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 September 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) 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: 24,628,126 shares outstanding
(which excludes 5,314,502 treasury shares) as of November 10, 1999.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets - September 30, 1999
(Unaudited) and December 31, 1998
Condensed Consolidated Statements of
Income (Three and Nine Month - September 30, 1999 and
Periods - Unaudited) 1998
Condensed Consolidated Statements of
Cash Flows (Nine Month - September 30, 1999 and
Periods - Unaudited) 1998
Notes to Condensed Consolidated Financial Statements
ARNOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1999 1998
ASSETS
Current Assets
Cash and Cash Equivalents 13,739,203 19,432,802
Marketable Securities 4,243,805 4,848,974
Accounts Receivable, Net 47,215,089 40,159,047
Notes Receivable, Current 875,000 873,709
Deferred Income Taxes 841,687 6,262,784
Prepaid Expenses and Supplies 8,830,520 7,458,315
Refundable Income Taxes 1,813,163 707,157
Total Current Assets 77,558,467 79,742,788
Property and Equipment, at Cost 395,573,476 370,157,592
Less: Accumulated Depreciation 154,828,743 149,458,462
Total Property and Equipment 240,744,733 220,699,130
Other Assets
Goodwill, Net 8,089,072 8,303,117
Investments in Limited Partnerships 8,723,082 9,119,574
Notes Receivable, Long-term 2,076,323 1,090,734
Other 1,197,157 1,155,368
Total Other Assets 20,085,634 19,668,793
TOTAL ASSETS 338,388,834 320,110,711
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable 20,842,699 15,863,399
Accounts Payable 17,162,005 10,352,289
Estimated Liability for Claims 3,678,500 5,078,913
Accrued Expenses - Other 15,932,023 13,317,352
Total Current Liabilities 57,615,227 44,611,953
Long-term Liabilities
Estimated Liability for Claims 3,381,000 10,714,000
Deferred Income Taxes 34,237,687 35,307,204
Notes Payable 157,614 1,309,929
Other 1,840,313 1,768,113
Total Long-term Liabilities 39,616,614 49,099,246
Stockholders' Equity
Common Stock 29,942,628 29,942,628
Paid-In Capital 1,413,917 658,065
Retained Earnings 249,040,762 232,417,298
Treasury Stock, at Cost (39,240,314) (36,618,479)
Total Stockholders' Equity 241,156,993 226,399,512
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY 338,388,834 320,110,711
The accompanying notes, herein following, are an integral part
of these consolidated financial statements.
ARNOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
1999 1998 1999 1998
Operating Revenues 315,274,859 300,493,801 109,776,176 102,227,461
Operating Expenses 275,563,721 259,862,263 97,708,528 87,282,983
Operating Income 39,711,138 40,631,538 12,067,648 14,944,478
Interest Expense (958,797) (838,202) (293,251) (291,543)
Other Income 498,015 600,041 211,640 380,818
Income Before
Income Taxes 39,250,356 40,393,377 11,986,037 15,033,753
Income Taxes 14,424,972 14,901,973 4,364,490 5,657,175
Net Income 24,825,384 25,491,404 7,621,547 9,376,578
Net Income per
Common Share:
Basic 1.00 .99 .31 .37
Diluted .99 .98 .30 .36
Average Common
Shares Outstanding:
Basic 24,852,767 25,874,471 24,865,309 25,672,976
Effect of dilutive
securities -
stock options 249,329 150,493 215,573 68,547
Diluted 25,102,096 26,024,964 25,080,882 25,741,523
Dividends per
Common Share .33 .33 .11 .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)
Nine Months Ended
September 30,
1999 1998
Operating Activities
Net Income 424,825,384 25,491,404
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 23,805,777 23,126,444
