(Front Cover)
1996 - ANNUAL REPORT ARNOLD INDUSTRIES, INC.
Positioned for the future
with financial strength,
outstanding cost controls
and a high-service, regional focus.
(Inside Front Cover)
Contents
Letter to Stockholders
New Penn Motor Express
Arnold Transportation Services
Arnold Logistics
Consolidated Five-Year Statistical Summary
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Accountants
Quarterly Performance
Price Range Common Stock
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Eleven-Year Financial Summary
Board of Directors and Stockholder Information
Company Executives
ARNOLD INDUSTRIES, INC.
OUR BUSINESS Arnold Industries is a diversified transportation and logistics
holding company. Through its subsidiaries, Arnold Industries executes its
strategy of high-service with a short-haul regional focus. The company serves
the regional less-than-truckload, regional and inter-regional truckload and
value-added warehousing markets. These markets are served through two
independent operating units: New Penn Motor Express and Arnold
Transportation Services. Each operating unit has a distinct market presence
and customer base.
New Penn is a northeast regional less-than-truckload carrier and represents
approximately 50% of total revenues. Arnold Transportation Services represents
the other 50% of corporate revenues and provides truckload service in the
northeast, southeast, and southwest regions of the United States. Arnold
Logistics, a division of Arnold Transportation, operates over 2.3 million
square feet of warehouse space and provides distribution, order fulfillment
and contract packaging services.
FINANCIAL SUMMARY
(dollars in thousands except per share data)
1996 1995 Change
REVENUES $356,335 $330,136 7.9%
NET INCOME $25,409 $30,501 (16.7%)
NET INCOME PER SHARE $ .95 $1.15 (17.4%)
STOCKHOLDERS' EQUITY $209,147 $195,367 7.1%
TOTAL ASSETS $303,112 $276,877 9.5%
RETURN ON AVERAGE
STOCKHOLDERS' EQUITY 12.6% 16.4% (3.8%)
LETTER TO STOCKHOLDERS As many of you know, our company went public in 1972.
In 22 of the subsequent 24 years I have been able to report an increase in
earnings. Unfortunately, 1996 marks the second time in which we experienced a
decline in earnings. While many companies in our industry can only dream of
pre-tax profit margins of 11%, the results were disappointing for our company.
We did set a new record for total revenue of $356 million. Revenues were up
nearly 8% and each of our operating units contributed to this growth.
Several factors affected the results of all of our companies. The bottom fell
out of the freight transportation market in late 1995 and early 1996 resulting
in what was called a "trucking depression". The industry-wide decline in
freight tonnage levels on the heels of a strong market resulted in significant
industry over-capacity. Many competitors reacted by cutting freight rates in an
attempt to fill empty trucks thereby putting pressure on margins. As we
entered 1996 adjusting to the lower tonnage levels, we were hit with severe
winter weather in the northeast. Customers were shut-down and unable to ship.
Tonnage levels further declined. The only good part of the situation was we
were able to demonstrate the quality of our service by being one of the few
carriers dedicated to meeting customer commitments in the severe winter
conditions.
As spring arrived temperatures rose, but not as fast as fuel prices. Fuel
prices peaked in April, declined and rose sharply again in August and through-
out the fall. Fuel prices significantly impacted our costs at all our companies
and especially in the truckload area. Fortunately, strong economic growth in
the second quarter breathed new life into the LTL freight market and tonnage
levels began to rise. Different factors influenced the performance of our
three operating units within this environment.
New Penn bounced back from a slow first quarter with tonnage and revenue levels
getting progressively stronger throughout the year. Record revenue levels had
been achieved by the year end. Higher costs associated with severe winter
weather, labor, fuel and insurance reserves resulted in a slight decline in
operating income. However, New Penn continued as an industry efficiency leader
by improving the productivity of employees and other assets. During the year
Ken Leedy was elected President of New Penn. At the same time, Steve O'Kane
was elected Executive Vice President of New Penn. My congratulations and thanks
to Ken, Steve and the entire New Penn team for another outstanding performance.
Arnold Transportation Services, our truckload and logistics operation, also
achieved record revenues although several internal and external factors con-
tributed to a significant decline in operating income. Declining industry
tonnage levels during the first part of the year reduced utilization of
tractors and trailers. Intrastate deregulation in Texas depressed prices and
reduced tonnage levels. We were unable to recover higher fuel costs through
a fuel surcharge until late in the year. We also had several above normal
charges associated with higher insurance, bad debts and systems development
expenses. As we enter 1997 exciting new developments are taking shape at Arnold
Transportation. We formerly managed the three regional truckload operations
as independent companies. We are now in the process of merging them into
one entity as further described in this report. Bob Petruzzi, Chief
Operating Officer, and all the employees of Arnold Transportation have made
many positive steps and I remain confident in their ability to improve profit
margins.
Arnold Logistics, a division of Arnold Transportation Services, had an
excellent year on the strength of integrated warehousing/order fulfillment and
contract packaging services which grew rapidly. We anticipate further
growth of these services and look to expand the application of our expertise
into new geographic markets. I commend Doug Enck, Vice President/General
Manager and all the employees of Arnold Logistics on having had a record year.
There were many bright spots in 1996 as we positioned the company for the
future. In the fourth quarter of 1996, revenue at New Penn was up over 18%.
We also have great momentum at Arnold Logistics. We anticipate Arnold
Transportation will have a much improved performance in 1997. We have our
plans and a winning team in place to produce the outstanding results that
have been the tradition of Arnold Industries. They say history repeats
itself. We plan to make sure it does.
E. H. Arnold
Chairman, President & CEO
March 3, 1997
The men
and women of New Penn
share a great sense of pride
in being
the best
in the
business.
THE COMPANY New Penn Motor Express is our northeast regional less-than-
truckload carrier providing next-day service throughout the New England and
Mid-Atlantic states. The company operates through 23 service centers
including facilities in Quebec, Canada and Puerto Rico. Service is provided
to all points in the southeastern United States, Indiana, Ohio and Ontario,
Canada in conjunction with other high service regional carriers. Use of
partnerships allows New Penn to improve the flexibility of our product line
without losing focus on our primary mission: to provide the best northeast
regional LTL service available.
Once again in 1996, New Penn was among the elite group of transportation
companies recognized as "the best of the best" in the Distribution magazine
"Quest for Quality" awards. New Penn uses five factors to focus our
improvement efforts and to communicate our benefits to customers. We call
them the New Penn Performance 5: speed, reliability, responsiveness,
flexibility and efficiency. Over 92% of New Penn shipments are delivered
the next business day at high levels of on-time and damage-free reliability.
Even with severe winter weather conditions New Penn delivered shipments over
96% on-time in 1996. A new record low claims ratio was established in 1996
of only .35% indicating that only one-third of one percent of revenues were
paid back to customers to settle loss and damage claims. New Penn customers
can expect a fast and flexible response to their inquiries through the use
of advanced information technology and the service-oriented culture at New
Penn. Our superior efficiency benefits customers through our financial
stability and our ability to invest in service enhancing equipment and
technology.
GROWTH New Penn achieved record revenues of $182 million in 1996. Growth
accelerated throughout the year averaging over 15% in the third and fourth
quarters. For the year, revenues were up 8.9%. By expanding our service
offerings and market segments served, we are able to continue our growth
within the northeast region. For instance, during 1996, we entered the
market for trade show exhibit transportation where we are creating a
regional market in what has been a national market. We are also pursuing
the fast growing import/export market providing our next-day LTL service to
and from air and ocean ports. The international markets of Canada and
Puerto Rico also contributed to our growth in 1996 as did the growth of
distribution/consolidation services and national account business.
