (1,741) | | (17.9) | % | |
State income tax provision (benefit) | |
| 1,485 | | 4.4 | % | |
| (155) | | (21.1) | % | |
| 1,668 | | 4.1 | % | |
| 279 | | 2.9 | % | |
Total provision (benefit) for income taxes | | $ | 9,184 | | 27.4 | % | | $ | (499) | | (68.0) | % | | $ | 10,892 | | 27.1 | % | | $ | (1,462) | | (15.0) | % | |
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| | Three Months Ended |
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| 2020 |
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| 2019 |
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| 2020 |
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| 2019 |
| | ||||||||||||
| | (in thousands, except percentages) | | | | | | | | | | | | | | ||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax provision at the statutory federal rate | | $ | 4,354 | | 21.0 | % | | $ | 7,048 | | 21.0 | % | | $ | 4,855 | | 21.0 | % | | $ | 8,433 | | 21.0 | % | |
Federal income tax effects of: | |
| | | | | | | | | | | | | | | | | | | | | | | |
Alternative fuel credit | |
| (247) | | (1.2) | % | |
| — | | — | % | |
| (698) | | (3.0) | % | |
| — | | — | % | |
Nondeductible expenses and other | |
| (24) | | (0.1) | % | |
| 355 | | 1.1 | % | |
| 380 | | 1.6 | % | |
| 836 | | 2.1 | % | |
Increase in valuation allowances | |
| 41 | | 0.2 | % | |
| — | | — | % | |
| 235 | | 1.0 | % | |
| — | | — | % | |
Decrease in uncertain tax positions(1) | | | — | | — | % | | | — | | — | % | | | (933) | | (4.0) | | | | — | | — | | |
Tax expense from vested RSUs | |
| 659 | | 3.1 | % | |
| 410 | | 1.2 | % | |
| 679 | | 3.0 | % | |
| 408 | | 1.0 | % | |
Federal research and development tax credits | | | (193) | | (0.9) | % | | | — | | — | % | | | (443) | | (1.9) | % | | | — | | — | % | |
Life insurance proceeds and changes in cash surrender value | | | (537) | | (2.6) | % | | | (114) | | (0.3) | % | | | 262 | | 1.1 | % | | | (453) | | (1.1) | % | |
Federal income tax provision | | $ | 4,053 | | 19.5 | % | | $ | 7,699 | | 23.0 | % | | $ | 4,337 | | 18.8 | % | | $ | 9,224 | | 23.0 | % | |
State income tax provision | |
| 801 | | 3.9 | % | |
| 1,485 | | 4.4 | % | |
| 1,000 | | 4.3 | % | |
| 1,668 | | 4.1 | % | |
Total provision for income taxes | | $ | 4,854 | | 23.4 | % | | $ | 9,184 | | 27.4 | % | | $ | 5,337 | | 23.1 | % | | $ | 10,892 | | 27.1 | % | |
(1) |
At June 30, 2019,2020, we had $54.8$52.9 million of net deferred tax liabilities after valuation allowances. We evaluated the need for a valuation allowance for deferred tax assets at June 30, 20192020 by considering the future reversal of existing taxable temporary differences, future taxable income, and available tax planning strategies. Valuation allowances for deferred tax assets totaled $0.1$0.9 million and $0.7 million at June 30, 20192020 and at December 31, 2018.2019, respectively. As of June 30, 2019,2020, deferred tax liabilities which will reverse in future years exceeded deferred tax assets.
In first quarter of 2019, we recorded a deferred tax asset of approximately $19.0 million related to our operating lease liabilities and recorded a deferred tax liability of approximately $19.0 million related to our operating lease right-of-use assets due to the adoption of ASC Topic 842.
Financial reporting income may differ significantly from taxable income because of items such as revenue recognition, accelerated depreciation for tax purposes, pension accounting rules, and a significant number of liabilities such as vacation pay, workers’ compensation, and other liabilities, which, for tax purposes, are generally deductible only when paid. For the six months ended June 30, 2020, income determined under income tax law exceeded financial reporting income. For the six months ended June 30, 2019, financial reporting income exceeded income determined under income tax law. For the six months ended June 30, 2018, income determined under income tax law exceeded financial reporting income.
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During the six months ended June 30, 2019,2020, we made federal,foreign and state and foreign tax payments of $8.9$2.3 million, and received refunds of less than $0.1$0.4 million of federal and state income taxes that were paid in prior years. Management does not expect the cash outlays for income taxes will materially exceed reported income tax expense for the foreseeable future.
Critical Accounting Policies
The accounting policies that are “critical,” or the most important, to understand our financial condition and results of operations and that require management to make the most difficult judgments are described in our 20182019 Annual Report on Form 10-K. There haveThe following policy has been no material changes in the Company’s critical accounting policiesupdated during the six months ended June 30, 2019.2020 for the adoption of an accounting standard update.