Provision for Deferred Taxes 4,351,580 (145,770)
Other (1,312,805) (1,760,619)
Changes in Operating Assets and Liabilities:
(Increase) in Accounts Receivable (7,056,042) (3,165,220)
(Increase) Decrease in Prepaid
Expenses and Supplies (1,372,205) (4,546,799)
Increase (Decrease) in Accounts Payable 2,170,089 1,729,476
(Decrease) in Estimated Liability
for Claims (8,733,413) (2,845,418)
Increase in Other Accrued Expenses 1,508,665 5,400,522
Other 72,200 109,050
Net Cash Provided by
Operating Activities 38,259,230 43,393,070
Investing Activities
Proceeds from Sale of Investment Securities 2,135,348 4,454,497
Purchase of Investment Securities (1,531,446) (557,466)
Proceeds from Disposition of
Property and Equipment 8,667,216 7,955,550
Purchase of Property and Equipment (50,591,702) (32,861,788)
Capital Contributions to
Limited Partnerships (1,175,351) (1,545,672)
Other 1,108,674 (17,171)
Net Cash Used In Investing Activities (41,387,261) (22,572,050)
Financing Activities
Cash Dividends Paid (8,201,920) (8,556,555)
Purchase of Treasury Stock (314,550) (10,964,125)
Proceeds from Employee Stock Options Exercised 948,566 377,702
Proceeds from Short-term Debt 5,000,000 0
Other 2,336 0
Net Cash Used In Financing Activities (2,565,568) (19,142,978)
Increase (Decrease) in Cash
and Cash Equivalents (5,693,599) 1,678,042
Cash and Cash Equivalents - Beginning of Year 19,432,802 26,504,782
Cash and Cash Equivalents - End of Period 13,739,203 28,182,824
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest 936,297 838,202
Income Taxes 11,426,819 12,526,455
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 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, Notes and information included in
the Company's latest annual report on Form 10-K and any intervening reports.
The results of operations for the three and nine-month periods ending
September 30, 1999 and 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 on a consolidated basis for the third quarter of 1999
were $109,776,176, an increase of $7,548,715 or 7% over Operating Revenues for
1998's third quarter. For the same period, Operating Expenses increased
$10,425,545, or 11.9%; Income before Income Taxes decreased $3,047,716, a
decrease of 20.3%; and Net Income decreased $1,755,031, or 19%. Earnings Per
Share-Basic for the third quarter of 1999 decreased as compared to the third
quarter of 1998 from $.37 per share to $.31 per share, a decrease of 16%.
Operating Income on a consolidated basis decreased during the third
quarter of 1999 relative to the comparable period of 1998. Consolidated
Operating Income declined by $2,876,830 from $14,944,478 to $12,067,648, a
decrease of 19.3%.
The Company's combined Operating Revenues for the nine months ended
September 30, 1999, were $315,274,859, an increase of $14,781,058, or 4.9%
over the comparable nine-month period in 1998. For the same period, Operating
Expenses increased $15,701,458, or 6%. Operating Income declined marginally
during the nine-month period, from $40,631,538 in 1998 to $39,711,138 in 1999
or a 2.3% decline. Income Before Income Taxes declined by $1,143,021, a
decrease of 2.8%; and Net Income also declined by $666,020, a decrease of 2.6%.
Earnings Per Share-Basic increased by a penny a share from $.99 for the first
nine months of 1998 to $1.00 for the first nine months of 1999. The Company
was able to maintain its market share during the nine-month period, despite
the competitive pressures to which all motor carriers are subject.