FINANCIAL RESULTS During 1996 New Penn produced operating income of $33
million, a 2.9% decline from the prior year. The company was recognized
in Transport Topics for having the lowest ratio of operating expenses to
revenues among the 100 largest trucking companies in the United States.
We will profitably
grow through
continuous improvements
in productivity and the
quality of our service.
For the year 1996, New Penn's operating ratio did increase to 82.0% reflecting
the severe winter weather, higher costs of labor, fuel and insurance reserves
and the continuing competitiveness of the LTL market. However, strong growth
in revenues during the second half of the year coupled with the company's skill
in identifying and controlling costs helped New Penn remain an industry
efficiency leader.
INVESTMENTS Increased business levels required the expansion of the tractor
and trailer fleet. A new terminal was built in Newburgh, NY to replace a
leased facility. The terminal more than doubles our capacity to serve the
Hudson Valley and parts of Connecticut and New Jersey. We continued the
development of our on-board computer system with expansion of the system to
our Philadelphia terminal. By combining the onboard system with our computer
dispatch system we gain improvements in operations planning and in our
ability to provide real-time shipment status to customers.
LOOKING AHEAD The regional LTL market continues to grow as shippers endeavor
to improve service to their customers. With high-service regional transporta-
tion, customers can reduce order lead time, respond faster, reduce inventory and
operate in a "just-in-time" environment. New Penn is well positioned to provide
these benefits and participate as the market grows. During the fourth
quarter of 1996 revenues grew by over 18%. As we look ahead we remain con-
fident in our ability to grow New Penn profitably.
While the market will remain extremely competitive, we continue to see
opportunity. We will grow through improvement of existing services and the
development of new products and markets. Our marketing will be targeted to
meet the needs of specific customer groups where profitable growth is
possible. We will continue to invest in the people, equipment, facilities
and technology necessary to meet customer needs and maximize the productivity
of our people.
Arnold Transportation Services
positions us to better meet
the needs of local and national
account customers in the regional
markets, the inter-regional market and
the previously untapped midwest region.
THE COMPANY Arnold Transportation Services includes our truckload and logistic
services companies. We are now in the process of merging SilverEagle, Dalworth
and LebArnold into a new company called Arnold Transportation Services. Arnold
Transportation primarily operates in the service-intensive short-haul markets of
the northeast, southeast and southwest states. The average length-of-haul is
350 miles. Arnold Transportation provides dry-van services to a variety of
industrial, retail and consumer packaged goods customers. Services include
regional and inter-regional irregular route, contract carriage and dedicated
fleet truckload service. Overnight and same-day delivery is typically
provided on single and multi-stop loads. Local cartage and intermodal drayage
services are also provided.
GROWTH Arnold Transportation achieved record revenues of $174 million during
1996, an increase of 6.7% compared to 1995. The growth primarily occurred in
the northeast and southeast regions. Excellent growth was experienced in the
dedicated carriage service as more companies have chosen to outsource their
private fleet operations. Deregulation of the Texas intra-state market made
revenue growth difficult in the southwest region as competition for the
available tonnage increased.
Overall, the rate of growth slowed from recent years due to the over-capacity
that plagued the industry during late 1995 and the first half of 1996. A
significant issue influencing the growth of Arnold Transportation, and the
entire truckload industry, is the availability of qualified drivers. At
current employment and freight tonnage levels, there continues to be a
shortage of qualified drivers.
FINANCIAL RESULTS The operating income at Arnold Transportation during 1996
was $7.6 million reflecting an operating ratio of 95.7%. While it is not
uncommon for truckload carriers to operate in the mid 90's, results in 1996
were disappointing since the Arnold Transportation companies have typically
operated in the range of 89-91%. Several factors contributed to the decline
in operating margins. The company had invested in additional equipment to
meet the higher demand for service in 1994 and early 1995. Freight tonnage
dropped and competitive pressures rose in late 1995 and early 1996, resulting
in lower equipment utilization. Deregulation of the Texas intra-state market
depressed prices and tonnage levels in this very important market. For most of
1996 market rates did not permit us to recoup the higher cost of fuel. We
also incurred several above normal charges associated with insurance, bad
debt and systems development expenses.
We will continue to evolve
Arnold Transportaion Services
to meet the changing
market for regional and
inter-regional truckload
transportation to ensure growth
in revenue and earnings.
INVESTMENTS Several areas of investment were made during 1996 to improve
operating efficiency and the quality of our service. Investments were made in
tractors and trailers to replace older units in order to maintain a modern,
reliable fleet and to meet higher revenue levels. New information systems
were developed. A proprietary truckload dispatch system was developed and
installed at the southwest regional office in July of 1996 and will be
installed throughout the company in 1997. A sales process automation system was
developed to improve communication across the divisions and cross-functionally
throughout the company. On-board satellite computer systems were installed in
the linehaul fleet to improve efficiency and customer service.
LOOKING AHEAD Significant improvements in the financial results of Arnold
Transportation are anticipated for 1997 and beyond. In 1997 we will complete
the merger of our truckload companies (SilverEagle, Dalworth and LebArnold)
to form one entity in Arnold Transportation Services. While we will retain our
regional focus, growth in the inter-regional and midwest markets will improve
quality of revenue and equipment utilization through changes in the freight
and customer mix. Equipment utilization will be further improved as the
number of trailers per tractor is reduced.
Reduced administrative and insurance expenses are expected to have a significant
and immediate positive impact. We have improved the driver to non-driver ratio
to 4.5:1 and project an additional 10% improvement. Restructuring the regional
companies into one entity with a single linehaul operation will facilitate the
development of the inter-regional market. The sales organization has been
realigned so the same people can pursue opportunities in and between all
regions. This will help us meet the growing need of national account
customers to do business with fewer carriers and achieve a higher return on
sales expense. Common information systems, particularly the dispatch and sales
automation systems, across all regions, will facilitate growth and greater
efficiency.
Arnold Logistics meets the
unique needs of each client by
integrating a menu of services
to develop customized solutions.
THE COMPANY Arnold Logistics operates over 2.3 million square feet of
value-added warehousing space. The facilities are primarily located in central
Pennsylvania and the Dallas-Fort Worth areas. Arnold Logistics is a division
of Arnold Transportation Services. Services provided include:
Distribution Services complete warehousing and transportation
capabilities, including climate-controlled facilities
Fulfillment Services seamless integration of telemarketing, warehousing,
kitting, shipping and information services from order
entry to custom reporting
Contract Packaging turnkey solutions for customized packaging projects of
any size
Arnold Logistics provides a very high level of service to a variety of
Fortune 500 customers. For instance, we provide worldwide order fulfillment
and distribution services to IBM with 99.98% of orders shipped complete and
on-time. We serve many companies in the food and beverage industry and during
1996 we received a perfect score in the American Institute of Baking (AIB)
audit for cleanliness of our food-grade facilities.
GROWTH Arnold Logistics achieved record revenue levels during 1996. Revenues
totaled $22.5 million, an increase of over 21.5% with improved operating
margins. The growth occurred at the Pennsylvania facilities and in the
value-added areas of contract packaging and order fulfillment.
INVESTMENTS During 1996 Arnold Logistics assumed responsibility for the
Dallas-Fort Worth facilities and invested in upgrading the physical and safety
features of the warehouse. By year end the conversion of the lift-truck fleet
from propane to electric operated units was 95% complete. The longer life
and lower emissions of the electric lift-trucks result in better return on
investment and an improved environment for our employees and the communities
in which we operate. The company also converted 50,000 square feet of dry
warehouse space to a cold storage facility to meet customer needs for additional
climate controlled storage.
