10-K 1 arcb-20171231x10k.htm 10-K arcb_Current folio_10K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the fiscal year December 31, 2017.

 

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 0-19969

 

ARCBEST CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

71-0673405

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

8401 McClure Drive, Fort Smith, Arkansas

 

72916

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code  479-785-6000

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

Name of each exchange

Title of each class

 

on which registered

Common Stock, $0.01 Par Value

 

The NASDAQ Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☒ No ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐ No ☒

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ☒ No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a 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 ☒

 

The aggregate market value of the Common Stock held by nonaffiliates of the registrant as of June 30, 2017, was $524,395,260.

 

The number of shares of Common Stock, $0.01 par value, outstanding as of February 22, 2018, was 25,641,511.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s Definitive Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the registrant’s Annual Stockholders’ Meeting to be held May 1, 2018, are incorporated by reference in Part III of this Form 10-K.

 

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ARCBEST CORPORATION

 

FORM 10-K

 

TABLE OF CONTENTS

 

 

 

 

ITEM

 

PAGE

NUMBER

 

NUMBER

 

PART I 

 

 

Forward-Looking Statements

3

Item 1. 

Business

4

Item 1A. 

Risk Factors

15

Item 1B. 

Unresolved Staff Comments

32

Item 2. 

Properties

32

Item 3. 

Legal Proceedings

32

Item 4. 

Mine Safety Disclosures

32

 

 

 

PART II 

 

Item 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

33

Item 6. 

Selected Financial Data

34

Item 7. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

35

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

67

Item 8. 

Financial Statements and Supplementary Data

70

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

115

Item 9A. 

Controls and Procedures

115

Item 9B. 

Other Information

118

 

 

 

PART III 

 

Item 10. 

Directors, Executive Officers and Corporate Governance

118

Item 11. 

Executive Compensation

118

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

118

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

118

Item 14. 

Principal Accountant Fees and Services

118

 

 

 

PART IV 

 

Item 15. 

Exhibits and Financial Statement Schedules

119

Item 16. 

Form 10-K Summary

122

 

 

 

SIGNATURES 

123

 

 

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PART I

 

Forward-Looking Statements

 

This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the federal securities laws. All statements, other than statements of historical fact, included or incorporated by reference in this Annual Report on Form 10-K, including, but not limited to, those in Item 1 (Business), Item 1A (Risk Factors), Item 3 (Legal Proceedings), and Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), are forward-looking statements. Terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “foresee,” “intend,” “may,” “plan,” “predict,” “project,” “scheduled,” “should,” “would,” and similar expressions and the negatives of such terms are intended to identify forward-looking statements. These statements are based on management’s beliefs, assumptions, and expectations based on currently available information, are not guarantees of future performance, and involve certain risks and uncertainties (some of which are beyond our control). Although we believe that the expectations reflected in these forward-looking statements are reasonable as and when made, we cannot provide assurance that our expectations will prove to be correct. Actual outcomes and results could materially differ from what is expressed, implied, or forecasted in these statements due to a number of factors, including, but not limited to:

·

a failure of our information systems, including disruptions or failures of services essential to our operations or upon which our information technology platforms rely, data breach, and/or cybersecurity incidents;

·

relationships with employees, including unions, and our ability to attract and retain employees;

·

unfavorable terms of, or the inability to reach agreement on, future collective bargaining agreements or a workforce stoppage by our employees covered under ABF Freight’s collective bargaining agreement;

·

the loss or reduction of business from large customers;

·

the cost, timing, and performance of growth initiatives;

·

competitive initiatives and pricing pressures;

·

general economic conditions and related shifts in market demand that impact the performance and needs of industries we serve and/or limit our customers’ access to adequate financial resources;

·

greater than anticipated funding requirements for our nonunion defined benefit pension plan;

·

availability and cost of reliable third-party services;

·

our ability to secure independent owner operators and/or operational or regulatory issues related to our use of their services;

·

governmental regulations;

·

environmental laws and regulations, including emissions-control regulations;

·

the cost, integration, and performance of any recent or future acquisitions;

·

not achieving some or all of the expected financial and operating benefits of our corporate restructuring or incurring additional costs or operational inefficiencies as a result of the restructuring;

·

union and nonunion 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;

·

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;

·

availability of fuel, the effect of volatility in fuel prices and the associated changes in fuel surcharges on securing increases in base freight rates, and the inability to collect fuel surcharges;

·

increased prices for and decreased availability of new revenue equipment, decreases in value of used revenue equipment, and higher costs of equipment-related operating expenses such as maintenance and fuel and related taxes;

·

potential impairment of goodwill and intangible assets;

·

maintaining our intellectual property rights, brand, and corporate reputation;

·

seasonal fluctuations and adverse weather conditions;

·

regulatory, economic, and other risks arising from our international business;

·

antiterrorism and safety measures; and

·

other financial, operational, and legal risks and uncertainties detailed from time to time in ArcBest Corporation’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 those expressed in these forward-looking statements, please see Item 1A (Risk Factors). All forward-looking statements included or incorporated by reference in this Annual Report on Form 10-K and all subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements. The forward-looking statements speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

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ITEM 1.BUSINESS

 

ArcBest Corporation

 

ArcBest CorporationTM (together with its subsidiaries, the “Company,” “we,” “us,” and “our”) is a leading logistics company with creative problem solvers who deliver integrated solutions. The Company was incorporated in Delaware in 1966. On January 1, 2017, we realigned our company’s structure and focused our go-to-market approach under the ArcBest® brand. Under the ArcBest brand, we offer customized logistics solutions to optimize our customers’ supply chains, while we continue to offer a full array of asset-based less-than-truckload (“LTL”) services through the ABF Freight® network and ground expedite services under the Panther Premium Logistics® brand. Our service offerings also include truckload, international air and ocean, time critical, managed transportation, warehousing and distribution, do-it-yourself moving under the U-Pack® brand, and commercial vehicle maintenance and repair from FleetNet America®. With a comprehensive suite of freight transportation and logistics services and employees who have The Skill and The Will® to get the job done, ArcBest Corporation has the unique ability to simplify and uncomplicate even the most complex logistics and supply chain challenges that our customers face every day.