Receivables Allowance
On January 1, 2020, we adopted ASC Topic 326, Financial Instruments – Credit Losses, (“ASC Topic 326”), which replaces the incurred loss methodology model with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including trade receivables and other receivables. We maintain allowances for credit losses (formerly known as the allowance for doubtful accounts) and revenue adjustments on our trade receivables.
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We estimate our allowance for credit losses based on historical trends, factors surrounding the credit risk of specific customers, and forecasts of future economic conditions. In order to gather information regarding these trends and factors, we perform ongoing credit evaluations of our customers, an analysis of accounts receivable aging by business segment, and an analysis of future economic conditions at period end. The allowance for revenue adjustments represents an estimate of potential adjustments associated with recognized revenue based upon historical trends and current information regarding trends and business changes. Actual write-offs or adjustments could differ from the allowance estimates due to a number of factors, including future changes in the forecasted economic environment or new factors and risks surrounding a particular customer. We continually update the history we use to make these estimates so as to reflect the most recent trends, factors, forecasts, and other information available. Management believes this methodology to be reliable in estimating the allowances for credit losses and revenue adjustments (collectively our receivable allowance). Accounts receivable are written off against the allowance for credit losses and revenue adjustments when accounts are turned over to a collection agency or when the accounts are determined to be uncollectible.
Accounting Pronouncements Not Yet Adopted
New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of financial statements. Accounting pronouncements which have been issued but are not yet effective for our financial statements are disclosed in Note A to our consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Management believes that there is no new accounting guidance issued but not yet effective that will impact our critical accounting policies.
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Forward-Looking Statements
Certain statements and information in this report may constitute “forward-looking statements.”statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “foresee,” “intend,” “may,” “plan,” “predict,” “project,” “scheduled,” “should,” “would,” and similar expressions and the negatives of such terms are intended to identify forward-looking statements. These statements are based on management’s beliefs, assumptions, and expectations based on currently available information, are not guarantees of future performance, and involve certain risks and uncertainties (some of which are beyond our control). Although we believe that the expectations reflected in these forward-looking statements are reasonable as and when made, we cannot provide assurance that our expectations will prove to be correct. Actual outcomes and results could materially differ from what is expressed, implied, or forecasted in these statements due to a number of factors, including, but not limited to: a failure of our information systems, including disruptions or failures of services essential to our operations or upon which our information technology platforms rely, data breach, and/or cybersecurity incidents; the ability to maintain third-party information technology systems or licenses; widespread outbreak of an illness or any other communicable disease and the effects of pandemics, including the COVID-19 pandemic, or any other public health crisis; regulatory measures that may be implemented in response to widespread illness, including the COVID-19 pandemic; ineffectiveness of our business continuity plans to meet our operational needs in the event of adverse external events or conditions; untimely or ineffective development and implementation of, or failure to realize potential benefits associated with, new or enhanced technology;technology or processes, including the pilot test program at ABF Freight, and any write-offs associated therewith; the loss or reduction of business from large customers; competitive initiatives and pricing pressures; general economic conditions and related shifts in market demand, including the impact of and uncertainties related to the COVID-19 pandemic, that impact the performance and needs of industries we serve and/or limit our customers’ access to adequate financial resources; the ability to manage our cost structure, and the timing and performance of growth initiatives; relationships with employees, including unions, and our ability to attract, retain, and retaindevelop employees; unfavorable terms of, or the inability to reach agreement on, future collective bargaining agreements or a workforce stoppage by our employees covered under ABF Freight’s collective bargaining agreement; the cost, timing, and performance of growth initiatives; general economic conditions and related shifts in market demand that impact the performance and needs of industries we serve and/or limit our customers’ access to adequate financial resources; availability and cost of reliable third-party services; governmental regulations; environmental laws and regulations, including emissions-control regulations; union and nonunion employee wages and benefits, including changes in required contributions to multiemployer plans; our ability to secure independent owner operators and/or operational or regulatory issues related to our use of their services; litigation or claims asserted against us; maintaining our intellectual property rights, brand, and corporate reputation; the loss of key employees or the inability to execute succession planning strategies; default on covenants of financing arrangements and the availability and termscost of future financing arrangements; timing and amount of capital expenditures; self-insurance claims and insurance premium costs; the cost, integration, and performance of any recent or future acquisitions;reliable third-party services; availability of fuel, the effect of volatility in fuel prices and the associated changes in fuel surcharges on securing increases in base freight rates, and the inability to collect fuel surcharges; governmental regulations; environmental laws and regulations, including emissions-control regulations; union employee wages and benefits, including changes in required contributions to multiemployer plans; litigation or claims asserted against us; the loss of key employees or the inability to execute succession planning strategies; maintaining our intellectual property rights, brand, and corporate reputation; default on covenants of financing arrangements and the availability and terms of future financing arrangements; timing and amount of capital expenditures; self-insurance claims and insurance premium costs; increased prices for and decreased availability of new revenue equipment, decreases in value of used revenue equipment, and higher costs of equipment-related operating expenses such as maintenance, and fuel, and related taxes; potential impairment of goodwill and intangible assets; greater than anticipated funding requirements for our nonunion defined benefit pension plan;the cost, integration, and performance of any recent or future acquisitions; seasonal fluctuations and adverse weather conditions; regulatory, economic, and other risks arising from our international business; acts of terrorism or war, or the impact of antiterrorism and safety measures; and other financial, operational, and legal risks and uncertainties detailed from time to time in ArcBest’s public filings with the SEC.Securities and Exchange Commission (“SEC”).