LOOKING AHEAD The continued trend toward outsourcing supports anticipated
excellent revenue growth at Arnold Logistics. The value-added areas of contract
packaging and order fulfillment will continue to be sources of growth. Improve-
ments made to facilities in the southwest during 1996 position us for growth in
that market during 1997. We continue to seek geographic expansion of Arnold
Logistics in the southeast region which will further compliment the coverage
of the truckload division and facilitate opportunities to integrate our
services. Additional investments in automation will support the growth of
packaging services. The company has purchased a logistics management software
package to create value for customers in the areas of transportation analysis
and management.
Consolidated Five-Year Statistical Summary
(dollars in thousands except per share data)
1992 1993 1994 1995 1996
Operating Revenues 233,620 272,697 302,390 330,136 356,335
Net Income 25,829 29,902 30,355 30,501 25,409
Net Income Per
Share .97 1.13 1.14 1.15 .95
Operating Revenues by Service
Warehousing/
Logistics 17,635 15,481 16,457 18,545 22,538
Truckload 77,958 100,694 126,300 144,534 151,926
Less-than-Truckload 138,027 156,522 159,633 167,057 181,871
Financial Statements
Contents
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Accountants
Quarterly Performance
Price Range Common Stock
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations
Eleven-Year Financial Summary
Board Of Directors And Stockholder Information
Company Executives
CONSOLIDATED BALANCE SHEETS
as of December 31, 1996 and 1995
(dollars in thousands)
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 19,704 $ 5,770
Marketable securities 21,917 8,503
Accounts receivable:
Trade (less allowance for doubtful
accounts of $1,724 and $1,108) 30,554 31,110
Officers and employees 95 234
Deferred income taxes 7,649 4,409
Prepaid expenses and supplies 3,765 4,668
Refundable income taxes - 1,418
Total current assets 83,684 56,112
Property and equipment, at cost:
Land 16,435 16,344
Buildings 79,846 74,775
Revenue and service equipment 196,325 187,805
Other equipment and fixtures 27,538 22,319
Construction in progress 2,668 3,718
322,812 304,961
Accumulated depreciation 123,198 105,139
Total property and equipment 199,614 199,822
Other assets:
Goodwill, net of accumulated amortization
of $2,049 and $1,680 8,863 9,232
Investments in limited partnerships 10,145 10,679
Cash value of life insurance, net 530 530
Other 276 502
Total other assets 19,814 20,943
$303,112 $276,877
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 16,222 $ 16,693
Accounts payable, trade 9,332 7,316
Federal and state income taxes 456 -
Estimated liability for claims 6,452 6,280
Salaries and wages 4,126 2,754
Accrued vacation 4,635 4,315
Accrued expenses - other 2,552 2,535
Total current liabilities 43,775 39,893
Other long-term liabilities:
Estimated liability for claims 13,689 9,169
Deferred income taxes 31,095 25,995
Notes payable 3,874 5,049
Other 1,532 1,404
Total other long-term liabilities 50,190 41,617
Commitments and contingencies (Note 10)
Stockholders' equity:
Common stock, par value $1.00; authorized
100,000,000 shares; 29,942,628 issued in
1996 and 1995 29,942 29,942
Paid-in capital 209 153
Retained earnings 187,923 174,242
218,074 204,337
Less treasury stock, at cost - 3,279,108
and 3,294,854 shares in 1996 and 1995,
respectively 8,927 8,970
Total stockholders' equity 209,147 195,367
$303,112 $276,877
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(dollars in thousands, except per share data)
1996 1995 1994
Operating revenues $356,335 $330,136 $302,390
Operating expenses:
Salaries, wages and related expenses 174,666 160,130 143,409
Supplies and expenses 57,552 50,542 45,179
Operating taxes and licenses 9,381 9,297 8,924
Insurance 9,837 6,816 6,067
Communication and utilities 4,680 4,297 3,707
Purchased transportation 28,066 22,755 20,988
Rental of buildings, revenue equipment,
etc., net 1,328 1,296 1,670
Depreciation and amortization 27,756 25,348 21,120
Miscellaneous 2,727 1,018 1,804
Total operating expenses 315,993 281,499 252,868
Operating income 40,342 48,637 49,522
Other expenses - net, including interest
income of $1,090, $996 and $1,375 (890) (736) (394)
Income before income taxes and
extraordinary loss 39,452 47,901 49,128
Income taxes 14,043 17,400 18,384
Income before extraordinary loss 25,409 30,501 30,744
Extraordinary loss, net of tax benefit - - 389
Net income $ 25,409 $ 30,501 $ 30,355
Per share amounts
Income before extraordinary loss $ 0.95 $ 1.15 $ 1.16
Net income $ 0.95 $ 1.15 $ 1.14
Weighted average common shares
outstanding 26,655,125 26,635,327 26,614,173
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(dollars in thousands, except per share data)
Common Paid-in Retained Treasury
Stock Capital Earnings Stock
Balance - December 31, 1993 $29,942 $ 6 $136,017 $ (9,098)
Net income - - 30,355 -
Distribution of treasury stock due to
exercise of stock options - 69 - 79
Cash dividends paid ($.41 per
share) - - (10,912) -
Balance - December 31, 1994 29,942 75 155,460 (9,019)
Net income - - 30,501 -
Distribution of treasury stock due to
exercise of stock options - 78 - 49
Cash dividends paid ($.44 per
share) - - (11,719) -
Balance - December 31, 1995 29,942 153 174,242 (8,970)
Net income - - 25,409 -
Distribution of treasury stock due to
exercise of stock options - 56 - 43
Cash dividends paid ($.44 per
share) - - (11,728) -
Balance - December 31, 1996 $29,942 $209 $187,923 $ (8,927)
The accompanying notes are an integral part of the consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(dollars in thousands)
1996 1995 1994
Cash flows from operating activities:
Net income $25,409 $30,501 $30,355
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary loss - - 389
Depreciation and amortization 28,269 25,546 21,101
Gain on disposal of property and equipment (726) (1,452) (1,185)
Equity in (earnings) losses of limited
partnerships (5) 30 48
Provision for deferred taxes 1,860 6,750 5,716
Net (gain) loss on investments 176 (374) 355
Changes in operating assets and liabilities:
(Increase) decrease in accounts
receivable 695 (1,199) (1,492)
(Increase) decrease in prepaid expenses and
supplies 903 (196) (568)
Increase (decrease) in accounts payable,
trade 2,016 (2,440) 4,033
Increase (decrease) in income taxes
payable 1,874 (2,959) 81
Increase in estimated liability for
claims 4,692 322 1,677
Increase (decrease) in accrued expenses 1,709 418 (73)
Other, net 128 128 87
Net cash provided by operating
activities 67,000 55,075 60,524
Cash flows from investing activities:
Proceeds from sale of investment
securities 3,103 11,546 30,136
Purchase of investment securities (16,693) (1,587) (19,606)
Proceeds from disposition of property and
equipment 4,830 7,602 4,976
Purchase of property and equipment (31,279) (52,606) (49,940)
Capital contributions in limited
partnerships (1,646) (1,866) (997)
Distributions from limited partnerships 22 32 12
Acquisition of primary assets of T.W.
Owens & Sons, Inc. - (11,121) -
Other, net 226 (69) (46)
Net cash used in investing activities (41,437) (48,069) (35,465)
Cash flows from financing activities:
Proceeds from employee stock options
exercised 99 127 148
Cash dividends paid (11,728) (11,719) (10,912)
Principal payments on long-term debt - (13,199) (52)
Net cash used in financing activities (11,629) (24,791) (10,816)
Increase (decrease) in cash and cash
equivalents 13,934 (17,785) 14,243
Cash and cash equivalents at beginning of
year 5,770 23,555 9,312
Cash and cash equivalents at end of year $19,704 $ 5,770 $23,555
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,300 $ 1,741 $ 1,311
Income taxes $10,388 $ 13,618 $12,668
Noncash investing activities in 1995 related to the recognition
of the fair value of future capital contributions in limited
partnerships of $6,951.
