FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2000. OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File No. 0-10894. ARNOLD INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-2200465 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 625 South Fifth Avenue, Lebanon, Pennsylvania (Address of principal executive offices) 17042 (Zip Code) (717) 274-2521 (Registrant's telephone number, including area code) No Change (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Stock, par value $1.00 per share: 24,581,626 shares outstanding (excluding treasury shares) as of May 12, 2000. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Condensed Consolidated Balance Sheets - March 31, 2000 (Unaudited) and December 31, 1999 Condensed Consolidated Statements of Income (Three Month Period - Unaudited) - March 31, 2000 and 1999 Condensed Consolidated Statements of Cash Flows (Three Month Period - Unaudited) - March 31, 2000 and 1999 Notes to Condensed Consolidated Financial Statements ARNOLD INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, December 31, 2000 1999 ASSETS Current Assets Cash and Cash Equivalents 27,092,168 16,231,274 Marketable Securities 2,106,915 2,104,634 Accounts Receivable, Net 51,618,062 49,811,512 Notes Receivable, Current 1,357,600 1,357,565 Deferred Income Taxes 4,994,753 4,258,455 Prepaid Expenses and Supplies 7,491,463 7,463,640 Total Current Assets 94,660,961 81,227,080 Property and Equipment, at Cost 400,107,443 401,801,207 Less: Accumulated Depreciation 158,496,866 157,027,805 Total Property and Equipment 241,610,577 244,773,402 Other Assets Goodwill, Net 7,946,376 8,017,724 Investments in Limited Partnerships 8,461,611 8,594,525 Notes Receivable, Long-term 1,834,085 1,754,510 Other 1,291,011 1,375,752 Total Other Assets 19,533,083 19,742,511 TOTAL ASSETS 355,804,621 345,742,993 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes Payable 23,782,846 24,829,682 Accounts Payable 10,642,345 10,789,594 Income Taxes 4,897,838 1,297,162 Estimated Liability for Claims 5,545,436 4,302,316 Accrued Expenses - Other 15,111,387 13,906,538 Total Current Liabilities 59,979,852 55,125,292 Long-term Liabilities Estimated Liability for Claims 2,646,000 2,646,000 Deferred Income Taxes 38,054,225 37,710,984 Notes Payable -0- 191,557 Other 1,916,722 1,887,522 Total Long-term Liabilities 42,616,947 42,436,063 Stockholders' Equity Common Stock 29,942,628 29,942,628 Paid-In Capital 1,682,050 1,584,422 Retained Earnings 262,423,716 256,160,707 Treasury Stock, at Cost (40,840,572) (39,506,119) Total Stockholders' Equity 253,207,822 248,181,638 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 355,804,621 345,742,993 The accompanying notes, herein following, are an integral part of these consolidated financial statements. ARNOLD INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 31, 2000 1999 Operating Revenues 114,832,392 100,305,647 Operating Expenses 100,312,876 87,205,988 Operating Income 14,519,516 13,099,659 Interest Expense (450,008) (249,407) Other Income 97,509 105,814 Income Before Income Taxes 14,167,017 12,956,066 Income Taxes 5,188,560 4,763,166 Net Income 8,978,457 8,192,900 Net Income per Common Share: Basic 0.36 0.33 Diluted 0.36 0.33 Average Common Shares Outstanding Basic 24,639,034 24,832,982 Effect of dilutive securities - Stock options 96,463 249,704 Diluted 24,735,497 25,082,686 Dividends per Common Share 0.11 0.11 The accompanying notes, herein following, are an integral part of these consolidated financial statements. ARNOLD INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, 2000 1999 Operating Activities Net Income 8,978,457 8,192,900 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 8,553,553 8,205,714 Provision for Deferred Taxes (393,057) 3,733,510 Other (160,490) (197,553) Changes in Operating Assets & Liabilities: Increase in Accounts Receivable (1,806,550) (595,098) (Increase) Decrease in Prepaid Expenses and Supplies (27,823) 1,088,090 Increase (Decrease) in Accounts Payable (147,249) 262,807 Increase (Decrease) in Estimated Liability for Claims 1,243,120 (11,038,967) Increase in Other Accrued Expenses 4,805,525 2,045,068 Other 29,200 27,400 Net Cash Provided By Operating Activities 21,074,686 11,723,871 Investing Activities Proceeds from Sale of Investment Securities 1,137 112,368 Purchase of Investment Securities (3,418) (13,974) Proceeds from Disposition of Property and Equipment 2,363,799 2,063,840 Purchase of Property and Equipment (7,393,371) (14,912,254) Capital Contributions