 

Our operations are conducted through our three reportable operating segments:

·

Asset-Based, which represents ABF Freight System, Inc. and certain other subsidiaries, including ABF Freight System (B.C.), Ltd.; ABF Freight System Canada, Ltd.; ABF Cartage, Inc.; and Land-Marine Cargo, Inc. (collectively “ABF Freight”);

·

ArcBest, our asset-light logistics operation; and

·

FleetNet.

 

The ArcBest and FleetNet reportable segments, combined, represent our Asset-Light operations.

 

Strategy

 

We strive to be a balanced, highly profitable, and financially sustainable enterprise, providing integrated logistics solutions with the best possible customer experience. We work to build long-term stakeholder value by:

·

Expanding our revenue opportunities. We seek to expand our revenue opportunities through deepening our existing customer relationships and securing new ones. We build relationships that last for decades and our customers assign a high degree of value for the high level of service and professionalism we provide. When customers talk about us, they say that we solve problems, we make it easy to do business, and we are trusted partners who understand them. 

·

Balancing our revenue and profit mix. We seek to differentiate ourselves from our competition with our ability to offer logistics solutions with a wide variety of fulfillment options, which can include our own assets. As our Asset-Light operations continue to grow alongside our Asset-Based services, we are balancing the mix of our revenue and profit between our Asset-Based segment and our Asset-Light operations. This balance drives long-term financial sustainability by making our business less capital-intensive relative to its size, and by reducing volatility in our business performance through varying cycles, events, and/or environments.

·

Optimizing our cost structure. We are focused on profitable growth, which causes us to continually review our costs and investment decisions accordingly. Our technology infrastructure enables business processes, insight and analytics that allow us to optimize our cost structure, and we continue to invest in technology to transform our business. Our enhanced market approach is designed to improve the customer experience while simultaneously driving added cost efficiency in our business.

 

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Our management is focused on increasing returns to our shareholders. To accomplish that objective, we continually analyze where additional capital should be invested and where management resources should be focused to improve relationships with customers and meet their expanding needs. In response to customers’ needs for expanded service offerings, we have strategically increased investment in our Asset-Light operations. The additional resources invested in growing our Asset-Light operations is part of management’s long-term strategy to ensure we are positioned to serve the changing marketplace through these businesses and our traditional LTL operations by providing a comprehensive suite of transportation and logistics services. As part of this strategy, we have completed the following acquisitions and changes to our business model:

·

On June 15, 2012, we acquired Panther Expedited Services, Inc., one of North America’s largest providers of expedited freight transportation services with expanding service offerings in premium freight logistics and freight forwarding. Our Expedite and premium logistics operations are reported in the ArcBest segment.

·

Effective July 1, 2013, we formed the segment previously reported as ABF Logistics in a strategic alignment of the sales and operations functions of our logistics businesses.

·

On April 30, 2014, we acquired a small privately-owned business which is reported within the FleetNet segment.

·

During 2014, we established our enterprise solutions group to offer more easily accessible transportation and logistics solutions for our customers through a single point of contact.

·

On January 2, 2015, we acquired Smart Lines Transportation Group, LLC (“Smart Lines”), a privately-owned truckload brokerage firm reported in the ArcBest segment.

·

On December 1, 2015, we acquired Bear Transportation Services, L.P. (“Bear”), a privately-owned truckload brokerage firm reported in the ArcBest segment.

·

On September 2, 2016, we acquired Logistics & Distribution Services, LLC (“LDS”), a privately-owned logistics and distribution firm with a focus on asset-light dedicated truckload business reported in the ArcBest segment.

·

On January 1, 2017, we realigned our company’s structure and focused our go-to-market approach under the ArcBest brand.

 

Business Description

 

We deliver integrated solutions for a variety of supply chain challenges. Our offerings include LTL freight transportation via the ABF Freight network, truckload and dedicated truckload logistics services through our ArcBest segment, ground expedited solutions through the Panther Premium Logistics brand, do-it-yourself moving under the U-Pack brand and commercial vehicle maintenance and repair from FleetNet America. From Fortune 100 companies to small businesses, our customers trust and rely on ArcBest Corporation for their transportation and logistics needs.

 

With a relentless focus on meeting our customers’ needs and unique access to assured transportation capacity, we create solutions for even the most complex and demanding supply chains. We are focused on providing the best customer experience possible with seamless access to a broad suite of logistics capabilities, including LTL, truckload, international air and ocean, ground expedite, managed transportation, warehousing and distribution, and moving services. 

 

For the year ended December 31, 2017, no single customer accounted for more than 5% of our consolidated revenues, and the 10 largest customers, on a combined basis, accounted for approximately 12% of our consolidated revenues. As of December 2017, we had approximately 13,000 employees, of which approximately 66% were members of labor unions.

