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 March 31, 2020
☐
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 May 1, 2020
Common Stock, $0.01 par value
25,262,470 shares
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets — March 31, 2020 and December 31, 2019
3
Consolidated Statements of Operations — For the Three Months Ended March 31, 2020 and 2019
4
Consolidated Statements of Comprehensive Income — For the Three Months Ended March 31, 2020 and 2019
5
Consolidated Statement of Stockholders’ Equity — For the Three Months Ended March 31, 2020 and 2019
6
Consolidated Statements of Cash Flows — For the Three Months Ended March 31, 2020 and 2019
7
Notes to Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
49
Item 4.
Controls and Procedures
PART II. OTHER INFORMATION
Legal Proceedings
50
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
51
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
52
SIGNATURES
53
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
March 31
December 31
2020
2019
(Unaudited)
(in thousands, except share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
$
352,165
201,909
Short-term investments
178,810
116,579
Accounts receivable, less allowances (2020 – $6,111; 2019 – $5,448)
278,783
282,579
Other accounts receivable, less allowances (2020 – $646; 2019 – $476)
15,276
18,774
Prepaid expenses
33,806
30,377
Prepaid and refundable income taxes
6,231
9,439
Other
4,460
4,745
TOTAL CURRENT ASSETS
869,531
664,402
PROPERTY, PLANT AND EQUIPMENT
Land and structures
343,527
342,122
Revenue equipment
885,949
896,020
Service, office, and other equipment
230,163
233,354
Software
154,749
151,068
Leasehold improvements
11,022
10,383
1,625,410
1,632,947
Less allowances for depreciation and amortization
961,950
949,355
PROPERTY, PLANT AND EQUIPMENT, net
663,460
683,592
GOODWILL
88,320
INTANGIBLE ASSETS, net
57,873
58,832
OPERATING RIGHT-OF-USE ASSETS
73,324
68,470
DEFERRED INCOME TAXES
8,145
7,725
OTHER LONG-TERM ASSETS
73,703
79,866
TOTAL ASSETS
1,834,356
1,651,207
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
127,625
134,374
Income taxes payable
31
12
Accrued expenses
217,678
232,321
Current portion of long-term debt
56,977
57,305
Current portion of operating lease liabilities
20,542
20,265
TOTAL CURRENT LIABILITIES
422,853
444,277
LONG-TERM DEBT, less current portion
476,945
266,214
OPERATING LEASE LIABILITIES, less current portion
56,716
52,277
POSTRETIREMENT LIABILITIES, less current portion
20,411
20,294
OTHER LONG-TERM LIABILITIES
35,058
38,892
63,167
66,210
STOCKHOLDERS’ EQUITY
Common stock, $0.01 par value, authorized 70,000,000 shares; issued 2020: 28,817,109 shares, 2019: 28,810,902 shares
288
Additional paid-in capital
336,064
333,943
Retained earnings
532,858
533,187
Treasury stock, at cost, 2020: 3,554,639 shares; 2019: 3,404,639 shares
(107,740)
(104,578)
Accumulated other comprehensive income (loss)
(2,264)
203
TOTAL STOCKHOLDERS’ EQUITY
759,206
763,043
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
(in thousands, except share and per share data)
REVENUES
701,399
711,839
OPERATING EXPENSES
693,580
703,248
OPERATING INCOME
7,819
8,591
OTHER INCOME (COSTS)
Interest and dividend income
1,375
1,478
Interest and other related financing costs
(2,947)
(2,882)
Other, net
(3,862)
(591)
(5,434)
(1,995)
INCOME BEFORE INCOME TAXES
2,385
6,596
INCOME TAX PROVISION
483
1,708
NET INCOME
1,902
4,888
EARNINGS PER COMMON SHARE
Basic
0.07
0.19
Diluted
0.18
AVERAGE COMMON SHARES OUTSTANDING
25,390,377
25,570,415
26,246,800
26,512,349
CASH DIVIDENDS DECLARED PER COMMON SHARE
0.08
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
OTHER COMPREHENSIVE INCOME (LOSS), net of tax
Pension and other postretirement benefit plans:
Net actuarial gain (loss), net of tax of: (2020 – $3; 2019 – $230)
(8)
661
Pension settlement expense, net of tax of: (2020 – $23; 2019 – $349)
66
1,007
Amortization of unrecognized net periodic benefit costs (credit), net of tax of: (2020 – $37; 2019 – $100)
Net actuarial (gain) loss
(108)
295
Prior service credit
—
(6)
Interest rate swap and foreign currency translation:
Change in unrealized loss on interest rate swap, net of tax of: (2020 – $352; 2019 – $118)
(997)
(332)
Change in foreign currency translation, net of tax of: (2020 – $502; 2019 – $79)
(1,420)
225
(2,467)
1,850
TOTAL COMPREHENSIVE INCOME (LOSS)
(565)
6,738
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2020
Accumulated
Additional
Common Stock
Paid-In
Retained
Treasury Stock
Comprehensive
Total
Shares
Amount
Capital
Earnings
Income (Loss)
Equity
Balance at December 31, 2019
28,811
3,405
Adjustments to beginning retained earnings for adoption of accounting standard (see Note A)
(198)
Balance at January 1, 2020
532,989
762,845
Net income
Other comprehensive income, net of tax
Issuance of common stock under share-based compensation plans
Tax effect of share-based compensation plans
(60)
Share-based compensation expense
2,181
Purchase of treasury stock
150
(3,162)
Dividends declared on common stock
(2,033)
Balance at March 31, 2020
28,817
3,555
Three Months Ended March 31, 2019
Loss
Balance at December 31, 2018
28,685
287
325,712
501,389
3,098
(95,468)
(14,238)
717,682
2,058
74
(2,663)
(2,052)
Balance at March 31, 2019
327,762
504,225
3,172
(98,131)
(12,388)
721,755
CONSOLIDATED STATEMENTS OF CASH FLOWS
OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
28,032
25,409
Amortization of intangibles
981
1,128
Pension settlement expense
89
1,356
Provision for losses on accounts receivable
1,383
112
Change in deferred income taxes
(2,815)
(584)
Gain on sale of property and equipment
(2,130)
(43)
Changes in operating assets and liabilities:
Receivables
3,874
3,931
(3,429)
(5,760)
Other assets
5,800
(141)
Income taxes
2,949
(4,313)
Operating right-of-use assets and lease liabilities, net
(138)
40
Multiemployer pension fund withdrawal liability
(150)
(143)
Accounts payable, accrued expenses, and other liabilities
(15,400)
(31,309)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
23,129
(3,371)
INVESTING ACTIVITIES
Purchases of property, plant and equipment, net of financings
(6,738)
(15,543)
Proceeds from sale of property and equipment
4,692
1,039
Purchases of short-term investments
(73,973)
(13,790)
Proceeds from sale of short-term investments
12,210
4,998
Capitalization of internally developed software
(3,342)
(2,656)
NET CASH USED IN INVESTING ACTIVITIES
(67,151)
(25,952)
FINANCING ACTIVITIES
Borrowings under credit facilities
180,000
Borrowings under accounts receivable securitization program
45,000
Payments on long-term debt
(14,598)
(15,217)
Net change in book overdrafts
(10,869)
(2,524)
Payment of common stock dividends
Purchases of treasury stock
Payments for tax withheld on share-based compensation
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
194,278
(22,464)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
150,256
(51,787)
Cash and cash equivalents at beginning of period
190,186
CASH AND CASH EQUIVALENTS CASH AT END OF PERIOD
138,399
NONCASH INVESTING ACTIVITIES
Accruals for equipment received
39
2,878
Lease liabilities arising from obtaining right-of-use assets
10,370
18,144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A – ORGANIZATION AND DESCRIPTION OF THE BUSINESS AND FINANCIAL STATEMENT PRESENTATION
ArcBest Corporation™ (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 70% of the Company’s total revenues before other revenues and intercompany eliminations for the three months ended March 31, 2020. As of March 2020, 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 2019 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. The Company considered the impact of the novel coronavirus (“COVID-19”) pandemic on the estimates and assumptions used and determined that there were no material adverse impacts on the Company’s results of operations or financial position as of and for the three months ended March 31, 2020. Given the uncertainties regarding the economic environment and the impact of the COVID-19 pandemic on our business, it is possible that these estimates and assumptions may materially change in future periods.
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 2019 Annual Report on Form 10-K. The following policies have been updated during the three months ended March 31, 2020 for the adoption of accounting standard updates disclosed within this Note.
Allowances: On January 1, 2020, the Company adopted ASC Topic 326, Financial Instruments – Credit Losses, (“ASC Topic 326”), which replaces the incurred loss methodology model with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including trade receivables and other receivables.
The Company maintains allowances for credit losses (formerly known as the allowance for doubtful accounts) and revenue adjustments on its trade receivables. The Company estimates the allowance for credit losses based on historical write-offs, factors surrounding the credit risk of specific customers, and forecasts of future economic conditions. In order to gather information regarding these trends and factors, the Company performs ongoing credit evaluations of customers, an analysis of accounts receivable aging by business segment, and an analysis of future economic conditions at period end. The allowance for revenue adjustments is an estimate based on historical revenue adjustments and current information
regarding trends and business changes. Actual write-offs or adjustments could differ from the allowance estimates due to a number of factors, including future changes in the forecasted economic environment or new factors and risks surrounding a particular customer. Accounts receivable are written off when the accounts are turned over to a collection agency or when the accounts are determined to be uncollectible. Actual write-offs and adjustments are charged against the allowances for doubtful accounts and revenue adjustments. The allowance for credit losses on the Company’s trade accounts receivable totaled $2.6 million at March 31, 2020 and $1.8 million at December 31, 2019. There were no material write-offs charged against or increases to the allowance for credit losses during the three months ended March 31, 2020.
