FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999.
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) 273-9058
(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: 24,867,326 shares outstanding
(which excludes 5,075,302 treasury shares) as of August 9, 1999.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets - June 30, 1999 and
(Unaudited) December 31, 1998
Condensed Consolidated Statements of - June 30, 1999
Income (Three and Six Month and 1998
Periods - Unaudited)
Condensed Consolidated Statements of - June 30, 1999
Cash Flows (Six Month and 1998
Periods - Unaudited)
Notes to Condensed Consolidated Financial Statements
ARNOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1999 1998
ASSETS
Current Assets
Cash and Cash Equivalents 25,213,522 19,432,802
Marketable Securities 4,644,956 4,848,974
Accounts Receivable, Net 43,224,792 40,159,047
Notes Receivable, Current 875,000 873,709
Deferred Income Taxes 2,833,813 6,262,784
Prepaid Expenses and Supplies 4,960,431 7,458,315
Refundable Income Taxes -0- 707,157
Total Current Assets 81,752,514 79,742,788
Property and Equipment, at Cost 383,699,131 370,157,592
Less: Accumulated Depreciation 151,989,347 149,458,462
Total Property and Equipment 231,709,784 220,699,130
Other Assets
Goodwill, Net 8,160,421 8,303,117
Investments in Limited Partnerships 8,851,639 9,119,574
Notes Receivable, Long-term 1,631,635 1,090,734
Other 1,183,839 1,155,368
Total Other Assets 19,827,534 19,668,793
TOTAL ASSETS 333,289,832 320,110,711
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable 20,908,251 15,863,399
Accounts Payable 12,809,352 10,352,289
Income Taxes 2,019,231 -0-
Estimated Liability for Claims 2,550,589 5,078,913
Accrued Expenses - Other 16,271,485 13,317,352
Total Current Liabilities 54,558,908 44,611,953
Long-term Liabilities
Estimated Liability for Claims 3,381,000 10,714,000
Deferred Income Taxes 34,645,790 35,307,204
Notes Payable 123,670 1,309,929
Other 1,815,413 1,768,113
Total Long-term Liabilities 39,965,873 49,099,246
Stockholders' Equity
Common Stock 29,942,628 29,942,628
Paid-in Capital 1,410,250 658,065
Retained Earnings 244,154,620 232,417,298
Treasury Stock - At Cost (36,742,447) (36,618,479)
Total Stockholders' Equity 238,765,051 226,399,512
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY 333,289,832 320,110,711
THE ACCOMPANYING NOTES, HERE AND FOLLOWING, ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ARNOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended Three Months Ended
June 30, June 30,
1999 1998 1999 1998
Operating Revenues 205,498,683 198,266,340 105,193,036 102,264,377
Operating Expenses 177,855,193 172,579,280 90,649,205 88,109,344
Operating Income 27,643,490 25,687,060 14,543,831 14,155,033
Interest Expense (665,546) (546,659) (416,139) (263,120)
Other Income
(Deductions) 286,375 219,223 180,561 105,927
Income Before
Income Taxes 27,264,319 25,359,624 14,308,253 13,997,840
Income Taxes 10,060,482 9,244,798 5,297,316 5,109,411
Net Income 17,203,837 16,114,826 9,010,937 8,888,429
Net Income per Common
Share:
Basic .69 .62 .36 .34
Diluted .69 .62 .36 .34
Average Common Shares
Outstanding:
Basic 24,846,392 25,976,888 24,859,653 25,995,769
Effect of
dilutive
securities -
stock options 266,211 191,466 282,720 158,132
Diluted 25,112,603 26,168,354 25,142,373 26,153,901
Dividends per
Common Share .22 .22 .11 .11
THE ACCOMPANYING NOTES, HERE AND FOLLOWING, ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ARNOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1999 1998
Operating Activities
Net Income 17,203,837 16,114,826
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 15,909,672 15,385,910
Provision for Deferred Taxes 2,767,557 (831,830)
Other (711,717) (863,234)
Changes in Operating Assets and Liabilities:
(Increase) in Accounts Receivable (3,065,745) (4,734,391)
(Increase) Decrease in Prepaid Expenses
and Supplies 2,497,884 (445,503)
Increase in Accounts Payable 2,457,063 2,025,080
(Decrease) in Estimated Liability
for Claims (9,861,324) (302,440)