 

Asset-Based Segment

 

Our Asset-Based segment provides LTL services through ABF Freight’s motor carrier operations. Asset-Based revenues, which totaled $2.0 billion for the year ended December 31, 2017 and $1.9 billion for each of the years ended December 31, 2016 and 2015, accounted for approximately 70% of our total revenues before other revenues and intercompany eliminations in 2017 and 2016 and approximately 71% in 2015. For the year ended December 31, 2017, no single customer accounted for more than 6% of revenues in the Asset-Based segment, and the segment’s 10 largest customers, on a combined basis, accounted for approximately 15% of its revenues. Note M to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K contains additional segment financial information, including revenues and operating income for the years ended December 31, 2017, 2016, and 2015.

 

Our Asset-Based carrier, ABF Freight, has been in continuous service since 1923. ABF Freight System, Inc. is the successor to Arkansas Motor Freight, a business originally organized in 1935 which was the successor to a local transfer and storage carrier that was originally organized in 1923. ABF Freight expanded operations through several strategic acquisitions and organic growth and is now one of the largest LTL motor carriers in North America, providing service to

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more than 98% of U.S. cities having a population of 30,000 or more. ABF Freight provides interstate and intrastate direct service to approximately 48,000 communities through 245 service centers in all 50 states, Canada, and Puerto Rico. ABF Freight also provides motor carrier freight transportation services to customers in Mexico through arrangements with trucking companies in that country.

 

Our Asset-Based operations offer transportation of general commodities through standard, time-critical, and guaranteed LTL services — both nationally and regionally. General commodities include all freight except hazardous waste, dangerous explosives, commodities of exceptionally high value, commodities in bulk, and those requiring special equipment. Shipments of general commodities differ from shipments of bulk raw materials, which are commonly transported by railroad, truckload tank car, pipeline, and water carrier. General commodities transported by our Asset-Based operations include, among other things, food, textiles, apparel, furniture, appliances, chemicals, nonbulk petroleum products, rubber, plastics, metal and metal products, wood, glass, automotive parts, machinery, and miscellaneous manufactured products.

 

Our Asset-Based operations transport a wide variety of large and small shipments to geographically dispersed destinations. Typically, LTL shipments are picked up at customers’ places of business and consolidated at a local service center. Shipments are consolidated by destination for transportation by intercity units to their destination cities or to distribution centers. At distribution centers, shipments from various service centers can be reconsolidated for other distribution centers or, more typically, local service centers. After arriving at a local service center, a shipment is delivered to the customer by local trucks operating from the service center. In some cases, when one large shipment or a sufficient number of different shipments at one origin service center are going to a common destination, they can be combined to make a full trailer load. A trailer is then dispatched to that destination without rehandling. The LTL transportation industry, which requires networks of local pickup and delivery service centers combined with larger distribution facilities, is significantly more infrastructure-intensive than truckload operations and, as such, has higher barriers to entry. Costs associated with an expansive LTL network, including investments in or costs associated with real estate and labor costs related to local pickup, delivery, and cross-docking of shipments, are to a large extent fixed in nature unless service levels are significantly changed.

 

Our Asset-Based operations offer regional service alongside ABF Freight’s traditional long-haul model to facilitate our customers’ next-day and second-day delivery needs in most areas throughout the United States. Development and expansion of ABF Freight’s regional network required added labor flexibility, strategically positioned freight exchange points, and increased door capacity at a number of key locations. Regional service offerings have resulted in reduced transit times and allows for consistent and continuous LTL service. We define our Asset-Based regional market, which represented approximately 60% of its tonnage in 2017, as tonnage moving 1,000 miles or less.

 

Labor costs, which amounted to 56.5% of Asset-Based revenues for 2017, are the largest component of the segment’s operating expenses. As part of our corporate restructuring, certain nonunion employees in the areas of sales, pricing, customer service, financial services, marketing, and capacity sourcing were transferred to our shared services subsidiary effective January 1, 2017, which increased the percentage of union employees within the Asset-Based segment. As of December 2017, approximately 83% of the Asset-Based segment’s employees were covered under a collective bargaining agreement, the ABF National Master Freight Agreement (the “ABF NMFA”), with the International Brotherhood of Teamsters (the “IBT”), which extends through March 31, 2018. The ABF NMFA included a 7% wage rate reduction on the November 3, 2013, implementation date, followed by wage rate increases of 2% on July 1 in each of the next three years, which began in 2014, and a 2.5% increase on July 1, 2017; a one-week reduction in annual compensated vacation effective for employee anniversary dates on or after April 1, 2013; the option to expand the use of purchased transportation; and increased flexibility in labor work rules. The ABF NMFA and the related supplemental agreements provide for continued contributions to various multiemployer health, welfare, and pension plans maintained for the benefit of our Asset-Based employees who are members of the IBT. The estimated net effect of the November 3, 2013 wage rate reduction and the benefit rate increase which was applied retroactively to August 1, 2013 was an initial reduction of approximately 4% to the combined total contractual wage and benefit rate under the ABF NMFA. Following the initial reduction, the combined contractual wage and benefit contribution rate under the ABF NMFA increased approximately 2.5% on a compounded annual basis throughout the contract period, which extends through March 31, 2018.