For additional information regarding known material factors that could cause our actual results to differ from our projected results, refer to Item 1A (Risk Factors) of Part I ofplease see our 2018filings with the SEC, including our Annual Report on Form 10-K.10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events, or otherwise.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date made and, other than as required by law, wehereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events, or otherwise.
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FINANCIAL INFORMATION
ARCBEST CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As disclosed in Part II, Item 7A of our 2019 Annual Report on Form 10-K, we are subject to interest rate risk due to variable interest rates on the borrowings under our credit agreements. We have a revolving credit facility (the “Credit Facility”) under our Third Amended and Restated Credit Agreement (the “Credit Agreement”) that has an initial maximum credit amount of $250.0 million, including a swing line facility in an aggregate amount of up to $25.0 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. We have the option to request additional revolving commitments or incremental term loans thereunder of up to $125.0 million, subject to certain additional conditions as provided in the Credit Agreement. Our accounts receivable securitization program allows for cash proceeds of $125.0 million to be provided under the program and has an accordion feature allowing us to request additional borrowings up to $25.0 million, subject to certain conditions. In March 2020, we drew down the $180.0 million remaining available borrowing capacity under the initial maximum credit amount of our Credit Facility and borrowed an additional $45.0 million under our accounts receivable securitization program, which reduced the initial committed funding capacity available under the facility to $28.0 million. Borrowings are subject to variable interest rates as defined within our credit agreements. These borrowings were a proactive measure to increase our cash position and preserve financial flexibility in consideration of general economic and financial market uncertainty and the potential for cash flow disruption resulting from the COVID-19 outbreak. These funds supplemented our already strong cash and short-term investments position. Cash, cash equivalents, and short-term investments totaled $574.0 million at June 30, 2020, of which $186.1 million was neither FDIC insured nor a direct obligation of the U.S. government. Our financing arrangements are discussed in Note F to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
On July 31, 2020, the Company repaid $45.0 million of the amounts borrowed under the accounts receivable securitization program in March 2020.
We did not modify our Credit Facility, accounts receivable securitization program, or interest rate swap agreement during the three and six months ended June 30, 2020 and, therefore, we are subject to the interest rate risk due to the variable interest rates on the borrowings under our credit agreements as of June 30, 2020 as disclosed in Part II, Item 7A of our 2019 Annual Report on Form 10-K. On May 4, 2020, we extended the term of our $50.0 million notional amount interest rate swap agreement from June 30, 2022 to October 1, 2024. We will receive floating-rate interest amounts based on one-month LIBOR in exchange for fixed-rate interest payments of 0.43% beginning on June 30, 2022 throughout the remaining term of the agreement. From June 30, 2022 to October 1, 2024, the extended interest rate swap agreement will effectively convert $50.0 million of borrowings under our Credit Facility from variable-rate interest to fixed-rate interest with a per annum rate of 1.56% based on the margin of our Credit Facility as of June 30, 2020.
Risks associated with the economic impacts of COVID-19 remain difficult to ascertain in the immediate future, further discussion related to our response to COVID-19 can be found in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Quarterly Report on Form 10-Q. In addition to the risk factors disclosed in Part I, Item 2 of our 2019 Annual Report on Form 10-K, we have supplemented our risk factors as discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Since December 31, 2018,2019, there have been no other significant changes in the Company’s market risks as reported in the Company’s 20182019 Annual Report on Form 10-K.
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ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was performed with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2019.2020.
There were no changes in the Company’s internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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PART II.
OTHER INFORMATION
ARCBEST CORPORATION
ITEM 1. LEGAL PROCEEDINGS
For information related to the Company’s legal proceedings, see Note L,K, Legal Proceedings, Environmental Matters, and Other Events under Part I, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
The Company’s risk factors are fully described in the Company’s 20182019 Annual Report on Form 10-K. No material changes toIn consideration of the COVID-19 pandemic, ArcBest is supplementing the risk factors set forth under “Item 1A. Risk Factors” in the Company’s 2019 Annual Report on Form 10-K with the risk factors have occurred sinceset forth below. These risk factors should be read in conjunction with the Company filed its 2018risk factors in the Company’s 2019 Annual Report on Form 10-K.