Increase in Other Accrued Expenses 5,680,521 6,578,532
Other 47,300 67,700
Net Cash Provided by
Operating Activities 32,925,048 32,994,650
Investing Activities
Proceeds from Sale of Investment Securities 726,036 2,267,413
Purchase of Investment Securities (523,286) (527,919)
Proceeds from Disposition of
Property and Equipment 5,427,340 4,062,922
Purchase of Property and Equipment (32,534,984) (20,278,595)
Capital Contributions to Limited Partnerships (1,141,407) (1,601,096)
Other 740,271 (19,446)
Net Cash Used In Investing Activities (27,306,030) (16,096,721)
Financing Activities
Cash Dividends Paid (5,466,514) (5,718,538)
Purchase of Treasury Stock (314,550) -0-
Proceeds from Short-term Debt 5,000,000 -0-
Other 942,766 363,538
Net Cash Provided by (Used in)
Financing Activities 161,702 (5,355,000)
Increase (Decrease)in Cash and Cash Equivalents 5,780,720 11,542,929
Cash and Cash Equivalents at Beginning of Year 19,432,802 26,504,782
Cash and Cash Equivalents at End of Period 25,213,522 38,047,711
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest 665,907 546,660
Income Taxes 4,570,519 7,136,156
THE ACCOMPANYING NOTES, HERE AND FOLLOWING, ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ARNOLD INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note I: 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 and any intervening reports.
The results of operations for the three and six-month periods ending
June 30, 1999, and June 30, 1998, 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 second quarter of 1999 were $105,193,036, an
increase of $2,928,659 or 3% from Operating Revenues for 1998's second
quarter. For the same period, Operating Expenses increased $2,539,861 or 3%;
Income Before Income Taxes increased $310,413, an increase of 2%; and Net
Income increased $122,508 or 1%. Earnings Per Share-Basic increased from $.34
to $.36 for the respective quarters.
Operating Revenues for the six months ended June 30, 1999, were
$205,498,683, an increase of $7,232,343 or 3.6% over the comparable period in
1998. For the same period, Operating Expenses increased $5,275,913 or 3.1%;
Income Before Taxes increased $1,904,695, an increase of 7.5%; and Net Income
increased $1,089,011 or 6.8%. Earnings Per Share-Basic increased from $.62 to
$.69 for the respective six-month periods.
New Penn Motor Express, Inc. ("New Penn"), the Company's
less-than-truckload carrier, increased revenues by 3.5% over the revenues
generated during the second quarter of 1998. Operating Income increased 8%,
as the operating ratio improved from 79.8 to 78.9. During the second quarter
of 1999, completion of projects to renovate and expand facilities in
Cinnaminson, NJ, and Billerica, MA, increased New Penn's capacity in the
Philadelphia and Boston markets. The Company also expanded its use of
on-board computers through installations at the Southington, CT, and
Providence, RI, facilities. On-board computers improve operational
efficiencies and customer service.
Arnold Transportation Services, Inc. ("ATS"), the Company's truckload
carrier, experienced nearly flat revenue growth during the second quarter of
1999. Operating Expenses as a percentage of Operating Revenue deteriorated
from 94.8 for the second quarter of 1998 to 96.1 for the second quarter of
1999. During the period, ATS completed the transition with one of its major
customers and with Raven Transport. The transition involved eliminating
reliance on Raven Transport as a referral source of business and entering into
direct contracts with the customer on lanes previously serviced. Although
terminating the Raven relationship had an impact on revenues and expenses,
much of the business that was lost to Raven early in the quarter was either
regained or replaced with new business by the end of the quarter, and June
revenues exceeded those of June 1998. ATS will be adding new tractors and
trailers during the third and fourth quarters of 1999 in anticipation of
increased customer demand and revenues.
