Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019
☐
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 000-19969
ARCBEST CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction ofincorporation or organization)
71-0673405
(I.R.S. Employer Identification No.)
8401 McClure Drive
Fort Smith, Arkansas 72916
(479) 785-6000
(Address, including zip code, and telephone number, including
area code, of the registrant’s principal executive offices)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock $0.01 Par Value
ARCB
Nasdaq
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at November 1, 2019
Common Stock, $0.01 par value
25,506,902 shares
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets — September 30, 2019 and December 31, 2018
3
Consolidated Statements of Operations — For the Three Months and Nine Months Ended September 30, 2019 and 2018
4
Consolidated Statements of Comprehensive Income — For the Three Months and Nine Months Ended September 30, 2019 and 2018
5
Consolidated Statement of Stockholders’ Equity — For the Three Months and Nine Months Ended September 30, 2019 and 2018
6
Consolidated Statements of Cash Flows — For the Nine Months Ended September 30, 2019 and 2018
8
Notes to Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
54
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
55
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
56
SIGNATURES
57
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30
December 31
2019
2018
(Unaudited)
(in thousands, except share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
183,838
190,186
Short-term investments
124,257
106,806
Accounts receivable, less allowances (2019 – $5,548; 2018 – $7,380)
292,935
297,051
Other accounts receivable, less allowances (2019 – $469; 2018 – $806)
18,122
19,146
Prepaid expenses
25,365
25,304
Prepaid and refundable income taxes
8,186
1,726
Other
5,285
9,007
TOTAL CURRENT ASSETS
657,988
649,226
PROPERTY, PLANT AND EQUIPMENT
Land and structures
339,298
339,640
Revenue equipment
902,289
858,251
Service, office, and other equipment
229,691
199,230
Software
146,789
138,517
Leasehold improvements
10,212
9,365
1,628,279
1,545,003
Less allowances for depreciation and amortization
948,205
913,815
PROPERTY, PLANT AND EQUIPMENT, net
680,074
631,188
GOODWILL
108,320
INTANGIBLE ASSETS, net
65,583
68,949
OPERATING RIGHT-OF-USE ASSETS
67,404
—
DEFERRED INCOME TAXES
6,128
7,468
OTHER LONG-TERM ASSETS
85,135
74,080
TOTAL ASSETS
1,670,632
1,539,231
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
160,054
143,785
Income taxes payable
198
1,688
Accrued expenses
234,863
243,111
Current portion of long-term debt
50,197
54,075
Current portion of operating lease liabilities
18,492
Current portion of pension and postretirement liabilities
1,921
8,659
TOTAL CURRENT LIABILITIES
465,725
451,318
LONG-TERM DEBT, less current portion
248,223
237,600
OPERATING LEASE LIABILITIES, less current portion
52,782
PENSION AND POSTRETIREMENT LIABILITIES, less current portion
32,059
31,504
OTHER LONG-TERM LIABILITIES
38,151
44,686
70,066
56,441
STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value, authorized 70,000,000 shares; issued 2019: 28,801,025 shares, 2018: 28,684,779 shares
288
287
Additional paid-in capital
331,773
325,712
Retained earnings
540,778
501,389
Treasury stock, at cost, 2019: 3,299,669 shares; 2018: 3,097,634 shares
(101,583)
(95,468)
Accumulated other comprehensive loss
(7,630)
(14,238)
TOTAL STOCKHOLDERS’ EQUITY
763,626
717,682
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Nine Months Ended
(in thousands, except share and per share data)
REVENUES
787,563
826,158
2,270,892
2,319,509
OPERATING EXPENSES
756,355
770,103
2,195,893
2,247,573
OPERATING INCOME
31,208
56,055
74,999
71,936
OTHER INCOME (COSTS)
Interest and dividend income
1,768
1,120
4,862
2,360
Interest and other related financing costs
(2,900)
(2,470)
(8,593)
(6,542)
Other, net
(6,734)
(714)
(7,770)
(4,038)
(7,866)
(2,064)
(11,501)
(8,220)
INCOME BEFORE INCOME TAXES
23,342
53,991
63,498
63,716
INCOME TAX PROVISION
7,072
13,215
17,964
11,753
NET INCOME
16,270
40,776
45,534
51,963
EARNINGS PER COMMON SHARE
Basic
0.64
1.58
1.78
2.02
Diluted
0.62
1.52
1.72
1.94
AVERAGE COMMON SHARES OUTSTANDING
25,527,982
25,697,509
25,550,365
25,670,435
26,416,595
26,795,659
26,461,668
26,708,259
CASH DIVIDENDS DECLARED PER COMMON SHARE
0.08
0.24
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
OTHER COMPREHENSIVE INCOME, net of tax
Pension and other postretirement benefit plans:
Net actuarial loss, net of tax of: (2019 – Three-month period $310, Nine-month period $100; 2018 – Three-month period $2,038, Nine-month period $689)
(894)
(5,877)
(291)
(1,987)
Pension settlement expense, including termination expense, net of tax of: (2019 – Three-month period $651, Nine-month period $1,072; 2018 – Three-month period $134, Nine-month period $413)
5,850
384
7,063
1,190
Amortization of unrecognized net periodic benefit costs, net of tax of: (2019 – Three-month period $75, Nine-month period $252; 2018 – Three-month period $146, Nine-month period $536)
Net actuarial loss
222
438
746
1,598
Prior service credit
(6)
(17)
(18)
(52)
Interest rate swap and foreign currency translation:
Change in unrealized income (loss) on interest rate swap, net of tax of: (2019 – Three-month period $120, Nine-month period $425; 2018 – Three-month period $59, Nine-month period $334)
(338)
167
(1,198)
946
Change in foreign currency translation, net of tax of: (2019 – Three-month period $12, Nine-month period $108; 2018 – Three-month period $45, Nine-month period $58)
(35)
127
306
(165)
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
4,799
(4,778)
6,608
1,530
TOTAL COMPREHENSIVE INCOME
21,069
35,998
52,142
53,493
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Accumulated
Additional
Common Stock
Paid-In
Retained
Treasury Stock
Comprehensive
Total
Shares
Amount
Capital
Earnings
Loss
Equity
Balance at December 31, 2018
28,685
3,098
Net income
4,888
Other comprehensive income, net of tax
1,850
Tax effect of share-based compensation plans
(8)
Share-based compensation expense
2,058
Purchase of treasury stock
74
(2,663)
Dividends declared on common stock
(2,052)
Balance at March 31, 2019
327,762
504,225
3,172
(98,131)
(12,388)
721,755
24,376
(41)
Issuance of common stock under share-based compensation plans
101
1
(1)
(1,174)
2,801
94
(2,508)
(2,050)
Balance at June 30, 2019
28,786
329,388
526,551
3,266
(100,639)
(12,429)
743,159
15
(24)
2,409
34
(944)
(2,043)
Balance at September 30, 2019
28,801
3,300
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY - CONTINUED
Balance at December 31, 2017
28,496
285
319,436
438,379
2,852
(86,064)
(20,574)
651,462
Adjustments to beginning retained earnings for adoption of accounting standards
3,992
(3,576)
416
Balance at January 1, 2018
442,371
(24,150)
651,878
9,954
4,072
1,870
(201)
(2,058)
Balance at March 31, 2018
28,499
321,265
450,267
2,857
(86,265)
(20,078)
665,474
1,233
2,236
43
(44)
1,674
Balance at June 30, 2018
28,542
322,895
449,442
(17,842)
668,515
(3)
2,641
(2,060)
Balance at September 30, 2018
28,548
325,533
488,158
(22,620)
705,091
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
79,967
78,305
Amortization of intangibles
3,365
3,394
Pension settlement expense, including termination expense
8,135
1,603
7,268
6,185
Provision for losses on accounts receivable
832
1,937
Change in deferred income taxes
14,099
3,697
Gain on sale of property and equipment
(1,384)
(188)
Gain on sale of subsidiaries
(1,945)
Changes in operating assets and liabilities:
Receivables
4,216
(47,287)
(265)
1,013
Other assets
(4,236)
(4,826)
Income taxes
(7,883)
5,675
Operating right-of-use assets and lease liabilities, net
526
Multiemployer pension fund withdrawal liability
(435)
22,744
Accounts payable, accrued expenses, and other liabilities
(11,726)
51,309
NET CASH PROVIDED BY OPERATING ACTIVITIES
138,013
173,579
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net of financings
(69,773)
(39,249)
Proceeds from sale of property and equipment
4,748
2,917
Proceeds from sale of subsidiaries
4,680
Purchases of short-term investments
(105,747)
(67,121)
Proceeds from sale of short-term investments
88,730
47,878
Capitalization of internally developed software
(8,500)
(7,411)
NET CASH USED IN INVESTING ACTIVITIES
(90,542)
(58,306)
FINANCING ACTIVITIES
Payments on long-term debt
(43,773)
(49,967)
Proceeds from notes payable
9,552
Net change in book overdrafts
(5,570)
(1,975)
Deferred financing costs
(562)
(202)
Payment of common stock dividends
(6,145)
(6,176)
Purchases of treasury stock
(6,115)
Payments for tax withheld on share-based compensation
(1,206)
(88)
NET CASH USED IN FINANCING ACTIVITIES
(53,819)
(58,609)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(6,348)
56,664
Cash and cash equivalents at beginning of period
120,772
CASH AND CASH EQUIVALENTS CASH AT END OF PERIOD
177,436
NONCASH INVESTING ACTIVITIES
Equipment financed
40,966
71,575
Accruals for equipment received
18,949
Lease liabilities arising from obtaining right-of-use assets
26,810
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A – ORGANIZATION AND DESCRIPTION OF THE BUSINESS AND FINANCIAL STATEMENT PRESENTATION
ArcBest CorporationTM (the “Company”) is the parent holding company of freight transportation and integrated logistics businesses providing innovative solutions. The Company’s operations are conducted through its three reportable operating segments: Asset-Based, which consists of ABF Freight System, Inc. and certain other subsidiaries; ArcBest®, the Company’s asset-light logistics operation; and FleetNet®. References to the Company in this Quarterly Report on Form 10-Q are primarily to the Company and its subsidiaries on a consolidated basis.
The Asset-Based segment represented approximately 69% of the Company’s total revenues before other revenues and intercompany eliminations for the nine months ended September 30, 2019. As of September 2019, approximately 82% of the Asset-Based segment’s employees were covered under a collective bargaining agreement, the ABF National Master Freight Agreement (the “2018 ABF NMFA”), with the International Brotherhood of Teamsters (the “IBT”), which will remain in effect through June 30, 2023.
Financial Statement Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) pertaining to interim financial information. Accordingly, these interim financial statements do not include all information or footnote disclosures required by accounting principles generally accepted in the United States for complete financial statements and, therefore, should be read in conjunction with the audited financial statements and accompanying notes included in the Company’s 2018 Annual Report on Form 10-K and other current filings with the SEC. In the opinion of management, all adjustments (which are of a normal and recurring nature) considered necessary for a fair presentation have been included.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual amounts may differ from those estimates.
Accounting Policies
The Company’s accounting policies are described in Note B to the consolidated financial statements included in Part II, Item 8 of the Company’s 2018 Annual Report on Form 10-K. The following policies have been updated during the nine months ended September 30, 2019 for the adoption of accounting standard updates disclosed within this Note.
Interest Rate Swap Derivative Instruments: The Company accounts for its derivative instruments as either assets or liabilities and carries them at fair value. The Company has interest rate swap agreements designated as cash flow hedges. The effective portion of the gain or loss on the interest rate swap instruments is reported as unrealized gain or loss as a component of accumulated other comprehensive income or loss, net of tax, in stockholders’ equity and the change in the unrealized gain or loss on the interest rate swaps is reported in other comprehensive income or loss, net of tax, in the consolidated statements of comprehensive income. The unrealized gain or loss is reclassified out of accumulated other comprehensive loss into income in the same period or periods during which the hedged transaction affects earnings. To receive hedge accounting treatment, cash flow hedges must be highly effective in offsetting changes to expected future cash flows on hedged transactions.
Leases: The Company leases, under finance and operating lease arrangements, certain facilities used primarily in the Asset-Based segment service center operations, certain revenue equipment used in the ArcBest segment operations, and certain other office equipment. The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases, (“ASC Topic 842”) effective January 1, 2019. In accordance with ASC Topic 842, right-of-use assets and lease liabilities for operating leases are recorded on the balance sheet and the related lease expense is recorded on a straight-line basis over
the lease term in operating expenses. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. For financial reporting purposes, right-of-use assets held under finance leases are amortized over their estimated useful lives on the same basis as owned assets, and leasehold improvements associated with assets utilized under finance or operating leases are amortized by the straight-line method over the shorter of the remaining lease term or the asset’s useful life. Amortization of assets under finance leases is included in depreciation expense. Obligations under the finance lease arrangements are included in long-term debt.
The short-term lease exemption was elected under ASC Topic 842 for all classes of assets to include real property, revenue equipment, and service, office, and other equipment. The Company adopted the policy election as a lessee for all classes of assets to account for each lease component and its related non-lease component(s) as a single lease component. In determining the discount rate, the Company uses the rate implicit in the lease if that rate is readily determinable when entering into a lease as a lessee. If the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate, determined by the price of a fully collateralized loan with similar terms based on current market rates.
For contracts entered into on or after the effective date, an assessment is made as to whether the contract is, or contains, a lease at the inception of a contract. The assessment is based on: (1) whether the contract involves the use of a distinct identified asset; (2) whether the Company obtains the right to substantially all the economic benefit from the use of the asset throughout the period; and (3) whether the Company has the right to direct the use of the asset. For all operating leases that meet the scope of ASC Topic 842, a right-of-use asset and a lease liability are recognized. The right-of-use asset is measured as the initial amount of the lease liability, plus any initial direct costs incurred, less any prepayments prior to commencement or lease incentives received. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s secured incremental borrowing rate for the same term as the underlying lease. Lease payments included in the measurement of the lease liability are comprised of the following: (1) the fixed noncancelable lease payments, (2) payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and (3) payments for early termination options unless it is reasonably certain the lease will not be terminated early. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement and included in the measurement of the initial lease liability. Additional payments based on the change in an index or rate are recorded as a period expense when incurred. Lease modifications result in remeasurement of the lease liability.
Adopted Accounting Pronouncements
ASC Topic 842, which was adopted by the Company effective January 1, 2019, requires lessees to recognize right-of-use assets and lease liabilities for operating leases with terms greater than 12 months on the balance sheet. The standard also requires additional qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company elected the modified retrospective method of applying the transition provisions at the beginning of the period of adoption and, as a result, has not adjusted comparative period financial information and has not included the new lease disclosures for periods before the effective date. Prior period amounts continue to be reported under the Company’s historical accounting in accordance with the previous lease guidance included in ASC Topic 840.