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands)
1. Summary of Significant Accounting Policies:
Nature of Business:
The Company operates in the motor carrier industry, principally
in the Eastern United States. Revenues are mainly generated
proportionately from less-than-truckload and truckload hauling.
Principles of Consolidation:
The accompanying consolidated financial statements include the
accounts of Arnold Industries, Inc. and all of its subsidiaries.
All material intercompany transactions and balances have been
eliminated.
Revenue Recognition:
In accordance with industry practice, revenues from less-than-
truckload hauling are allocated between reporting periods based
on relative transit time in each reporting period with expenses
recognized as incurred, and revenues from truckload hauling are
recognized when the shipment is completed with expenses
recognized as incurred.
Cash and Cash Equivalents:
For purposes of the consolidated statements of cash flows, the
Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
Marketable Securities:
At December 31, 1996 and 1995, marketable equity and debt
securities have been categorized as available for sale and as a
result are recorded at fair value. Realized gains and losses on
the sale of securities are recognized using the specific
identification method and are included in other income in the
consolidated statements of income. Quoted market prices are used
to determine market value.
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash and cash
equivalents, marketable securities, and trade accounts
receivable. The Company places its cash and cash equivalents
with high credit financial institutions, and limits the amount of
credit exposure to any one financial institution. The Company's
marketable securities consist principally of U.S. Government
securities and municipal bonds. These securities are subject to
minimal risk. Concentrations with respect to trade receivables
are limited due to the large number of customers comprising the
Company's customer base, and their dispersion across many
different industries and geographies.
Property and Equipment:
The Company depreciates the cost, less estimated residual value,
of revenue equipment and other depreciable assets principally on
the straight-line basis over their estimated useful lives.
The estimated useful lives used in computing depreciation on the
principal classifications of property and equipment are as
follows:
Buildings 15 - 31 years
Revenue equipment 3 - 7 years
Service equipment 3 - 6 years
Other equipment and fixtures 4 - 7 years
Goodwill:
The excess of the cost of investments in subsidiaries over the
fair market value of net assets acquired is shown as goodwill,
which is being amortized on a straight-line basis over a maximum
period of 40 years. The Company's policy is to record an
impairment loss against the net unamortized cost in excess of net
assets of businesses acquired in the period when it is determined
that the carrying amount of the asset may not be recoverable. An
evaluation is made at each balance sheet date (quarterly) and it
is based on such factors as the occurrence of a significant
event, a significant change in the environment in which the
business operates or if the expected future net cash flows
(undiscounted and without interest) would become less than the
carrying amount of the asset.
Investments in Limited Partnerships:
The Company's investments in low-income housing limited
partnerships reflect their cash investment plus the present value
of required future contributions net of amortization of any
excess of cost over the estimated residual value.
Use of Estimates:
The preparation of the Company's financial statements in
accordance with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. The consolidated financial
statements include estimates for claims outstanding, the future
recoverability of deferred tax assets, the allowance for
uncollectible accounts receivable and residual value of several
limited partnerships accounted for on a cost basis. Actual
results could differ from those estimates.
Income Taxes:
In accordance with Financial Accounting Standards Board Statement
No. 109, "Accounting for Income Taxes" (SFAS 109), deferred
income taxes are accounted for by the liability method, wherein
deferred tax assets or liabilities are calculated on the
differences between the bases of assets and liabilities for
financial statement purposes versus tax purposes (temporary
differences) using enacted tax rates in effect for the year in
which the differences are expected to reverse. Tax expense in
the consolidated statements of income is equal to the sum of
taxes currently payable plus an amount necessary to adjust
deferred tax assets and liabilities to an amount equal to
period-end temporary differences at prevailing tax rates.
Treasury Stock:
Treasury stock is carried at cost, determined by the first-in,
first-out method.
Per Share Amounts:
Per share amounts are computed based on the weighted average
number of common shares outstanding during the year. No
consideration has been given to common share equivalents (stock
options) since the effect of their inclusion is not material.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" (SFAS 128). SFAS 128 establishes standards for computing
and presenting earnings per share and applies to entities with
publicly held common stock or potential common stock. SFAS 128
simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, "Earnings Per Share," by
replacing the presentation of primary earnings per share with a
presentation of basic earnings per share. It also requires dual
presentation of basic and diluted earnings per share on the face
of the income statement for all entities with complex capital
structures.
SFAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods.
Earlier application is not permitted; however, restatement of all
prior-period earnings per share data is required upon adoption.
The impact of SFAS 128 adoption on the Company's earnings per
share data has not yet been determined.
2. Marketable Securities:
The cost and market value of investment securities at
December 31, 1996 and 1995 follows:
1996 1995
Market Market
Cost Value Cost Value
U.S. treasury securities $ 95 $ 95 - -
Municipal bonds 20,484 20,505 $7,426 $7,429
Equity securities 1,000 1,000 1,000 1,000
Accrued interest receivable 317 317 74 74
Total $21,896 $21,917 $8,500 $8,503
The net gain (loss) on marketable securities recorded during the
years ended 1996, 1995 and 1994 amounted to $24, $374 and $(355),
respectively.
The contractual maturities of debt securities available for sale
at December 31, 1996 are as follows:
Market
Value
Due within one year $18,445
Due after one year through five years 2,060
$20,505
3. Notes Payable:
The Company has unsecured working capital lines of credit with
maximum borrowings of $31,500 of which $14,790 was outstanding at
December 31, 1996 and 1995. Borrowings under these agreements
bear interest at fixed rates quoted by the bank at the time of
borrowing. The current interest rate on the outstanding balance
was 6.0%. For the years ended December 31, 1996, 1995 and 1994,
the weighted average interest rate on short-term borrowings
outstanding was 5.88%, 5.65% and 4.49%, respectively.
In connection with its investments in low income housing limited
partnerships, the Company is required as of December 31, 1996 to
make additional contributions over the next five years as
follows: 1997, $1,742; 1998, $1,712; 1999, $1,209; 2000, $1,189;
and 2001, $200. The additional contributions of $6,052 were
discounted to $5,306 using the Company's incremental borrowing
rate of 6%. Management anticipates that the cash flow from the
tax credits generated by these investments will approximate the
additional contributions during this period.
4. Stock Option and Stock Purchase Plans:
Stock Option Plan:
The Company has a stock option plan which provides for the
granting of options to purchase shares of the Company's stock to
certain executives, employees, consultants and directors.
Options to acquire up to 1,625,000 shares of the stock may be
granted to executives, employees, consultants and directors of
the Company. Such options carry various restrictions. Under the
plan, certain options granted to employees will be qualified
incentive stock options within the meaning of Section 422A of the
Internal Revenue Code and other options will be considered
nonqualified stock options. The incentive stock options may be
granted for no less than market value at the date of grant and
nonqualified stock options may be granted for no less than half
of market value at the date of grant. Options are exercisable
starting three months from the date of grant and expire no later
than ten years after the date of grant. Also, no employee may
participate in the incentive stock option plan if immediately
after the grant he or she would own directly or indirectly more
than 10% of the stock of the Company.
Transactions and other information relating to the stock option
plan for the three years ended December 31, 1996 are summarized
in the following chart:
Stock Option Plan
The Company has a stock option plan which provides for the granting
of options to purchase shares of the Company's stock to certain
executives, employees, consultants and directors.
Options to acquire up to 1,625,000 shares of the stock may be granted
to executives, employees, consultants and directors of the Company.