 

Amendments to the Employee Retirement Income Security Act of 1974 (“ERISA”), pursuant to the Multiemployer Pension Plan Amendments Act of 1980 (the “MPPA Act”), substantially expanded the potential liabilities of employers who participate in multiemployer pension plans. Under ERISA, as amended by the MPPA Act, an employer who contributes to a multiemployer pension plan and the members of such employer’s controlled group are jointly and severally

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liable for their share of the plan’s unfunded vested benefits in the event the employer ceases to have an obligation to contribute to the plan or substantially reduces its contributions to the plan (i.e., in the event of a complete or partial withdrawal from the multiemployer plans). The Multiemployer Pension Reform Act of 2014 (the “Reform Act”), which was included in the Consolidated and Further Continuing Appropriations Act of 2015 (the “CFCAA”) that was signed into law on December 16, 2014, includes provisions to address the funding of multiemployer pension plans in critical and declining status. 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 (the “Treasury Department”) for the reduction of certain accrued benefits. Through the term of its current collective bargaining agreement, ABF Freight’s multiemployer pension plan contribution obligations generally will be satisfied by making the specified contributions when due. However, we cannot determine with any certainty the contributions that will be required under future collective bargaining agreements for ABF Freight’s contractual employees. See Note I to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more specific disclosures regarding the multiemployer pension plans to which ABF Freight contributes.

 

ABF Freight operates in a highly competitive industry which consists predominantly of nonunion motor carriers. Nonunion competitors have a lower fringe benefit cost structure and less stringent labor work rules, and certain carriers also have lower wage rates for their freight-handling and driving personnel. Wage and benefit concessions granted to certain union competitors also allow for a lower cost structure. ABF Freight has continued to address with the IBT the effect of the wage and benefit cost structure on its operating results. The combined effect of cost reductions under the ABF NMFA, lower cost increases throughout the contract period, and increased flexibility in labor work rules are important factors in bringing ABF Freight’s labor cost structure closer in line with that of its competitors; however, under its collective bargaining agreement, ABF Freight continues to pay some of the highest benefit contribution rates in the industry. These rates include contributions to multiemployer plans, a portion of which are used to fund benefits for individuals who were never employed by ABF Freight. Information provided by a large multiemployer pension plan to which ABF Freight contributes indicates that approximately 50% of the plan’s benefit payments are made to retirees of companies that are no longer contributing employers to that plan.

 

ABF Freight is currently negotiating its new collective bargaining agreement with the IBT for the period subsequent to March 31, 2018. The negotiation of terms of the collective bargaining agreement is a very complex process, and there can be no assurances regarding the terms of the new agreement and the related impact on ABF Freight’s operations and its wage and benefit cost structure for the new period. The inability to agree on acceptable terms prior to the expiration of ABF Freight’s current agreement could result in a work stoppage, the loss of customers, or other events that could have a material adverse effect on the Company’s competitive position, results of operations, cash flows, and financial position in 2018 and subsequent years.

 

Asset-Light Operations

 

The ArcBest and FleetNet reportable segments, combined, represent our Asset-Light operations. Our Asset-Light operations are a key component of our strategy to offer customers a single source of end-to-end logistics solutions, designed to satisfy the complex supply chain and unique shipping requirements customers encounter. Through unique methods and processes, including technology solutions and the use of third-party service providers, our Asset-Light operations provide various logistics and maintenance services without significant investment in revenue equipment or real estate.

 

For the year ended December 31, 2017, 2016, and 2015, the combined revenues of our Asset-Light operations totaled $863.0 million, $803.4 million, and $765.4 million, respectively, accounting for approximately 30% of our total revenues before other revenues and intercompany eliminations in 2017 and 2016 and approximately 29% in 2015. For the year ended December 31, 2017, no single customer accounted for more than 5% of the ArcBest segment’s revenues, and the segment’s 10 largest customers, on a combined basis, accounted for approximately 25% of its revenues. Note M to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K contains additional segment financial information, including revenues and operating income for the years ended December 31, 2017, 2016, and 2015.

 

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ArcBest Segment

As previously discussed in “Strategy” within this Business section, our ArcBest segment originated with the formation of the ABF Logistics segment in July 2013, when we strategically aligned the sales and operations functions of our organic logistics businesses. The ArcBest segment now also includes the ground expedite services of the Panther Premium Logistics brand; do-it-yourself moving under the U-Pack brand, for which the majority of the moves are provided with the  assured capacity of our Asset-Based operations; and the acquired operations of Smart Lines, Bear, and LDS. The ArcBest segment offers the following solutions:

 

Truckload and Truckload-Dedicated

Our Truckload and Truckload-Dedicated services provide third-party transportation brokerage by sourcing a variety of capacity solutions, including dry van over the road, temperature-controlled and refrigerated, flatbed, intermodal or container shipping, and specialized equipment, coupled with strong technology and carrier- and customer-based Web tools. We offer a growing network of over 18,000 vetted service providers, with services to 50 states, Canada, and Mexico. Additional value is created for customers through seamless access to the ABF Freight network.

 

Expedite

Through the Panther Premium Logistics brand, we offer Expedite freight transportation services to commercial and government customers and we offer premium logistics services that involve the rapid deployment of highly specialized equipment to meet extremely specific linehaul requirements, such as temperature control, hazardous materials, geofencing (routing a shipment across a mandatory, defined route with satellite monitoring and automated alerts concerning any deviation from the route), specialized government cargo, security services, and life sciences. Through its premium logistics service, ArcBest solves the toughest shipping and logistics challenges that customers face through a global network of owner operators and contract carriers.