The Company has excluded short-term leases from accounting under ASC Topic 842 and has elected the package of practical expedients as permitted under the transition guidance, which allowed the Company to not reassess: (1) whether contracts are, or contain, leases; (2) lease classification; and (3) capitalization of initial direct costs. For contracts entered into on or after the effective date, an assessment is made as to whether the contract is, or contains, a lease at the inception of a contract. Consistent with the package of practical expedients elected, leases entered into prior to January 1, 2019, are accounted for under ASC Topic 840 and were not reassessed. For all classes of assets, the policy election was made to account for each lease component and its related non-lease component(s) as a single lease component. The election to not recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less did not have a material effect on the right-of-use assets and lease liabilities.
The majority of the Company’s lease portfolio consists of real property operating leases related to facilities used in the Asset-Based segment service center operations. The lease portfolio also includes operating leases related to certain revenue equipment used in the ArcBest segment operations as well as a small number of office equipment finance leases. Management has recorded the right-of-use assets and associated lease liabilities for operating leases on the consolidated
10
balance sheet as of September 30, 2019 in accordance with ASC Topic 842. Finance leases are not material to the consolidated financial statements.
The most significant impact of adopting ASC Topic 842 was the recognition of right-of-use assets and lease liabilities on the balance sheet for operating leases of $58.7 million as of January 1, 2019. The accounting for finance leases (formerly referred to as capital leases prior to the adoption of ASC Topic 842) remained substantially unchanged. The expense recognition for operating leases and finance leases under ASC Topic 842 is substantially consistent with ASC Topic 840 and the impact of the new standard is non-cash in nature. As a result, there is no significant impact on the Company’s results of operations or cash flows presented in the Company’s consolidated financial statements.
ASC Topic 815, Derivatives and Hedging, which was adopted by the Company on January 1, 2019, was amended to change the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results to simplify hedge accounting treatment and better align an entity’s risk management activities and financial reporting for hedging relationships. ASC Topic 815, as amended, also allows for the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a U.S. benchmark interest rate. The amendment did not have an impact on the consolidated financial statements.
The U.S. Securities and Exchange Commission (the “SEC”) issued Final Rule 33-10618, FAST Act Modernization and Simplification of Regulation S-K, (“Final Rule 33-10618”) in March 2019 to modernize and simplify certain disclosure requirements in Regulation S-K and the related rules and forms. Effective April 2, 2019, the final rule allows registrants to redact confidential information from most exhibits filed with the SEC without filing a confidential treatment request. Effective May 2, 2019, the final rule requires registrants to include the trading symbol for each class of registered securities on the cover page of certain SEC forms. The eXtensible Business Reporting Language (“XBRL”) reporting requirements of the final rule for tagging data on the cover page of certain SEC filings and the use of hyperlinks for information that is incorporated by reference and available on EDGAR became effective for the Company with the filing of its Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.
Accounting Pronouncements Not Yet Adopted
Final Rule 33-10618 includes certain provisions to simplify certain annual disclosure requirements within the Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), Risk Factors, and Properties sections of Form 10-K. These provisions, which the Company will adopt for its 2019 Annual Report on Form 10-K, are not expected to have a significant impact on the Company’s consolidated financial statement disclosures.
ASC Subtopic 350-40, Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, (“ASC Subtopic 350-40”) was amended by the FASB in August 2018 and is effective for the Company beginning January 1, 2020. The amendments to ASC Subtopic 350-40 clarify the accounting treatment for implementation costs incurred by the customer in a cloud computing software arrangement. The amendments allow implementation costs of cloud computing arrangements to be capitalized using the same method prescribed by ASC Subtopic 350-40, Internal-Use Software. The amendments to ASC Subtopic 350-40 will be adopted on a prospective basis and are not expected to have an impact on the Company’s consolidated financial statements.
ASC Topic 820, Fair Value Measurement, was amended to modify the disclosure requirements of fair value measurements, primarily impacting the disclosures for Level 3 fair value measurements. The amendment is effective for the Company beginning January 1, 2020 and is not expected to have a significant impact on the Company’s financial statement disclosures.
ASC Topic 326, Financial Instruments – Credit Losses, (“ASC Topic 326”), was amended to improve the measurement of credit losses on financial instruments, including trade accounts receivable. The amendment is effective for the Company beginning January 1, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements.
Management believes there is no other new accounting guidance issued but not yet effective that is relevant to the Company’s current financial statements.
11
NOTE B – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Financial Instruments
The following table presents the components of cash and cash equivalents and short-term investments:
Cash deposits(1)
159,249
124,938
Variable rate demand notes(1)(2)
14,647
19,786
Money market funds(3)
9,942
42,470
U.S. Treasury securities(4)
2,992
Total cash and cash equivalents
Certificates of deposit(1)
75,175
82,949
49,082
23,857
Total short-term investments
The Company’s long-term financial instruments are presented in the table of financial assets and liabilities measured at fair value within this Note.
Concentrations of Credit Risk of Financial Instruments
The Company is potentially subject to concentrations of credit risk related to its cash, cash equivalents, and short-term investments. The Company reduces credit risk by maintaining its cash deposits primarily in FDIC-insured accounts and placing its short-term investments primarily in FDIC-insured certificates of deposit. However, certain cash deposits and certificates of deposit may exceed federally insured limits. At September 30, 2019 and December 31, 2018, cash, cash equivalents, and short-term investments totaling $54.4 million and $94.7 million, respectively, were neither FDIC insured nor direct obligations of the U.S. government.
Fair Value Disclosure of Financial Instruments
Fair value disclosures are made in accordance with the following hierarchy of valuation techniques based on whether the inputs of market data and market assumptions used to measure fair value are observable or unobservable:
12
Fair value and carrying value disclosures of financial instruments are presented in the following table:
Carrying
Fair
Value
Credit Facility(1)
70,000
Accounts receivable securitization borrowings(2)
40,000
Notes payable(3)
188,326
192,291
181,409
181,560
298,326
302,291
291,409
291,560
13
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the assets and liabilities that are measured at fair value on a recurring basis:
September 30, 2019
Fair Value Measurements Using
Quoted Prices
Significant
In Active
Observable
Unobservable
Markets
Inputs
(Level 1)
(Level 2)
(Level 3)
Assets:
Money market funds(1)
Equity, bond, and money market mutual funds held in trust related to the Voluntary Savings Plan(2)
3,071
Interest rate swaps(3)
13,025
13,013
Liabilities:
834
December 31, 2018
2,342
801
45,613
44,812
Contingent consideration(4)
4,472
14
NOTE C – GOODWILL AND INTANGIBLE ASSETS
Goodwill represents the excess of cost over the fair value of net identifiable tangible and intangible assets acquired. Goodwill by reportable operating segment consisted of $107.7 million and $0.6 million reported in the ArcBest and FleetNet segments, respectively, for both September 30, 2019 and December 31, 2018.
Intangible assets consisted of the following:
Weighted-Average
Net
Amortization Period
Cost
Amortization
(in years)
Finite-lived intangible assets
Customer relationships
60,431
27,410
33,021
24,130
36,301
1,032
770
262
684
348
61,463
28,180
33,283
24,814
36,649
Indefinite-lived intangible assets
Trade name
N/A
32,300
Total intangible assets
93,763
The future amortization for intangible assets acquired through business acquisitions as of September 30, 2019 was as follows:
Amortization of
Intangible Assets
Remainder of 2019
1,116
2020
4,454
2021
4,412
2022
4,385
2023
4,287
Thereafter
14,629
Total amortization
NOTE D – INCOME TAXES
On December 22, 2017, H.R. 1/Public Law 115-97 which includes tax legislation titled Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. Effective January 1, 2018, the Tax Reform Act reduced the U.S. federal corporate tax rate from 35% to 21%. As a result of the Tax Reform Act, the Company recorded a provisional reduction of net deferred income tax liabilities of approximately $24.5 million at December 31, 2017, pursuant to the provisions of ASC Topic 740, Income Taxes, which requires the impact of tax law changes to be recognized in the period in which the legislation is enacted. An additional provisional reduction of net deferred income tax liabilities of $0.8 million and $3.5 million was recognized in the three and nine months ended September 30, 2018, respectively, related to the reversal of temporary differences through the Company’s fiscal tax year end of February 28, 2018. State tax rates vary among states and average approximately 6.0% to 6.5%, although some state rates are higher and a small number of states do not impose an income tax. The effective tax rate was 30.3% and 28.3% for the three and nine months ended September 30, 2019, respectively, and the effective tax rate was 24.5% and 18.4% for the three and nine months ended September 30, 2018, respectively.
In addition to the provisional effect on net deferred tax liabilities described above, the Company recorded a provisional reduction in current income tax expense of $1.3 million and less than $0.1 million at December 31, 2017 and September 30, 2018, respectively, as a result of the Tax Reform Act, to reflect the Company’s use of a fiscal year rather than a calendar year for U.S. income tax filing. Due to the fact that the Company’s fiscal tax year included the effective date of the rate change under the Tax Reform Act, taxes were required to be calculated by applying a blended rate to the taxable income for the taxable year ended February 28, 2018. The blended rate is calculated based on the ratio of days in the fiscal year prior to and after the effective date of the rate change. In computing total tax expense for the three and nine months ended
September 30, 2018, a 32.74% blended federal statutory rate was applied to the two months ended February 28, 2018, and a 21.0% federal statutory rate was applied to the months of March 2018 through September 2018. A federal statutory rate of 21.0% was applied to the three and nine months ended September 30, 2019.
The accounting for the income tax effects of the Tax Reform Act was completed as of December 31, 2018, and all amounts recorded were considered final.
For the three and nine months ended September 30, 2019, the difference between the Company’s effective tax rate and the federal statutory rate primarily resulted from state income taxes, nondeductible expenses, changes in the cash surrender value of life insurance, tax expense from the vesting of stock awards, and noncash pension settlement expense related to changes in other comprehensive income for which there was no tax benefit. For the nine months ended September 30, 2018, the difference between the Company’s effective tax rate and the federal statutory rate primarily resulted from the $3.5 million provisional reduction of net deferred income tax liabilities, as previously discussed, and the $1.2 million alternative fuel tax credit related to the year ended December 31, 2017 which was recognized in first quarter 2018 due to the February 2018 passage of the Bipartisan Budget Act of 2018 which retroactively reinstated the alternative fuel tax credit that had previously expired on December 31, 2016. The difference between the Company’s effective tax rate and the federal statutory rate for the three and nine months ended September 30, 2018 also resulted from state income taxes, nondeductible expenses, changes in tax valuation allowances, the tax benefit from the vesting of stock awards, and changes in the cash surrender value of life insurance.
As of September 30, 2019, the Company’s deferred tax liabilities, which will reverse in future years, exceeded the deferred tax assets. The Company evaluated the total deferred tax assets at September 30, 2019 and concluded that, other than for certain deferred tax assets related to state contribution carryforwards, the assets did not exceed the amount for which realization is more likely than not. In making this determination, the Company considered the future reversal of existing taxable temporary differences, future taxable income, and tax planning strategies. Valuation allowances for deferred tax assets totaled less than $0.1 million and $0.1 million at September 30, 2019 and December 31, 2018, respectively.
The Company had reserves for uncertain tax positions of $1.0 million at September 30, 2019 and December 31, 2018.
In first quarter of 2019, the Company recorded a deferred tax asset of approximately $19.0 million related to operating lease liabilities and recorded a deferred tax liability of approximately $19.0 million related to operating lease right-of-use assets due to the adoption of ASC Topic 842.
The Company paid federal, state, and foreign income taxes of $11.7 million during the nine months ended September 30, 2019, and paid $3.6 million of foreign and state income taxes during the nine months ended September 30, 2018. The Company received refunds of less than $0.1 million of state income taxes and refunds of $1.1 million of federal and state income taxes that were paid in prior years during the nine months ended September 30, 2019 and 2018, respectively.
NOTE E – LEASES
The Company leases, under finance and operating lease arrangements, certain facilities used primarily in the Asset-Based segment service center operations, certain revenue equipment used in the ArcBest segment operations, and certain other office equipment. Operating leases have remaining terms of less than 10 years, some of which include one or more options to renew, with renewal option terms up to five years, and some of which include options to terminate the leases within the next three years. The right-of-use assets and lease liabilities as of September 30, 2019 do not assume the option to early terminate any of the Company’s leases, and all renewal options that have been exercised or are reasonably certain to be exercised as of September 30, 2019 are included in the right-of-use assets and lease liabilities. Variable lease cost for operating leases consists of subsequent changes in CPI index, rent payments that are based on usage, and other lease related payments subject to change and not considered fixed payments. All fixed lease and non-lease component payments are combined in determining the right-of-use asset and lease liability.
16
The Company has a small number of finance leases recorded in property, plant and equipment and long-term debt related to structures and office equipment that are immaterial to the consolidated financial statements.
The components of operating lease expense were as follows:
Operating lease expense
5,651
16,632
Variable lease expense
878
2,491
Sublease income
(99)
(235)
Total operating lease expense
6,430
18,888
Rental expense for operating leases, excluding expenses related to leases with initial terms of less than one year, totaled approximately $5.0 million and approximately $14.5 million, net of sublease income, for the three and nine months ended September 30, 2018, respectively.
The operating cash flows from operating lease activity were as follows:
Noncash change in operating right-of-use assets
15,093
Change in operating lease liabilities
(14,567)
Operating right-use-of-assets and lease liabilities, net
Cash paid for amounts included in the measurement of operating lease liabilities
(16,256)
Supplemental balance sheet information related to operating lease liabilities was as follows:
(in thousands, except lease term and discount rate)
Land and
Equipment
Operating leases
Structures
and Others
Operating right-of-use assets (long-term)
65,906
1,498
Operating lease liabilities (current)
17,498
994
Operating lease liabilities (long-term)
52,285
497
Total operating lease liabilities
71,274
69,783
1,491
Weighted-average remaining lease term (in years)
5.4
Weighted-average discount rate
3.88%
17
Maturities of operating lease liabilities at September 30, 2019 were as follows:
and
Structures(1)
5,419
5,156
263
20,131
19,132
999
15,604
15,334
270
11,189
8,068
18,676
Total lease payments
79,087
77,555
1,532
Less imputed interest
(7,813)
(7,772)
The future minimum rental commitments, net of minimum rentals to be received under noncancelable subleases, as of December 31, 2018 for all noncancelable operating leases were as follows:
19,130
18,067
1,063
14,620
13,676
944
10,972
10,716
256
7,125
4,477
62,174
59,911
2,263
18
NOTE F – LONG-TERM DEBT AND FINANCING ARRANGEMENTS
Long-Term Debt Obligations
Long-term debt consisted of borrowings outstanding under the Company’s revolving credit facility and accounts receivable securitization program, both of which are further described in Financing Arrangements within this Note, and notes payable and finance lease obligations related to the financing of revenue equipment (tractors and trailers used primarily in Asset-Based segment operations), real estate, and certain other equipment as follows:
Credit Facility (interest rate of 3.2%(1) at September 30, 2019)
Accounts receivable securitization borrowings (interest rate of 3.0% at September 30, 2019)
Notes payable (weighted-average interest rate of 3.4% at September 30, 2019)
Finance lease obligations (weighted-average interest rate of 5.3% at September 30, 2019)
266
298,420
291,675
Less current portion
Long-term debt, less current portion
Scheduled maturities of long-term debt obligations as of September 30, 2019 were as follows:
Accounts
Receivable
Credit
Securitization
Notes
Finance Lease
Facility(1)
Program(1)
Payable
Obligations(2)
Due in one year or less
58,779
1,951
1,023
55,721
84
Due after one year through two years
55,830
1,687
873
53,263
Due after two years through three years
88,632
1,668
46,961
Due after three years through four years
33,068
1,694
31,374
Due after four years through five years
15,896
1,733
14,163
Due after five years
Total payments
322,205
78,733
41,896
201,482
Less amounts representing interest
23,785
8,733
1,896
13,156
Long-term debt
19
Assets securing notes payable or held under finance leases were included in property, plant and equipment as follows:
260,019
264,396
Land and structures (service centers)
1,794
1,508
1,484
15,485
5,941
Total assets securing notes payable or held under finance leases
278,806
273,615
Less accumulated depreciation and amortization(1)
76,962
79,961
Net assets securing notes payable or held under finance leases
201,844
193,654
Financing Arrangements
Credit Facility
The Company has a revolving credit facility (the “Credit Facility”) under the Third Amended and Restated Credit Agreement which was amended and restated in September 2019 (the “Credit Agreement”) to increase the initial maximum credit amount from $200.0 million to $250.0 million, including a swing line facility in an aggregate amount of up to $25.0 million and a letter of credit sub-facility providing for the issuance of letters of credit up to an aggregate amount of $20.0 million. The Company option to request additional revolving commitments or incremental term loans thereunder increased from $100.0 million to $125.0 million, subject to certain additional conditions as provided in the Credit Agreement. As of September 30, 2019, the Company had available borrowing capacity of $180.0 million under the Credit Facility.