Adopted Accounting Pronouncements
As previously discussed within Accounting Policies in this Note, effective January 1, 2020, the Company adopted ASC Topic 326, which replaces the incurred loss methodology model with an expected loss methodology referred to as the CECL methodology for the Company’s trade receivables and other receivables. The Company adopted ASC Topic 326 with the modified retrospective approach. Under this approach, results for reporting periods after January 1, 2020 are presented under ASC Topic 326 while prior period amounts continue to be reported in accordance with previously applicable accounting guidance. The Company recorded a decrease to retained earnings of $0.2 million as of January 1, 2020 for the cumulative effect of adopting ASC Topic 326.
On January 1, 2020 the Company adopted 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”) which was amended by the Financial Accounting Standards Board in August 2018. 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 were adopted on a prospective basis and did not have an impact on the Company’s consolidated financial statements.
On January 1, 2020 the Company adopted ASC Topic 820, Fair Value Measurement, which was amended to modify the disclosure requirements of fair value measurements, primarily impacting the disclosures for Level 3 fair value measurements. The amendment did not have an impact on the Company’s financial statement disclosures as of March 31, 2020.
The amendments to ASC Topic 848, Reference Rate Reform, (“ASC Topic 848”) are effective as of March 12, 2020 through December 31, 2022 and provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Company did not elect the optional expedients or apply the exceptions allowed by ASC Topic 848 during the three months ended March 31, 2020 and does not expect that the amendments, if elected, will have a significant impact on the Company’s consolidated financial statements. The Company’s revolving credit facility (“Credit Facility”) under its Third Amended and Restated Credit Agreement (“Credit Agreement”), accounts receivable securitization program, and interest rate swap agreements utilize interest rates based on LIBOR, which is expected to be phased out by the end of 2021. The Company’s Credit Facility and current interest rate swap agreement, which was amended on May 4, 2020 (see Note F), mature on October 1, 2024. The Credit Agreement provides for the use of an alternate rate of interest in accordance with the provisions of the agreement and the interest rate on the swap agreement will change to the rate in the Credit Agreement. 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 the Company’s agreement with the lenders as to the replacement reference rate.
Accounting Pronouncements Not Yet Adopted
ASC Topic 740, Income Taxes, was amended to simplify the accounting for income taxes to improve consistency of accounting methods and remove certain exceptions. The amendment is effective for the Company beginning January 1, 2021. The Company is currently assessing the impact this amendment will have on the consolidated financial statements and disclosures.
9
Management believes there is no other new accounting guidance issued but not yet effective that is relevant to the Company’s current financial statements.
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)
224,193
166,619
Variable rate demand notes(1)(2)
14,846
14,750
Money market funds(3)
113,126
20,540
Total cash and cash equivalents
Certificates of deposit(1)
131,477
69,314
U.S. Treasury securities(4)
47,333
47,265
Total short-term investments
The increase in cash and cash equivalents and short-term investments from December 31, 2019 was due to borrowings under the Company’s Credit Facility and accounts receivable securitization program, as further disclosed in Note F.
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 March 31, 2020 and December 31, 2019, cash, cash equivalents, and short-term investments totaling $245.9 million and $66.2 million, respectively, were neither FDIC insured nor direct obligations of the U.S. government.
10
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:
Fair value and carrying value disclosures of financial instruments are presented in the following table:
Carrying
Fair
Value
Credit Facility(1)
250,000
70,000
Accounts receivable securitization borrowings(2)
85,000
40,000
Notes payable(3)
198,908
206,437
213,504
216,432
533,908
541,437
323,504
326,432
11
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:
March 31, 2020
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)
2,539
115,665
Liabilities:
Interest rate swaps(3)
1,912
December 31, 2019
2,427
22,967
563
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 $87.7 million and $0.6 million reported in the ArcBest and FleetNet segments, respectively, for both March 31, 2020 and December 31, 2019.
Intangible assets consisted of the following:
Weighted-Average
Net
Amortization Period
Cost
Amortization
(in years)
Finite-lived intangible assets
Customer relationships
14
52,721
27,621
25,100
26,667
26,054
1,315
842
473
1,294
816
478
54,036
28,463
25,573
54,015
27,483
26,532
Indefinite-lived intangible assets
Trade name
N/A
32,300
Total intangible assets
86,336
86,315
The future amortization for intangible assets acquired through business acquisitions as of March 31, 2020 was as follows:
Amortization of
Intangible Assets
Remainder of 2020
2,930
2021
3,869
2022
3,842
2023
3,744
2024
3,695
Thereafter
7,493
Total amortization
Goodwill and indefinite-lived intangible assets are not amortized, but rather are evaluated for impairment annually or more frequently if indicators of impairment exist. Due to the impact of COVID-19 on business and freight levels, the Company considered several factors to consider if it was more likely than not that impairment of these assets existed as of March 31, 2020. In making this analysis, management considered current and forecasted business levels and estimated future cash flows over several years. Management’s assumptions include an expected economic recovery beginning in late 2020 with a more robust recovery in 2021. Based on our analysis, management determined it was more likely than not that goodwill and indefinite-lived intangible assets were not impaired as of March 31, 2020.
The evaluation of goodwill impairment requires management’s judgment and the use of estimates and assumptions to determine if indicators of impairment exist at an interim date. Assumptions require considerable judgment because changes in broad economic factors and industry factors can result in variable and volatile fair values. Changes in key estimates and assumptions that impact the fair value of the operations, including the impact of COVID-19 on the reporting units, could materially affect future analyses and result in material impairments of goodwill and indefinite-lived intangible assets.
NOTE D – INCOME TAXES
The effective tax rate was 20.3% and 25.9% for the three months ended March 31, 2020 and March 31, 2019, respectively. 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. Due to the uncertainty surrounding the impact of the COVID-19 pandemic, for the three months ended March 31, 2020, the Company calculated the tax provision based on the actual statutory tax rate as opposed to using an annual effective tax rate, because of the inability to provide a reliable estimate of ordinary income within a reasonable range or the tax effect of nondeductible expenses.
13
For the three months ended March 31, 2020, 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, federal alternative fuel and research and development tax credits, changes in tax valuation allowances, and the reversal of an uncertain tax position. For the three months ended March 31, 2019, the difference between the Company’s effective tax rate and the federal statutory rate primarily resulted from state income taxes, nondeductible expenses, and changes in the cash surrender value of life insurance.
As of March 31, 2020, 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 March 31, 2020 and concluded that, other than for certain deferred tax assets related to foreign tax credit 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. Additionally, as a result of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) enacted on March 27, 2020, net operating losses originating in the tax year including December 31, 2020 may be carried back five years to a period in which the Company had substantial taxable income. Valuation allowances for deferred tax assets totaled $0.9 million and $0.7 million at March 31, 2020 and December 31, 2019, respectively.
The Company had a reserve for uncertain tax positions of $0.9 million at December 31, 2019. The reserve was reversed in the first quarter of 2020 due to the expiration of the statute of limitations.
The Company paid foreign and state income taxes of $0.3 million during the three months ended March 31, 2020 and paid $6.6 million of federal, state, and foreign income taxes during the three months ended March 31, 2019. The Company received refunds of $0.4 million of federal income taxes and refunds of less than $0.1 million of state income taxes that were paid in prior years during the three months ended March 31, 2020 and 2019, 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.
The components of operating lease expense were as follows:
March 31, 2019
Operating lease expense
5,796
5,339
Variable lease expense
1,040
839
Sublease income
(92)
(67)
Total operating lease expense
6,744
6,111
The operating cash flows from operating lease activity were as follows:
Noncash change in operating right-of-use assets
5,815
4,730
Change in operating lease liabilities
(5,953)
(4,690)
Operating right-use-of-assets and lease liabilities, net
Cash paid for amounts included in the measurement of operating lease liabilities
(5,925)
(5,290)
Maturities of operating lease liabilities at March 31, 2020 were as follows:
Equipment
Land and
and
Structures(1)
17,679
16,935
744
18,426
18,145
281
13,922
13,911
10,459
7,817
16,891
Total lease payments
85,194
84,158
1,036
Less imputed interest
(7,936)
(7,917)
(19)
77,258
76,241
1,017
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), certain other equipment, and software as follows:
Credit Facility (interest rate of 2.1%(1) at March 31, 2020)
Accounts receivable securitization borrowings (interest rate of 2.1% at March 31, 2020)
Notes payable (weighted-average interest rate of 3.3% at March 31, 2020)
Finance lease obligations (weighted-average interest rate of 3.3% at March 31, 2020)
15
533,922
323,519
Less current portion
Long-term debt, less current portion
Scheduled maturities of long-term debt obligations as of March 31, 2020 were as follows:
Accounts
Receivable
Credit
Securitization
Notes
Finance Lease
Facility(1)
Program(1)
Payable
Obligations
Due in one year or less
68,124
4,233
1,245
62,639
Due after one year through two years
147,955
4,087
85,583
58,278
Due after two years through three years
51,217
4,414
46,803
Due after three years through four years
34,303
4,678
29,625
Due after four years through five years
266,658
252,430
14,228
Due after five years
Total payments
568,257
269,842
86,828
211,573
Less amounts representing interest
34,335
19,842
1,828
12,665
Long-term debt
Assets securing notes payable or held under finance leases were included in property, plant and equipment as follows:
264,884
265,315
2,140
26,344
Total assets securing notes payable or held under finance leases
293,368
293,799
Less accumulated depreciation and amortization(1)
81,672
71,405
Net assets securing notes payable or held under finance leases
211,696
222,394
Financing Arrangements
Credit Facility
The Company has a revolving credit facility (the “Credit Facility”) under its Third Amended and Restated Credit Agreement (the “Credit Agreement”) with an initial maximum credit amount of $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 may request additional revolving commitments or incremental term loans thereunder up to an aggregate amount of $125.0 million, subject to certain additional conditions as provided in the Credit Agreement. In March 2020, the Company borrowed an additional $180.0 million under the Credit Facility as a precautionary measure to preserve financial flexibility during the COVID-19 pandemic. As of March 31, 2020, the Company does not have any available borrowing capacity under the initial maximum credit amount of 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,
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consolidations, purchases and sales of assets, and certain restricted payments. The leverage covenant under the Company’s Credit Agreement is based on a net debt calculation and consequently was not immediately impacted by the draw against the Credit Facility in March 2020. The Company was in compliance with the covenants under the Credit Agreement at March 31, 2020.