 

Substantially all of the network capacity for our Expedite operations is provided by third-party carriers, including owner operators, ground linehaul providers, cartage agents, and other transportation asset providers, which are selected based on their ability to serve our customers effectively with respect to price, technology capabilities, geographic coverage, and quality of service. Third-party owned vehicles are driven by independent contract drivers and by drivers engaged directly by independent owners of multiple pieces of equipment, commonly referred to as fleet owners. Our Expedite operations own a fleet of trailers, the communication devices used by its owner operators, and certain highly specialized equipment, primarily temperature-controlled trailers, to meet the service requirements of certain customers.

 

International

Our International services provide international ocean and air shipping solutions by partnering with ocean shipping lines and air freight carriers worldwide. As a non-vessel operating common carrier (NVOCC), we provide less-than-container load (LCL) and full-container load (FCL) service, offering ocean transport to approximately 90% of the total ocean international market to and from the United States.

 

Managed Transportation

We also provide freight transportation and management services for customers. ArcBest seeks to offer value through identifying specific challenges relating to customers’ supply chain needs and providing customized solutions utilizing technology, both internally to manage its business processes and externally to provide shipment and inventory visibility to its customers. Additional value is created for customers through seamless access to the ABF Freight network, the Panther fleet, and other ArcBest capacity sources, offering unique access to assured capacity.

 

Moving

Our Moving services offer flexibility and convenience to the way people move through targeted service offerings for the “do-it-yourself” consumer and corporate account employee relocations. We offer these targeted services at competitive prices that reflect the additional value customers find in Moving’s convenient, reliable service offerings. Industry leading technology, customer-friendly interfaces, and supply chain solutions are combined to provide a wide range of options customized to meet unique customer needs.

 

Other Logistics Services

We also provide other services to meet our customers’ logistics needs, such as final mile, time critical, product launch, warehousing, retail logistics, supply chain optimization, and trade show shipping services.

 

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FleetNet Segment

The FleetNet segment includes the results of operations of FleetNet America, Inc. (“FleetNet”), our subsidiary that provides roadside assistance and maintenance management services for commercial vehicles to customers in the United States and Canada through a network of third-party service providers. FleetNet began in 1953 as the internal breakdown department for Carolina Freight Carriers Corp. In 1993, the department was incorporated as Carolina Breakdown Service, Inc. to allow the opportunity for other trucking companies to take advantage of the established nationwide service. In 1995, we purchased WorldWay Corporation, which operated various subsidiaries including Carolina Freight Carriers Corp. and Carolina Breakdown Service, Inc. The name of Carolina Breakdown Service, Inc. was changed to FleetNet America, Inc. in 1997.

 

Competition, Pricing, and Industry Factors

 

Competition

We seek to offer value through identifying specific customer needs, then providing operational flexibility and seamless access to our services in order to respond with customized solutions and assured capacity.

 

Our Asset-Based segment actively competes for freight business with other national, regional, and local motor carriers and, to a lesser extent, with private carriage, domestic and international freight forwarders, railroads, and airlines. The segment competes most directly with nonunion and union LTL carriers, including YRC Freight and YRC Regional Transportation (reporting segments of YRC Worldwide Inc.), FedEx Freight, Inc. (included in the FedEx Freight operating segment of FedEx Corporation), UPS Freight (a business unit of United Parcel Service, Inc.), Old Dominion Freight Line, Inc., Saia, Inc., the LTL operating segment of Roadrunner Transportation Systems, Inc., and the LTL operations of XPO Logistics, Inc. Competition is based primarily on price, service, and availability of flexible shipping options to customers. The Asset-Based segment’s careful cargo handling and use of technology, both internally to manage its business processes and externally to provide shipment visibility to its customers, are examples of how we add value to our services.

 

Our ArcBest segment operates in a very competitive asset-light logistics market that includes approximately 13,000 active brokerage authorities, as well as asset-based truckload carriers and logistics companies, large expedited carriers including FedEx Custom Critical, smaller expedited carriers, foreign and U.S.-based non-vessel-operating common carriers, freight forwarders, internal shipping departments at companies that have substantial transportation requirements, smaller niche service providers, and a wide variety of solution providers, including large integrated transportation companies as well as regional warehouse and transportation management firms. ArcBest’s Moving services compete with truck rental, self-move, and van line service providers, and a number of emerging self-move competitors who offer moving and storage container service. Quality of service, technological capabilities, and industry expertise are critical differentiators among the competition. In particular, companies with advanced technological systems that offer optimized shipping solutions, real-time visibility of shipments, verification of chain of custody procedures, and advanced security have significant operational advantages and create enhanced customer value. ArcBest’s performance in each of these areas of competitive distinction has enabled the segment to secure business and drive growth within our Asset-Light operations.

 

FleetNet strategically competes in the commercial vehicle maintenance and repair industry in two major sectors: emergency roadside and preventive maintenance. FleetNet competes directly against other third-party service providers, automotive fleet managers, leasing companies, and companies handling repairs in-house via individual service providers. While no one company encompasses all of FleetNet’s service offerings, competition is based primarily on providing maintenance solutions services. In partnership with best-in-class third-party vendors, FleetNet offers flexible, customized solutions and utilizes technology to provide valuable information and data to minimize fleet downtime, reduce maintenance events, and lower total maintenance costs for its customers.

 

Pricing

Approximately 30% of our Asset-Based business is subject to base LTL tariffs, which are affected by general rate increases, combined with individually negotiated discounts. Rates on the other 70% of this business, including business priced in the spot market, are subject to individual pricing arrangements that are negotiated at various times throughout the year. The majority of the business that is subject to negotiated pricing arrangements is associated with larger customer accounts with annually negotiated pricing arrangements, and the remaining business is priced on an individual shipment basis considering each shipment’s unique profile, the value we provide to the customer, and current market conditions.