Principal payments under the Credit Facility are due upon maturity of the facility on October 1, 2024; however, borrowings may be repaid, at the Company’s discretion, in whole or in part at any time, without penalty, subject to required notice periods and compliance with minimum prepayment amounts. Borrowings under the Credit Agreement can either be, at the Company’s election: (i) at an alternate base rate (as defined in the Credit Agreement) plus a spread; or (ii) at a Eurodollar rate (as defined in the Credit Agreement) plus a spread. The applicable spread is dependent upon the Company’s Adjusted Leverage Ratio (as defined in the Credit Agreement). The Credit Agreement contains conditions, representations and warranties, events of default, and indemnification provisions that are customary for financings of this type, including, but not limited to, a minimum interest coverage ratio, a maximum adjusted leverage ratio, and limitations on incurrence of debt, investments, liens on assets, certain sale and leaseback transactions, transactions with affiliates, mergers, consolidations, purchases and sales of assets, and certain restricted payments. The Company was in compliance with the covenants under the Credit Agreement at September 30, 2019.
Interest Rate Swaps
The Company has a five-year interest rate swap agreement with a $50.0 million notional amount maturing on January 2, 2020. The Company receives floating-rate interest amounts based on one-month LIBOR in exchange for fixed-rate interest payments of 1.85% over the life of the agreement. The interest rate swap mitigates interest rate risk by effectively converting $50.0 million of borrowings under the Credit Facility from variable-rate interest to fixed-rate interest with a per annum rate of 2.98% based on the margin of the Credit Facility as of September 30, 2019. The fair value of the interest rate swap of less than $0.1 million and $0.3 million was recorded in other long-term assets in the consolidated balance sheet at September 30, 2019 and December 31, 2018, respectively.
20
In June 2017, the Company entered into a forward-starting interest rate swap agreement with a $50.0 million notional amount which will start on January 2, 2020 upon maturity of the current interest rate swap agreement, and mature on June 30, 2022. The Company will receive floating-rate interest amounts based on one-month LIBOR in exchange for fixed-rate interest payments of 1.99% over the life of the agreement. The interest rate swap mitigates interest rate risk by effectively converting $50.0 million of borrowings under the Credit Facility from variable-rate interest to fixed-rate interest with a per annum rate of 3.12% based on the margin of the Credit Facility as of September 30, 2019. The fair value of the interest rate swap of $0.8 million was recorded in other long-term liabilities in the consolidated balance sheet at September 30, 2019. At December 31, 2018, the fair value of the interest rate swap of $0.5 million was recorded in other long-term assets in the consolidated balance sheet.
The unrealized gain or loss on the interest rate swap instruments was reported as a component of accumulated other comprehensive loss, net of tax, in stockholders’ equity at September 30, 2019 and December 31, 2018, and the change in the unrealized income or loss on the interest rate swaps for the three and nine months ended September 30, 2019 and 2018 was reported in other comprehensive income (loss), net of tax, in the consolidated statements of comprehensive income. The interest rate swaps are subject to certain customary provisions that could allow the counterparty to request immediate settlement of the fair value liability or asset upon violation of any or all of the provisions. The Company was in compliance with all provisions of the interest rate swap agreements at September 30, 2019.
Accounts Receivable Securitization Program
The Company’s accounts receivable securitization program, which matures on October 1, 2021, allows for cash proceeds of $125.0 million to be provided under the program and has an accordion feature allowing the Company to request additional borrowings up to $25.0 million, subject to certain conditions. Under this program, certain subsidiaries of the Company continuously sell a designated pool of trade accounts receivables to a wholly owned subsidiary which, in turn, may borrow funds on a revolving basis. This wholly owned consolidated subsidiary is a separate bankruptcy-remote entity, and its assets would be available only to satisfy the claims related to the lender’s interest in the trade accounts receivables. Borrowings under the accounts receivable securitization program bear interest based upon LIBOR, plus a margin, and an annual facility fee. The securitization agreement contains representations and warranties, affirmative and negative covenants, and events of default that are customary for financings of this type, including a maximum adjusted leverage ratio covenant. As of September 30, 2019, $40.0 million was borrowed under the program. The Company was in compliance with the covenants under the accounts receivable securitization program at September 30, 2019.
The accounts receivable securitization program includes a provision under which the Company may request and the letter of credit issuer may issue standby letters of credit, primarily in support of workers’ compensation and third-party casualty claims liabilities in various states in which the Company is self-insured. The outstanding standby letters of credit reduce the availability of borrowings under the program. As of September 30, 2019, standby letters of credit of $12.2 million have been issued under the program, which reduced the available borrowing capacity to $72.8 million.
Letter of Credit Agreements and Surety Bond Programs
As of September 30, 2019, the Company had letters of credit outstanding of $12.8 million (including $12.2 million issued under the accounts receivable securitization program). The Company has programs in place with multiple surety companies for the issuance of surety bonds in support of its self-insurance program. As of September 30, 2019, surety bonds outstanding related to the self-insurance program totaled $62.3 million.
Notes Payable
The Company has financed the purchase of certain revenue equipment, other equipment, and software through promissory note arrangements, including $30.0 million and $50.5 million for revenue equipment and other equipment during the three and nine months ended September 30, 2019, respectively.
Subsequent to September 30, 2019, the Company financed the purchase of an additional $24.9 million of revenue equipment and software through promissory note arrangements as of November 1, 2019.
21
NOTE G – PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
Nonunion Defined Benefit Pension, Supplemental Benefit, and Postretirement Health Benefit Plans
The following is a summary of the components of net periodic benefit cost:
Three Months Ended September 30
Nonunion Defined
Supplemental
Postretirement
Benefit Pension Plan
Benefit Plan
Health Benefit Plan
Service cost
80
92
Interest cost
138
1,136
27
303
209
Expected return on plan assets
29
(363)
Amortization of prior service credit
(23)
Pension settlement expense(1)
2,530
518
Amortization of net actuarial loss(2)
50
494
24
225
76
Net periodic benefit cost
2,747
1,785
47
600
354
Nine Months Ended September 30
240
275
624
3,259
81
909
628
(60)
(1,142)
(25)
(70)
4,164
260
1,864
71
60
674
228
4,988
5,584
100
141
1,798
1,061
Nonunion Defined Benefit Pension Plan
In November 2017, an amendment was executed to terminate the nonunion defined benefit pension plan with a termination date of December 31, 2017. In September 2018, the plan received a favorable determination letter from the IRS regarding qualification of the plan termination. Benefit election forms were provided to plan participants during the fourth quarter of 2018 and participants could elect any form of payment allowed by the plan for immediate commencement of payment or defer payment until a later date. The plan began distributing immediate lump sum benefit payments related to the plan termination in fourth quarter 2018 and continued making these distributions through third quarter 2019. The plan received an extension from the Pension Benefit Guaranty Corporation (the “PBGC”) to allow additional time for the plan to administer the settlement of the remaining obligation for deferred benefits through the purchase of a nonparticipating annuity contract from an insurance company.
The benefit obligations of the nonunion defined benefit pension plan were settled in third quarter 2019. The plan purchased a nonparticipating annuity contract from an insurance company to settle the pension obligation related to the vested benefits of approximately 120 plan participants and beneficiaries who were either receiving monthly benefit payments at the time of the contract purchase or who did not elect to receive a lump sum benefit upon plan termination. The remaining benefit obligation for the vested benefits of 30 plan participants who could not be located for payment was transferred to the PBGC.
22
The Company recognized pension settlement expense as a component of net periodic benefit cost of the nonunion defined benefit pension plan for the three and nine months ended September 30, 2019 of $2.5 million (pre-tax), or $1.9 million (after-tax), and $4.2 million (pre-tax), or $3.1 million (after-tax), respectively. Pension settlement expense for the three and nine months ended September 30, 2019 was related to lump-sum benefit distributions from the plan of $16.0 million and $33.9 million, respectively, which included third quarter 2019 payments of $14.0 million to purchase the annuity contract and $1.5 million to transfer the remaining benefit obligation to the PBGC. During the three and nine months ended September 30, 2019, an additional $4.0 million pension termination expense (with no tax benefit) was recorded with pension settlement expense in the “Other, net” line of other income (costs) in the consolidated statements of operations. This noncash charge was related to an amount which was stranded in accumulated other comprehensive loss until the nonunion defined benefit pension obligation was settled upon plan termination. The stranded amount originally related to a previous valuation allowance on deferred tax assets for nonunion defined benefit pension liabilities. For the three and nine months ended September 30, 2018, pension settlement expense of $0.5 million (pre-tax), or $0.4 million (after-tax), and $1.6 million (pre-tax), or $1.2 million (after-tax), respectively, was recognized related to $3.1 million and $11.6 million of lump-sum distributions from the plan for the three and nine months ended September 30, 2018, respectively.
The Company made $7.7 million of tax-deductible cash contributions to the plan in third quarter 2019 to fund the plan benefit and expense distributions in excess of plan assets. The nonunion defined benefit plan was substantially liquidated as of September 30, 2019 and liquidation is expected to be completed in 2019.
The Company’s short-term rate of return assumption, net of estimated expenses expected to be paid from plan assets, utilized in determining nonunion defined benefit pension expense was lowered from 1.4% for first quarter 2019 to 0.0% for the second and third quarters of 2019, as estimated expenses expected to be paid from plan assets were expected to offset investment returns on plan assets which were held in money market mutual funds during 2019.
The following table discloses the changes in benefit obligations and plan assets of the nonunion defined benefit pension plan for the nine months ended September 30, 2019:
Change in benefit obligations
Benefit obligations at December 31, 2018
33,373
Actuarial loss(1)
300
Benefits paid
(34,297)
Benefit obligations at September 30, 2019
Change in plan assets
Fair value of plan assets at December 31, 2018
26,646
Actual return on plan assets
(30)
Employer contributions
7,710
Fair value of plan assets at September 30, 2019
Funded status at period end(2)
Accumulated benefit obligation
23
Multiemployer Plans
ABF Freight System, Inc. and certain other subsidiaries reported in the Company’s Asset-Based operating segment (“ABF Freight”) contribute to multiemployer pension and health and welfare plans, which have been established pursuant to the Taft-Hartley Act, to provide benefits for its contractual employees. ABF Freight’s contributions generally are based on the time worked by its contractual employees, in accordance with the 2018 ABF NMFA and other related supplemental agreements. ABF Freight recognizes as expense the contractually required contributions for each period and recognizes as a liability any contributions due and unpaid.
The 25 multiemployer pension plans to which ABF Freight contributes vary greatly in size and in funded status. Contribution obligations to these plans are generally specified in the 2018 ABF NMFA, which will remain in effect through June 30, 2023. The funding obligations to the pension plans are intended to satisfy the requirements imposed by the Pension Protection Act of 2006, which was permanently extended by the Multiemployer Pension Reform Act (the “Reform Act”) included in the Consolidated and Further Continuing Appropriations Act of 2015. Provisions of the Reform Act include, among others, providing qualifying plans the ability to self-correct funding issues, subject to various requirements and restrictions, including applying to the U.S. Department of the Treasury for the reduction of certain accrued benefits. Through the term of its current collective bargaining agreement, ABF Freight’s contribution obligations generally will be satisfied by making the specified contributions when due. However, the Company cannot determine with any certainty the contributions that will be required under future collective bargaining agreements for ABF Freight’s contractual employees. If ABF Freight was to completely withdraw from certain multiemployer pension plans, under current law, ABF Freight would have material liabilities for its share of the unfunded vested liabilities of each such plan.
Approximately one half of ABF Freight’s total contributions to multiemployer pension plans are made to the Central States, Southeast and Southwest Areas Pension Plan (the “Central States Pension Plan”). As set forth in the 2018 Annual Funding Notice for the Central States Pension Plan, the funded percentage of the plan was 27.2% as of January 1, 2018. ABF Freight received a Notice of Critical and Declining Status for the Central States Pension Plan dated March 29, 2019, in which the plan’s actuary certified that, as of January 1, 2019, the plan is in critical and declining status, as defined by the Reform Act. Critical and declining status is applicable to critical status plans that are projected to become insolvent anytime within the next 14 plan years, or if the plan is projected to become insolvent within the next 19 plan years and either the plan’s ratio of inactive participants to active participants exceeds two to one or the plan’s funded percentage is less than 80%.
As more fully described in Note I to the consolidated financial statements in Item 8 of the Company’s 2018 Annual Report on Form 10-K, ABF Freight’s multiemployer pension plan obligation with the New England Teamsters and Trucking Industry Pension Fund (the “New England Pension Fund”) was restructured under a transition agreement effective on August 1, 2018, which resulted in a related withdrawal liability for which ABF Freight recognized a one-time charge of $37.9 million (pre-tax) as of September 30, 2018. In accordance with the transition agreement, ABF Freight made an initial lump sum cash payment of $15.1 million in third quarter 2018 and the remainder of the withdrawal liability, which had an initial aggregate present value of $22.8 million, will be settled with monthly payments to the New England Pension Fund over a period of 23 years. In accordance with current tax law, these payments are deductible for income taxes when paid.
As of September 30, 2019, the outstanding withdrawal liability to the New England Pension Fund totaled $22.2 million, of which $0.6 million and $21.6 million was recorded in accrued expenses and other long-term liabilities, respectively. The fair value of the obligation was $25.4 million at September 30, 2019, which is equal to the present value of the future withdrawal liability payments, discounted at a 3.1% interest rate determined using the 20-year U.S. Treasury rate plus a spread (Level 2 of the fair value hierarchy).