Interest Rate Swaps
The Company has an interest rate swap agreement with a $50.0 million notional amount which started on January 2, 2020 and will 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 March 31, 2020. The fair value of the interest rate swap of $1.9 million and $0.6 million was recorded in other long-term liabilities in the consolidated balance sheet at March 31, 2020 and December 31, 2019, respectively. The Company had a five-year interest rate swap agreement with a $50.0 million notional amount that matured on January 2, 2020 for which less than $0.1 million was recorded in other long-term liabilities in the consolidated balance sheet at December 31, 2019.
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 March 31, 2020 and December 31, 2019, and the change in the unrealized income or loss on the interest rate swaps for the three months ended March 31, 2020 and 2019 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 March 31, 2020.
On May 4, 2020, the Company extended the term of its $50.0 million notional amount interest rate swap agreement from June 30, 2022 to October 1, 2024. The Company will receive floating-rate interest amounts based on one-month LIBOR in exchange for fixed-rate interest payments of 0.43% beginning on June 30, 2022 throughout the remaining term of the agreement. From June 30, 2022 to October 1, 2024, the extended interest rate swap agreement will effectively convert $50.0 million of borrowings under the Credit Facility from variable-rate interest to fixed-rate interest with a per annum rate of 1.56% based on the margin of the Credit Facility as of March 31, 2020.
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. In March 2020, the Company borrowed an additional $45.0 million for a total of $85.0 million outstanding at March 31, 2020 under the program as a precautionary measure to preserve financial flexibility during the COVID-19 pandemic. The Company was in compliance with the covenants under the accounts receivable securitization program at March 31, 2020.
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 March 31, 2020, standby letters of credit of $12.0 million have been issued under the program, which reduced the available borrowing capacity to $28.0 million.
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Letter of Credit Agreements and Surety Bond Programs
As of March 31, 2020, the Company had letters of credit outstanding of $12.6 million (including $12.0 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 March 31, 2020, surety bonds outstanding related to the self-insurance program totaled $62.3 million.
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 March 31
Nonunion Defined
Supplemental
Postretirement
Benefit Pension Plan
Benefit Plan
Health Benefit Plan
2020(1)
2020(2)
Service cost
47
80
Interest cost
318
144
303
Expected return on plan assets
(90)
Amortization of prior service credit
(9)
Pension settlement expense(3)
Amortization of net actuarial (gain) loss(4)
149
24
(149)
Net periodic benefit cost
1,733
96
34
42
599
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.
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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 2019 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 June 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 March 31, 2020, the outstanding withdrawal liability to the New England Pension Fund totaled $21.9 million, of which $0.6 million and $21.3 million was recorded in accrued expenses and other long-term liabilities, respectively. The fair value of the obligation was $27.0 million at March 31, 2020, which is equal to the present value of the future withdrawal liability payments, discounted at a 2.3% 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 2019 Annual Report on Form 10-K.
NOTE H – STOCKHOLDERS’ EQUITY
Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss) were as follows:
Pre-tax amounts:
Unrecognized net periodic benefit credit
2,831
2,898
Interest rate swap
(1,912)
(563)
Foreign currency translation
(3,997)
(2,075)
(3,078)
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After-tax amounts:
2,102
2,152
(1,413)
(416)
(2,953)
(1,533)
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The following is a summary of the changes in accumulated other comprehensive income (loss), net of tax, by component for the three months ended March 31, 2020 and 2019:
Unrecognized
Interest
Foreign
Net Periodic
Rate
Currency
Benefit Costs
Swap
Translation
Balances at December 31, 2019
Other comprehensive loss before reclassifications
(2,425)
Amounts reclassified from accumulated other comprehensive income
(42)
Net current-period other comprehensive loss
(50)
Balances at March 31, 2020
Balances at December 31, 2018
(12,749)
591
(2,080)
Other comprehensive income (loss) before reclassifications
554
Amounts reclassified from accumulated other comprehensive loss
1,296
Net current-period other comprehensive income (loss)
1,957
Balances at March 31, 2019
(10,792)
259
(1,855)
The following is a summary of the significant reclassifications out of accumulated other comprehensive income (loss) by component:
Unrecognized Net Periodic
Benefit Credit (Costs)(1)(2)
Amortization of net actuarial gain (loss)
145
(398)
(89)
(1,356)
Total, pre-tax
56
(1,745)
Tax benefit (expense)
(14)
449
Total, net of tax
(1,296)
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
2,033
2,052
On May 1, 2020, the Company’s Board of Directors declared a dividend of $0.08 per share to stockholders of record as of May 15, 2020.
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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, 2019, the Company had $13.2 million remaining under the program for repurchases of its common stock. During the three months ended March 31, 2020, the Company purchased 150,000 shares for an aggregate cost of $3.2 million, leaving $10.0 million available for repurchase of common stock under the program.
NOTE I – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Effect of unvested restricted stock awards
(1)
Adjusted net income
1,901
4,879
Denominator:
Weighted-average shares
Earnings per common share
Effect of dilutive securities
856,423
941,934
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-month periods ended March 31, 2020 and 2019, outstanding stock awards of 0.2 million were not included in the diluted earnings per share calculation because their inclusion would have the effect of increasing the earnings per share.
NOTE J – 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.
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
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the third quarter of 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, available capacity in the market, and the impact of other adverse external events or conditions, including the COVID-19 pandemic, may influence quarterly freight tonnage levels.
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, available capacity in the market, and the impact of other adverse external events or conditions, including the COVID-19 pandemic, 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.
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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
515,713
506,079
ArcBest
164,775
173,204
FleetNet
52,439
53,259
Other and eliminations
(31,528)
(20,703)
Total consolidated revenues
Salaries, wages, and benefits
283,838
280,276
Fuel, supplies, and expenses(1)
61,225
63,972
Operating taxes and licenses
12,794
12,398
Insurance
7,824
7,991
Communications and utilities(1)
4,711
4,616
Depreciation and amortization(1)
23,270
20,961
Rents and purchased transportation(1)
55,770
49,306
Shared services(1)
48,885
50,295
(2,164)
(34)
Innovative technology costs(1)(2)
4,533
1,802
Other(1)
1,787
881
Total Asset-Based
502,473
492,464
Purchased transportation
137,182
140,105
Supplies and expenses
2,280
2,774
2,470
3,151
Shared services
21,727
23,031
2,525
2,413
Total ArcBest
166,184
171,474
51,399
51,771
(26,476)
(12,461)
Total consolidated operating expenses
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13,240
13,615
(1,409)
1,730
1,488
(5,052)
(8,242)
Total consolidated operating income
Other, net(1)
Total other income (costs)
The following table presents operating expenses by category on a consolidated basis:
344,946
343,668
Rents, purchased transportation, and other costs of services
217,028
221,025
Fuel, supplies, and expenses
71,773
79,336
29,013
26,537
30,820
32,682
NOTE K – 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 56 underground tanks located in 16 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 March 31, 2020 and December 31, 2019, 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 $0.7 million and $0.4 million, respectively. 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, 2019. Our 2019 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.
COVID-19
Since the beginning of 2020, the worldwide spread of the novel coronavirus (“COVID-19”) has been rapid and unprecedented. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. Efforts to control the spread of COVID-19 have led governments and other authorities to impose restrictions which have resulted in business closures and disrupted global supply chains.
Business Impact
The impact of the COVID-19 pandemic and measures taken to prevent its spread began to impact our business during late March 2020. Our Asset-Based business was impacted by lower revenue and shipment levels in late March 2020 due to the COVID-19 pandemic. In late March 2020, the ArcBest segment began experiencing the impact of measures taken to slow the spread of COVID-19, including plant shutdowns of its automotive and manufacturing customers; however, the impact to the segment’s overall business was not significant for the first quarter of 2020.
Subsequent to March 31, 2020, the negative impact on demand for our services, including declines in shipment and tonnage levels, accelerated as the COVID-19 pandemic continued to disrupt businesses and the economy during April 2020. Asset-Based billed revenues decreased approximately 21% on a per-day basis and revenues of our ArcBest segment (ArcBest Asset-Light operations, excluding FleetNet) decreased approximately 17% on a per-day basis in April 2020, compared to April 2019, primarily due to the negative impact of the COVID-19 pandemic on demand for our services. Our April 2020 results are further discussed in the April business updates within the Asset-Based Segment Results and Asset-Light Results sections.
In addition to reductions in business levels, the altered marketplace environment has negatively impacted our freight mix and shipment profile. This negative impact is occurring during our typically stronger seasonal period of the year, which is the second and third quarters. The extent of the adverse effect of the COVID-19 pandemic on our business results is unknown and depends on future developments, including the severity and duration of the pandemic.
Business Response
Business Continuity & Our Employees and Customers
In March 2020, we began implementing certain business continuity processes focused on maintaining customer service levels while emphasizing the health, welfare, and safety of our employees and our customers. These processes include employee communication on proper hand washing, social distancing, mask wearing, and glove removal; increased cleaning and disinfecting measures; providing masks to certain employees throughout the Company; reduced nonessential travel and in-person meetings, including meetings with customers; remote work arrangements for many personnel; health screening questionnaires for personnel working onsite; health screening procedures for critical customer visitors; and promotion of social distancing to every extent possible, including between employees and with customers, as recommended by the Centers for Disease Control and Prevention.
Financial Position and Cash Preservation
On March 26, 2020, we drew down the $180.0 million remaining available borrowing capacity under the initial maximum credit amount of our revolving credit facility and borrowed $45.0 million under our accounts receivable securitization program. These borrowings were a proactive measure to increase our cash position and preserve financial flexibility in consideration of general economic and financial market uncertainty resulting from the COVID-19 outbreak. These funds supplement our already strong cash and short-term investments position, which totaled $531.0 million at March 31, 2020.
We lowered our planned capital expenditures for the current year by 30%, including a reduction in revenue equipment purchases of $18.0 million. Total net capital expenditures for 2020 are now expected to be in a range of $95.0 million to $105.0 million. Considering the changes in projected capital expenditures for 2020, depreciation and amortization for the year is now estimated to be approximately $110.0 million.