 

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Effective August 1, 2017, we began applying space-based pricing on shipments subject to LTL tariffs to better reflect freight shipping trends that have evolved over the last several years. These trends include the overall growth and ongoing profile shift of bulkier shipments across the entire supply chain, the acceleration in e-commerce, and the unique requirements of many shipping and logistics solutions. An increasing percentage of freight is taking up more space in trailers without a corresponding increase in weight. Space-based pricing involves the use of freight dimensions (length, width, and height) to determine applicable cubic minimum charges (“CMC”) that will supplement weight-based metrics when appropriate. Traditional LTL pricing is generally weight-based, while our linehaul costs are generally space-based (i.e., costs are impacted by the volume of space required for each shipment). We believe space-based pricing better aligns our pricing mechanisms with the metrics which affect our costs to ship freight. We seek to provide logistics solutions to our customers’ business and the unique shipment characteristics of their various products and commodities, and we believe that we are particularly experienced in handling complicated freight. The CMC is an additional pricing mechanism to better capture the value we provide in transporting these shipments.

 

Our Asset-Based and certain operations within our ArcBest segment assess a fuel surcharge based on the index of national on-highway average diesel fuel prices published weekly by the U.S. Department of Energy. While the fuel surcharge is one of several components in our overall rate structure, the actual rate paid by customers is governed by market forces and the overall value of services provided to the customer.

 

Industry Factors

According to management’s estimates and market studies by Armstrong & Associates, Inc. and the U.S. Department of Commerce, the total market potential in the industry segments we serve is approximately $286 billion, with $38 billion of potential revenue in the LTL market segment, $205 billion potential in the markets served by our ArcBest segment, and $43 billion in the maintenance and repair market served by our FleetNet segment. The LTL industry has significant barriers to entry and is highly competitive, as previously discussed in “Asset-Based Segment” within this Business section. Based on 2017 revenues, our Asset-Light operations represents a minor portion of the total market, which evidences the significant growth opportunity for us in the outsourced logistics market. More sophisticated supply chain practices are required as supply chains expand and become more complex, product and service needs continue to evolve, and companies look for solutions to their logistics challenges as well as for lower cost supply chain alternatives. Regulation in the transportation industry, as further discussed below, will continue to impair the competitiveness of smaller carriers in the logistics market, which may lead to tighter capacity or consolidation within certain sectors of the logistics market. In addition, disruptions from unexpected events such as natural disasters have resulted in further utilization of expedited shipping and premium logistics services and have caused companies to focus on risk management of their supply chains.

 

Various federal and state agencies exercise broad regulatory powers over the transportation industry, generally governing such activities as operations of and authorization to engage in motor carrier freight transportation, operations of non-vessel-operating common carriers, operations of ocean freight forwarders and ocean transportation intermediaries, safety, contract compliance, insurance and bonding requirements, tariff and trade policies, customs, import and export, employment practices, licensing and registration, taxation, environmental matters, data privacy and security, and financial reporting. The trucking industry faces rising costs, including costs of compliance with government regulations on safety, equipment design and maintenance, driver utilization, and fuel economy, and rising costs in certain non-industry specific areas, including health care and retirement benefits.

 

We are subject to various laws, rules, and regulations and are required to obtain and maintain various licenses and permits, some of which are difficult to obtain. The mandate of the Federal Motor Carrier Safety Administration (the “FMCSA”) for interstate commercial trucks to have electronic logging devices (“ELDs”) installed to monitor compliance with hours-of-service regulations became effective in December 2017. ELDs are fully operational on ABF Freight’s city and road tractors for electronic logging and the electronic capture of drivers’ hours of service for reporting. The ArcBest segment’s network of third-party contract carriers must also comply with industry regulations, including the ELD mandate and other regulations such as the safety and fitness regulations of the Department of Transportation (the “DOT”), including requirements related to drug and alcohol testing and hours of service. Any future modifications to these rules and other regulations impacting the transportation industry may impact our operating practices and costs.

 

Our operations are impacted by seasonal fluctuations which are described in “Seasonality” within Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this Annual Report on Form 10-K.

 

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Technology

 

Our advancements in technology are important to customer service and provide a competitive advantage. The majority of the applications of information technology we use have been developed internally and tailored specifically for customer or internal business processing needs.

 

We make information readily accessible to our customers through various electronic pricing, billing, and tracking services, including mobile-responsive websites which allow customers to access information about their shipments, request shipment pickup, and utilize a variety of other digital tools. Online functions tailored to the services requested by customers include bill of lading generation, pickup planning, customer-specific price quotations, proactive tracking, customized e‑mail notification, logistics reporting, dynamic rerouting, and extensible markup language (XML) connectivity. This technology allows customers to incorporate data from our systems directly into their own website or backend information systems. As a result, our customers can provide shipping information and support directly to their own customers.

 

Expedite freight transportation customers of the ArcBest segment communicate their freight needs, typically on a shipment-by-shipment basis, by means of telephone, email, internet, or Electronic Data Interchange (“EDI”). The information about each shipment is entered into a proprietary operating system which facilitates selection of a contracted carrier or carriers based on the carrier’s service capability, equipment availability, freight rates, and other relevant factors. Once the carrier is selected, the cost for the transportation has been agreed upon, and the carrier has committed to provide the transportation, we are in contact with the carrier through numerous means of communication (including EDI, its proprietary website, email, fax, telephone, and mobile applications) and utilize satellite tracking and communication units on the vehicles to continually update the position of equipment to meet customers’ requirements as well as to track the status of the shipment from origin to delivery. The satellite tracking and communication system automatically updates our fully-integrated internal software and provides customers with real-time electronic updates.