The multiemployer plan administrators have provided to the Company no other significant changes in information related to multiemployer plans from the information disclosed in the Company’s 2018 Annual Report on Form 10-K.
NOTE H – STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss were as follows:
Pre-tax amounts:
Unrecognized net periodic benefit costs
(7,068)
(11,821)
Interest rate swap
(822)
Foreign currency translation
(2,402)
(2,816)
(10,292)
(13,836)
After-tax amounts:
(5,249)
(12,749)
(607)
591
(1,774)
(2,080)
The following is a summary of the changes in accumulated other comprehensive loss, net of tax, by component for the nine months ended September 30, 2019 and 2018:
Unrecognized
Interest
Foreign
Net Periodic
Rate
Currency
Benefit Costs
Swap
Translation
Balances at December 31, 2018
Other comprehensive income (loss) before reclassifications
(1,183)
Amounts reclassified from accumulated other comprehensive loss
7,791
Net current-period other comprehensive income (loss)
7,500
Balances at September 30, 2019
Balances at December 31, 2017
(19,715)
292
(1,151)
Adjustment to beginning balance of accumulated other comprehensive loss for adoption of accounting standard(1)
(3,391)
63
(248)
Balances at January 1, 2018
(23,106)
355
(1,399)
2,736
749
Balances at September 30, 2018
(22,357)
1,301
(1,564)
25
The following is a summary of the significant reclassifications out of accumulated other comprehensive loss by component:
Unrecognized Net Periodic
Benefit Costs(1)(2)
Amortization of net actuarial loss(3)
(1,005)
(2,152)
70
Pension settlement expense, including termination expense(3)(4)
(8,135)
(1,603)
Total, pre-tax
(9,115)
(3,685)
Tax benefit
1,324
949
Total, net of tax(3)
(7,791)
(2,736)
Dividends on Common Stock
The following table is a summary of dividends declared during the applicable quarter:
Per Share
(in thousands, except per share data)
First quarter
2,052
Second quarter
2,050
Third quarter
2,043
2,060
On October 29, 2019, the Company’s Board of Directors declared a dividend of $0.08 per share to stockholders of record as of November 12, 2019.
The Company has a program to repurchase its common stock in the open market or in privately negotiated transactions. The program has no expiration date but may be terminated at any time at the Board of Directors’ discretion. Repurchases may be made using the Company’s cash reserves or other available sources. As of December 31, 2018, the Company had $22.3 million remaining under the program for repurchases of its common stock. During the nine months ended September 30, 2019, the Company purchased 202,035 shares for an aggregate cost of $6.1 million, leaving $16.2 million available for repurchase of common stock under the program.
NOTE I – SHARE-BASED COMPENSATION
Stock Awards
As of December 31, 2018, the Company had outstanding restricted stock units (“RSUs”) granted under the 2005 Ownership Incentive Plan (the “2005 Plan”). On April 30, 2019, the Company’s stockholders approved the ArcBest Ownership Incentive Plan (the “Ownership Incentive Plan”) to amend and restate the 2005 Plan. The Ownership Incentive Plan
26
provides for the granting of 4.0 million shares, which may be awarded as incentive and nonqualified stock options, stock appreciation rights, restricted stock, RSUs, or performance award units. The Company had outstanding RSUs granted under the Ownership Incentive Plan as of September 30, 2019.
Restricted Stock Units
A summary of the Company’s restricted stock unit award program is presented below:
Grant Date
Units
Fair Value
Outstanding – January 1, 2019
1,436,983
25.81
Granted
386,840
27.75
Vested
(157,994)
40.15
Forfeited(1)
(19,676)
26.32
Outstanding – September 30, 2019
1,646,153
24.89
NOTE J – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Effect of unvested restricted stock awards
(2)
(98)
(28)
(128)
Adjusted net income
16,268
40,678
45,506
51,835
Denominator:
Weighted-average shares
Earnings per common share
(94)
(124)
40,682
51,839
Effect of dilutive securities
888,613
1,098,150
911,303
1,037,824
Adjusted weighted-average shares and assumed conversions
Under the two-class method of calculating earnings per share, dividends paid and a portion of undistributed net income, but not losses, are allocated to unvested RSUs that receive dividends, which are considered participating securities. Beginning with 2015 grants, the RSU agreements were modified to remove dividend rights; therefore, the RSUs granted subsequent to 2015 are not participating securities. For each of the three- and nine-month periods ended September 30, 2019 and 2018, outstanding stock awards of 0.2 million and 0.1 million, respectively, were not included in the diluted earnings per share calculation because their inclusion would have the effect of increasing the earnings per share.
NOTE K – OPERATING SEGMENT DATA
The Company uses the “management approach” to determine its reportable operating segments, as well as to determine the basis of reporting the operating segment information. The management approach focuses on financial information that the Company’s management uses to make operating decisions. Management uses revenues, operating expense categories, operating ratios, operating income, and key operating statistics to evaluate performance and allocate resources to the Company’s operations.
As previously announced in its Current Report on Form 8-K dated October 22, 2019, the Company began a pilot test program in early 2019 to improve freight handling at ABF Freight. The pilot utilizes patented handling equipment, software, and a patented process to load and unload trailers more rapidly and safely. During third quarter 2019, the presentation of operating expenses was modified to present innovative technology costs associated with the pilot test program as a separate operating expense line item for the Asset-Based segment and for the summary of consolidated expenses by category. Previously, innovative technology costs incurred directly by the segment or allocated through shared services were categorized in individual segment expense line items. Certain reclassifications have been made to the prior period operating segment expenses to conform to the current year presentation. There was no impact on total consolidated expenses or total segment expenses as a result of the reclassifications.
Shared services represent costs incurred to support all segments, including sales, pricing, customer service, marketing, capacity sourcing functions, human resources, financial services, information technology, legal, and other company-wide services. Certain overhead costs are not attributable to any segment and remain unallocated in “Other and eliminations.” Included in unallocated costs are expenses related to investor relations, legal, the ArcBest Board of Directors, and certain technology investments. Shared services costs attributable to the operating segments are predominantly allocated based upon estimated and planned resource utilization-related metrics such as estimated shipment levels, number of pricing proposals, or number of personnel supported. The bases for such charges are modified and adjusted by management when necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by the operating segments. Management believes the methods used to allocate expenses are reasonable.
The Company’s reportable operating segments are impacted by seasonal fluctuations which affect tonnage, shipment or service event levels, and demand for services, as described below; therefore, operating results for the interim periods presented may not necessarily be indicative of the results for the fiscal year.
The Company’s reportable operating segments are as follows:
Freight shipments and operating costs of the Asset-Based segment can be adversely affected by inclement weather conditions. The second and third calendar quarters of each year usually have the highest tonnage levels while the first quarter generally has the lowest, although other factors, including the state of the U.S. and global economies, may influence quarterly freight tonnage levels.
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ArcBest segment operations are influenced by seasonal fluctuations that impact customers’ supply chains. The second and third calendar quarters of each year usually have the highest shipment levels while the first quarter generally has the lowest, although other factors, including the state of the U.S. and global economies and available capacity in the market, may impact quarterly business levels. Shipments of the ArcBest segment may decline during winter months because of post-holiday slowdowns, but expedite shipments can be subject to short-term increases depending on the impact of weather disruptions to customers’ supply chains. Plant shutdowns during summer months may affect shipments for automotive and manufacturing customers of the ArcBest segment, but severe weather events can result in higher demand for expedite services. Moving services of the ArcBest segment are impacted by seasonal fluctuations, generally resulting in higher business levels in the second and third quarters as the demand for moving services is typically stronger in the summer months.
Emergency roadside service events of the FleetNet segment are favorably impacted by extreme weather conditions that affect commercial vehicle operations, and the segment’s results of operations will be influenced by seasonal variations in service event volume.
The Company’s other business activities and operating segments that are not reportable include ArcBest Corporation and certain other subsidiaries. Certain costs incurred by the parent holding company and the Company’s shared services subsidiary are allocated to the reporting segments. The Company eliminates intercompany transactions in consolidation. However, the information used by the Company’s management with respect to its reportable segments is before intersegment eliminations of revenues and expenses.
Further classifications of operations or revenues by geographic location are impracticable and, therefore, are not provided. The Company’s foreign operations are not significant.
The following tables reflect reportable operating segment information:
Asset-Based
565,621
585,290
1,631,348
1,626,644
ArcBest
199,758
205,449
554,135
587,369
FleetNet
53,976
50,494
158,957
145,045
Other and eliminations
(31,792)
(15,075)
(73,548)
(39,549)
Total consolidated revenues
Salaries, wages, and benefits
296,503
292,082
873,795
848,611
Fuel, supplies, and expenses(1)
65,738
63,936
195,502
191,163
Operating taxes and licenses
12,865
12,261
37,477
35,927
Insurance
7,646
9,448
23,235
24,055
Communications and utilities
5,064
4,308
14,181
12,964
23,776
22,200
66,370
64,492
Rents and purchased transportation
61,102
70,946
167,234
180,332
Shared services(1)
56,031
57,472
161,664
158,042
Multiemployer pension fund withdrawal liability charge(2)
37,922
(82)
(123)
(1,703)
(522)
Innovative technology costs(1)(3)
4,664
1,080
9,200
2,947
Other(1)
592
2,878
3,778
Total Asset-Based
533,899
535,140
1,549,833
1,559,711
Purchased transportation
164,521
164,322
452,178
475,614
Supplies and expenses
2,780
3,522
8,412
10,290
2,607
3,558
8,813
10,563
Shared services
25,032
23,453
71,204
68,857
2,366
2,546
7,224
6,973
Restructuring costs(4)
152
Gain on sale of subsidiaries(5)
Total ArcBest
197,306
195,456
547,831
570,504
52,805
49,406
155,272
141,407
(27,655)
(9,899)
(57,043)
(24,049)
Total consolidated operating expenses
30
31,722
50,150
81,515
66,933
2,452
9,993
6,304
16,865
1,171
1,088
3,685
3,638
(4,137)
(5,176)
(16,505)
(15,500)
Total consolidated operating income
Other, net(1)
Total other income (costs)
The following table presents operating expenses by category on a consolidated basis:
363,902
363,348
1,068,685
1,048,018
Rents, purchased transportation, and other costs of services
249,110
265,042
706,200
742,338
Fuel, supplies, and expenses
81,023
82,188
241,059
245,718
Depreciation and amortization(1)
29,361
28,026
83,332
81,699
32,959
31,449
96,617
91,112
Restructuring costs(3)
766
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NOTE L – LEGAL PROCEEDINGS, ENVIRONMENTAL MATTERS, AND OTHER EVENTS
The Company is involved in various legal actions arising in the ordinary course of business. The Company maintains liability insurance against certain risks arising out of the normal course of its business, subject to certain self-insured retention limits. The Company routinely establishes and reviews the adequacy of reserves for estimated legal, environmental, and self-insurance exposures. While management believes that amounts accrued in the consolidated financial statements are adequate, estimates of these liabilities may change as circumstances develop. Considering amounts recorded, routine legal matters are not expected to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.
Environmental Matters
The Company’s subsidiaries store fuel for use in tractors and trucks in 60 underground tanks located in 17 states. Maintenance of such tanks is regulated at the federal and, in most cases, state levels. The Company believes it is in substantial compliance with all such regulations. The Company’s underground storage tanks are required to have leak detection systems. The Company is not aware of any leaks from such tanks that could reasonably be expected to have a material adverse effect on the Company.
The Company has received notices from the Environmental Protection Agency and others that it has been identified as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act, or other federal or state environmental statutes, at several hazardous waste sites. After investigating the Company’s involvement in waste disposal or waste generation at such sites, the Company has either agreed to de minimis settlements or determined that its obligations, other than those specifically accrued with respect to such sites, would involve immaterial monetary liability, although there can be no assurances in this regard.
At September 30, 2019 and December 31, 2018, the Company’s reserve, which was reported in accrued expenses, for estimated environmental cleanup costs of properties currently or previously operated by the Company totaled $0.6 million. Amounts accrued reflect management’s best estimate of the future undiscounted exposure related to identified properties based on current environmental regulations, management’s experience with similar environmental matters, and testing performed at certain sites.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
ArcBest CorporationTM (together with its subsidiaries, the “Company,” “we,” “us,” and “our”) provides a comprehensive suite of freight transportation and integrated logistics services to deliver innovative solutions. Our operations are conducted through our three reportable operating segments: Asset-Based, which consists of ABF Freight System, Inc. and certain other subsidiaries (“ABF Freight”); ArcBest®, our asset-light logistics operation; and FleetNet®. The ArcBest and the FleetNet reportable segments combined represent our Asset-Light operations. References to the Company, including “we,” “us,” and “our,” in this Quarterly Report on Form 10-Q are primarily to the Company and its subsidiaries on a consolidated basis.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) describes the principal factors affecting our results of operations, liquidity and capital resources, and critical accounting policies. This discussion should be read in conjunction with the accompanying quarterly unaudited consolidated financial statements and the related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2018. Our 2018 Annual Report on Form 10-K includes additional information about significant accounting policies, practices, and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties to which our financial and operating results are subject.
Results of Operations
Consolidated Results
Total Asset-Light
253,734
255,943
713,092
732,414
Asset-Based(1)
3,623
11,081
9,989
20,503
NET INCOME(2)
DILUTED EARNINGS PER SHARE(2)
Our consolidated revenues, which totaled $787.6 million and $2,270.9 million for the three and nine months ended September 30, 2019, respectively, decreased 4.7% and 2.1% compared to the same prior-year periods. The decrease in consolidated revenues for third quarter 2019, versus third quarter 2018, reflects a 3.4% decrease in our Asset-Based revenues and a 0.9% decrease in revenues of our Asset-Light operations (representing the combined operations of our ArcBest and FleetNet segments). For the nine-month period ended September 30, 2019, the decrease in our consolidated revenues reflects a 2.6% decline in revenues of our Asset-Light operations, partially offset by a 0.3% improvement in our Asset-Based revenues, compared to the same period of 2018. The decline in our third quarter 2019 Asset-Based revenues was impacted by a 4.6% decrease in total tonnage per day, partially offset by a 1.5% improvement in yield, as measured by billed revenue per hundredweight, including fuel surcharges. The year-over-year increase in our Asset-Based revenues for the nine months ended September 30, 2019 is primarily due to a 4.3% increase in yield, partially offset by the impact of a 3.7% decline in total tonnage per day. Declines in our Asset-Based tonnage per day for the three and nine months ended September 30, 2019 reflect decreases in shipment levels and weight per shipment. The revenue decreases of our Asset-Light operations for the three and nine months ended September 30, 2019, compared to the same periods of 2018, are primarily due to lower revenue per shipment for the ArcBest segment of 7.9% and 8.1%, respectively, and declines in shipments per day of 1.9% and 1.5%, respectively, associated with lower market prices and more available capacity in the truckload market. The Asset-Light revenue decrease in the ArcBest segment was partially offset by revenue improvement for the FleetNet segment on higher service event volume. On a combined basis, the Asset-Light operating segments generated approximately 31% and 30% of our total revenues before other revenues and intercompany eliminations for the three and nine months ended September 30, 2019, respectively.