Such options carry various restrictions. Under the plan, certain
options granted to employees will be qualified incentive stock options
within the meaning of Section 422A of the Internal Revenue Code and
other options will be considered nonqualified stock options. The
incentive stock options may be granted for no less than market value
at the date of grant and nonqualified stock options may be granted
for no less than half of market value at the date of grant and expire
no later than ten years after the date of grant. Also, no employee
may participate in the incentive stock option plan if immediately
after the grant he or she would own directly or indirectly more than
10% of the stock of the Company.
Transactions and other information relating to the stock option plan
for the three years ended December 31, 1996 are summarized in the
following chart:
Weighted
Average
Fair Value
of Options
Granted
During
Shares Price Per Share the Year
Balance, outstanding -
December 31, 1993 1,009,100 $ 4.46 to $15.62
Options granted 135,600 $13.63
Options exercised (29,490) $ 4.46 to $13.94
Options expired (11,100) $ 7.25 to $13.94
Balance, outstanding -
December 31, 1994 1,104,110 $ 4.46 to $15.62
Options granted -
Options exercised (18,730) $ 4.46 to $ 7.25
Options expired (28,700) $ 7.25 to $14.75
Balance, outstanding -
December 31, 1995 1,056,680 $ 4.46 to $15.62
Options granted 38,800 $13.63 $3.81
Options exercised (15,746) $ 4.46 to $ 7.25
Options expired (26,000) $13.63 to $14.75
Balance, outstanding -
December 31, 1996 1,053,734 $ 4.46 to $15.62
Options exercisable -
December 31, 1996 451,754 $ 4.46 to $14.75
On June 26, 1996, stock options granted in 1994 for $18.25 per
share to $18.50 per share have been repriced to $13.63 per share.
All other provisions on the 1994 options have remained unchanged.
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS 123). As permitted by SFAS 123, the Company
has chosen to apply APB Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations in
accounting for its plan. Accordingly, no compensation cost has
been recognized for options granted under the plan. Had
compensation costs for the Company's plan been determined based
on the fair value at the grant dates for awards under the plan
consistent with the method of SFAS 123, the impact on the
Company's net income and earnings per share would be as follows:
1996 1995
As As
Reported Pro Forma Reported Pro Forma
Net income $25,409 $25,281 $30,501 $30,501
Earnings per share $ 0.95 $ 0.95 $ 1.15 $ 1.15
The fair value of each option grant is estimated on the date of
the grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1996
and 1995; dividend yield of 3.00%, expected volatility of 26.00%,
risk-free interest rate of 6.72%, and expected life of 6 years.
Stock Purchase Plan:
Effective November 15, 1992 the Company adopted a stock purchase
plan which replaced a similar plan adopted in 1975. The 1992
stock purchase plan is available to all eligible employees.
Under the plan, subscriptions of each subscribing employee are
remitted to a custodian for investment in the common stock of the
Company.
Minimum and maximum contributions under the 1992 plan are $520
and $8,200 for each employee in any one year. The minimum and
maximum contributions under the 1975 plan were $300 and $3,000
for each employee in any one year. At least monthly the
custodian purchases the stock in the over-the-counter market and
the Company allocates all purchased shares based on average price
for all purchases and individual payroll deduction amounts.
Under the 1992 plan the Company is responsible for all costs of
stock purchases and stock sales within the plan and any
administrative costs related to issuance of stock certificates.
Employees are responsible for the expense of sale or transfer on
issued stock certificates. The 1975 plan required that employees
pay all of the custodian and brokerage fees.
5. Income Taxes:
Consolidated income tax expense consists of the following:
1996 1995 1994
Currently payable:
Federal $10,334 $ 8,960 $10,198
State 1,849 1,690 2,470
12,183 10,650 12,668
Deferred:
Federal 1,517 5,626 4,867
State 343 1,124 849
1,860 6,750 5,716
Total income tax expense $14,043 $17,400 $18,384
The effective income tax rates of 35.6% in 1996, 36.3% in 1995
and 37.4% in 1994 differ from the federal statutory rates for the
following reasons:
1996 1995 1994
Statutory federal income
tax rate 35.0% 35.0% 35.0%
State income taxes, net of
federal income tax benefit 3.6 3.8 4.4
Tax-free investment income
and other (3.0) (2.5) (2.0)
35.6% 36.3% 37.4%
Deferred tax liabilities (assets) are comprised of the following
at December 31:
1996 1995
Property and equipment, principally
due to differences in depreciation $33,293 $29,052
Limited partnership investments,
principally due to differences in
tax basis 1,350 1,313
Other 294 346
Gross deferred tax liabilities 34,937 30,711
Estimated liability for claims, principally
due to differences in timing of
recognition of expense (7,828) (6,068)
Net operating loss carryforwards of
pooled subsidiary - (26)
Vacation liability, principally due to
differences in timing of recognition
of expense (1,519) (1,466)
Allowance for bad debts, principally due
to differences in timing of recognition
of expense (673) (318)
Deferred compensation, principally due
to differences in timing of recognition
of expense (672) (562)
Other (799) (685)
Gross deferred tax assets (11,491) (9,125)
$23,446 $21,586
6. Profit Sharing Plans:
The Company has trusteed profit sharing plans for all employees
meeting certain eligibility tests. The plans may be amended at
any time at the discretion of the Board of Directors.
Approximate charges to income for contributions to the plans
amounted to $1,751, $1,662 and $1,518 for 1996, 1995 and 1994,
respectively.
7. Pension Plans:
Charges to income for pension expense for 1996, 1995, and 1994
approximates $7,100, $6,599 and $6,352, respectively,
representing payments to multiemployer pension plans under the
provisions of various labor contracts. Under the Multiemployer
Pension Plan Amendments Act of 1980 (the Act), an employer
withdrawing from a multiemployer pension plan is liable for a
portion of the unfunded vested benefit obligations of such plan.
The Act treats an employer as having withdrawn when the employer
either permanently ceases to have an obligation to contribute to
the plan or permanently ceases all covered operations under the
plan. The Company presently has no plans to withdraw from a
multiemployer pension plan.
The Company also offers a supplemental defined benefit pension
plan for certain key officers and employees with payments to
begin five years following retirement. Death and disability
benefits are also provided. The amount of annual pension benefit
is determined by the Board of Directors. The charge to income
for this plan was $149, $140 and $141 for 1996, 1995, and 1994,
respectively. The following table sets forth the supplemental
plan's funded status and amounts recognized in the Company's
consolidated balance sheets at December 31, 1996 and 1995:
1996 1995
Actuarial present value of
benefit obligations:
Vested benefit obligation $ 601 $ 479
Accumulated benefit obligation $1,480 $1,343
Projected benefit obligation for service
rendered to date 1,480 1,343
Plan assets at fair value - -
Plan liability under projected benefit
obligation 1,480 1,343
Unrecognized net gain - 1
Unrecognized net asset at transition 52 58
Accrued pension cost $1,532 $1,402
The following table sets forth components of net pension cost for
the supplemental plan recognized in the Company's consolidated
income statements for the years ended December 31, 1996, 1995 and
1994:
1996 1995 1994
Service cost - benefits earned
during the period $ 61 $ 61 $ 72
Interest cost on projected benefit
obligation 94 85 75
Net amortization and deferral (6) (6) (6)
Net pension cost $149 $140 $141
A discount rate of 7% is used in accounting for the pension plan
as of December 31, 1996 and 1995.
8. Fair Value of Financial Instruments:
Financial instruments include cash and cash equivalents,
marketable securities, investments in limited partnerships and
notes payable. At December 31, 1996 the carrying amount of cash
equivalents approximates fair value because of the short-term
maturity of those instruments, and the carrying value of
marketable securities is fair market value. With respect to
investments in limited partnerships, management has determined
that the resulting carrying value approximates estimated fair
market value. The fair value of the Company's obligations for
contributions to limited partnerships approximates its carrying
value.