The widespread outbreak of an illness or any other communicable disease, including the effects of pandemics, or any other public health crisis, as well as regulatory measures implemented in response to such events, could adversely affect our business, results of operations, financial condition, and cash flows.
Our business has been and may continue to be negatively impacted the COVID-19 pandemic, and could be negatively impacted by the widespread outbreak of another illness, communicable disease, or public health crisis. Measures intended to prevent the spread of a health epidemic could also have an adverse effect on our business. The COVID-19 pandemic has adversely impacted economic activity and conditions worldwide and created significant volatility and disruption to financial markets. Efforts to control the spread of COVID-19 have led governments and other authorities to impose restrictions which have resulted in business closures and disrupted supply chains worldwide. The COVID-19 pandemic and measures taken to prevent its spread have negatively impacted demand for our services, and thus our shipment and tonnage levels, and could continue to further negatively impact our business. We are continuing to monitor developments involving our workforce, customers, and third-party service providers. The extent of the continued impact of the COVID-19 pandemic on our business is uncertain and will depend on future developments, including the duration and severity of the pandemic and government restrictions imposed in response to the pandemic. Extended periods of economic disruption and resulting declines in industrial production and manufacturing, consumer spending, and demand for our services, as well as the ability of our customers and other business partners to fulfill their obligations, could have a material adverse effect on our results of operations, financial condition, and cash flows.
We, or the third parties upon which we depend to provide services for us, may be adversely affected by external events from which our business continuity plans may not adequately protect us.
The occurrence of severe weather, natural disasters, health epidemics, acts of war or terrorism, and other adverse external events or conditions that impact us or the operations of third parties upon which we rely to provide services for us have the potential to significantly impact our ability to conduct business. Although we have business continuity plans in place, including an emergency succession plan, there is no guarantee that our plans can be successfully implemented. Additionally, even if we were to successfully implement our continuity plans, we may incur substantial expenses and there is no guarantee that our business, financial conditions, and results of operations will not be materially impacted.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)Recent sales of unregistered securities.
None.
(b)Use of proceeds from registered securities.
None.
(c)Purchases of equity securities by the issuer and affiliated purchasers.
| | | | | | | | | | | |
| | | | | | | Total Number of | | Maximum |
| |
| | | | | | | Shares Purchased | | Approximate Dollar |
| |
| | Total Number | | Average | | as Part of Publicly | | Value of Shares that |
| ||
| | of Shares | | Price Paid | | Announced | | May Yet Be Purchased |
| ||
|
| Purchased |
| Per Share(1) |
| Program |
| Under the Program(2) |
| ||
| | (in thousands, except share and per share data) |
| ||||||||
4/1/2019-4/30/2019 |
| — |
| $ | — |
| — |
| $ | 19,644 | |
5/1/2019-5/31/2019 |
| 49,500 | |
| 27.00 |
| 49,500 |
| $ | 18,308 | |
6/1/2019-6/30/2019 |
| 44,650 | |
| 26.24 |
| 44,650 |
| $ | 17,136 | |
Total |
| 94,150 |
| $ | 26.64 |
| 94,150 | | | | |
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 June 30, 2020 and December 31, 2019, the Company had $10.0 million and $13.2 million, respectively, remaining under the program for repurchases of its common stock. The Company did not make share repurchases during the three months ended June 30, 2020.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The following exhibits are filed or furnished with this report or are incorporated by reference to previously filed material:
Exhibit |
|
|
No. | | |
| | |
3.1 | | |
| | |
3.2 | | |
| | |
3.3 | | |
| | |
3.4 | | |
| | |
10.1# | | |
| | |
31.1* | | |
| | |
31.2* | | |
| | |
32** | | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
101.INS* | | XBRL Instance Document – the instance document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document. |
| | |
101.SCH* | | Inline XBRL Taxonomy Extension Schema Document |
| | |
101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| | |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| | |
101.LAB* | | Inline XBRL Taxonomy Extension Labels Linkbase Document |
| | |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
104* | | The Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document. |
#Designates a compensation plan or arrangement for directors or executive officers. |
|
* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| |
| ARCBEST CORPORATION |
| (Registrant) |
| |
Date: August | /s/ Judy R. McReynolds |
| Judy R. McReynolds |
| Chairman, President and Chief Executive Officer |
| and Principal Executive Officer |
| |
| |
Date: August | /s/ David R. Cobb |
| David R. Cobb |
| Vice President — Chief Financial Officer |
| and Principal Financial Officer |
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