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 third quarters of 1999 and 1998 and for the nine (9) month
periods ended September 30, 1999, and September 30, 1998:
(Dollars in Thousands)
Third Quarter Ended September 30,
1999 1998
Amount % Amount %
LESS-THAN-TRUCKLOAD
Operating Revenues 55,984 100.0 51,805 100.0
Operating Expenses 45,570 81.4 40,792 78.7
Operating Income 10,414 18.6 11,013 21.3
TRUCKLOAD
Operating Revenues 44,161 100.0 42,854 100.0
Operating Expenses 43,413 98.3 40,512 94.5
Operating Income 748 1.7 2,342 5.5
WAREHOUSING/LOGISTICS
Operating Revenues 9,631 100.0 7,568 100.0
Operating Expenses 8,681 90.1 5,971 78.9
Operating Income 950 9.9 1,597 21.1
Unallocated corporate
operating income (loss) (44) (8)
Consolidated operating
income 12,068 14,944
(Dollars in Thousands)
Nine-Month Period Ended September 30,
1999 1998
Amount % Amount %
LESS-THAN-TRUCKLOAD
Operating Revenues 158,704 100.0 152,395 100.0
Operating Expenses 126,392 79.6 121,144 79.5
Operating Income 32,312 20.4 31,251 20.5
TRUCKLOAD
Operating Revenues 130,111 100.0 126,915 100.0
Operating Expenses 126,414 97.2 121,841 96.0
Operating Income 3,697 2.8 5,074 4.0
WAREHOUSING/LOGISTICS
Operating Revenues 26,459 100.0 21,184 100.0
Operating Expenses 22,432 84.8 17,037 80.4
Operating Income 4,027 15.2 4,147 19.6
Unallocated corporate
operating income (loss) (325) 160
Consolidated operating
income 39,711 40,632
New Penn enjoyed a strong third quarter of 1999, with business levels
growing throughout the period. New Penn Operating Revenues rose by 8.1% in
the quarter. The closing of Preston Trucking at the end of July contributed
to double-digit revenue increases in August and September. Provided that
there is no significant decline in activity in the U.S. economy as a whole, or
the occurrence of some other unforeseen negative circumstances, the positive
revenue comparison experienced during August and September is expected to
continue into the fourth quarter of 1999 and the first half of 2000.
To support future growth, New Penn has added several new sales positions
during 1999 and filled a key executive position when James E. Devlin was named
Vice President of Sales during the third quarter. The company remains open to
potential acquisitions as an additional avenue for future growth.
New Penn implemented an increase in base rate prices of 5.4% on
September 27,1999, on non-contract business. Although the general pricing
environment is relatively stable at the present time, the competitive nature
of the carrier industry has resulted in an industry-wide practice of increasing
the base rates and then increasing discounts to offset significant portions of
the increases.
Operating Income at New Penn decreased 5% during the third quarter, but
increased 3.4% in the first nine months of the year as a whole. Operating
profit margins declined by 2.7 points in the third quarter and by .1 point for
the nine-month period.
New Penn's results would have been stronger but for substantial negative
insurance reserve adjustments for liability exposures from previous years of
operations. The insurance reserve adjustment was $1.26 million taken in the
third quarter. The reserve expenses are one-time charges that are not
expected to recur in subsequent quarters. The insurance reserve adjustment
accounts for 2.3 points of the 2.7 decline in operating margin during the
quarter.
The remaining decline in the operating margins of 0.4 point is largely
attributable to increases in salaried and non-salaried payroll expenses
associated with ramping up to handle the increased business levels noted
above while simultaneously improving service levels. The impact on margins
is expected to decline in the future as the company maximizes efficiency at
the higher business and service levels.
Rising fuel prices impacted expenses during the first half of the third
quarter. A fuel surcharge was implemented on August 16, 1999, to ameliorate
this rising expense. Fuel surcharges are now common in the less-than-
truckload segment and have been generally accepted by customers.
In the third quarter, New Penn continued to implement its plans to expand
capacity. The company purchased land to build a larger terminal facility in
Buffalo, New York, in order to better serve the markets of western New York
state and Ontario, Canada.
New Penn recently introduced an interactive web site to enhance customer
service. By linking on-board computers in the tractors to the new web site,
the company provides up-to-the-minute information on shipment status. The
on-board computers are now installed in 65% of the fleet and tentative plans
are to have them installed in over 90% of the fleet by the fourth quarter
2000.
Arnold Transportation Services, the truckload operations of Arnold
Industries, experienced a 3% rise in Operating Revenues from those generated
during the third quarter of 1998. During both the second and third quarters,
the company transitioned from working through a third party for a significant
portion of its business to developing direct customer contacts. The result was
relatively flat revenue growth. Several large dedicated service contracts
were recently secured to replace business lost during that transition.
Operating Income declined 68% during the third quarter compared to the
same quarter in 1998. Operating margins declined by 3.8 points. As with the
third quarter results of New Penn, the third quarter results of Arnold
Transportation Services were adversely affected by negative insurance reserve
adjustments for liability exposures from previous years. The adjustment at
Arnold Transportation Services was $503,000, which negatively impacted the
operating margin by 1.1 point.