to Limited Partnerships (1,171,564) (1,175,351) Other 8,731 193,433 Net Cash Used In Investing Activities (6,194,686) (13,731,938) Financing Activities Cash Dividends Paid (2,715,452) (2,731,416) Purchase of Treasury Stock (1,391,250) (314,550) Proceeds from Short-term Debt 0 5,000,000 Other 87,596 493,276 Net Cash Provided by (Used In) Financing Activities (4,019,106) 2,447,310 Increase in Cash and Cash Equivalents 10,860,894 439,243 Cash and Cash Equivalents - Beginning of Year 16,231,274 19,432,802 Cash and Cash Equivalents - End of Period 27,092,168 19,872,045 Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest 449,608 249,047 Income Taxes 2,013,350 1,121,293 The accompanying notes, herein following, are an integral part of these consolidated financial statements. ARNOLD INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1: Basis of Presentation The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim period. This financial information should be read in conjunction with the Financial Statements and Notes thereto included in the Company's latest annual report on Form 10-K. The results of operations for the three-month period ending March 31, 2000 and 1999 are not necessarily indicative of the results to be expected for the full year. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Operating Revenues for the first quarter of 2000 were $114,832,392, an increase of $14,526,745 or 14% over Operating Revenues for 1999's first quarter. For the same periods, Operating Expenses increased $13,106,888 or 15%; Income before Income Taxes increased $1,210,951, an increase of 9%, and Net Income increased $785,557, or 10% to $8,978,457. Earnings Per Share increased to $.36 for the first quarter of 2000 from $.33 for the first quarter of 1999, a 9% increase. The Company's revenue figures for the first quarter of 2000 as compared to the first quarter of 1999 are higher due primarily to increased business volume at New Penn Motor Express, Inc. ("New Penn"), the Company's less-than-truckload carrier, which experienced a 16% increase in revenue, and Arnold Logistics, the Company's fulfillment and logistics division, which experienced a 49% increase in revenue. Revenue figures for Arnold Transportation Services, Inc. ("Arnold Transportation"), the Company's truckload carrier, showed a modest improvement in revenues, increasing by approximately 6%. Set forth below is a schedule of the Unaudited Operating Revenues, Expenses and Operating Income of the LTL, TL and Fulfillment/Logistics companies: (Dollars in Thousands) First Quarter Ended March 31, 2000 1999 Amount % Amount % LESS-THAN-TRUCKLOAD Operating Revenues 57,544 100.0 49,584 100.0 Operating Expenses 45,725 79.5 38,886 78.4 Operating Income 11,819 20.5 10,698 21.6 TRUCKLOAD Operating Revenues 45,397 100.0 42,760 100.0 Operating Expenses 44,588 98.2 41,481 97.0 Operating Income 809 1.8 1,279 3.0 FULFILLMENT/LOGISTICS Operating Revenues 11,891 100.0 7,962 100.0 Operating Expenses 9,997 84.1 6,561 82.4 Operating Income 1,894 15.9 1,401 17.6 Unallocated corporate operating income (loss) (2) (278) Consolidated operating income 14,520 13,100 The Company's working capital at the end of the first quarter of 2000 was $34,681,109, which is an increase of $8,579,321 or 33% from the end of the 1999 fiscal year. The principal factors contributing to the increase in working capital were the increase in consolidated net income earned by the Company during the quarter, coupled with a temporary slowdown in the capital expansion program in place at all three operating divisions. The Company's investment in Property and Equipment (Less Accumulated Depreciation) as of the end of the first quarter of 2000 stood at $241,610,577. This figure represents a decrease from December 31, 1999, of $3,162,825, reflecting the slowdown in the capital expansion program. Funding for the Company's ongoing capital expansion program is being accomplished through the use of cash generated from current operating and investment activities. The Company's results for the first quarter of 2000 were positively impacted by factors that included mild winter weather experienced in the northeastern United States, a robust national economy, the demise of a competitor during the summer of 1999 and a strong pricing environment that permitted rate increases in many lanes. The results were negatively impacted by such factors as substantially higher fuel prices, which particularly impacted Arnold Transportation, and increased competition from