In April 2020, we began taking various actions to preserve cash and lower costs to mitigate the operating and financial impact of the COVID-19 pandemic including a 15% reduction in the salaries of officers and nonunion employees and similar compensation adjustments for hourly nonunion employees; a 15% reduction in fees paid to members and committee chairpersons of ArcBest’s Board of Directors; implementation of a hiring freeze; suspension of the employer match on our nonunion 401(k) plan; and reduction of advertising, training, travel, and other costs to better align with current business levels. We anticipate that the expense reduction associated with these compensation and other cost reductions will be in a range of $15 million to $20 million in second quarter 2020, versus second quarter 2019, provided the measures are maintained throughout second quarter 2020.
In addition, we made operational changes in the ABF Freight® network designed to reduce costs, including workforce reductions to better align resources with business levels. Our cost reductions may not directly correspond to significant changes in business levels and there can be no assurance that the impact of the COVID-19 pandemic will not have a material adverse effect on our operating results.
As previously announced in our Current Report on Form 8-K filed on April 7, 2020, in light of the COVID-19 pandemic, we supplemented our risk factors with the following risk factor:
The widespread outbreak of an illness or any other communicable disease, including the effects of pandemics, or any other public health crisis, as well as regulatory measures implemented in response to such events, could adversely affect our business, results of operations, financial condition, and cash flows.
In this Quarterly Report on Form 10-Q, we are also supplementing our risk factors with the new risk factor set forth below:
We, or the third parties upon which we depend to provide services for us, may be adversely affected by external events from which our business continuity plans may not adequately protect us.
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Our new risk factors are fully described in Part II, Item 1A of this Quarterly Report on Form 10-Q. These risk factors should be read in conjunction with the risk factors within “Item 1A. Risk Factors” in our 2019 Annual Report on Form 10-K, including our description of risks related to economic conditions and uncertainties, within the risk factor titled “Our business is cyclical in nature, and we are subject to general economic factors and instability in financial and credit markets that are largely beyond our control, any of which could adversely affect our business, financial condition, and results of operations.”
Accounting Estimates
In accordance with generally accepted accounting principles, we use projected financial information to determine certain accounting estimates and the values of certain assets included in our consolidated financial statements. As of March 31, 2020, we evaluated our goodwill, intangible assets, operating assets, and deferred tax assets for indicators of impairment and challenged our accounting estimates considering the current economic conditions and lower expected business levels. Certain of these assessments are discussed in the paragraphs below. Given the uncertainties regarding the economic environment and the impact of the COVID-19 pandemic on our business, there can be no assurance that our estimates and assumptions made for purposes of impairment evaluations and accounting estimates will prove to be accurate.
Goodwill and Intangible Asset Impairment Consideration
We have assessed impairment indicators to determine if our asset balances, including goodwill and intangible assets which totaled $146.2 million at March 31, 2020, should be written down based on currently available information. While future impacts of COVID-19 are difficult to forecast, we expect to generate cash flows subsequent to March 31, 2020 which would continue to support the fair value in excess of carrying value for our reporting units and indefinite-life intangible assets. We have determined there have not been any indicators of impairment that would, more likely than not, reduce the fair value of our reporting units or trade name intangible asset below their carrying values and that would require interim tests of impairment. Due to the impact of COVID-19 on business and freight levels, the Company considered several factors to consider if it was more likely than not that impairment of these assets existed as of March 31, 2020. In making this analysis, management considered current and forecasted business levels and estimated future cash flows over several years. Management’s assumptions include an expected economic recovery beginning in late 2020 with a more robust recovery in 2021. Based on our analysis, we determined it was more likely than not that goodwill and indefinite-lived intangible assets were not impaired as of March 31, 2020.
As of March 31, 2020, we believe the values of the intangible assets and goodwill as reported in our consolidated financial statements are appropriate; however, we will continually monitor performance measures and events for any significant changes in impairment indicators. Significant declines in business levels or other changes in cash flow assumptions, including the impact of the COVID-19 pandemic, or other factors that negatively impact the fair value of the operations of our reporting units could result in future impairment and a resulting non-cash write-off of a significant portion of the goodwill and indefinite-lived intangible assets of our ArcBest segment, which would have an adverse effect on our financial condition and operating results.
Allowances on Accounts Receivable
As further described in the Critical Accounting Policies section, we estimate our allowance for credit losses on accounts receivable based on historical trends, factors surrounding the credit risk of specific customers, and forecasts of future economic conditions. We continually update the data we use to make these estimates so as to reflect the most recent trends, factors, forecasts, and other information available; however, actual write-offs or adjustments could differ from our allowance estimates due to a number of factors, including changes in the overall economic environment or factors and risks surrounding a particular customer, both of which have a higher degree of uncertainty at this time due to the impact of the COVID-19 pandemic.
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Results of Operations
Consolidated Results
Total Asset-Light
217,214
226,463
(369)
3,218
DILUTED EARNINGS PER SHARE
Our consolidated revenues, which totaled $701.4 million for the three months ended March 31, 2020, decreased 1.5% compared to the same prior-year period. The year-over-year decrease in consolidated revenues reflects a 4.1% decrease in revenues of our Asset-Light operations (representing the combined operations of our ArcBest and FleetNet segments), partially offset by an 1.9% increase in our Asset-Based revenues, compared to the same prior-year period. The higher elimination of revenues reported in the “Other and eliminations” line of consolidated revenues for the three months ended March 31, 2020, compared to the same period of 2019, includes the impact of increased intersegment business levels among our operating segments, reflecting continued integration of our logistics services.
Our Asset-Based revenue growth reflects a 4.6% increase in tonnage per day with one additional business day in the current year quarter, partially offset by a 4.3% decline in billed revenue per hundredweight, including fuel surcharges, for the three-month period ended March 31, 2020, versus the same period of 2019. Asset-Based revenues were impacted by lower revenue and business levels in late March 2020 due to the COVID-19 pandemic. The decline in revenues of our Asset-Light operations for the three months ended March 31, 2020, compared to the same period of 2019, is primarily due to a 9.8% decline in shipments per day and a 3.3% decrease in revenue per shipment for the ArcBest segment, associated with excess available capacity in the truckload market and reduced demand for expedite services, and a decline in total service event volume for the FleetNet segment. On a combined basis, the Asset-Light operating segments generated approximately 30% of our total revenues before other revenues and intercompany eliminations for the three months ended March 31, 2020.
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For the three months ended March 31, 2020, consolidated operating income totaled $7.8 million, compared to $8.6 million for the same period of 2019. In addition to the results of our operating segments (further described within the Asset-Based Segment Results and the Asset-Light Results sections of MD&A), the year-over-year comparisons of consolidated operating results were impacted by investments in innovative technology, as described in the following paragraphs, and lower costs for certain nonunion fringe benefits. For the three months ended March 31, 2020, compared to the same prior-year period, expenses for certain nonunion performance-based incentive plans, including long-term incentive plans impacted by shareholder returns relative to peers, decreased $2.6 million, and costs related to our defined contribution plan decreased $1.1 million.
Innovative technology costs related to the freight handling pilot test program at ABF Freight impacted consolidated results by $4.6 million (pre-tax), or $3.6 million (after-tax) and $0.14 per diluted share, for the three months ended March 31, 2020, compared to $2.8 million (pre-tax), or $2.1 million (after-tax) and $0.08 per diluted share, for the same period of 2019. The freight handling pilot test program at ABF Freight is discussed in the Asset-Based Operating Income section of Asset-Based Segment Results within Asset-Based Operations.
The loss reported in the “Other and eliminations” line, which totaled $5.1 million for the three months ended March 31, 2020, compared to $8.2 million for the same period of 2019, 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 $3.1 million decrease in the loss reported in “Other and eliminations” in first quarter 2020, compared to first quarter 2019, reflects lower technology costs and reduced personnel and benefit expenses. As a result of our ongoing investments in technology, including the design and development of digital business platforms, and other corporate costs, we expect the loss reported in “Other and eliminations” for second quarter 2020 to approximate $4.0 million and to be approximately $20.0 million for full year 2020.
In addition to the above items, consolidated net income and earnings per share was impacted by changes in the cash surrender value of variable life insurance policies and nonunion defined benefit pension expense, including settlement charges, 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 securities and, therefore, are subject to market volatility. Changes in the cash surrender value of life insurance policies decreased net income by $3.8 million, or $0.14 per diluted share, for the three-month period ended March 31, 2020, compared to an increase to net income of $1.6 million, or $0.06 to diluted earnings per share, for the same prior-year period. Consolidated after-tax pension expense, including settlement charges, recognized for the nonunion defined benefit pension plan totaled $1.3 million, or $0.05 per diluted share, for the three months ended March 31, 2019, with no comparable expense for the three months ended March 31, 2020 as termination of the nonunion defined benefit pension plan was completed as of December 31, 2019.
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 the 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.
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Consolidated Adjusted EBITDA
2,947
2,882
Income tax provision
Amortization of share-based compensation
Amortization of net actuarial losses of benefit plans and pension settlement expense(1)
(56)
1,754
36,470
39,827
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 2019 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 2019 Annual Report on Form 10-K, are outlined below. These key indicators are used by management to evaluate segment operating performance and measure the effectiveness of strategic initiatives in the results of our Asset-Based segment. We quantify certain key indictors using key operating statistics which are important measures in analyzing segment operating results from period to period. These statistics are defined within the key indicators below and referred to throughout the discussion of results of our Asset-Based segment:
Pounds or Tonnage – total weight of shipments processed during the period in U.S. pounds or U.S. tons.
Pounds per day or Tonnage per day (average daily shipment weight) – pounds or tonnage divided by the number of workdays in the period.
Shipments per day – total number of shipments moving through the Asset-Based freight network during the period divided by the number of workdays in the period.
Pounds per shipment (weight per shipment) – total pounds divided by the number of shipments during the period.
Average length of haul (miles) – total miles driven divided by the total number of shipments during the period.