Arnold Logistics ("ARLO"), a division of ATS which operates warehousing
and related trucking, experienced a 27% increase in revenues during the second
quarter of 1999 over the second quarter of 1998. Significant project start-up
costs temporarily reduced margins during the quarter. ARLO's operating ratio
increased from 78.9 for the second quarter of 1998 to 81.1 for the second
quarter of 1999, principally due to the temporary start-up costs. ARLO's new
562,000 square foot warehouse in Lancaster, PA, is due to be fully occupied by
the end of September, 1999. The facility provides the tenant, a leading
entertainment software developer and distributor, with turnkey distribution
services.
Although all of the Company's operating units continue to experience
fierce price competition in the trucking and warehousing industries, Company
management remains focused on improving operating efficiencies. At the same
time, management continues to seek growth opportunities by offering expanded
trucking and warehousing related services to meet the needs of existing and
prospective customers. Company management will continue to seek opportunities
for profitable expansion of the Company through acquisitions and value-added
services.
Set forth below is a schedule of the Unaudited Operating Revenues,
Expenses and Operating Income of the LTL, TL and Warehousing/Logistics
companies for the second quarters of 1999 and 1998 and for the six (6) month
periods ended June 30, 1999, and June 30, 1998:
(Dollars in Thousands)
Second Quarter Ended June 30,
1999 1998
Amount % Amount %
LESS-THAN-TRUCKLOAD
Operating Revenues 53,137 100.0 51,327 100.0
Operating Expenses 41,936 78.9 40,953 79.8
Operating Income 11,201 21.1 10,374 20.2
TRUCKLOAD
Operating Revenues 43,189 100.0 43,978 100.0
Operating Expenses 41,520 96.1 41,672 94.8
Operating Income 1,669 3.9 2,306 5.2
WAREHOUSING/LOGISTICS
Operating Revenues 8,867 100.0 6,959 100.0
Operating Expenses 7,190 81.1 5,490 78.9
Operating Income 1,677 18.9 1,469 21.1
Unallocated corporate
operating income (loss) (3) 6
Consolidated operating
income 14,544 14,155
(Dollars in Thousands)
Six-Month Period Ended June 30,
1999 1998
Amount % Amount %
LESS-THAN-TRUCKLOAD
Operating Revenues 102,721 100.0 100,590 100.0
Operating Expenses 80,822 78.7 80,351 79.9
Operating Income 21,899 21.3 20,239 20.1
TRUCKLOAD
Operating Revenues 85,950 100.0 84,060 100.0
Operating Expenses 83,002 96.6 81,329 96.8
Operating Income 2,948 3.4 2,731 3.2
WAREHOUSING/LOGISTICS
Operating Revenues 16,828 100.0 13,616 100.0
Operating Expenses 13,751 81.7 11,066 81.3
Operating Income 3,077 18.3 2,550 18.7
Unallocated corporate
operating income (loss) (281) 167
Consolidated operating
income 27,643 25,687
The Company's working capital at the end of the second quarter of 1999
was $27,193,606, which is a small decrease of $196,318 or .7% from the end of
the first quarter of 1999. For the first six months of 1999, working capital
decreased by a total of $7,937,229, or 22.6%, from working capital at the end
of 1998. The principal factors contributing to the decrease in working
capital during the six-month period were use of funds for purchase of new
equipment, construction of new facilities and payment of approximately
$11,000,000 during the first quarter to an outside insurance carrier for the
carrier's assumption of liability for certain accrued, self-insured claims
that arose during 12-month periods ending June 30, 1998, 1997 and 1996.
Accrued short and long-term contingent liabilities of approximately $3,667,000
and $7,333,000, respectively, that previously appeared on the Company's
financial statements were in effect liquidated and paid by this transfer.
The Company's investment in Property and Equipment (Less Accumulated
Depreciation) as of the end of the second quarter of 1999 stood at
$231,709,784. This figure represents an increase from March 31, 1999, of
$6,566,188 or 3%. The increase reflects the Company's ongoing capital
expansion program. Funding for the Company's continuing capital expansion
program will be accomplished through the use of cash generated from current
operating and investment activities, supplemented, when necessary, by short or
long-term debt financing.