surviving competitors who are gaining in efficiency and quality of service. At New Penn, the double-digit revenue growth rate of the fourth quarter of 1999 accelerated in the first quarter of 2000. Management anticipates that revenue growth will continue to be strong in comparison to the same periods of one year ago, in large part due to the demise of Preston Trucking in July of 1999 and the addition of many former Preston customers to New Penn's customer base. The increase in revenues resulting from Preston's demise began to be reflected in the third quarter of 1999 and, accordingly, will level out with results for the third quarter of 2000. Whether double digit increases in revenues will continue into the third quarter of 2000 and thereafter will depend upon factors such as the strength of the U.S. economy, inflation, fuel prices and New Penn's ability to attract new customers through improvements in service and pricing. Certain of New Penn's financially healthy competitors are expanding their northeast operations, and it is anticipated that New Penn will face increasing competitive pressures in coming quarters. New Penn continued to hold operating expenses to a minimum during the first quarter, thereby producing an operating ratio of 79.5 for the period. Operating income increased by $1.1 million, or 10.5%, compared to the prior year. New Penn took delivery of 150 new trailers during the first quarter to support the continuing growth in revenue. During 2000, New Penn anticipates acquiring $10.4 million of new equipment (which includes $8.4 of new rolling stock and $2.0 million of new computer equipment) and expending $10.1 million for new real estate and improvements to existing properties. Expansion is planned or in process at terminals in Albany, Syracuse and Buffalo, New York, and South Brunswick and Kearny, New Jersey. Although revenues increased by 6.2% at Arnold Transportation, operating income declined by 36.7%. The regional and dedicated truckload operations continued to perform well. However, interregional operations, which provide service on longer lengths of haul, were particularly hard hit by the increase in diesel fuel prices. Arnold Transportation was not able to obtain fuel surcharges from customers sufficient to defray higher fuel costs. Fuel prices have declined in recent weeks, but remain above year-ago levels. Arnold Transportation is focused on expanding regional and dedicated operations while also adding customer revenues that will improve operating margins on interregional operations. During 2000, Arnold Transportation anticipates acquiring $3 million of new equipment and expending $500,000 for new real estate and improvements to existing properties (to be funded by gains from real estate sales). Arnold Logistics increased operating income by 35.2% over the same period of a year ago. Revenues increased during the quarter in comparison to the first quarter of 1999 due primarily to placement of the new Lancaster warehouse facility into operation during the last half of 1999. Although margins declined from the same period in the prior year, margins improved compared to the fourth quarter of 1999. Margins improved from the immediately prior quarter in part because changes were made to the Lancaster operations to improve efficiencies and fine-tune the revenue/cost relationship with the principal customer occupying that facility. Significant progress was made to develop a proprietary Internet order and warehouse management system in support of future e-commerce growth opportunities. During 2000, Arnold Logistics' capital expenditures will approximate $2.6 million for new equipment and $400,000 for capital improvements to real estate. Company management remains focused on improving operating efficiencies while at the same time seeking growth opportunities by, among other things, offering expanded trucking and warehousing related services to meet the needs of existing and prospective customers. Management will continue to seek opportunities for profitable expansion of the Company. Year 2000 Compliance The Company's program to correct and/or replace internally produced software was fully completed prior to December 31, 1999. The cost of the Company's internal program, all of which has been incurred and paid, was $1,675,000. The Company continues to monitor and assess the status of third parties upon whom the Company relies for externally produced software, including communications software, as well as suppliers of basic materials, such as