 

Insurance, Safety, and Security

 

Generally, claims exposure in the freight transportation and logistics industry consists of workers’ compensation, third-party casualty liability, and cargo loss and damage. We are effectively self-insured for $1.0 million of each workers’ compensation loss.  For each third-party casualty loss, we are generally self-insured for $1.0 million for our Asset-Based segment and $0.3 million for our Asset-Light operations. We are also self-insured for each cargo loss, up to a $0.3 million deductible for our Asset-Based segment and a $0.1 million deductible for our ArcBest segment. We maintain insurance that we believe is adequate to cover losses in excess of such self-insured amounts or deductibles. However, we cannot provide assurance that our insurance coverage will provide adequate protection under all circumstances or against all potential losses. We have experienced situations where excess insurance carriers have become insolvent. We pay assessments and fees to state guaranty funds in states where we have workers’ compensation self-insurance authority. In some of these states, depending on the specific state’s rules, the guaranty funds may pay excess claims if the insurer cannot pay due to insolvency. However, there can be no certainty of the solvency of individual state guaranty funds.

 

We have been able to obtain what we believe to be adequate insurance coverage for 2018 and are not aware of any matters which would significantly impair our ability to obtain adequate insurance coverage at market rates for our operations in the foreseeable future. A material increase in the frequency or severity of accidents, cargo claims, or workers’ compensation claims or the material unfavorable development of existing claims could have a material adverse effect on our cost of insurance and results of operations.

 

As evidenced by being an eight-time winner of the American Trucking Associations’ Excellence in Security Award, a seven-time winner of the President’s Trophy for Safety, and a seven-time winner of the Excellence in Claims & Loss Prevention Award, management believes its Asset-Based operations have one of the best safety records and one of the lowest cargo claims ratios in the LTL industry.

 

Our operations are subject to cargo security and transportation regulations issued by the Transportation Security Administration (“TSA”) and regulations issued by the U.S. Department of Homeland Security. We are not able to accurately predict how past or future events will affect government regulations and the transportation industry. We believe that any additional security measures that may be required by future regulations could result in additional costs; however, other carriers would be similarly affected.

 

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Environmental and Other Government Regulations

 

We are subject to federal, state, and local environmental laws and regulations relating to, among other things: emissions control, transportation of hazardous materials, underground and aboveground storage tanks, stormwater pollution prevention, contingency planning for spills of petroleum products, and disposal of waste oil.

 

In August 2011, the Environmental Protection Agency (“EPA”) and the National Highway Traffic Safety Administration (the “NHTSA”) established a national program to reduce greenhouse gas (“GHG”) emissions and establish new fuel efficiency standards for commercial vehicles beginning in model year 2014 and extending through model year 2018. The new tractors our Asset-Based segment has placed in service since 2014 are equipped with engines that meet such standards. In August 2016, the EPA and the NHTSA jointly finalized a national program establishing the second phase of greenhouse gas emissions (“EPA/NHTSA Phase 2”), imposing new fuel efficiency standards for medium- and heavy-duty vehicles, such as those operated by our Asset-Based segment, and also instituting fuel efficiency improvement technology requirements for trailers beginning with model year 2018 and extending through model year 2027. The vehicle and engine rules cover model years 2021-2027. In October 2017, the U.S. Court of Appeals for the District of Columbia stayed the portion of the EPA/NHTSA Phase 2 Final Rule regarding the trailer regulations, and the review of the Final Rule has an indefinite date of final ruling. In February 2018, the California Air Resources Board (the “CARB”) approved plans to retain two provisions of the EPA/NHTSA Phase 2 Final Rule that would regulate glider kits and trailers. In the event the EPA does not enforce the trailer regulations of EPA/NHTSA Phase 2, certain other states may also individually enact legislation to enforce the regulations. A number of states have individually enacted, and California and certain other states may continue to enact, legislation relating to engine emissions, trailer regulations, fuel economy, and/or fuel formulation, such as regulations enacted by the CARB.

 

At the present time, management believes that these regulations may not result in significant net additional overall costs should the technologies developed for tractors, as required in the EPA/NHTSA Phase 2 rulemaking, prove to be as cost-effective as forecasted by the EPA/NHTSA. However, although fuel consumption and emissions may be reduced under the new standards, emission-related regulatory actions have historically resulted in increased costs of revenue equipment, diesel fuel, and equipment maintenance, and future legislation, if enacted, could result in increases in these and other costs. We are unable to determine with any certainty the effects of any future climate change legislation beyond the currently enacted regulations, and there can be no assurance that more restrictive regulations than those previously described will not be enacted either federally or locally.

 

Our Asset-Based operations store fuel for use in tractors and trucks in 62 underground tanks located in 18 states. Maintenance of such tanks is regulated at the federal and, in most cases, state levels. Management believes we are in substantial compliance with all such regulations. The underground storage tanks are required to have leak detection systems, and we are not aware of any leaks from such tanks that could reasonably be expected to have a material adverse effect on our operating results.

 

Certain of our Asset-Based service center facilities operate with non-discharge certifications or stormwater permits under the federal Clean Water Act (“CWA”). The stormwater permits require periodic monitoring and reporting of stormwater sampling results and establish maximum levels of certain contaminants that may be contained in such samples.