For the three and nine months ended September 30, 2019, consolidated operating income totaled $31.2 million and $75.0 million, compared to $56.1 million and $71.9 million, respectively, for the same periods of 2018. Our operating results for the nine months ended September 30, 2018 were impacted by a one-time charge of $37.9 million (pre-tax), or $28.2 million (after-tax) and $1.05 per diluted share, recorded by ABF Freight in second quarter 2018 for a multiemployer pension plan withdrawal liability resulting from the transition agreement with the New England Teamsters and Trucking Industry Pension Fund (the “New England Pension Fund”), as further discussed within the Asset-Based Segment Overview section of Results of Operations. Excluding the impact of this one-time charge, our consolidated operating results for the three and nine months ended September 30, 2019, compared to the same prior-year periods, declined primarily due to the lower revenues previously described, combined with the matters further described within the discussions of segment results, including business mix changes and expense impacts, as well as certain other expenses described in the following paragraphs which are meaningful to the analysis of our consolidated operating results.
Innovative technology costs related to a freight handling pilot test program at ABF Freight, which are further discussed in the Asset-Based Segment Overview section of Results of Operations, impacted consolidated results by $4.7 million (pre-tax), or $3.6 million (after-tax) and $0.14 per diluted share, for the three months ended September 30, 2019, compared to $1.8 million (pre-tax), or $1.3 million (after-tax) and $0.05 per diluted share, for the same period of 2018. For the nine months ended September 30, 2019, these innovative technology costs were $11.1 million (pre-tax), or $8.5 million (after-tax) and $0.32 per diluted share, compared to $4.1 million (pre-tax), or $3.0 million (after-tax) and $0.11 per diluted share, for the same period of 2018. During the three and nine months ended September 30, 2019, the Asset-Based segment also incurred conversion costs to comply with the electronic logging device (“ELD”) mandate, which are further discussed in the Asset-Based Segment Overview section of Results of Operations, of $1.8 million (pre-tax), or $1.3 million (after-tax) and $0.05 per diluted share, for the three months ended September 30, 2019, and $2.4 million (pre-tax), or $1.8 million (after-tax) and $0.07 per diluted share, for the nine months ended September 30, 2019, with no comparable costs recognized during the same periods of 2018.
The year-over-year comparisons of consolidated operating results were impacted by lower expenses for certain nonunion performance-based incentive plans, including long-term incentive plans impacted by shareholder returns relative to peers, which were $9.7 million and $20.4 million lower for the three and nine months ended September 30, 2019, respectively, than the same periods of 2018. The decreases in these fringe benefit costs were partially offset by higher nonunion healthcare costs, which increased $3.2 million and $4.3 million for the three and nine months ended September 30, 2019, compared to the same prior-year periods, due to an increase in the average cost per health claim and higher prescription drug costs. Consolidated operating results for the three and nine months ended September 30, 2018 benefited from a $1.9 million gain on sale of subsidiaries related to the sale of ArcBest’s military moving business in December 2017. Restructuring charges related to the realignment of our organizational structure totaled less than $0.1 million and $0.8 million for the three and nine months ended September 30, 2018, with no comparable costs recognized during the same periods of 2019.
The loss reported in the “Other and eliminations” line, which totaled $4.1 million and $16.5 million for the three and nine months ended September 30, 2019, respectively, compared to $5.2 million and $15.5 million, respectively, for the same periods of 2018, includes expenses related to investments to develop and design various ArcBest technology and innovations, as well as expenses related to shared services for the delivery of comprehensive transportation and logistics services to ArcBest’s customers. The $1.0 million decrease in the loss reported in “Other and eliminations” in third quarter 2019, compared to third quarter 2018, was primarily due to lower expenses for certain incentive plans. For the nine months ended September 30, 2019, the $1.0 million increase in the loss in “Other and eliminations,” compared to the same period of 2018, was primarily due to investments in technology, partially offset by lower expenses for certain incentive plans. As a result of our ongoing investments in technology, including the design and development of digital business platforms, and the seasonal impact of shared service allocations of other corporate costs, we expect the loss reported in “Other and eliminations” for fourth quarter 2019 to approximate $8.0 million and to be approximately $24.0 million for full year 2019, compared to a loss of $22.7 million in 2018.
In addition to the above items, consolidated net income and earnings per share were impacted by nonunion defined benefit pension expense, including settlement charges, and income from changes in the cash surrender value of variable life insurance policies, both of which are reported below the operating income line in the consolidated statements of operations. A portion of our variable life insurance policies have investments, through separate accounts, in equity and fixed income
35
securities and, therefore, are subject to market volatility. Changes in the cash surrender value of life insurance policies contributed $0.02 and $0.10 to diluted earnings per share for the three- and nine-month periods ended September 30, 2019, respectively, and contributed $0.05 and $0.08 per diluted per share, for the same respective prior-year periods.
In November 2017, an amendment was executed to terminate our nonunion defined benefit pension plan with a termination date of December 31, 2017. The plan began distributing immediate lump sum benefit payments related to the plan termination in fourth quarter 2018 and continued making these distributions through third quarter 2019, when the benefit obligations of the nonunion defined benefit pension plan were settled. In third quarter 2019, the plan purchased a nonparticipating annuity contract from an insurance company to settle the pension obligation related to the vested benefits of participants and beneficiaries who were either receiving monthly benefit payments at the time of the contract purchase or who did not elect to receive a lump sum benefit upon plan termination. The remaining benefit obligation for the vested benefits of participants who could not be located for payment was transferred to the Pension Benefit Guaranty Corporation (the “PBGC”). Consolidated after-tax pension expense, including settlement charges, recognized for the nonunion defined benefit pension plan totaled $2.0 million and $3.7 million for the three and nine months ended September 30, 2019, respectively, compared to $1.3 million and $4.1 million for the three and nine months ended September 30, 2018, respectively. For each of these periods, pension settlement charges related to lump-sum benefit distributions and, for the 2019 periods, the plan’s purchase of the annuity contract and transfer of the remaining benefit obligation to the PBGC. During the three and nine months ended September 30, 2019, consolidated net income and earnings per share were also impacted by a $4.0 million noncash pension termination expense related to an amount which was stranded in accumulated other comprehensive loss until the nonunion defined benefit pension obligation was settled upon plan termination. We made $7.7 million of tax-deductible cash contributions to the plan in third quarter 2019 to fund the plan benefit and expense distributions in excess of plan assets. The nonunion defined benefit plan was substantially liquidated as of September 30, 2019 and liquidation is expected to be completed in 2019.
For the three and nine months ended September 30, 2018, consolidated net income and earnings per share were impacted by provisional tax benefits of $0.8 million, or $0.03 per diluted share, and $3.5 million, or $0.13 per diluted share, respectively, as a result of recognizing a reasonable estimate of the tax effects of the Tax Cuts and Jobs Act (the “Tax Reform Act”). Consolidated net income and earnings per share for the nine months ended September 30, 2018 were also impacted by a tax credit of $1.2 million, or $0.05 per diluted share, for the February 2018 retroactive reinstatement of the alternative fuel tax credit related to the year ended December 31, 2017. The tax benefits and credits, including the impact of the Tax Reform Act, as well as other changes in the effective tax rates which impacted consolidated net income and earnings per share for the three and nine months ended September 30, 2019 and 2018, are further described within the Income Taxes section of MD&A.
Consolidated Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”)
We report our financial results in accordance with generally accepted accounting principles (“GAAP”). However, management believes that certain non-GAAP performance measures and ratios, such as Adjusted EBITDA, utilized for internal analysis provide analysts, investors, and others the same information that we use internally for purposes of assessing our core operating performance and provides meaningful comparisons between current and prior period results, as well as important information regarding performance trends. Accordingly, using these measures improves comparability in analyzing our performance because it removes the impact of items from operating results that, in management's opinion, do not reflect our core operating performance. Management uses Adjusted EBITDA as a key measure of performance and for business planning. The measure is particularly meaningful for analysis of our operating performance, because it excludes amortization of acquired intangibles and software of our Asset-Light businesses, which are significant expenses resulting from strategic decisions rather than core daily operations. Additionally, Adjusted EBITDA is a primary component of the financial covenants contained in our Third Amended and Restated Credit Agreement (see Note F to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q). Other companies may calculate Adjusted EBITDA differently; therefore, our calculation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results. Adjusted EBITDA should not be construed as a better measurement than operating income, operating cash flow, net income, or earnings per share, as determined under GAAP.
36
Consolidated Adjusted EBITDA
2,900
2,470
8,593
6,542
Income tax provision(1)
Amortization of share-based compensation
Amortization of net actuarial losses of benefit plans and pension settlement expense, including termination expense(2)
6,800
1,108
9,140
3,755
Multiemployer pension fund withdrawal liability charge(3)
Restructuring charges(4)
64,812
88,286
171,831
200,585
Asset-Based Operations
Asset-Based Segment Overview
The Asset-Based segment consists of ABF Freight System, Inc., a wholly-owned subsidiary of ArcBest Corporation, and certain other subsidiaries (“ABF Freight”). Our Asset-Based operations are affected by general economic conditions, as well as a number of other competitive factors that are more fully described in Item 1 (Business) and in Item 1A (Risk Factors) of Part I of our 2018 Annual Report on Form 10-K.
The key indicators necessary to understand the operating results of our Asset-Based segment, which are more fully described in the Asset-Based Segment Overview within the Asset-Based Operations section of Results of Operations in Item 7 (MD&A) of Part II of our 2018 Annual Report on Form 10-K, include:
37
As of September 2019, approximately 82% of our Asset-Based segment’s employees were covered under the ABF National Master Freight Agreement (the “2018 ABF NMFA”), the collective bargaining agreement with the International Brotherhood of Teamsters (the “IBT”), which will remain in effect through June 30, 2023. Under the 2018 ABF NMFA, the contractual wage and benefits costs, including the ratification bonuses and vacation restoration, are estimated to increase approximately 2.0% on a compounded annual basis through the end of the agreement, although the phase-in of an additional week of vacation results in a higher annual percentage increase in the earlier months of the agreement through the fourth quarter of 2019. Profit-sharing bonuses based on the Asset-Based segment’s annual operating ratios for any full calendar year under the contract would represent an additional increase in costs under the 2018 ABF NMFA.
As more fully described in the Asset-Based Operations section of Results of Operations within MD&A in Item 7 of the Company’s 2018 Annual Report on Form 10-K, ABF Freight’s multiemployer pension plan obligation with the New England Teamsters and Trucking Industry Pension Fund (the “New England Pension Fund”) was restructured under a transition agreement effective on August 1, 2018. The transition agreement resulted in ABF Freight’s withdrawal as a participating employer in the New England Pension Fund and triggered settlement of the related withdrawal liability. ABF Freight simultaneously re-entered the New England Pension Fund as a new participating employer free from any preexisting withdrawal liability and at a lower future contribution rate. ABF Freight recognized a one-time charge of $37.9 million (pre-tax) to record the withdrawal liability as of June 30, 2018, when the transition agreement was determined to be probable. In accordance with the transition agreement, ABF Freight made an initial lump sum cash payment of $15.1 million in third quarter 2018 and the remainder of the withdrawal liability, which had an initial aggregate present value of $22.8 million, will be settled with monthly payments to the New England Pension Fund over a period of 23 years. In accordance with current tax law, these payments are deductible for income taxes when paid.
Asset-Based Segment Results
The following table sets forth a summary of operating expenses and operating income as a percentage of revenue for the Asset-Based segment:
Asset-Based Operating Expenses (Operating Ratio)
52.4
%
49.9
53.6
52.2
11.6
10.9
12.0
11.7
2.3
2.1
2.2
1.4
1.6
1.5
0.9
0.7
0.8
4.2
3.8
4.0
10.8
12.1
10.2
11.1
9.9
9.8
9.7
(0.1)
Innovative technology costs(1)
0.2
0.6
0.1
0.3
94.4
91.4
95.0
95.9
Asset-Based Operating Income
5.6
8.6
5.0
4.1
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The following table provides a comparison of key operating statistics for the Asset-Based segment:
% Change
Workdays
63.5
63.0
190.0
190.5
Billed revenue(1) per hundredweight, including fuel surcharges
36.35
35.83
35.38
33.92
4.3
Pounds
1,552,739,025
1,614,220,578
(3.8)
4,622,532,207
4,812,499,089
(3.9)
Pounds per day
24,452,583
25,622,549
(4.6)
24,329,117
25,262,462
(3.7)
Shipments per day
20,027
20,835
19,762
19,912
(0.8)
Shipments per DSY(2) hour
0.440
0.446
(1.3)
0.437
0.444
(1.6)
Pounds per DSY(2) hour
537.69
548.13
(1.9)
538.36
562.76
(4.3)
Pounds per shipment
1,221
1,230
(0.7)
1,231
1,269
(3.0)
Pounds per mile(3)
18.73
18.77
(0.2)
19.21
19.56
(1.8)
Average length of haul (miles)
1,040
1,043
(0.3)
1,035
1,042
Asset-Based Revenues
Asset-Based segment revenues for the three and nine months ended September 30, 2019 totaled $565.6 million and $1,631.3 million, respectively, compared to $585.3 million and $1,626.6 million, respectively, for the same periods of 2018. Billed revenue (as described in footnote (1) to the key operating statistics table) decreased 3.2% on a per-day basis for the three months ended September 30, 2019, compared to the same prior-year period, primarily reflecting a 4.6% decrease in tonnage per day, partially offset by a 1.5% increase in total billed revenue per hundredweight, including fuel surcharges. For the nine months ended September 30, 2019, billed revenue increased 0.5% on a per-day basis, compared to the same prior-year period, primarily reflecting a 4.3% increase in total billed revenue per hundredweight, including fuel surcharges, partially offset by a 3.7% decrease in tonnage per day. Third quarter 2019 had an additional one half of a workday, versus third quarter 2018, and the nine-month period ended September 30, 2019 had one half of a workday less than the same period of 2018.
The increases in total billed revenue per hundredweight during the three- and nine-month periods ended September 30, 2019, compared to the same periods of 2018, reflect yield improvement initiatives, including general rate increases, contract renewals, and further implementation of space-based pricing, partially offset by the impact of a higher proportion of truckload-rated spot business. Our space-based pricing program, which we introduced in third quarter 2017, applies cubic minimum charges (“CMC”) on shipments subject to LTL tariffs to better reflect freight shipping trends that have evolved in recent years, as more fully described in the Asset-Based Segment Overview within the Asset-Based Operations section of Results of Operations in Item 7 (MD&A) of Part II of our 2018 Annual Report on Form 10-K. The Asset-Based segment implemented nominal general rate increases on its LTL base rate tariffs of 5.9% effective February 4, 2019 and April 16, 2018, although the rate changes vary by lane and shipment characteristics. Approximately one third of our Asset-Based business is subject to base LTL tariffs, which are affected by general rate increases, combined with individually negotiated discounts. Rates on the other two thirds of our Asset-Based business, including business priced in the spot market, are subject to individual pricing arrangements that are negotiated at various times throughout the year. Prices on accounts subject to deferred pricing agreements and annually negotiated contracts which were renewed during the three and nine months ended September 30, 2019 increased approximately 2.9% and 3.4%, respectively, compared to the same periods of 2018. Excluding changes in fuel surcharges, average pricing on the Asset-Based
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segment’s LTL-rated business during the three and nine months ended September 30, 2019 had high-single-digit percentage increases, compared to the same periods of 2018. Throughout the first nine months of 2019, the fuel surcharge mechanism generally continued to have market acceptance among customers; however, certain nonstandard pricing arrangements have limited the amount of fuel surcharge recovered. Our standard fuel surcharge program impacts approximately 35% of Asset-Based shipments and primarily affects noncontractual customers. There can be no assurances that the current pricing trend will continue. The competitive environment could limit the Asset-Based segment from securing adequate increases in base LTL freight rates and could limit the amount of fuel surcharge revenue recovered.