fuel, parts, tires, etc. The Company also monitors the status of significant customers upon whose continued business the Company relies for revenues. During 1998 and 1999, the Company incurred expense of $125,000 to correct and/or replace software acquired from third parties. The Company has had no significant Y2K problems with its vendors, suppliers or customers, and does not anticipate significant problems in the future. Cautionary Remarks as to Forward-Looking Statements: The nature of the Company's operations subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. In accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions that there are important factors which, among others, could cause future results to differ materially from the forward-looking statements about our management confidence and strategies for performance; expectations for new and existing technologies and opportunities; and expectations for market segment and industry growth. These factors include, but are not limited to: (1) changes in the business environment in which the Company operates, including licensing restrictions, interest rates and capital costs; (2) changes in governmental law and regulations, including taxes; (3) market and competitive changes, including market demand and acceptance for new services and technologies; and (4) other risk factors specifically identified from time to time in Company releases and disclosure documents, including SEC reports and the annual proxy solicitation and report to stockholders. The Company will update forward-looking statements as required by law. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Neither the Company nor any of its subsidiaries, including Maris, Inc., own derivative financial instruments. Accordingly, the Company has no exposure to sudden changes in the financial and commodities markets and the impact that those changes may have on the value of market risk sensitive derivative securities. Maris, Inc., however, does own certain market risk sensitive instruments, including money market funds, time deposits, tax-free bonds and other like instruments. The Company believes that the risk inherent in owning these types of investments is no greater than the market risk of owning any security traded on various exchanges in the United States and elsewhere. Item 4.Matters Brought to a Vote of Shareholders. At the Annual Meeting, held May 3, 2000, stockholders re-elected E. H. Arnold, Ronald E. Walborn and Arthur L. Peterson to serve as members of the Board of Directors, each for a two-year term. The Company also announced that the Board of Directors declared the regular quarterly dividend of eleven cents per share, payable June 5, 2000, to stockholders of record on May 22, 2000. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 27 - Financial Data Schedule (b) NONE APPLICABLE 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 thereunto duly authorized. ARNOLD INDUSTRIES, INC. (Registrant) Date: May 15, 2000 By /s/ Heath L. Allen Heath L. Allen, Secretary Date: May 15, 2000 By /s/ Ronald E. Walborn Ronald E. Walborn, Treasurer EXHIBIT 27 FINANCIAL DATA SCHEDULE FOR ARNOLD INDUSTRIES, INC. FORM 10-Q FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN ARNOLD INDUSTRIES, INC.'S FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. Item Description Amount cash and cash items 27,092,168 marketable securities 2,106,915 notes and accounts receivable - trade 53,071,651 allowances for doubtful accounts 1,697,243 inventory 0 total current assets 94,660,961 property, plant and equipment 400,107,443 accumulated depreciation 158,496,866 total assets 355,804,621 total current liabilities 59,979,852 bonds, mortgages and similar debts 0 preferred stock-mandatory redemption 0 preferred stock-no mandatory redemption 0 common stock 29,942,628 other stockholders' equity 223,265,194 total liabilities and stockholders' equity 355,804,621 net sales of tangible products 0 total revenues 114,832,392 cost of tangible goods sold 0 total costs and expenses applicable to sales and revenues 100,312,876 other costs and expenses 0 provision for doubtful accounts and notes 307,500 interest and amortization of debt discount 450,008 income before taxes and other items 14,167,017 income tax expense 5,188,560 income/loss continuing operations 8,978,457 discontinued operations 0 extraordinary items 0 cumulative effect changes in accounting principles 0 net income or loss 8,978,457 earnings per share - basic 0.36 earnings per share - diluted 0.36