Fuel also had a negative impact on margins in the truckload operations,
accounting for a 1.5 point deterioration in the operating margin. Going
forward, the company expects to recover a portion of the higher fuel expense
in the form of fuel surcharges. However, higher fuel costs are expected to
have a negative impact on comparisons to the prior year for the next several
quarters. An additional 0.4 point decline in the operating margin compared
to the prior year is due to lower gains relating to equipment sales.
Management still believes operating margins at Arnold Transportation
Services are not satisfactory. Efforts to improve the truckload operations
are focused on cost-containment and the addition of profitable revenue.
Management is looking to create a more efficient Arnold Transportation
Services and has moved in that direction by continuing dispositions of
underutilized property and equipment. Some existing customer business may
also be eliminated if it cannot be handled at a reasonable profit.
Additionally, Arnold Transportation Services continued to suffer from a
shortage of drivers and inefficient hauls to the Midwest without profitable
freight from the Midwest. Management is acting vigorously to promote driver
recruitment at Arnold Transportation Services and continues to look for a
compatible Midwest truckload carrier either for acquisition or for a strategic
partnership.
At Arnold Logistics, Operating Revenues grew by 27% over Operating
Revenues for the third quarter of 1998 as the company utilized the new
warehouse in Lancaster, PA, and added several new e-commerce clients.
Nevertheless, Arnold Logistics experienced lackluster earnings during the
recent two quarters. Operating Income declined by 40.5% in the third quarter
and is down 2.9% year-to-date. Greater than anticipated start-up costs
adversely impacted Arnold Logistics' earnings during the second quarter by
roughly $400,000 and in the third quarter by approximately $600,000. Start-up
efforts have also increased expenses associated with employee turnover as
there is a higher percentage of employees in their first 90 days of service
when turnover tends to be high. In addition to the start-up costs, the tenant
of the Lancaster facility experienced operational difficulties during the third
quarter, which adversely impacted Arnold Logistics' cash flow and earnings.
Arnold Logistics has also been investing heavily this year to further
capitalize on the trend toward e-commerce. The company provides the
back-office functions of order processing, inventory management, shipping and
customer service including live-chat, and email support for several
Internet-based companies. An additional 200,000 square feet of warehouse
space has been secured for this purpose. The company has invested in
information technology for the E-commerce Customer Support Center and in
warehouse automation systems.
The Company's working capital at the end of the third quarter of 1999 was
$19,943,240. This represents a decrease of $7,250,366 or 27% from the working
capital at the end of the previous quarter in 1999. The decrease in working
capital reflects the Company's use of funds to acquire capital assets in
connection with the on-going capital expansion program and to re-purchase
outstanding shares in the open market.
The Company's investment in Property and Equipment (Less Accumulated
Depreciation) as of the end of the third quarter of 1999 stood at
$240,744,733. This figure represents an increase from June 30, 1999, of
$9,034,949, or 3.9%, and reflects the on-going results of the Company's
capital expansion program. Future funding for the Company's capital expansion
program will likely be accomplished through the use of cash generated from
current operating and investment activities, supplemented, when necessary, by
short or long-term financing. Management continues to seek opportunities for
profitable expansion of the Company.
On October 26, 1999, the Company announced its quarterly cash dividend of
$.11 per share, payable December 3, 1999, to stockholders of record on
November 19, 1999.
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, although such areas of concern are isolated
and have lessened as compliance efforts continue over time. 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 the external Y2K program, including correction and/or replacement
costs and testing, is anticipated to be $125,000, of which $100,000 has been
incurred to date, funded entirely from operating revenues of the Company. The
remainder of the anticipated costs, $25,000, will also be funded from
operating revenues.
The Company faces the risk of disruptions to customer services if
significant vendors, suppliers and/or customers are not Y2K compliant.
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 has developed and is implementing contingency plans to
acquire electricity, fuel and essential parts from other vendors in the event
of a Y2K malfunction by a prime supplier. The Company is purchasing and
retaining slightly 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 (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, 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.
No matters were brought to a vote of the shareholders during the third
quarter of 1999.
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: November 15, 1999 By /s/ Heath L. Allen
Heath L. Allen, Secretary
Date: November 15, 1999 /s/ Ronald E. Walborn
Ronald E. Walborn, Treasurer