Billed revenue per hundredweight, including fuel surcharges (yield) – revenue per every 100 pounds of shipment weight, including surcharges related to fuel, systematically calculated as shipments are processed in the Asset-Based freight network. Revenue for undelivered freight is deferred for financial statement purposes in accordance with the Company’s revenue recognition policy. Billed revenue used for calculating revenue per hundredweight measurements is not adjusted for the portion of revenue deferred for financial statement purposes.
Operating ratio – the percent of operating expenses to revenue levels.
We also quantify certain key operating statistics which are used by management to evaluate productivity of operations within the Asset-Based freight network and to measure the effectiveness of strategic initiatives to manage the segment’s cost structure from period to period. These measures are defined below and further discussed in the Asset-Based Operating Expenses section within Asset-Based Segment Results:
Other companies within our industry may present different key performance indicators or operating statistics, or they may calculate their measures differently; therefore, our key performance indicators or operating statistics may not be comparable to similarly titled measures of other companies. Key performance indicators or operating statistics should be viewed in addition to, and not as an alternative for, our reported results. Our key performance indicators or operating statistics should not be construed as better measurements of our results than operating income, operating cash flow, net income, or earnings per share, as determined under GAAP.
As of March 2020, 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. Profit-sharing bonuses based on the Asset-Based segment’s annual operating ratios for any full calendar year under the contract represent an additional increase in costs under the 2018 ABF NMFA.
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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)
55.0
%
55.4
11.9
12.7
2.5
2.4
1.5
1.6
0.9
4.5
4.1
10.8
9.7
9.5
9.9
(0.4)
0.4
0.3
0.2
97.4
97.3
Asset-Based Operating Income
2.6
2.7
The following table provides a comparison of key operating statistics for the Asset-Based segment, as previously defined in the Asset-Based Overview:
% Change
Workdays(1)
64.0
63.0
Billed revenue per hundredweight, including fuel surcharges
33.16
34.66
(4.3)
Pounds
1,552,936,297
1,460,818,989
6.3
Pounds per day
24,264,630
23,187,603
4.6
Shipments per day
18,803
19,219
(2.2)
Shipments per DSY hour
0.439
0.434
1.2
Pounds per shipment
1,290
1,207
6.9
Pounds per mile
19.87
19.33
2.8
Average length of haul (miles)
1,042
1,023
1.9
Asset-Based Revenues
Asset-Based segment revenues for the three months ended March 31, 2020 totaled $515.7 million, compared to $506.1 million for the same period of 2019. Billed revenue (as described in the Asset-Based Segment Overview) was relatively flat on a per-day basis for the three months ended March 31, 2020, compared to the same prior-year period, primarily reflecting a 4.6% increase in tonnage per day, offset by a 4.3% decrease in total billed revenue per hundredweight, including fuel surcharges. The number of workdays was greater by one day in first quarter 2020, versus first quarter 2019.
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The 4.6% increase in tonnage per day for the three months ended March 31, 2020, compared to the same period of 2019, reflects a low-single-digit percentage increase in LTL-rated tonnage and a double-digit percentage increase in truckload-rated spot shipments moving in the Asset-Based network. Tonnage comparisons with the previous year have been positively impacted by initiatives to fill available Asset-Based equipment capacity with spot truckload-rated shipments and LTL-rated transactional shipments. These larger-sized shipments contributed to the 6.9% increase in total weight per shipment, including a 3.6% increase in weight per shipment on LTL-rated tonnage for the three months ended March 31, 2020, compared to the same period of 2019. The increase in tonnage per day for the three months ended March 31, 2020 was partially offset by a 2.2% decrease in total shipments per day, primarily reflecting the impact of softer economic conditions in the industrial and manufacturing sectors. In late March 2020, the Asset-Based segment also began to experience reductions in shipments related to the impact of COVID-19; however, the effect of the pandemic on the segment’s business was not significant for the overall first quarter of 2020.
The 4.3% decrease in total billed revenue per hundredweight reflects lower fuel surcharge revenues and a decrease in billed revenue per hundredweight on truckload-rated spot shipments moving in the Asset-Based network for the three months ended March 31, 2020, compared to the same period of 2019. Excluding fuel surcharges, billed revenue per hundredweight on LTL-rated freight increased slightly for the three months ended March 31, 2020, compared to the same prior-year period. Changes in freight mix negatively impacted total billed revenue per hundredweight for the three months ended March 31, 2020, compared to the same period of 2019, due to the effect of a higher number of heavier transactional LTL-rated shipments. The year-over-year decrease in total billed revenue per hundredweight, including fuel surcharges, was also impacted by comparison to solid pricing results for the three months ended March 31, 2019, when total billed revenue per hundredweight increased 8.0% over the same period of 2018. However, pricing on ABF Freight’s traditional published and contractual business reflected solid increases in the midst of a rational pricing environment in the marketplace. The Asset-Based segment implemented nominal general rate increases on its LTL base rate tariffs of 5.9% effective February 24, 2020 and February 4, 2019, although the rate changes vary by lane and shipment characteristics. Prices on accounts subject to deferred pricing agreements and annually negotiated contracts which were renewed during the three months ended March 31, 2020 increased approximately 4.3%, compared to the same period of 2019.
The Asset-Based segment’s average nominal fuel surcharge rate for the three months ended March 31, 2020 decreased approximately 60 basis points from the same period in 2019. Fuel prices have declined significantly subsequent to March 31, 2020, as described in the discussion of the segment’s April 2020 results below. During periods of changing diesel fuel prices, the fuel surcharge and associated direct diesel fuel costs also vary by different degrees. Depending upon the rates of these changes and the impact on costs in other fuel- and energy-related areas, operating margins could be impacted. Whether fuel prices fluctuate or remain constant, operating results may be adversely affected if competitive pressures limit our ability to recover fuel surcharges. In periods of declining fuel prices, fuel surcharge percentages also decrease, which negatively impacts the total billed revenue per hundredweight measure and, consequently, revenues, and the revenue decline may be disproportionate to our fuel costs. The segment’s operating results will continue to be impacted by further changes in fuel prices and the related fuel surcharges.
Asset-Based Segment — April 2020
Asset-Based billed revenues for the month of April 2020 decreased approximately 21% on a per-day basis in April 2020, compared to April 2019, primarily due to the negative impact of the COVID-19 pandemic on demand for our services. The revenue decline reflects a 14% decrease in average daily total tonnage and a 7.5% decline in total billed revenue per hundredweight, including fuel surcharges, in April 2020, compared to April 2019.
In April 2020, LTL-rated tonnage and truckload-rated spot shipments moving in the Asset-Based network both decreased by double-digit percentages, compared to the same prior-year period. Total shipments per day decreased 16% in April 2020, compared to April 2019. Total weight per shipment increased 2% in April 2020, with the weight per shipment on LTL-rated shipments up approximately 4%, versus the same prior-year period, reflecting the impact of a higher number of heavier transactional LTL-rated shipments.
The decrease in total billed revenue per hundredweight reflects lower fuel surcharge revenues, a decrease in billed revenue per hundredweight on truckload-rated spot shipments moving in the Asset-Based network, and a mid-single-digit decline in revenue per hundredweight, excluding fuel surcharges, on LTL-rated shipments, compared to the same period of 2019. Although the pricing environment in April 2020 was comparable with previous quarters, a higher number of heavier transactional LTL-rated shipments has continued to impact yield metrics. These transactional shipments utilize available trailer space, that would otherwise be moving empty, while improving operational metrics in the Asset-Based network. The year-over-year decrease in total billed revenue per hundredweight in April 2020 is also impacted by comparison to solid pricing results in the same period of 2019, when total billed revenue per hundredweight increased 5.6% over the same period of 2018. Asset-Based revenues for April 2020, compared to 2019, were negatively impacted by lower fuel surcharge revenue due to an approximate 350 basis point decline in the nominal fuel surcharge rate, while total fuel costs were also lower. Pricing on traditional LTL published business, excluding fuel surcharges, improved compared to April 2019 and sequentially compared to March 2020. In addition, the average increases on deferred pricing agreements and annually negotiated contracts which were renewed during April 2020 were comparable with the those obtained in first quarter 2020.
Current economic conditions, including the effects of the COVID-19 pandemic will continue to impact the Asset-Based segment’s tonnage levels and the prices it receives for its services and, as such, there can be no assurance that the Asset-Based segment will maintain or achieve improvements in its current operating results. The severity and duration of the decline in demand for our services due to the impact of the COVID-19 pandemic and the resulting effects on the economy is unknown. Our tonnage levels and the pricing we receive for our Asset-Based services may remain at significantly reduced levels. Furthermore, 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 in future periods.
Historically, the second quarter operating ratio seasonally improves versus the first quarter. However, due to the impact of the COVID-19 pandemic, the 2020 sequential operating ratio comparison for second quarter versus first quarter is not currently expected to be comparable to historic trends and may deteriorate on a sequential basis, depending on business levels through June 2020.
During April 2020, we have taken cost reduction actions to mitigate the operating and financial impact of the COVID-19 pandemic. These actions are discussed within the COVID-19 Business Response of the General section at the beginning of MD&A.
The Asset-Based segment generated operating income of $13.2 million for the three months ended March 31, 2020, compared to $13.6 million for the same period of 2019. The Asset-Based segment operating ratio increased by 0.1 percentage points for the three months ended March 31, 2020, over the same prior-year period.
As previously announced in our Current Report on Form 8-K dated October 22, 2019 and disclosed in our 2019 Annual Report on Form 10-K, ArcBest Technologies, our wholly owned 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 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 late-summer 2020. While ArcBest believes the pilot has potential to provide 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 $4.5 million and $1.8 million for the three months ended March 31, 2020 and 2019, respectively. We anticipate innovative technology costs associated with the pilot to impact our Asset-Based operating expenses by approximately $2 million more in second quarter 2020 than in second quarter 2019.
The segment’s operating ratio was also impacted by changes in operating expenses as discussed in the following paragraphs.