The 4.6% decrease in tonnage per day for the three months ended September 30, 2019, compared to the same period of 2018, reflects a 10.0% decrease in LTL-rated tonnage, partially offset by double-digit percentage growth in truckload-rated freight. The 3.7% decrease in tonnage per day for the nine months ended September 30, 2019, compared to the same period of 2018, reflects a mid-single digit percentage decrease in LTL-rated tonnage, partially offset by a slight increase in truckload-rated tonnage levels. For the three and nine months ended September 30, 2019, total shipments per day decreased 3.9% and 0.8%, respectively, and average weight per shipment declined 0.7% and 3.0%, respectively, compared to the same periods of 2018. The lower weight per shipment for the three and nine months ended September 30, 2019, compared to the same periods of 2018, reflects the impact of softer economic conditions which have the effect of reducing the size of customers’ shipments combined with increased capacity in the truckload market which enables customers to utilize truckload carriers for some of their larger-sized LTL-rated shipments. In a reversal of quarterly trends through the first quarter of 2019, our Asset-Based segment has experienced declines in LTL-rated shipment levels in the second and third quarters of 2019, while truckload-rated shipment levels increased due to adding more volume-quoted spot shipments to improve the efficiency of our linehaul network.
Asset-Based Revenues — October 2019
Asset-Based billed revenues for the month of October 2019 decreased approximately 7.0% compared to October 2018 on a per-day basis. Total tonnage decreased approximately 9.0% per day, reflecting a higher mix of truckload-rated business. The double-digit percentage decrease in LTL-rated tonnage was partially offset by a double-digit percentage increase in truckload-rated spot tonnage moving in the Asset-Based network in October 2019, compared to the same prior-year period. Total shipments per day decreased approximately 7.0% in October 2019, compared to October 2018. Total weight per shipment decreased approximately 2.0% in October 2019, with the weight per shipment on LTL-rated shipments down approximately 6.0%, versus the same prior-year period, reflecting changes in account mix. Total billed revenue per hundredweight for October 2019 increased approximately 2.0% compared to the October 2018 measure. A high-single-digit percentage increase in revenue per hundredweight, excluding fuel surcharge, for the Asset-Based segment’s LTL-rated business was partially offset by lower revenue per hundredweight on truckload-rated spot shipments moving in the Asset-Based network.
The Asset-Based segment generated operating income of $31.7 million and $81.5 million for the three and nine months ended September 30, 2019, respectively, compared to $50.2 million and $66.9 million, respectively, for the same periods of 2018. The Asset-Based segment operating ratio increased by 3.0 percentage points for the three months ended September 30, 2019 and improved by 0.9 percentage points for the nine months ended September 30, 2019, over the same prior-year periods. The nine months ended September 30, 2018 includes the $37.9 million one-time charge recognized in second quarter 2018 for the multiemployer plan withdrawal liability resulting from the transition agreement ABF Freight entered into with the New England Pension fund, as previously discussed in the Asset-Based Segment Overview.
As previously announced in our Current Report on Form 8-K dated October 22, 2019, ArcBest Technologies, a wholly-owned ArcBest subsidiary which is focused on the advancement of supply chain execution technologies, began a pilot test program (the “pilot”) in early 2019 to improve freight handling at ABF Freight. The pilot utilizes patented handling equipment, software, and a patented process to load and unload trailers more rapidly and safely, with full freight loads pulled out of the trailer onto the facility floor and accessible from multiple points. The pilot is in the early stages in a limited number of locations. ABF Freight has leased new facilities in the test pilot regions in Indiana and also at a new Kansas City distribution center location expected to open in mid-2020. The pilot provides ABF Freight an opportunity to evaluate the potential for improving safety and working conditions for employees and for providing a better experience for customers. Potential benefits include improved transit performance, reduced cargo claims, reduced injuries and workers’ compensation claims, and faster employee training. While ArcBest believes the pilot has potential to provide
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safer and improved freight-handling, a number of factors will be involved in determining proof of concept and there can be no assurances that pilot testing will be successful or expand beyond current testing locations.
Innovative technology costs related to the freight handling pilot test program at ABF Freight impacted operating results of the Asset-Based segment by $4.7 million and $9.2 million for the three and nine months ended September 30, 2019, respectively, compared to $1.1 million and $2.9 million, respectively, for the same periods of 2018. For the remainder of 2019, we anticipate innovative technology costs associated with the pilot to impact our Asset-Based operating expenses by approximately $4.0 million in fourth quarter, compared to approximately $1.0 million in fourth quarter 2018, and approximately $13.0 million for the full year, compared to approximately $4.0 million for the full year of 2018.
During the three and nine months ended September 30, 2019, the Asset-Based segment also incurred impairment charges related to equipment replacement and other one-time costs incurred to comply with the electronic logging device (“ELD”) mandate which will be effective in December 2019. These ELD conversion costs totaled $1.8 million and $2.4 million for the three and nine months ended September 30, 2019, respectively. For the nine-month period ended September 30, 2019, operating income was negatively impacted by approximately $2.0 million due to weather events in first quarter 2019 that reduced business levels and unfavorably impacted labor. The segment’s operating ratio was also impacted by changes in operating expenses as discussed in the following paragraphs.
Asset-Based Operating Expenses
Labor costs, which are reported in operating expenses as salaries, wages, and benefits, amounted to 52.4% and 53.6% of Asset-Based segment revenues for the three- and nine-month periods ended September 30, 2019, respectively, compared to 49.9% and 52.2% for the same periods of 2018, primarily reflecting year-over-year increases in contractual wage and benefit contribution rates under the 2018 ABF NMFA. The contractual wage rate under the 2018 ABF NMFA increased 1.4% effective July 1, 2019, and the average health, welfare, and pension benefit contribution rate increased approximately 2.2% effective primarily on August 1, 2019. Expenses related to the restoration of one week of vacation under the 2018 ABF NMFA also increased salaries, wages, and benefits costs by $1.1 million and $5.2 million for the three and nine months ended September 30, 2019, respectively, compared to the same periods of 2018. The additional week of vacation under the new labor agreement is accrued as it is earned for anniversary dates that begin on or after April 1, 2018. Salaries, wages, and benefits costs for the three and nine months ended September 30, 2019, compared to the same period of 2018, were also impacted by an increase in workers’ compensation expense of $0.4 million and $1.9 million, respectively, which primarily reflects an increase in severity of claims experience, and increases in nonunion healthcare costs of $2.3 million and $3.7 million, respectively. The segment’s higher labor costs were partially offset by lower expenses for certain nonunion performance-based incentive plans, including long-term incentive plans impacted by shareholder returns relative to peers.
Although the Asset-Based segment manages costs with shipment levels, portions of salaries, wages, and benefits are fixed in nature and the adjustments which would otherwise be necessary to align the labor cost structure throughout the system to corresponding tonnage levels are limited as the segment strives to maintain customer service. The Asset-Based segment’s 2019 results reflect the impact of retaining freight handling personnel and drivers in the midst of a tight labor market to maintain customer service levels, as tonnage levels declined versus 2018. These resources allowed for lower utilization of local delivery agents and linehaul purchased transportation as further described below. Although certain productivity measures were negatively impacted by these strategic decisions, management believes the service emphasis provides opportunity to generate improved yields and business levels. Shipments per DSY hour declined 1.3% and 1.6% for the three and nine months ended September 30, 2019, compared to the same prior-year periods. Productivity was negatively impacted by shipment profile metrics that increased handling costs for LTL shipments in the weaker freight market, compared to the prior year. The lower weight per shipment was a contributing profile factor of the 1.9% and 4.3% decline in pounds per DSY hour for the three and nine months ended September 30, 2019, respectively, compared to the same periods of 2018. Pounds per mile declined 0.2% and 1.8% for the three and nine months ended September 30, 2019, respectively, compared to the same periods of 2018, reflecting freight profile effects, including lower weight per shipment and shorter length of haul on available freight, while also maintaining service delivery schedules. Dock and street productivity metrics for the nine-month period ended September 30, 2019 also reflect the negative impact of first quarter severe winter weather events previously described, compared to the same period of 2018.
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Fuel, supplies, and expenses as a percentage of revenue increased 0.7 percentage points and 0.3 percentage points for the three and nine months ended September 30, 2019, respectively, compared to the same periods of 2018, primarily due to year-over-year increases in expense for maintenance and repairs of revenue equipment. The increase in fuel, supplies, and expenses was partially offset by a decrease in average fuel price per gallon (excluding taxes) of approximately 14% and 8% for the three and nine months ended September 30, 2018, respectively, and fewer miles driven during these periods, compared to the same periods of 2018.
Depreciation and amortization as a percentage of revenue increased 0.4 percentage points for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, primarily due to the impairment charges related to equipment replacement to comply with the ELD mandate, as previously described. Depreciation and amortization as a percentage of revenue was comparable between the nine-month periods.
Rents and purchased transportation as a percentage of revenue decreased 1.3 and 0.9 percentage points for the three and nine months ended September 30, 2019, respectively, compared to the same periods of 2018, primarily due to lower utilization of local delivery agents and linehaul purchased transportation as the Asset-Based segment focused on optimizing utilization of owned assets and retained additional labor resources to maintain customer service. The decrease in purchased transportation costs were also impacted by lower rail utilization, as rail miles decreased approximately 7% and 3% for the three and nine months ended September 30, 2019, compared to same prior-year periods.
Innovative technology costs as a percentage of revenue increased 0.6 and 0.4 percentage points for the three and nine months ended September 30, 2019, respectively, compared to the same periods of 2018, primarily due to increased activity for the freight handling pilot test program at ABF Freight previously discussed.
Asset-Light Operations
Asset-Light Overview
The ArcBest and FleetNet reportable segments, combined, represent our Asset-Light operations. Our Asset-Light operations are a key component of our strategy to offer customers a single source of end-to-end logistics solutions, designed to satisfy the complex supply chain and unique shipping requirements customers encounter. We have unified our sales, pricing, customer service, marketing, and capacity sourcing functions to better serve our customers through delivery of integrated logistics solutions.
Our Asset-Light operations are affected by general economic conditions, as well as a number of other competitive factors that are more fully described in Item 1 (Business) and in Item 1A (Risk Factors) of Part I of our 2018 Annual Report on Form 10-K. The key indicators necessary to understand our Asset-Light operating results include:
Asset-Light Results
For the three and nine months ended September 30, 2019, the combined revenues of our Asset-Light operations totaled $253.7 million and $713.1 million, respectively, compared to $255.9 million and $732.4 million, respectively, for the same periods of 2018. The combined revenues of our Asset-Light operating segments generated approximately 31% and 30% of our total revenues before other revenues and intercompany eliminations for the three and nine months ended September 30, 2019, respectively, compared to 30% and 31% for the three and nine months ended September 30, 2018, respectively.
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ArcBest Segment
The following table sets forth a summary of operating expenses and operating income as a percentage of revenue for the ArcBest segment:
ArcBest Segment Operating Expenses (Operating Ratio)
82.4
80.0
81.6
81.0
1.7
1.3
1.8
12.5
11.4
12.9
1.2
Restructuring costs
Gain on sale of subsidiaries(1)
(0.9)
98.8
95.1
98.9
97.1
ArcBest Segment Operating Income
4.9
1.1
2.9
A comparison of key operating statistics for the ArcBest segment presented in the following table reflects the segment’s combined operations, excluding statistical data related to managed transportation solutions transactions. Growth in managed transportation solutions has increased the number of shipments for these services to more than one-third of the ArcBest segment’s total shipments, while the business represents less than 15% of segment revenues for the three and nine months ended September 30, 2019. Due to the nature of our managed transportation solutions which typically involve a larger number of shipments at a significantly lower revenue per shipment level than the segment’s other service offerings, inclusion of the managed transportation solutions data would result in key operating statistics which are not representative of the operating results of the segment as a whole. As such, the key operating statistics management uses to evaluate performance of the ArcBest segment exclude managed transportation solutions transactions.
Year Over Year % Change
Revenue / Shipment
(7.9%)
(8.1%)
Shipments / Day
(1.9%)
(1.5%)
ArcBest segment revenues totaled $199.8 million and $554.1 million for the three and nine months ended September 30, 2019, respectively, compared to $205.4 million and $587.4 million, respectively, for the same periods of 2018. The 2.8% and 5.7% decrease in revenues for the three and nine months ended September 30, 2019, respectively, compared to the same prior-year periods, primarily reflects decreases in revenue per shipment and fewer shipments on a per-day basis. More truckload market capacity in 2019 was the primary driver of reduced market pricing for expedite services compared to the strong market for these services in 2018. The revenue declines were partially offset by higher demand for managed transportation solutions for the three and nine months ended September 30, 2019, compared to the same periods of 2018.
Operating income totaled $2.5 million and $6.3 million for the three and nine months ended September 30, 2019, respectively, compared to $10.0 million and $16.9 million for the same periods of 2018, primarily reflecting the declines in revenue and the impact of the $1.9 million gain recognized in third quarter 2018 related to the sale of ArcBest’s military moving business. As previously discussed, changes in truckload capacity negatively impacted revenue during the three and nine months ended September 30, 2019. The revenue decline outpaced the corresponding decline in purchased transportation, resulting in costs increasing by 2.4 and 0.6 percentage points as a percentage of revenue, for the three and nine months ended September 30, 2019, respectively, compared to the same periods of 2018. Although the ArcBest segment manages costs with shipment levels, portions of operating expenses are fixed in nature and cost reductions can be
limited as the segment strives to maintain customer service. Shared services expenses increased 1.1 and 1.2 percentage points as a percentage of revenue in the three and nine months ended September 30, 2019, respectively, compared to the same prior-year periods, primarily due to strategic development of our owner-operator fleet and contract carrier capacity. In addition, cost allocations that are based on shipment or activity levels declined less than the reduction in revenue per shipment. Elevated costs associated with long-term strategic development of our owner-operator fleet and contract carrier capacity will continue for the remainder of the year and we expect these investments to increase ArcBest segment expenses by approximately $0.5 million in fourth quarter 2019, compared to fourth quarter 2018.