The fair market value of the Company's notes payable approximates
its carrying value and was based on the borrowing rates currently
available to the Company for bank loans with similar terms and
maturities.
9. Transactions With Affiliates:
Accounting and legal fees totaling approximately $746, $733 and
$762 in 1996, 1995 and 1994, respectively, were paid or accrued
to firms in which certain directors have financial interests.
10. Commitments and Contingencies:
By agreement with its insurance carriers, the Company has assumed
liability in any single occurrence for Workmen's Compensation and
Property Damage up to $1,000 and for Public Liability up to
$1,000 for the first occurrence and up to $500 for each
subsequent occurrence with excess liability assumed by the
insurance carriers up to $52,000. In conjunction with these
agreements, the Company has issued irrevocable letters of credit
to guarantee future payments of claims to the insurance carriers.
At December 31, 1996, the outstanding balance of the letters of
credit was $11,695 on a total commitment of $12,000.
11. Extraordinary Loss:
The Trucking Industry Regulatory Reform Act of 1994 deregulated
intrastate trucking. As a result, the Company recorded an
extraordinary loss, net of income taxes, of approximately $389
relating to the write-off of the unamortized balance of
intrastate operating rights.
12. Acquisition:
On January 3, 1995, the Company purchased for approximately
$11,121 in cash substantially all of the accounts receivable,
property, revenue and other equipment and resulting goodwill of a
Georgia-based truckload transportation company. Arnold
Industries did not assume any of the liabilities of the Georgia
company.
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Arnold Industries, Inc.
Lebanon, Pennsylvania:
We have audited the accompanying consolidated balance sheets of
Arnold Industries, Inc. and subsidiaries as of December 31, 1996
and 1995 and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Arnold Industries, Inc. and subsidiaries
as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years
in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
One South Market Square
Harrisburg, Pennsylvania
February 28, 1997
QUARTERLY PERFORMANCE
(dollars in thousands except per share data)
Operating Operating Net
Revenues Income Income
Quarter 1996 1995 1996 1995 1996 1995
First 82,392 83,417 8,233 13,418 5,043 8,509
Second 90,111 83,383 11,467 13,652 7,154 8,523
Third 91,442 81,898 10,938 11,236 7,128 7,073
Fourth 92,390 81,438 9,704 10,331 6,084 6,396
356,335 330,136 40,342 48,637 25,409 30,501
Net Income Dividends
Per Share Per Share
Quarter 1996 1995 1996 1995
First .19 .32 .11 .11
Second .27 .32 .11 .11
Third .27 .27 .11 .11
Fourth .22 .24 .11 .11
.95 1.15 .44 .44
PRICE RANGE COMMON STOCK
HIGH LOW HIGH LOW
Quarter 1996 1995
First 17 7/8 13 20 3/4 17 3/8
Second 16 1/2 13 1/2 18 1/2 16 1/4
Third 16 1/2 13 5/8 19 1/4 16 3/4
Fourth 16 1/2 15 1/4 18 3/4 15 7/8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
Arnold Industries' operating revenues, as set forth below,
are from four separate operating subsidiaries:
New Penn Motor Express, Inc. ("New Penn")
Arnold Transportation Services:
LebArnold, Inc. ("LebArnold")
SilverEagle Transport, Inc. ("SilverEagle")
D.W. Freight, Inc. ("D.W.")
New Penn is a less-than-truckload (LTL) transportation
company. LebArnold, SilverEagle and D.W. provide truckload (TL)
transportation services. In addition, LebArnold, under the name
Arnold Logistics, provides specialty warehousing operations and
related transportation services.
Operating Revenues
(dollars in millions) Total LTL
Amount % Increase Amount % Increase
1996 $356.3 8 $181.9 9
1995 330.1 9 167.1 5
1994 302.4 11 159.6 2
Warehousing/
Truckload Related Trucking
Amount % Increase Amount % Increase
1996 $151.9 5 $ 22.5 21
1995 144.4 14 18.6 13
1994 126.3 25 16.5 6
The revenue growth at New Penn for 1996 over 1995 was
primarily due to the tonnage increase in 1996 to 1,008,566 tons
from 920,581 tons in 1995, a 10% increase. The revenue growth
for both New Penn and the Arnold Transportation Services
companies in 1996 and 1995 was affected substantially by
discounted pricing as a result of excess capacity in the
transportation industry. This excess capacity occurred because
many trucking companies expanded equipment fleets during 1995,
while the anticipated increase in demand did not materialize. In
addition, both companies' revenues were negatively impacted by
the extreme winter weather in early 1996 and flooding during the
year in various parts of the country which affected the truckload
divisions. Also, the revenue of D.W. was negatively impacted in
1996 due to the deregulation in the State of Texas.
The Arnold Transportation Services companies increased their
revenue in 1996 by 7% over revenues generated in 1995. The
increase was due to additional freight hauled during the year.
Revenue for 1995 increased 14% over 1994. The majority of the
increase in 1995 was attributable to the acquisition of T.W.
Owens & Sons, Inc., a Georgia based $18 million annual revenue
regional truckload carrier. Approximately $9 million of revenue
was retained from T.W. Owens customers. The additional capacity
acquired in the Owens transaction was used to increase business
with SilverEagle's existing customer base.
Set forth below is a schedule showing the operating revenues
of the four operating subsidiaries.
1996 1995 1994
Amount % Amount % Amount %
New Penn $181.9 51 $167.1 50 $159.6 53
SilverEagle 67.8 19 62.3 19 48.8 16
D.W. 52.0 15 51.7 16 48.7 16
LebArnold
Trucking 32.1 9 30.4 9 28.8 10
Warehousing &
Related Trucking 22.5 6 18.6 6 16.5 5
TOTAL $356.3 100% $330.1 100% $302.4 100%
NOTE: The assets of T.W. Owens & Sons, Inc. were acquired by
SilverEagle in January 1995 and H.R. Hill, Inc. by D.W.
in March 1994. Both companies were acquired as
purchases and no revenues are shown for these
acquisitions prior to these respective dates.
The following tables set forth the percentages of operating
expenses and operating income to operating revenues for the years
indicated.
New Penn Motor Express Arnold Transp.
& Related Companies Services
1996 1995 1994 1996 1995 1994
Operating Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses
Salaries, wages and
related expenses 60.0 58.4 57.5 37.6 38.3 36.1
Supplies and expenses 10.3 9.8 9.7 22.2 20.9 20.8
Operating taxes and
licenses 3.2 3.5 3.7 2.0 2.2 2.2
Insurance 1.8 1.5 1.5 3.8 2.7 2.6
Communication and
utilities 1.2 1.1 1.1 1.5 1.5 1.3
Purchased
transportation 1.0 1.0 1.0 15.0 12.9 13.6
Rental of buildings,
revenue equipment,
etc., net (.3) (.4) (.4) 1.1 1.2 1.6
Depreciation and
amortization 4.8 4.9 4.5 10.9 10.5 9.7
(Gain) on sale of
equipment (.2) (.4) (.2) (.1) (.4) (.5)
Miscellaneous .2 .4 .9 1.7 1.1 1.1
Total Operating
Expenses 82.0 79.8 79.3 95.7 90.9 88.5
Operating Income 18.0% 20.2% 20.7% 4.3% 9.1% 11.5%
The operating expenses of New Penn and its related
companies increased to 82.0% of operating revenues in 1996 from
79.8% in 1995 and 79.3% in 1994. Salaries, wages and related
expenses increased to 60.0% in 1996 from 58.4% in 1995 and 57.5%
in 1994, primarily as a result of increased drivers' wages and
benefits, including workers' compensation expense. Supplies and
expenses increased in 1996 to 10.3% from 9.8% in 1995 as a result
of higher fuel costs. A fuel surcharge was implemented in
September, 1996, which partially offset the higher fuel costs.