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Asset-Based Operating Expenses
Labor costs, which are reported in operating expenses as salaries, wages, and benefits, amounted to 55.0% and 55.4% of Asset-Based segment revenues for the three-month period ended March 31, 2020 and 2019, respectively. The decrease in salaries, wages, and benefits as a percentage of revenue was influenced by the effect of higher revenues, as a portion of operating costs are fixed in nature and decrease as a percent of revenue with increases in revenue levels. Salaries, wages, and benefits increased $3.6 million for the three months ended March 31, 2020, compared to the same period of 2019, primarily reflecting year-over-year increases in contractual wage and benefit contribution rates under the 2018 ABF NMFA, partially offset by the impact on labor costs of managing labor hours to the lower shipment levels during the first quarter of 2020, and increased utilization of rail service and purchased transportation. 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. Salaries, wages, and benefits costs for the three months ended March 31, 2020, compared to the same period of 2019, were also impacted by an increase in workers’ compensation expense of $1.1 million, which primarily reflects unfavorable claims experience compared to the prior-year period.
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 and shipment levels are limited as the segment strives to maintain customer service. A higher number of heavier transactional LTL-rated shipments in the first quarter of 2020 contributed to improved operational metrics in the Asset-Based network, compared to the same period of 2019, as these transactional shipments utilize available trailer space that would otherwise be moving empty. The first quarter 2020 improvement in shipments per DSY hour of 1.2%, compared to first quarter 2019, reflects efforts to manage costs with shipment levels. Pounds per mile increased 2.8% for the three months ended March 31, 2020, compared to the same period of 2019, reflecting freight profile effects, including increased weight per shipment and longer length of haul. In March 2020, productivity measures also benefited from less congested roadways as a result of many states issuing “shelter-in-place” orders for non-essential workers.
Fuel, supplies, and expenses as a percentage of revenue decreased 0.8 percentage points for the three months ended March 31, 2020, compared to the same period in 2019, primarily due to lower fuel costs as the Asset-Based segment’s average fuel price per gallon (excluding taxes) decreased approximately 14% during the three months ended March 31, 2020, compared to the same period of 2019. The decrease in the fuel, supplies, and expenses line for the three months ended March 31, 2020, compared to the same prior-year period, was partially offset by increases in expense for maintenance and repairs of revenue equipment.
Rents and purchased transportation as a percentage of revenue increased 1.1 percentage points for the three months ended March 31, 2020, compared to the same period of 2019, primarily due to higher utilization of rail transportation, as rail miles increased approximately 17% for the three months ended March 31, 2020, compared to the same prior-year period. Along with increased rail costs, higher utilization of linehaul purchased transportation and local delivery agents contributed to the increase in rents and purchased transportation costs as the Asset-Based segment used purchased transportation agents when necessary for service requirements while remaining focused on optimizing owned assets.
Shared services as a percentage of revenue decreased 0.4 percentage points for the three months ended March 31, 2020, compared to the same period of 2019, primarily due to reduced costs with the lower business levels and the effect of lower expenses for certain nonunion performance-based incentive plans, including long-term incentive plans impacted by shareholder returns relative to peers.
Gain on sale of property and equipment for the three months ended March 31, 2020 reflects a $2.4 million gain on the sale of unused real estate property.
Innovative technology costs as a percentage of revenue increased 0.5 percentage points for the three months ended March 31, 2020, compared to the same period of 2019, primarily due to increased activity for the freight handling pilot test program at ABF Freight, as previously disclosed in the Asset-Based Operating Income section.
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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 integrated logistics solutions, designed to satisfy the complex supply chain and unique shipping requirements customers encounter.
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 2019 Annual Report on Form 10-K. The key indicators necessary to understand our Asset-Light operating results are outlined below. These key indicators are used by management to evaluate segment operating performance and measure the effectiveness of strategic initiatives in the results of our Asset-Light segments. We quantify certain key indictors using key operating statistics which are important measures in analyzing segment operating results from period to period. These statistics are defined within the key indicators below and referred to throughout the discussion of results of our Asset-Light operations:
Shipments per day – total shipments (excluding managed transportation solutions as discussed below) divided by the number of working days during the period, compared to the same prior-year period, for the ArcBest segment.
Service events – roadside, preventative maintenance, or total service events during the period, compared to the same prior-year period, for the FleetNet segment.
Revenue per shipment or event – total segment revenue divided by total segment shipments or events during the period (excluding managed transportation solutions for the ArcBest segment as discussed below), compared to the same prior-year period.
Purchased transportation costs as a percentage of revenue – the expense incurred for third-party transportation providers to haul or deliver freight during the period, divided by segment revenues for the period, expressed as a percentage.
Presentation and discussion of the key operating statistics of revenue per shipment and shipments per day for the ArcBest segment exclude statistical data of the managed transportation solutions transactions. Growth in managed transportation solutions has increased the number of shipments for these services to nearly one half of the ArcBest segment’s total shipments, while the business represents less than 20% of segment revenues for the three months ended March 31, 2020. 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 services transactions.
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Other companies within our industry may present different key performance indicators or they may calculate their key performance indicators differently; therefore, our key performance indicators may not be comparable to similarly titled measures of other companies. Key performance indicators should be viewed in addition to, and not as an alternative for, our reported results. Our key performance indicators should not be construed as better measurements of our results than operating income, operating cash flow, net income, or earnings per share, as determined under GAAP.
Asset-Light Results
For the three months ended March 31, 2020, the combined revenues of our Asset-Light operations totaled $217.2 million, compared to $226.5 million, for the same period of 2019. The combined revenues of our Asset-Light operating segments generated approximately 30% of our total revenues before other revenues and intercompany eliminations for the three months ended March 31, 2020, compared to 31% for the three months ended March 31, 2019.
ArcBest Segment
The following table sets forth a summary of operating expenses and operating income (loss) as a percentage of revenue for the ArcBest segment:
ArcBest Segment Operating Expenses (Operating Ratio)
83.3
80.9
1.4
1.8
13.2
13.3
100.9
99.0
ArcBest Segment Operating Income (Loss)
(0.9)
1.0
A comparison of key operating statistics for the ArcBest segment, as previously defined in the Asset-Light Overview section, is presented in the following table:
Year Over Year % Change
Revenue per shipment
(3.3%)
(9.8%)
ArcBest segment revenues totaled $164.8 million for the three months ended March 31, 2020, compared to $173.2 million for the same period of 2019. The 4.9% decrease in revenues for the three months ended March 31, 2020, compared to the same prior-year period, primarily reflects reductions in revenue per shipment and fewer shipments. Excess available truckload market capacity, combined with a softer economic environment, which was experienced during 2019 continued into the first quarter of 2020, resulting in lower revenue per shipment for our truckload and expedite services and reduced demand for expedite services, compared to the same period of 2019. Continued weakness in the automotive and manufacturing sectors also contributed to lower demand for expedite services for the three months ended March 31, 2020, versus the same prior-year period. The segment’s revenue decline was partially offset by higher demand for managed transportation services for three months ended March 31, 2020, compared to the same period of 2019. In late March 2020, the ArcBest segment began experiencing the impact of measures taken to slow the spread of COVID-19, including plant shutdowns of its automotive and manufacturing customers; however, the impact to the segment’s business was not significant for the first quarter of 2020.
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Operating loss totaled $1.4 million for the three months ended March 31, 2020, compared to operating income of $1.7 million in the same period of 2019, primarily reflecting the previously discussed declines in revenue. Due to changes in market conditions and freight mix, the prices our ArcBest segment secured from customers decreased while the prices paid for purchased transportation decreased by a smaller percentage, resulting in margin compression in first quarter 2020, compared to the same period of 2019, continuing the trend we have experienced since the second half of 2019. Purchased transportation costs increased by 2.4 percentage points as a percentage of revenue, for the three months ended March 31, 2020, compared to the same period of 2019. Although the ArcBest segment manages costs with shipment levels, which contributed to lower operating expenses for the three months ended March 31, 2020 versus the same prior-year period, portions of operating expenses are fixed in nature and cost reductions can be limited as the segment strives to maintain customer service.
ArcBest Segment – April 2020
Revenues of our ArcBest segment (ArcBest Asset-Light operations, excluding FleetNet) on a per-day basis in April 2020 decreased approximately 17%, compared to April 2019, reflecting lower shipment volumes primarily due to the negative impact of the COVID-19 pandemic on demand for our services. Purchased transportation expense on a per-day basis for April 2020 decreased approximately 18%, compared to April 2019. Purchased transportation expense represented approximately 80% of revenues in April 2020, compared to approximately 82% of revenues in April 2019. As a result of the decrease in purchased transportation costs outpacing the revenue decline, the segment experienced overall margin improvement in April 2020, compared to April 2019, primarily due to additional expedite project business related to the pandemic.
FleetNet Segment
FleetNet’s revenues totaled $52.4 million for the three months ended March 31, 2020, compared to $53.3 million for the same period of 2019. The 1.5% decrease in revenues was driven by lower roadside service event volume resulting primarily from a softer freight environment and milder weather conditions experienced during the three months ended March 31, 2020, compared to the same period of 2019, partially offset by an increase in preventative maintenance service events provided to our Asset-Based segment.
FleetNet’s operating income totaled $1.0 million and $1.5 million for the three-month periods ended March 31, 2020 and 2019, respectively, on lower revenue in first quarter 2020. FleetNet’s operating income margins in first quarter 2020 were impacted by lower revenue per event on maintenance services and by the effect of lower revenues as a portion of operating costs are fixed in nature and increase as a percent of revenue with decreases in revenue.
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.
Asset-Light Adjusted EBITDA
Operating Income (Loss)(1)
Depreciation and amortization(2)
Adjusted EBITDA
1,061
4,881
Operating Income(1)
391
317
1,431
1,805
2,861
3,468
2,492
6,686
Current Economic Conditions
Given the current economic conditions and the uncertainties regarding the impact of the COVID-19 pandemic 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.
Effects of Inflation
We cannot be certain of the future economic environment and there can be no assurances of the potential impact of inflationary conditions on our business. Generally, inflationary increases in labor and fuel costs as they relate to our Asset-Based operations have historically been mostly offset through price increases and fuel surcharges. In periods of increasing fuel prices, the effect of higher associated fuel surcharges on the overall price to the customer influences our ability to obtain increases in base freight rates. In addition, certain nonstandard arrangements with some of our customers have limited the amount of fuel surcharge recovered. The timing and extent of base price increases on our Asset-Based revenues may not correspond with contractual increases in wage rates and other inflationary increases in cost elements and, as a result, could adversely impact our operating results.