ArcBest Segment Revenues – October 2019
Revenues of our ArcBest segment (ArcBest Asset-Light operations, excluding FleetNet) decreased approximately 7.0% on a per-day basis in October 2019, compared to October 2018, and purchased transportation expense decreased approximately 3.0% on a per-day basis between the periods. Available truckload capacity during 2019, compared to the tight capacity environment in 2018, led to lower revenue per shipment and reduced demand for expedite services in October 2019 versus October 2018. Managed transportation solutions continued to have a positive impact on the ArcBest segment’s business in October 2019.
FleetNet Segment
FleetNet’s revenues totaled $54.0 million and $159.0 million for the three and nine months ended September 30, 2019, compared to $50.5 million and $145.0 million, respectively, for the same periods of 2018. The 6.9% and 9.6% increase in revenues for the three and nine months ended September 30, 2019, respectively, compared to the same periods of 2018, was driven by higher service event volume, primarily due to an increase in preventative maintenance service events provided to our Asset-Based segment.
FleetNet’s operating income totaled $1.2 million and $3.7 million for the three and nine months ended September 30, 2019, respectively, compared to $1.1 million and $3.6 million for the same periods of 2018. The increase in FleetNet’s operating income for the three and nine months ended September 30, 2019, compared to the same periods of 2018, reflects revenue growth, partially offset by the impact on operating income margins of lower revenue per event on maintenance services combined with increased operating costs to service the event growth.
Asset-Light Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”)
We report our financial results in accordance with GAAP. However, management believes that certain non-GAAP performance measures and ratios, such as Adjusted EBITDA, utilized for internal analysis provide analysts, investors, and others the same information that we use internally for purposes of assessing our core operating performance and provides meaningful comparisons between current and prior period results, as well as important information regarding performance trends. The use of certain non-GAAP measures improves comparability in analyzing our performance because it removes the impact of items from operating results that, in management's opinion, do not reflect our core operating performance. Management uses Adjusted EBITDA as a key measure of performance and for business planning. The measure is particularly meaningful for analysis of our Asset-Light businesses, because it excludes amortization of acquired intangibles and software, which are significant expenses resulting from strategic decisions rather than core daily operations. Management also believes Adjusted EBITDA to be relevant and useful information, as EBITDA is a standard measure commonly reported and widely used by analysts, investors, and others to measure financial performance of asset-light businesses and the ability to service debt obligations. Other companies may calculate Adjusted EBITDA differently; therefore, our calculation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results. Adjusted EBITDA should not be construed as a better measurement than operating income, operating cash flow, net income, or earnings per share, as determined under GAAP.
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Asset-Light Adjusted EBITDA
Operating Income(1)
Depreciation and amortization(2)
Restructuring charges(3)
Adjusted EBITDA
5,059
13,551
15,117
27,580
332
291
982
1,503
1,379
4,667
2,939
3,849
9,795
11,397
6,562
14,930
19,784
32,052
Current Economic Conditions
Given the current economic conditions and the uncertainties regarding the potential impact on our business, there can be no assurance that our estimates and assumptions regarding the pricing environment and economic conditions, which are made for purposes of impairment tests related to operating assets and deferred tax assets, will prove to be accurate. Significant declines in business levels or other changes in cash flow assumptions or other factors that negatively impact the fair value of the operations of our reporting units could result in impairment and a resulting non-cash write-off of a significant portion of the goodwill and intangible assets of our ArcBest segment, which would have an adverse effect on our financial condition and operating results.
Environmental and Legal Matters
We are subject to federal, state, and local environmental laws and regulations relating to, among other things: emissions control, transportation or handling of hazardous materials, underground and aboveground storage tanks, stormwater pollution prevention, contingency planning for spills of petroleum products, and disposal of waste oil. We may transport or arrange for the transportation of hazardous materials and explosives, and we operate in industrial areas where truck service centers and other industrial activities are located and where groundwater or other forms of environmental contamination could occur. See Note L to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion of the environmental matters to which we are subject and the reserves we currently have recorded in our consolidated financial statements for amounts related to such matters.
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We are involved in various legal actions, the majority of which arise in the ordinary course of business. We maintain liability insurance against certain risks arising out of the normal course of our business, subject to certain self-insured retention limits. We routinely establish and review the adequacy of reserves for estimated legal, environmental, and self-insurance exposures. While management believes that amounts accrued in the consolidated financial statements are adequate, estimates of these liabilities may change as circumstances develop. Considering amounts recorded, routine legal matters are not expected to have a material adverse effect on our financial condition, results of operations, or cash flows.
Information Technology and Cybersecurity
We depend on the proper functioning, availability, and security of our information systems, including communications, data processing, financial, and operating systems, as well as proprietary software programs, that are integral to the efficient operation of our business. Cybersecurity attacks and other cyber incidents that impact the availability, reliability, speed, accuracy, or other proper functioning of these systems or that result in proprietary information or sensitive or confidential data being compromised could have a significant impact on our operations. Any new or enhanced technology that we may develop and implement may also be subject to cybersecurity attacks and may be more prone to related incidents. We also utilize certain software applications provided by third parties and provide underlying data which is utilized by third parties who provide certain outsourced administrative functions, either of which may increase the risk of a cybersecurity incident. Although we strive to carefully select our third-party vendors, we do not control their actions and any problems caused by these third parties, including cyber attacks and security breaches at a vendor, could adversely affect our ability to provide service to our customers and otherwise conduct our business. Our information systems are protected through physical and software safeguards as well as backup systems considered appropriate by management. However, it is not practicable to protect against the possibility of power loss, telecommunications failures, cybersecurity attacks, and other cyber events in every potential circumstance that may arise. To mitigate the potential for such occurrences at our corporate headquarters, we have implemented various systems, including redundant telecommunication facilities; replication of critical data to an offsite location; a fire suppression system to protect our on-site data center; and electrical power protection and generation facilities. We also have a catastrophic disaster recovery plan and alternate processing capability available for our critical data processes in the event of a catastrophe that renders our corporate headquarters unusable.
Our business interruption and cyber insurance would offset losses up to certain coverage limits in the event of a catastrophe or certain cyber incidents; however, losses arising from a catastrophe or significant cyber incident would likely exceed our insurance coverage and could have a material adverse impact on our results of operations and financial condition. Furthermore, a significant disruption in our information technology systems or a significant cyber incident, including denial of service, system failure, security breach, intentional or inadvertent acts by employees or vendors with access to our systems or data, disruption by malware, or other damage, could interrupt or delay our operations, damage our reputation, cause a loss of customers, cause errors or delays in financial reporting, expose us to a risk of loss or litigation, and/or cause us to incur significant time and expense to remedy such an event. We have experienced incidents involving attempted denial of service attacks, malware attacks, and other events intended to disrupt information systems, wrongfully obtain valuable information, or cause other types of malicious events that could have resulted in harm to our business. To date, the systems employed have been effective in identifying these types of events at a point when the impact on our business could be minimized. We must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address, and mitigate the risk of unauthorized access, misuse, computer viruses, and other events that could have a security impact. We have made and continue to make significant financial investments in technologies and processes to mitigate these risks. We also provide employee awareness training around phishing, malware, and other cyber risks. Management is not aware of any cybersecurity incident that has had a material effect on our operations, although there can be no assurances that a cyber incident that could have a material impact to our operations could not occur.
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Liquidity and Capital Resources
Our primary sources of liquidity are cash, cash equivalents, and short-term investments, cash generated by operations, and borrowing capacity under our revolving credit facility or accounts receivable securitization program.
Cash Flow and Short-Term Investments
Components of cash and cash equivalents and short-term investments were as follows:
Cash and cash equivalents(1)
Short-term investments(2)
Total(3)
308,095
296,992
Cash, cash equivalents, and short-term investments increased $11.1 million from December 31, 2018 to September 30, 2019. During the nine-month period ended September 30, 2019, cash provided by operations was used to repay $34.2 million of long-term debt, net of proceeds; fund $65.0 million of capital expenditures (and an additional $41.0 million of certain Asset-Based revenue equipment was financed with notes payable), net of proceeds from asset sales; fund $8.5 million of internally developed software; purchase $6.1 million of treasury stock; and pay dividends of $6.1 million on common stock.
Cash provided by operating activities during the nine months ended September 30, 2019 was $138.0 million, a $35.6 million decrease compared to $173.6 million of cash provided by operating activities in the same prior-year period. Net income for the nine months ended September 30, 2018, was reduced by a one-time charge of $28.2 million (after-tax) recognized in second quarter 2018 for the multiemployer plan withdrawal liability resulting from the transition agreement ABF Freight entered into with the New England Pension Fund (previously discussed within the Asset-Based Segment Overview section of MD&A Results of Operations). Excluding the effect of establishing the multiemployer pension withdrawal liability, net income declined $34.6 million during the nine months ended September 30, 2019, compared to the same prior-year period. The $35.6 million decrease in cash provided by operating activities is primarily related to the lower income level and growth in working capital (which resulted in operating cash outflow) for the nine months ended September 30, 2019, compared to the same period of 2018, partially offset by higher noncash pension settlement expense and related charges as we settled the benefit obligation of our nonunion defined benefit pension plan during the nine months ended September 30, 2019 (see Note G to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q).
Excluding the impact of the multiemployer pension withdrawal liability, changes in working capital contributed $11.7 million to the decrease in operating cash flow for the nine months ended September 30, 2019, compared to the same period of 2018, primarily due to higher payouts in first quarter 2019 combined with lower accruals during 2019 for certain nonunion performance-based incentive plans. Cash contributions of $7.7 million were made during the nine months ended September 30, 2019 to the nonunion defined benefit pension plan, compared to cash contributions of $5.5 million made to the plan during the same period of 2018 (see Note G to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q).
Cash, cash equivalents, and short-term investments increased $76.1 million from December 31, 2017 to September 30, 2018. During the nine-month period ended September 30, 2018, cash provided by operations of $173.6 million was used to repay $50.0 million of notes payable; fund $36.3 million of capital expenditures (and an additional $71.6 million of certain Asset-Based revenue equipment was financed with notes payable), net of proceeds from asset sales; and pay dividends of $6.2 million on common stock. Cash payments of $15.3 million were made toward the New England Pension Fund withdrawal liability during the nine months ended September 30, 2018.
Our financing arrangements are discussed in Note F to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Contractual Obligations
We have purchase obligations, consisting of authorizations to purchase and binding agreements with vendors, relating to revenue equipment used in our Asset-Based operations, other equipment, facility improvements, software, certain service contracts, and other items for which amounts were not accrued in the consolidated balance sheet as of September 30, 2019. These purchase obligations totaled $82.1 million as of September 30, 2019, with $73.0 million estimated to be paid within the next year, $7.0 million estimated to be paid in the following two-year period, and $2.1 million to be paid within five years, provided that vendors complete their commitments to us. Purchase obligations for revenue equipment and other equipment are included in our 2019 capital expenditure plan.
As of September 30, 2019, contractual obligations for operating lease liabilities, primarily related to our Asset-Based service centers, totaled $79.1 million, including imputed interest. As of September 30, 2019, the Company has undiscounted lease obligations of $34.7 million related to a lease which was executed but not commenced. The Company plans to take possession of the leased space in mid-2020. The scheduled maturities of our operating lease liabilities as of September 30, 2019 are disclosed in Note E to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our contractual obligations related to our notes payable, which provide financing for revenue equipment and software purchases, totaled $201.5 million, including interest, as of September 30, 2019, a decrease of $6.4 million from December 31, 2018. The scheduled maturities of our long-term debt obligations as of September 30, 2019 are disclosed in Note F to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no other material changes in the contractual obligations disclosed in our 2018 Annual Report on Form 10-K during the nine months ended September 30, 2019.
For 2019, our total capital expenditures, including amounts financed, are estimated to range from $160.0 million to $165.0 million, net of asset sales. These 2019 estimated net capital expenditures include revenue equipment purchases of $90.0 million, primarily for our Asset-Based operations. The remainder of 2019 expected capital expenditures includes real estate projects, costs of other facility and handling equipment for our Asset-Based operations, including forklifts, and technology investments across the enterprise. We have the flexibility to adjust certain planned 2019 capital expenditures as business levels dictate. Depreciation and amortization expense, excluding amortization of intangibles, is estimated to be approximately $107.0 million in 2019.
ABF Freight System, Inc. and certain other subsidiaries reported in our Asset-Based operating segment contribute to multiemployer health, welfare, and pension plans based generally on the time worked by their contractual employees, as specified in the collective bargaining agreement and other supporting supplemental agreements (see Note G to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q).
Other Liquidity Information
Cash, cash equivalents, and short-term investments totaled $308.1 million at September 30, 2019. General economic conditions, along with competitive market factors and the related impact on our business, primarily the tonnage and pricing levels that the Asset-Based segment receives for its services, could affect our ability to generate cash from operations and
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maintain cash, cash equivalents, and short-term investments on hand as operating costs increase. Our revolving credit facility (“Credit Facility”) under our Third Amended and Restated Credit Agreement (“Credit Agreement”) and our accounts receivable securitization program provide available sources of liquidity with flexible borrowing and payment options. We had available borrowing capacity under our Credit Facility and our accounts receivable securitization program of $180.0 million and $72.8 million, respectively, at September 30, 2019. We believe these agreements provide borrowing capacity options necessary for growth of our businesses. We believe existing cash, cash equivalents, short-term investments, cash generated by operations, and amounts available under our Credit Agreement or accounts receivable securitization program will be sufficient to meet our liquidity needs, including financing potential acquisitions and the repayment of amounts due under our financing arrangements, for the foreseeable future. Notes payable, finance leases, and other secured financing may also be used to fund capital expenditures, provided that such arrangements are available and the terms are acceptable to us.
During 2019, we are continuing to take actions to enhance shareholder value with our quarterly dividend payments and treasury stock purchases. On October 29, 2019, our Board of Directors declared a dividend of $0.08 per share to stockholders of record as of November 12, 2019. We expect to continue to pay quarterly dividends on our common stock in the foreseeable future, although there can be no assurances in this regard since future dividends will be at the discretion of the Board of Directors and are dependent upon our future earnings, capital requirements, and financial condition; contractual restrictions applying to the payment of dividends under our Credit Agreement; and other factors.
We have a program in place to repurchase our common stock in the open market or in privately negotiated transactions. The program has no expiration date but may be terminated at any time at the Board of Directors’ discretion. Repurchases may be made using cash reserves or other available sources. During the nine months ended September 30, 2019, we purchased 202,035 shares of our common stock for an aggregate cost of $6.1 million, leaving $16.2 million available for repurchase under the current buyback program.
Our Credit Facility, accounts receivable securitization program, and interest rate swap agreements utilize interest rates based on LIBOR. LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rates on loans globally. In July 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. The Alternative Reference Rates Committee (the “ARRC”), a steering committee comprised of private-sector entities including large U.S. financial institutions, was jointly convened by the Federal Reserve Board and the Federal Reserve Bank of New York to help ensure a successful transition from LIBOR to an alternative reference rate in the United States. The ARRC selected the Secured Overnight Financing Rate (the “SOFR”) as its preferred replacement for LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in April 2018. The SOFR is calculated by the Federal Reserve Board based on the interest rates banks charge one another in the overnight market, typically called repurchase agreements, and is intended to be a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities.