Y2K Readiness Program
The Company continues its on-going project to assure Year 2000 ("Y2K")
readiness. Y2K readiness involves assuring that all essential functions of
the Company, including activities that are not directly computer dependant,
will remain operative upon arrival of the Year 2000. The Company's project to
correct and/or replace internal information technology ("IT") software is 100%
complete. Internal IT software is software that the Company produces
internally, using its own technicians and programmers, to perform such carrier
and warehousing functions as billing, accounts receivable aging, payables,
payroll, inventory control, dispatch, etc. The Company's internal IT software
operates on an IBM AS 400 mainframe computer, and all such software, including
software servicing the Company's three principal business units, New Penn
Motor Express, Arnold Transportation Services and Arnold Logistics, has been
assessed, corrected and/or replaced and tested successfully for Y2K
compliance.
The cost of the Company's program to correct and/or replace non-compliant
internal IT software was $1,675,000. Those costs have already been incurred
and paid from operating revenues of the Company's three principal business
units. No other projects or capital expenditures were deferred or canceled
due to the diversion of resources to Y2K compliance. Approximately 70% of the
cost of the Company's internal program was incurred for services of
third-party consultants and replacement of software. The remaining 30% of the
cost was incurred for services of employees of the Company or its subsidiaries
who devoted time to assuring Y2K readiness.
The Company continues to monitor and assess the progress of third parties
upon whom the Company relies in performing carrier and warehousing services.
The Company purchases various externally produced, date-dependant software,
including, but not limited to, communications software, fueling cards,
satellite-based on-board computers, diagnostic repair programs used at
Company repair facilities, microfilm indexing, etc. Many such externally
produced software programs are non-IT systems and impact the actual carriage
of freight or storage of goods by the Company's operating units. The Company
also monitors the progress of suppliers of basic materials such as fuel,
parts, tires, etc., as well as that of significant customers upon whose
continued business the Company relies for revenues. These monitoring efforts
have revealed areas of concern with respect to Y2K readiness of the Company's
vendors, suppliers and customers. To the extent reasonably practicable, the
Company is taking steps to assure timely compliance or the availability of
alternate software, services and supplies. The cost of maintaining and
completing the external Y2K project, including correction and/or replacement
costs and testing, is anticipated to be $125,000. The additional cost will be
funded entirely from operating
revenues of the Company.
The Company faces the risk of disruptions to service if significant
vendors, suppliers and/or customers do not become Y2K compliant in a timely
manner. Failure by vendors and suppliers to become compliant would result in
the loss of systems controlling dispatch, billing and payroll, among other
essential functions of the Company. The Company believes that disruptions to
service, if any, will be minimal as a result of the Company's efforts to
assure Y2K compliance, but the risk nevertheless exists that major disruptions
to the national power grid, telephone systems, fuel delivery systems, etc.,
would impact the Company's ability to operate.
The Company is developing contingency plans to acquire electricity, fuel
and essential parts from other vendors in the event of a Y2K malfunction by a
prime supplier. Plans include purchase and retention of higher levels of
inventory for items such as tires and spare parts. As necessary, electricity
will be available at most Company facilities, at least temporarily, through
the use of generators that the Company routinely maintains for power outages.
The Company has no contingency plans for loss of revenues from shippers who do
not become Y2K compliant.
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 (5) 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, such as the obligation to provide quarterly
up-dates as to progress toward Year 2000 readiness.
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 5, 1999, stockholders re-elected
Kenneth F. Leedy, Heath L. Allen, and Carlton E. Hughes to serve as members
of the Board of Directors, each for a two-year term, and approved a
restatement and amendment of the Company's Bylaws.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 - Financial Data Schedule
(b) NONE
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: August 12, 1999 By /s/ Heath L. Allen
Heath L. Allen, Secretary
Date: August 12, 1999 By /s/ Ronald E. Walborn
Ronald E. Walborn, Treasurer