Generally, inflationary increases in labor and operating costs regarding our Asset-Light operations have historically been offset through price increases. The pricing environment, however, generally becomes more competitive during economic downturns, which may, as it has in the past, affect the ability to obtain price increases from customers both during and following such periods.
In addition, partly as a result of inflationary pressures, our revenue equipment (tractors and trailers) have been and will very likely continue to be replaced at higher per unit costs, which could result in higher depreciation charges on a per-unit basis. We consider these costs in setting our pricing policies, although the overall freight rate structure is governed by market forces based on value provided to the customer. The Asset-Based segment’s ability to fully offset inflationary and contractual cost increases can be challenging during periods of recessionary and uncertain economic conditions.
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 K 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.
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.
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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; provide underlying data to third parties; grant access to certain of our systems to third parties who provide certain outsourced administrative functions or other services; and increasingly store and transmit data with our customers and third parties by means of connected information technology systems, any 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 or impacting these third parties, including cyber attacks and security breaches at a vendor, could result in claims, litigation, losses, and/or liabilities and 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 primary data center, 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 one of our data centers unusable. In efforts to protect the health of our employees and comply with social distancing guidelines implemented due to the COVID-19 pandemic, many of our employees are working remotely, which may create increased vulnerability to cybersecurity incidents. We continue to implement strong physical and cybersecurity measures in an attempt to safeguard our systems in order to serve our operational needs in a remote working environment and to provide uninterrupted service to our customers.
Our property and cyber insurance would offset losses up to certain coverage limits in the event of a catastrophe or certain cyber incidents, including certain business interruption events related to these 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. We do not have insurance coverage specific to losses resulting from a pandemic. A significant disruption in our information technology systems or a significant cybersecurity 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 our knowledge, the various protections we have employed have been effective to date 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.
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)
530,975
318,488
Cash, cash equivalents, and short-term investments increased $212.5 million from December 31, 2019 to March 31, 2020, primarily due to borrowings under our revolving credit facility and accounts receivable securitization facility totaling $225.0 million. During the three-month period ended March 31, 2020, cash on hand and cash provided by operations was used to repay $14.6 million of long-term debt; fund $2.0 million of capital expenditures, net of proceeds from asset sales; fund $3.3 million of internally developed software; purchase $3.2 million of treasury stock; and pay dividends of $2.0 million on common stock.
Cash provided by operating activities during the three months ended March 31, 2020 was $23.1 million compared to $3.4 million of cash used in operating activities in the same prior-year period. The $26.5 million increase in cash provided by operating activities is primarily related to reduced cash outflow for operating assets and liabilities for the three months ended March 31, 2020, compared to the same period of 2019. The primary items that reduced cash outflow were lower payouts in first quarter 2020 for certain nonunion performance-based incentive plans and higher accruals related to the timing of payroll disbursements at March 31, 2020 versus March 31, 2019. Cash provided by operating activities included federal, state, and foreign income tax payments, net of refunds, of less than $0.1 million and $6.6 million for the three months ended March 31, 2020 and 2019, respectively.
We have a revolving credit facility (the “Credit Facility”) under our Third Amended and Restated Credit Agreement (the “Credit Agreement”) that has an initial maximum credit amount of $250.0 million. We have the option to request additional revolving commitments or incremental term loans thereunder of up to $125.0 million, subject to certain additional conditions as provided in the Credit Agreement. Our accounts receivable securitization program allows for cash proceeds of $125.0 million to be provided under the program and has an accordion feature allowing us to request additional borrowings up to $25.0 million, subject to certain conditions. In March 2020, we drew down the $180.0 million remaining available borrowing capacity under the initial maximum credit amount of our Credit Facility and borrowed $45.0 million under our accounts receivable securitization program, which reduced the initial committed funding capacity available under the facility to $28.0 million. These borrowings were a proactive measure to increase our cash position and preserve financial flexibility in consideration of general economic and financial market uncertainty resulting from the COVID-19 outbreak. These funds supplement our already strong cash and short-term investments position, which totaled $531.0 million at March 31, 2020.
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On May 4, 2020, we extended the term of our $50.0 million notional amount interest rate swap agreement from June 30, 2022 to October 1, 2024. We will receive floating-rate interest amounts based on one-month LIBOR in exchange for fixed-rate interest payments of 0.43% beginning on June 30, 2022 throughout the remaining term of the agreement. From June 30, 2022 to October 1, 2024, the extended interest rate swap agreement will effectively convert $50.0 million of borrowings under our Credit Facility from variable-rate interest to fixed-rate interest with a per annum rate of 1.56% based on the margin of our Credit Facility as of March 31, 2020.
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 March 31, 2020. These purchase obligations totaled $106.2 million as of March 31, 2020, with $92.2 million estimated to be paid within the next year, $12.9 million estimated to be paid in the following two-year period, and $1.1 million to be paid within five years, provided that vendors complete their commitments to us. As of March 31, 2020, the amount of our purchase obligations has increased $72.5 million from December 31, 2019, primarily related to revenue equipment, real estate projects, and technology advancements which are included in our 2020 capital expenditure plan.
As of March 31, 2020, contractual obligations for operating lease liabilities, primarily related to our Asset-Based service centers, totaled $85.2 million, including imputed interest. As of March 31, 2020, the Company has undiscounted lease obligations of $40.4 million related to leases which were executed but not yet commenced. The Company plans to take possession of the leased space in mid-2020. The scheduled maturities of our operating lease liabilities as of March 31, 2020 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 $211.6 million, including interest, as of March 31, 2020, a decrease of $16.3 million from December 31, 2019. The scheduled maturities of our long-term debt obligations as of March 31, 2020 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 2019 Annual Report on Form 10-K during the three months ended March 31, 2020.
As previously announced, our recent actions to preserve cash and lower costs to mitigate the financial impact of the COVID-19 pandemic on our business include a reduction of our 2020 capital expenditure plan by approximately 30%, including a reduction in revenue equipment purchases of $18.0 million. Our total capital expenditures for 2020, including amounts financed, are now estimated to range from $95.0 million to $105.0 million, net of asset sales. These 2020 estimated net capital expenditures include revenue equipment purchases of $64.0 million, primarily for our Asset-Based operations. The remainder of 2020 expected capital expenditures include 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 2020 capital expenditures as business levels dictate. Depreciation and amortization expense, excluding amortization of intangibles, is estimated to be approximately $110.0 million in 2020.
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
The COVID-19 pandemic has been disruptive to businesses, the economy, and the financial markets, and there is much uncertainty about the severity and duration of its impact. The effects of COVID-19 on the health of our employees and the
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economy, along with competitive market factors and the related impact on our business, primarily tonnage and shipment levels and the pricing that we receive for our services in future periods, could affect our ability to generate cash from operations and maintain cash, cash equivalents, and short-term investments on hand as operating costs increase. As previously mentioned, we proactively drew down the remaining borrowing capacity of our Credit Facility and borrowed additional amounts under our accounts receivable securitization program in March 2020 to further strengthen our cash position and preserve financial flexibility. We believe existing cash, cash equivalents, short-term investments, cash generated by operations, and borrowing capacity available under our accounts receivable securitization program, which totaled $28.0 million at March 31, 2020, will be sufficient to finance our operating expenses, fund our ongoing investments in technology, and repay amounts due under our financing arrangements. 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.
We have continued to take actions to enhance shareholder value with our quarterly dividend payments and treasury stock purchases. The capital allocated to these programs has been at reasonable levels; however, these programs will be monitored in consideration of cash requirements for our operations that might occur from further economic weakness and uncertainty that has resulted from the COVID-19 pandemic response.
On May 1, 2020, our Board of Directors declared a dividend of $0.08 per share to stockholders of record as of May 15, 2020. 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 three months ended March 31, 2020, we purchased 150,000 shares of our common stock for an aggregate cost of $3.2 million, leaving $10.0 million available for repurchase under the current buyback program.
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 March 31, 2020. We have an interest rate swap agreement in place which is 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
Cash and Cash Equivalents and Short-term Investments
The increase in cash and cash equivalents of $150.3 million and the increase in short-term investments of $62.2 million from December 31, 2019 to March 31, 2020 are due to the March 2020 borrowings under our Credit Facility and our accounts receivable securitization program of $180.0 million and $45.0 million, respectively, as a precautionary measure to preserve financial flexibility during the COVID-19 pandemic.
Accrued Expenses
Accrued expenses decreased $14.6 million from December 31, 2019 to March 31, 2020, primarily due to payments during first quarter 2020 of amounts accrued at December 31, 2019 for certain incentive accruals related to our operating performance and long-term incentive plans and contributions to defined contribution plans.
Long-term Debt
The $210.4 million increase in long-term debt, including current portion, from December 31, 2019 to March 31, 2020 is due to the March 2020 borrowings under our Credit Facility and our accounts receivable securitization program of $180.0 million and $45.0 million, respectively, as a precautionary measure to preserve financial flexibility during the COVID-19 pandemic.
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Off-Balance Sheet Arrangements
At March 31, 2020, our off-balance sheet arrangements for purchase obligations totaled $106.2 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 20.3% and 25.9% of pre-tax income for the three months ended March 31, 2020 and March 31, 2019, respectively. The average state tax rate, net of the associated federal deduction, is approximately 5%. Due to the uncertainty surrounding the impact of the COVID-19 pandemic, for the three months ended March 31, 2020, we calculated the tax provision based on the actual statutory tax rate as opposed to using an annual effective tax rate, because of the inability to provide a reliable estimate of ordinary income within a reasonable range. Various factors, including the amount of pre-tax income, as well as significant changes in nondeductible expenses, such as cash surrender value of life insurance and the settlement of share-based payment awards primarily vesting in the second quarter, may cause the full-year 2020 tax rate to vary significantly from the statutory rate. Due to the impact of nondeductible expenses, we generally incur a higher tax rate when we generate lower levels of pre-tax income and a lower benefit rate when we generate lower levels of pre-tax losses. Conversely, as pre-tax income or loss increases, the impact of nondeductible expense on the overall rate declines.