Insurance expense increased to 1.8% in 1996 from the 1.5% in the
years 1995 and 1994. The Company's insurance carrier increased
the insurance reserve during the year 1996 due to a prior year's
loss.
The Arnold Transportation Services companies' salaries,
wages and related expenses decreased to 37.6% in 1996 from 38.3%
in 1995 due to the use of more owner/operators during 1996 which
resulted in lower salaries and wages expense. However, this
reduction in salaries and wages was partially offset by higher
workers' compensation and health benefit expenses. The 1995
expense increased to 38.3% from 36.1% in 1994 primarily as a
result of decreased revenue per mile. Supplies and expenses
increased to 22.2% in 1996 from 20.9% and 20.8% for 1995 and
1994, respectively. This was due to substantially higher fuel
costs in 1996. The higher fuel costs were partially offset by a
fuel surcharge which was implemented in September and October,
1996. Insurance increased to 3.8% from 2.7% in 1995 and 2.6% in
1994 as a result of the Company's insurance carrier increasing
the insurance reserves in 1996 for several losses which were
incurred in prior years. Since July 1, 1995, the Company has
made major changes to its insurance and risk management programs
which have substantially improved the Company's loss and reserve
experience. Purchased transportation costs increased to 15.0% in
1996 compared to 12.9% in 1995 and 13.6% in 1994 because of the
use of additional owner/operators. The 1995 costs decreased from
1994 because of higher revenue without a proportionate increase
in owner/operators.
Miscellaneous operating expenses increased to 1.7% in 1996
from 1.1% for both years 1995 and 1994 as a result of the Company
sustaining a number of losses due to shipper bankruptcies, which
resulted in writing off accounts receivable balances.
Total operating expenses increased to 95.7% for 1996
compared to 90.9% in 1995 and 88.5% in 1994.
Arnold Industries' operating income for 1996 decreased $8.3
million or 17% over 1995, and 1995 operating income decreased $.9
million or 2% over 1994. Operating income was adversely impacted
by excessive discounting and excess capacity in the industry in
both 1996 and 1995, and was also substantially affected by higher
fuel and insurance costs in 1996.
Other net non-operating expenses consist primarily of
interest income, other investment income, and interest expense.
The years 1996 and 1995 were affected by amortization of
investments in low-income housing limited partnerships in the
amounts of $.5 and $.3 million, respectively. The 1996 interest
expense decreased to $1.3 million compared to $1.7 million in
1995, primarily due to a reduction in debt. Interest income was
reduced by $.3 million for 1996 and $.4 million for 1995 compared
to the year 1994 due to reduced interest rates and reduced
investments. The reductions in investment securities held in
1995 and 1994 were primarily due to the asset acquisitions from
T.W. Owens in 1995 and H.R. Hill in 1994.
The effective income tax rates for 1996, 1995 and 1994, were
35.6%, 36.3%, and 37.4% respectively. The reductions in the
effective tax rates are due primarily to tax credits generated by
investments in low-income housing limited partnerships.
Net income for 1996 decreased to $25.4 million compared to $30.5
million for 1995. Net income per share in 1996 was $.95 compared
to $1.15 for 1995. This compares to $30.3 million or $1.14 per
share for 1994. Approximately one-half of the decline in the
Company's 1996 net income per share is attributable to increased
insurance reserves as a result of several large losses in prior
years.
Capital Expenditures
The total property and equipment purchases (net of
dispositions) amounted to $26.4 million for 1996, compared to
$53.6 million for 1995 and $45.0 million for 1994. This included
equipment purchases of $8.6 million on the T.W. Owens acquisition
in 1995 and approximately $10 million as a result of the H.R.
Hill acquisition in 1994. The Company is projecting capital
expenditures at approximately $36 million for 1997, excluding any
acquisitions.
Liquidity and Capital Resources
Cash, cash equivalents, and marketable securities totaled
$42 million at the end of 1996 compared to $14 million at the end
of 1995 and $42 million at the end of 1994. The increase for the
year 1996 was due to substantially lower investments in property
and equipment, whereas the decrease in 1995 compared to 1994 was
due to a substantially higher investment in property and
equipment and the payment of a line of credit loan. Working
capital amounted to $40 million, $16 million, and $25 million at
the end of 1996, 1995 and 1994, respectively. Net cash provided
by operating activities was $67 million in 1996, $55 million in
1995, and $61 million in 1994.
The Company's current cash position, together with funds
invested in marketable securities and cash flow generated from
future operations are expected to be sufficient to finance
anticipated capital expenditures. These funds may be
supplemented when necessary or desirable by short or long-term
borrowing.
Inflation
During 1996, the Company believes that inflation had a
minimal effect on operating results. However, most of the
Company's expenses are subject to inflation which results in
increased costs.
Seasonality
In the trucking industry, results of operations show a
seasonal pattern because of customers' reduced shipments in the
winter months. In addition, operating expenses are usually
higher during the winter months.
Current Trends
On January 2, 1997, New Penn effected a general rate
increase of 5.9% which affected approximately 33% of its
customers. Other customer rates are subject to negotiated
contracts and agreements. Discounting and overcapacity in both
the LTL and TL segments of the industry in 1995 has continued
through 1996 and into 1997.
New Penn's revenue was up 18% for the fourth quarter of
1996. The beginning of 1997 continues to show increases in
revenue. However, revenues at the Arnold Transportation Services
companies show little growth.
The truckload operations of LebArnold, SilverEagle, and D.W.
will be combined into a core carrier subsidiary in 1997 under the
name of Arnold Transportation Services. Management believes that
the restructuring of the TL companies will have positive effects
through improved marketing, quality of revenue and equipment
utilization. The Company is continuing to improve efficiency by
continued refinement of information technology which will reduce
costs and provide better service to its customers.
The Company continues to seek niche markets requiring high levels
of customized service which offer above average returns for the
expertise required to serve them. Management believes that
growth opportunities remain for both the LTL and TL companies
through improved marketing efforts, expansion of regional markets
and continued refinement of information technology. In December
1995, the Company registered up to $75 million worth of common
stock and warrants for possible use in connection with future
business acquisitions. Management will continue to evaluate
opportunities to expand in both the LTL and TL segments of the
industry.