In October 2018, the FASB amended ASC Topic 815, Derivatives and Hedging, to permit the SOFR Overnight Index Swap (OIS) Rate as a U.S. benchmark interest rate. This amendment was effective for us on January 1, 2019 and it did not have an impact on our consolidated financial statements. Any changes to the terms of our borrowing arrangements which would allow for the use of an alternative to LIBOR in calculating the interest rate under such arrangements are anticipated to be effective in 2022 upon our agreement with the lenders as to the replacement reference rate. Our Credit Agreement, which was amended and restated during third quarter 2019, provides for the use of an alternate rate of interest in accordance with the provisions of the agreement. It is our understanding that replacement of LIBOR with an alternative reference in determining the interest rate under our borrowing arrangements will not have a significant impact on our cost of borrowing; however, there can be no assurances in this regard, as the new rates resulting from the replacement of LIBOR in our borrowing arrangements may not be as favorable to us as those in effect prior to any LIBOR phase-out.
We have not historically entered into financial instruments for trading purposes, nor have we historically engaged in a program for fuel price hedging. No such instruments were outstanding as of September 30, 2019. We have interest rate
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swap agreements in place which are discussed in Note F to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Balance Sheet Changes
Operating Right-of-Use Assets
The $67.4 million increase in operating right-of-use assets from December 31, 2018 to September 30, 2019 is due to adoption of Accounting Standards Codification Topic 842, Leases, (“ASC Topic 842”) effective January 1, 2019, and represents the recognition of right-of-use assets from operating lease agreements in our consolidated balance sheet.
Other Long-Term Assets
Other long-term assets increased $11.1 million from December 31, 2018 to September 30, 2019, primarily due to prepaid licenses and services related to the Asset-Based segment’s ELD conversion, the transfer of property previously used by our service center operations to held-for-sale, and an increase in the value of investments related to our cash surrender value of life insurance policies.
Accounts Payable
The $16.3 million increase in accounts payable from December 31, 2018 to September 30, 2019, is primarily due to an increase in the accrual for equipment received and increases in payables for purchased transportation due to higher business levels in September 2019 compared to December 2018.
Current Portion of Operating Lease Liabilities and Operating Lease Liabilities
The $18.5 million and $52.8 million increases in current and long-term operating lease liabilities, respectively, from December 31, 2018 to September 30, 2019, are due to the January 1, 2019 adoption of ASC Topic 842 and represent the recognition of liabilities from operating lease agreements in our consolidated balance sheet.
Deferred Income Tax Liabilities
Deferred income tax liabilities increased $13.6 million primarily due to an increase in depreciation for income tax purposes versus depreciation expensed in accordance with GAAP.
Off-Balance Sheet Arrangements
At September 30, 2019, our off-balance sheet arrangements for purchase obligations totaled $82.1 million, as previously discussed in the Contractual Obligations section of Liquidity and Capital Resources.
We have no investments, loans, or any other known contractual arrangements with unconsolidated special-purpose entities, variable interest entities, or financial partnerships and have no outstanding loans with executive officers or directors.
Income Taxes
Our effective tax rate was 30.3% and 28.3% of pre-tax income for the three and nine months ended September 30, 2019, compared to 24.5% and 18.4% of pre-tax income for the three and nine months ended September 30, 2018. As a result of the Tax Reform Act and our use of a fiscal year rather than a calendar year for U.S. income tax filing, taxes for the tax year ended February 28, 2018 were required to be calculated by applying a blended rate to taxable income. In computing total tax expense for the three and nine months ended September 30, 2018, a 32.74% blended rate was applied to the two months ended February 28, 2018, and a 21.0% federal statutory rate was applied to the months of March 2018 through September 30, 2018. A federal statutory rate of 21.0% was applied to the three and nine months ended September 30, 2019. The average state tax rate, net of the associated federal deduction, is approximately 5%. However, various factors may cause the full-year 2019 tax rate to vary significantly from the statutory rate. Our full year 2019 tax rate is expected to be approximately 28%, while the effective rate in any quarter may be impacted by items discrete to that period.
At December 31, 2017, as a result of the Tax Reform Act, we remeasured deferred federal tax assets and liabilities based on the rate at which they were expected to reverse in the future. Existing deferred tax assets and liabilities at December 31, 2017 that were reasonably estimated to reverse in the tax year ending February 28, 2018 were remeasured at a rate of 32.74%. Existing deferred tax assets and liabilities at December 31, 2017 that were reasonably estimated to reverse after the tax year ending February 28, 2018 were remeasured at a rate of 21.0%. In the first nine months of 2018, a provisional reduction of net deferred income tax liabilities was recognized related to the reversal of temporary differences through our tax year end of February 28, 2018. As a result, we recognized a provisional deferred tax benefit of $3.5 million for the nine months ended September 30, 2018, which impacted the effective tax benefit rate as noted in the following table. As of December 31, 2018, the accounting for the income tax effects of the Tax Reform Act was complete and all amounts recorded were considered final.
Reconciliation between the effective income tax rate, as computed on income before income taxes, and the statutory federal income tax rate is presented in the following table:
Income tax provision at the statutory federal rate(1)
4,902
21.0
11,338
13,335
13,380
Federal income tax effects of:
Impact of the Tax Reform Act on deferred tax
(825)
(1.5)
(3,466)
(5.4)
Impact of the Tax Reform Act on current tax
(47)
Alternative fuel credit(2)
(1,203)
Nondeductible expenses and other
342
992
1.9
1,178
1,903
Increase (decrease) in valuation allowances
(26)
205
0.4
(79)
Tax expense (benefit) from vested RSUs
464
(325)
(0.5)
Nonunion pension termination expense(3)
4.5
Life insurance proceeds and changes in cash surrender value
(117)
(0.4)
(242)
(570)
(438)
Federal income tax provision
6,197
26.6
11,466
21.3
15,421
24.3
9,725
15.2
State income tax provision
875
3.7
1,749
3.2
2,543
2,028
Total provision for income taxes
30.3
24.5
28.3
18.4
At September 30, 2019, we had $63.9 million of net deferred tax liabilities after valuation allowances. We evaluated the need for a valuation allowance for deferred tax assets at September 30, 2019 by considering the future reversal of existing taxable temporary differences, future taxable income, and available tax planning strategies. Valuation allowances for deferred tax assets totaled less than $0.1 million and $0.1 million at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, deferred tax liabilities which will reverse in future years exceeded deferred tax assets.
In first quarter of 2019, we recorded a deferred tax asset of approximately $19.0 million related to our operating lease liabilities and recorded a deferred tax liability of approximately $19.0 million related to our operating lease right-of-use assets due to the adoption of ASC Topic 842.
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Financial reporting income may differ significantly from taxable income because of items such as revenue recognition, accelerated depreciation for tax purposes, pension accounting rules, and a significant number of liabilities such as vacation pay, workers’ compensation, and other liabilities, which, for tax purposes, are generally deductible only when paid. For the nine months ended September 30, 2019 and September 30, 2018, financial reporting income exceeded income determined under income tax law.
During the nine months ended September 30, 2019, we made federal, state, and foreign tax payments of $11.7 million, and received refunds of less than $0.1 million of state income taxes that were paid in prior years. Management does not expect the cash outlays for income taxes will materially exceed reported income tax expense for the foreseeable future.
Critical Accounting Policies
The accounting policies that are “critical,” or the most important, to understand our financial condition and results of operations and that require management to make the most difficult judgments are described in our 2018 Annual Report on Form 10-K. There have been no material changes in the Company’s critical accounting policies during the nine months ended September 30, 2019.
New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of financial statements. Accounting pronouncements which have been issued but are not yet effective for our financial statements are disclosed in Note A to our consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. Management believes that there is no new accounting guidance issued but not yet effective that will impact our critical accounting policies.
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Forward-Looking Statements
Certain statements and information in this report may constitute “forward-looking statements.” Terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “foresee,” “intend,” “may,” “plan,” “predict,” “project,” “scheduled,” “should,” “would,” and similar expressions and the negatives of such terms are intended to identify forward-looking statements. These statements are based on management’s beliefs, assumptions, and expectations based on currently available information, are not guarantees of future performance, and involve certain risks and uncertainties (some of which are beyond our control). Although we believe that the expectations reflected in these forward-looking statements are reasonable as and when made, we cannot provide assurance that our expectations will prove to be correct. Actual outcomes and results could materially differ from what is expressed, implied, or forecasted in these statements due to a number of factors, including, but not limited to: a failure of our information systems, including disruptions or failures of services essential to our operations or upon which our information technology platforms rely, data breach, and/or cybersecurity incidents; untimely or ineffective development and implementation of new or enhanced technology or processes, including the pilot test program at ABF Freight; failure to realize potential benefits associated with new or enhanced technology or processes, including the pilot test program at ABF Freight, and any write-offs associated therewith; the loss or reduction of business from large customers; competitive initiatives and pricing pressures; relationships with employees, including unions, and our ability to attract and retain employees; unfavorable terms of, or the inability to reach agreement on, future collective bargaining agreements or a workforce stoppage by our employees covered under ABF Freight’s collective bargaining agreement; the cost, timing, and performance of growth initiatives; general economic conditions and related shifts in market demand that impact the performance and needs of industries we serve and/or limit our customers’ access to adequate financial resources; availability and cost of reliable third-party services; governmental regulations; environmental laws and regulations, including emissions-control regulations; union and nonunion employee wages and benefits, including changes in required contributions to multiemployer plans; our ability to secure independent owner operators and/or operational or regulatory issues related to our use of their services; litigation or claims asserted against us; maintaining our intellectual property rights, brand, and corporate reputation; the loss of key employees or the inability to execute succession planning strategies; default on covenants of financing arrangements and the availability and terms of future financing arrangements; timing and amount of capital expenditures; self-insurance claims and insurance premium costs; the cost, integration, and performance of any recent or future acquisitions; availability of fuel, the effect of volatility in fuel prices and the associated changes in fuel surcharges on securing increases in base freight rates, and the inability to collect fuel surcharges; increased prices for and decreased availability of new revenue equipment, decreases in value of used revenue equipment, and higher costs of equipment-related operating expenses such as maintenance and fuel and related taxes; potential impairment of goodwill and intangible assets; greater than anticipated funding requirements for our nonunion defined benefit pension plan; seasonal fluctuations and adverse weather conditions; regulatory, economic, and other risks arising from our international business; antiterrorism and safety measures; and other financial, operational, and legal risks and uncertainties detailed from time to time in ArcBest’s public filings with the SEC.
For additional information regarding known material factors that could cause our actual results to differ from our projected results, refer to Item 1A (Risk Factors) of Part I of our 2018 Annual Report on Form 10-K.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As disclosed in Part II, Item 7A of the our 2018 Annual Report on Form 10-K, we are subject to interest rate risk due to variable interest rates on the borrowings under our credit agreements. In September 2019, we amended and extended our credit agreement (the “Third Amended and Restated Credit Agreement”) to increase the initial maximum credit amount of our revolving credit facility (the “Credit Facility”) from $200.0 million to $250.0 million, including a swing line facility in an aggregate amount of up to $25.0 million, a letter of credit sub-facility providing for the issuance of letters of credit up to an aggregate amount of $20.0 million, and to increase the additional revolving commitments or incremental term loans we may request under the facility from $100.0 million to $125.0 million. The maturity date of the Credit Facility was extended to October 1, 2024. The Company has interest rate swap agreements which mitigate interest rate risk by effectively converting $50.0 million of borrowings under the Credit Facility from variable-rate interest to fixed-rate interest with a per annum rate of 2.98% through January 2, 2020 and 3.12% from January 2, 2020 through June 30, 2022 based on the margin of the Credit Facility as of September 30, 2019. Our Credit Facility and interest rate swaps are further described in Financing Arrangements of the Liquidity and Capital Resources section of Management’s Discussion and Analysis (“MD&A”) in Part I, Item 2 of this Quarterly Report on Form 10-Q.
The following table reflects the contractual maturity date and projected interest rates (based on a LIBOR curve, provided by a financial institution independent of the facility, plus our margin) for the borrowings outstanding under the Credit Facility as of September 30, 2019:
Contractual Maturity Date
Year Ended December 31
(in thousands, except interest rates)
Projected interest rate
3.11
2.63
2.38
2.40
2.43
2.48
Since December 31, 2018, there have been no other significant changes in the Company’s market risks as reported in the Company’s 2018 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was performed with the participation of the Company’s management, including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Principal Executive Officer and Principal Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019.
There were no changes in the Company’s internal controls over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information related to the Company’s legal proceedings, see Note L, Legal Proceedings, Environmental Matters, and Other Events under Part I, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
The Company’s risk factors are fully described in the Company’s 2018 Annual Report on Form 10-K. No material changes to the Company’s risk factors have occurred since the Company filed its 2018 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)Recent sales of unregistered securities.
None.
(b)Use of proceeds from registered securities.
(c)Purchases of equity securities by the issuer and affiliated purchasers.
Total Number of
Maximum
Shares Purchased
Approximate Dollar
Total Number
Average
as Part of Publicly
Value of Shares that
of Shares
Price Paid
Announced
May Yet Be Purchased
Purchased
Per Share(1)
Program
Under the Program(2)
7/1/2019-7/31/2019
17,136
8/1/2019-8/31/2019
33,500
28.17
16,193
9/1/2019-9/30/2019
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are filed or furnished with this report or are incorporated by reference to previously filed material:
Exhibit
No.
3.1
Restated Certificate of Incorporation of the Company (previously filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2019, File No. 000-19969, and incorporated herein by reference).
Certificate of Amendment to the Restated Certificate of Incorporation of the Company (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the SEC on April 24, 2009, File No. 000-19969, and incorporated herein by reference).
3.3
Fifth Amended and Restated Bylaws of the Company dated as of October 31, 2016 (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the SEC on November 4, 2016, File No. 000-19969, and incorporated herein by reference).
3.4
Certificate of Ownership and Merger, effective May 1, 2014, as filed on April 29, 2014 with the Secretary of State of the State of Delaware (previously filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the SEC on April 30, 2014, File No. 000-19969, and incorporated herein by reference).
10.1*
Third Amended and Restated Credit Agreement, dated as of September 27, 2019, among ArcBest Corporation and certain of its subsidiaries party thereto from time to time, as borrowers, U.S. Bank National Association, as Administrative Agent, Branch Banking and Trust Company and PNC Bank, National Association, as Syndication Agents, and the lenders and issuing banks party thereto (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on October 1, 2019 File No. 000-19969, and incorporated herein by reference).
31.1*
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32**
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document – the instance document does not appear in the Interactive Data Files because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*
The Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document.
* Filed herewith.
** Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
(Registrant)
Date: November 8, 2019
/s/ Judy R. McReynolds
Judy R. McReynolds
Chairman, President and Chief Executive Officer
and Principal Executive Officer
/s/ David R. Cobb
David R. Cobb
Vice President — Chief Financial Officer
and Principal Financial Officer