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:
(in thousands, except percentages)
Income tax provision at the statutory federal rate
501
21.0
1,385
Federal income tax effects of:
Alternative fuel credit
(451)
(18.9)
Nondeductible expenses and other
405
17.0
481
7.2
Increase in valuation allowances
193
8.1
Decrease in uncertain tax positions(1)
(933)
(39.1)
Tax expense (benefit) from vested RSUs
0.8
(2)
Federal research and development tax credits
(250)
(10.5)
Life insurance proceeds and changes in cash surrender value
799
33.5
(339)
(5.1)
Federal income tax provision
284
1,525
23.1
State income tax provision
199
8.4
183
Total provision for income taxes
20.3
25.9
At March 31, 2020, we had $55.0 million of net deferred tax liabilities after valuation allowances. We evaluated the need for a valuation allowance for deferred tax assets at March 31, 2020 by considering the future reversal of existing taxable temporary differences, future taxable income, and available tax planning strategies. Additionally, as a result of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) enacted on March 27, 2020, net operating losses originating in the tax year including December 31, 2020 may be carried back five years to a period in which we had substantial taxable income. Valuation allowances for deferred tax assets totaled $0.9 million and $0.7 million at March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020, deferred tax liabilities which will reverse in future years exceeded deferred tax assets.
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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, 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 three months ended March 31, 2020 and March 31, 2019, income determined under income tax law exceeded financial reporting income.
During the three months ended March 31, 2020, we made foreign and state tax payments of $0.3 million, and received refunds of $0.4 million of federal 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 2019 Annual Report on Form 10-K. The following policy has been updated during the three months ended March 31, 2020 for the adoption of an accounting standard update.
Receivables Allowance
On January 1, 2020, we adopted ASC Topic 326, Financial Instruments – Credit Losses, (“ASC Topic 326”), which replaces the incurred loss methodology model with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including trade receivables and other receivables. We maintain allowances for credit losses (formerly known as the allowance for doubtful accounts) and revenue adjustments on our trade receivables.
We estimate our allowance for credit losses based on historical trends, factors surrounding the credit risk of specific customers, and forecasts of future economic conditions. In order to gather information regarding these trends and factors, we perform ongoing credit evaluations of our customers, an analysis of accounts receivable aging by business segment, and an analysis of future economic conditions at period end. The allowance for revenue adjustments represents an estimate of potential adjustments associated with recognized revenue based upon historical trends and current information regarding trends and business changes. Actual write-offs or adjustments could differ from the allowance estimates due to a number of factors, including future changes in the forecasted economic environment or new factors and risks surrounding a particular customer. We continually update the history we use to make these estimates so as to reflect the most recent trends, factors, forecasts, and other information available. Management believes this methodology to be reliable in estimating the allowances for credit losses and revenue adjustments (collectively our receivable allowance). Accounts receivable are written off against the allowance for credit losses and revenue adjustments when accounts are turned over to a collection agency or when the accounts are determined to be uncollectible.
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.
Forward-Looking Statements
Certain statements and information in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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; the ability to maintain third-party information technology systems or licenses; widespread outbreak of an illness or any other communicable disease and the effects of pandemics, including the COVID-19 pandemic, or any other public health crisis; regulatory measures that may be implemented in response to widespread illness, including the COVID-19 pandemic; ineffectiveness of our business continuity plans to meet our operational needs in the event of adverse external events or conditions; untimely or ineffective development and implementation of, or 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; general economic conditions and related shifts in market demand, including the impact of and uncertainties related to the COVID-19 pandemic, that impact the performance and needs of industries we serve and/or limit our customers’ access to adequate financial resources; the ability to manage our cost structure, and the timing and performance of growth initiatives; relationships with employees, including unions, and our ability to attract, retain, and develop 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; our ability to secure independent owner operators and/or operational or regulatory issues related to our use of their services; availability and cost of reliable third-party services; 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; governmental regulations; environmental laws and regulations, including emissions-control regulations; union employee wages and benefits, including changes in required contributions to multiemployer plans; litigation or claims asserted against us; the loss of key employees or the inability to execute succession planning strategies; maintaining our intellectual property rights, brand, and corporate reputation; 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; 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, fuel, and related taxes; potential impairment of goodwill and intangible assets; the cost, integration, and performance of any recent or future acquisitions; seasonal fluctuations and adverse weather conditions; regulatory, economic, and other risks arising from our international business; acts of terrorism or war, or the impact of 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 Securities and Exchange Commission (“SEC”).
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see our filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events, or otherwise.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, 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 our 2019 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. We have a revolving credit facility (the “Credit Facility”) under our Third Amended and Restated Credit Agreement (the “Credit Agreement”) that has an initial maximum credit amount of $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. We have the option to request additional revolving commitments or incremental term loans thereunder of up to $125.0 million, subject to certain additional conditions as provided in the Credit Agreement. Our accounts receivable securitization program allows for cash proceeds of $125.0 million to be provided under the program and has an accordion feature allowing us to request additional borrowings up to $25.0 million, subject to certain conditions. In March 2020, we drew down the $180.0 million remaining available borrowing capacity under the initial maximum credit amount of our Credit Facility and borrowed an additional $45.0 million under our accounts receivable securitization program, which reduced the initial committed funding capacity available under the facility to $28.0 million. Borrowings are subject to variable interest rates as defined within our credit agreements. These borrowings were a proactive measure to increase our cash position and preserve financial flexibility in light of general economic and financial market uncertainty resulting from the COVID-19 outbreak. These funds supplement our already strong cash and short-term investments position, which totaled $531.0 million at March 31, 2020. Cash, cash equivalents, and short-term investments totaling $245.9 million and $66.2 million, respectively, were neither FDIC insured nor direct obligations of the U.S. government at March 31, 2020 and December 31, 2019. 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.
We did not modify our Credit Facility, accounts receivable securitization program, or interest rate swap agreement during the three months ended March 31, 2020 and, therefore, we are subject to the interest rate risk due to the variable interest rates on the borrowings under our credit agreements as of March 31, 2020 as disclosed in Part II, Item 7A of our 2019 Annual Report on Form 10-K. On May 4, 2020, we extended the term of our $50.0 million notional amount interest rate swap agreement from June 30, 2022 to October 1, 2024. We will receive floating-rate interest amounts based on one-month LIBOR in exchange for fixed-rate interest payments of 0.43% beginning on June 30, 2022 throughout the remaining term of the agreement. From June 30, 2022 to October 1, 2024, the extended interest rate swap agreement will effectively convert $50.0 million of borrowings under our Credit Facility from variable-rate interest to fixed-rate interest with a per annum rate of 1.56% based on the margin of our Credit Facility as of March 31, 2020.
Risks associated with the economic impacts of COVID-19 remain difficult to ascertain in the immediate future, further discussion related to our response to COVID-19 can be found in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Quarterly Report on Form 10-Q. In addition to the risk factors disclosed in Part I, Item 2 of our 2019 Annual Report on Form 10-K, we have supplemented our risk factors as discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Since December 31, 2019, there have been no other significant changes in the Company’s market risks as reported in the Company’s 2019 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 March 31, 2020.
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 K, 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 2019 Annual Report on Form 10-K. In light of the COVID-19 pandemic, ArcBest is supplementing the risk factors set forth under “Item 1A. Risk Factors” in the Company’s 2019 Annual Report on Form 10-K with the new risk factors set forth below. These risk factors should be read in conjunction with the risk factors in the Company’s 2019 Annual Report on Form 10-K.
Our business could be negatively impacted by the widespread outbreak of an illness or any other communicable disease or other public health crisis, including the COVID-19 pandemic. Measures intended to prevent the spread of a health epidemic could also have an adverse effect on our business. The COVID-19 pandemic has adversely impacted economic activity and conditions worldwide and created significant volatility and disruption to financial markets. Efforts to control the spread of COVID-19 have led governments and other authorities to impose restrictions which have resulted in business closures and disrupted supply chains worldwide. The COVID-19 pandemic and measures taken to prevent its spread have negatively impacted demand for our services, and thus our shipment and tonnage levels, and could continue to further negatively impact our business. We are continuing to monitor developments involving our workforce, customers, and third-party service providers. The extent of the impact of the COVID-19 pandemic on our business is highly uncertain and will depend on future developments, including the duration and severity of the pandemic and government restrictions imposed in response to the pandemic. An extended period of economic disruption and resulting declines in industrial production and manufacturing, consumer spending, and demand for our services, as well as the ability of our customers and other business partners to fulfill their obligations, could have a material adverse effect on our results of operations, financial condition, and cash flows.
The occurrence of severe weather, natural disasters, health epidemics, acts of war or terrorism, and other adverse external events or conditions that impact us or the operations of third parties upon which we rely to provide services for us have the potential to significantly impact our ability to conduct business. Although we have business continuity plans in place, including an emergency succession plan, there is no guarantee that our plans can be successfully implemented. Additionally, even if we were to successfully implement our continuity plans, we may incur substantial expenses and there is no guarantee that our business, financial conditions, and results of operations will not be materially impacted.
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)
1/1/2020-1/31/2020
13,197
2/1/2020-2/29/2020
79,500
22.85
11,380
3/1/2020-3/31/2020
70,500
19.09
10,034
150,000
21.08
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).
3.2
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#
First Amendment to the ArcBest Corporation Ownership Incentive Plan (previously filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the SEC on May 7, 2020, File No. 000-19969, and incorporated herein by reference).
10.2#*
The ArcBest 16b Annual Incentive Compensation Plan and form of award.
10.3#*
The ArcBest Long-Term (3-Year) Incentive Compensation Plan and form of award.
10.4#*
Form of Restricted Stock Unit Award Agreement (Non-Employee Directors – with deferral feature).
10.5#*
Form of Restricted Stock Unit Award Agreement (Employees).
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.
# Designates a compensation plan or arrangement for directors or executive officers.
* 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: May 11, 2020
/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