ELEVEN-YEAR FINANCIAL SUMMARY<FN1>
(dollars in thousands, except per share data)
Fiscal Year 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
Income
Operating revenues 356,335 330,136 302,390 272,697 233,620 196,202 188,830 167,589 148,196 124,176 99,062
Operating expenses
Depreciation and amortization 27,756 25,348 21,120 17,811 14,222 11,500 10,527 11,021 9,906 8,973 6,098
Operating taxes and licenses 9,381 9,297 8,924 7,908 6,780 5,887 4,836 4,537 4,147 3,593 2,968
Other 278,856 246,854 222,824 200,106 172,304 142,080 137,027 123,121 109,397 92,886 73,625
Operating income 40,342 48,637 49,522 46,872 40,314 36,735 36,440 28,910 24,746 18,724 16,371
Non-operating income (expense)
Interest income (expense), net (200) (711) 35 355 246 195 (1,123) (1,180) (923) (691) (221)
Other (690) (25) (429) 1,326 (71) 10 (449) 884 4,142 (287) 2,773
Income before income taxes,
extraordinary loss, and
cumulative effect of change
in accounting principle 39,452 47,901 49,128 48,553 40,489 36,940 34,868 28,614 27,965 17,746 18,923
Income taxes 14,043 17,400 18,384 18,651 14,660 13,512 12,452 10,939 10,543 8,171 9,358
Income before extraordinary loss
and cumulative effect of
change in accounting principle 25,409 30,501 30,744 29,902 25,829 23,428 22,416 17,675 17,422 9,575 9,565
Extraordinary loss, net of tax
benefit<FN5> -- -- 389 -- -- -- -- -- -- -- --
Cumulative effect of change in
accounting for income taxes<FN6> -- -- -- -- -- -- -- 1,322 -- -- --
Net income 25,409 30,501 30,355 29,902 25,829 23,428 22,416 18,997 17,422 9,575 9,565
Per Share Data<FN2>
Income before extraordinary
loss and cumulative effect
of change in accounting
principle .95 1.15 1.16 1.13 .97 .88 .84 .67 .67 .37 .38
Net income .95 1.15 1.14 1.13 .97 .88 .84 .71 .67 .37 .38
Cash dividends declared .44 .44 .41 .35 .32 .29 .25 .22 .11 .06 .05
Book value 7.84 7.33 6.63 5.90 5.12 4.46 3.86 3.31 2.76 2.16 1.76
Financial Position - Year End
Cash, temporary investments and
marketable securities<FN3> 41,621 14,273 41,643 38,285 45,186 57,558 37,184 26,826 25,318 15,029 11,407
Working capital<FN4> 39,909 16,219 24,839 24,093 29,856 55,664 30,877 24,049 23,575 11,558 10,360
Property and equipment-net 199,614 199,822 169,603 144,148 110,674 88,250 91,393 83,540 67,346 58,291 44,097
Total assets 303,112 276,877 260,279 228,361 197,203 170,668 159,973 136,313 116,197 94,081 72,936
Long-term debt 3,874 5,049 -- -- 476 17,603 19,479 19,749 14,812 12,840 6,685
Stockholders' equity 209,147 195,367 176,458 156,867 136,015 118,502 102,362 87,681 72,589 55,520 45,210
Other Data
Percentage return on average
stockholders' equity 12.6 16.4 18.2 20.4 20.3 21.2 23.6 23.7 27.2 19.0 23.4
Net cash provided by operating
activities 67,000 55,075 60,524 51,299 34,518 35,898 36,639 29,471 25,195 23,136 14,752
<FN>
<FN1>
1. D.W. Freight, Inc. was acquired in April 1992 and is accounted
for under the purchase method - asset acquisitions from H.R.
Hill and T.W. Owens occurred in March 1994 and January 1995,
respectively
<FN2>
2. Adjusted to give retroactive effect to the two-for-one stock split
in 1993, the two-for-one stock split in 1991, the three-for-two
stock split in 1988, the five-for-four stock split in 1987, and the
two-for-one stock split in 1986
<FN3>
3. Excludes restricted cash prior to 1992
<FN4>
4. Certain liabilities with respect to claims were reclassified as
long-term beginning in 1991
<FN5>
5. Write-off of the unamortized balance of intrastate operating rights
<FN6>
6. The Company adopted SFAS No. 96, "Accounting for Income Taxes," in
1989
</FN>
BOARD OF DIRECTORS
E. H. Arnold
Chairman, President, CEO and Director
Kenneth F. Leedy
Director
President - New Penn Motor Express, Inc.
Heath L. Allen, Esq.
Secretary and Director
Partner - Keefer, Wood, Allen and Rahal
Harrisburg, PA
Ronald E. Walborn, CPA
Treasurer and Director
President - Walborn Shambach Associates
Harrisburg, PA
Arthur L. Peterson
Director
Executive Director - Florida Association of
Colleges and Universities, Madeira Beach, FL
Carlton E. Hughes
Director
Chairman - Stewart-Amos Steel, Inc.
Harrisburg, PA
STOCKHOLDER INFORMATION
Counsel
Messrs. Keefer, Wood, Allen and Rahal
210 Walnut Street
Harrisburg, PA 17101
Auditors
Coopers & Lybrand L.L.P.
One South Market Square
Harrisburg, PA 17101
Registrar and Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Stock Listing
Arnold Industries common stock is traded on the NASDAQ National
Market System. The stock symbol is AIND. In newspapers, the
stock is listed as "ArnoldInd", "Arnold Inds" or similar
variations. There were 1,347 record-holders of the Company's
common stock as of March 10, 1997. The number of beneficial
owners is considerably greater.
Annual Meeting of Stockholders
The Arnold Industries 1997 Annual Meeting of Stockholders will be
held 4:00 PM, May 7, 1997 at the Lebanon Country Club, 3375 West
Oak Street, Lebanon, Pennsylvania.
Investor Information
Stockholders, securities analysts, portfolio managers,
representatives of financial institutions and individuals seeking
financial and operating information, including copies of
Form 10K, may contact:
Corporate Secretary
Arnold Industries, Inc.
P.O. Box 210
Lebanon, PA 17042
(717) 273-9058
Copies of the Company's Form 10-K will be supplied to
stockholders upon request without charge.
Dividend Reinvestment/Cash Purchase Plan
This plan enables you, as a stockholder, to apply your dividends
on the Company's stock towards the purchase of additional shares
of Arnold Industries, Inc. common stock on an automatic basis.
Also, at your option, you may make quarterly cash payments from
$25 to $3,000 to purchase additional stock. The Company pays the
brokerage commissions and administrative fees connected with your
participation in this Plan. Participation in the Plan is
entirely voluntary and you may enroll or withdraw at any time.
The Plan is administered by Registrar and Transfer Company,
Arnold Industries' stock transfer agent. For information call
800-368-5948.
Quarterly Reports
The Company presently sends to its stockholders of record a
quarterly report from its President, Edward H. Arnold,
summarizing results of operations for the most recent quarter.
If you are not a stockholder of record, but instead hold your
stock in the name of a broker or other nominee, you may also
receive these quarterly reports by requesting this report and
supplying your mailing address to the Company. Requests should
be mailed to the Company to the attention of the Corporate
Secretary.
(Inside Back Cover)
COMPANY EXECUTIVES
ARNOLD INDUSTRIES, INC.
E. H. Arnold, Chairman, President & CEO
Donald G. Johnson, Senior Vice President*
Andrew J. Kerlik, VP, Personnel & Safety*
Timothy D. Hoffman, VP, Properties*
Ronald E. Walborn, CPA, CFO* & Treasurer
Heath L. Allen, Esq., Secretary
*As of January 1, 1997
NEW PENN MOTOR EXPRESS, INC.
Kenneth F. Leedy, President
Stephen M. O'Kane, Executive Vice President
Terrence P. Ryan, VP, Sales
Steven J. Ginter, VP, Marketing
Charles J. Kachel, VP, National Accounts
Daniel W. Schmidt, VP, Labor Relations
Frank Santanella, VP, Eastern Division
Charles A. Zaccaria, VP, Northern Division
John G. McCloy, VP, Central Division
Shawn P. Nolan, VP, Western Division
Thomas P. McDonald, Division VP, Sales
Anthony S. Nicosia, Division VP, Sales
ARNOLD TRANSPORTATION SERVICES
Robert J. Petruzzi, COO
Paul L. Shiffler, CFO
Kurt E. Antkiewicz, VP, Sales & Marketing
David L. Teichert, VP, Southeast Division
J. Michael Driggers, VP, Southwest Division
Kurt E. Morgan, VP, Northeast Division
ARNOLD LOGISTICS
Douglas B. Enck, Vice President/General Manager
(Back Cover)
Company Logo
Arnold Industries, Inc.
Corporate Headquarters
625 South Fifth Avenue
Lebanon, Pennsylvania 17042
(717) 274-2521