 

We have received notices from the EPA and others that we have 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 our subsidiaries’ involvement in waste disposal or waste generation at such sites, we have either agreed to de minimis settlements or determined that our obligations, other than those specifically accrued with respect to such sites, would involve immaterial monetary liability, although there can be no assurance in this regard. It is anticipated that the resolution of our environmental matters could take place over several years. Our reserves for environmental cleanup costs are estimated based on management’s experience with similar environmental matters and on testing performed at certain sites.

 

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Reputation and Responsibility

 

Our Company and our brands are consistently recognized for best-in-class performance.

 

Brands

The value of our brands is critical to our success. The ABF Freight brand is recognized in the industry for our Asset-Based segment’s leadership in commitment to quality, customer service, safety, and technology. Independent research has consistently shown that ABF Freight is regarded as a premium service provider, and that the ABF Freight brand stands for excellence in the areas of customer service, reliability, strategic business partnership, and tactical problem solving. The Panther Premium Logistics brand within the operations of our ArcBest segment is also synonymous with premium service that surpasses customer expectations. Customers rely on the Panther Premium Logistics brand when their shipment cannot fail, and owner operators, fleet owners, and contract carriers look to the Panther Premium Logistics brand for unique opportunities to grow their business profitably.

 

We have registered or are pursuing registration of various marks or designs as trademarks in the United States, including but not limited to “ArcBest,” “ABF Freight,” “FleetNet America,” “Panther Premium Logistics,” “U-Pack,” and “The Skill & The Will.” For some marks, we also have registered or are pursuing registration in certain other countries. We believe these marks or designs are of significant value to our business and play an important role in enhancing brand recognition and executing our marketing strategy.

 

Contributions & Awards

We have a corporate culture focused on quality service and responsibility. Our employees are committed to the communities in which they live and work. We make financial contributions to a number of charitable organizations, many of which are supported by our employees. These employees volunteer their time and expertise and many serve as officers or board members of various charitable organizations. In our hometown of Fort Smith, Arkansas, we have been a long-time supporter of the United Way of Fort Smith Area and its 34 partner organizations. In 2017, with employee support, we again earned the United Way’s coveted Pacesetter award by setting the standard for leadership and community support. As a past winner of the Outstanding Philanthropic Corporation Award, we have been recognized by the Arkansas Community Foundation for the service that our employees provide to exemplify the spirit of good citizenship, concern for the community, and support of worthy philanthropic endeavors.

 

In January 2016, the Company was named to Chief Executive Magazine’s “2016 Best Companies for Leaders List.” The Company also received the Circle of Excellence award from the National Business Research Institute in 2016 for its effort in increasing employee engagement. ArcBest Corporation was named to Forbes’ “America’s Best Employers” list for 2016 and has been ranked on Fortune magazine’s “Fortune 1000” list annually since 2013. The Company was also ranked 13th in The Commercial Carrier Journal’s 2016 list of “Top 250 For-Hire Carriers.”

 

Asset-Based Segment

For the fifth consecutive year and the sixth year overall, our Asset-Based carrier ABF Freight received the “Quest for Quality Award” from Logistics Management magazine, being recognized in both the National LTL and the Expedited categories in 2017. In 2016, ABF Freight was named to Inbound Logistics’ list of “Top 100 Trucking Companies” for the third consecutive year. ABF Freight’s 2016 ranking in the top 25 on Selling Power magazine’s list of “Best Companies to Sell For” marked its fourteenth consecutive year to be honored. Also in 2016, for the fourth consecutive year and the sixth time in the last eight years, ABF Freight was named as the “National LTL Carrier of the Year” by the National Shippers Strategic Transportation Council, which recognizes transportation providers on a quantitative scale in the areas of customer service, operational excellence, pricing, business relationship, leadership, and technology. In 2017, ABF Freight was selected as a SupplyChainBrain “Great Supply Chain Partner” for the second consecutive year and the third year overall. Also in 2017, ABF Freight received the “Pro Patria Award” and an “Above and Beyond Award” from the Arkansas Employer Support of the Guard and Reserve, a Department of Defense program, in recognition of its support of employees who serve in the National Guard and Reserve. Marking the ninth year in a row to be honored by Training magazine, ABF Freight was listed 12th in the “Training Top 125” in February 2018.

 

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Our Asset-Based segment is dedicated to safety and security in providing transportation and freight-handling services to its customers. As previously discussed in “Insurance, Safety, and Security” within this Business section, ABF Freight is an eight-time winner of  the American Trucking Associations’ Excellence in Security Award, a seven-time winner of the President’s Trophy for Safety, and a seven-time winner of the Excellence in Claims & Loss Prevention Award. In January 2017, two ABF Freight drivers were named by the American Trucking Associations as captains of the 2017-2018 “America’s Road Team,” continuing the tradition of ABF Freight’s representation in this select program based on the drivers’ exceptional safety records and their strong commitment to safety and professionalism.

 

We are actively involved in efforts to promote a cleaner environment by reducing both fuel consumption and emissions. For many years, our Asset-Based segment has voluntarily limited the maximum speed of its trucks, which reduces fuel consumption and emissions and contributes to ABF Freight’s excellent safety record. Our Asset-Based segment utilizes engine idle management programming to automatically shut down engines of parked tractors. Fuel consumption and emissions have also been minimized through a strict equipment maintenance schedule. In 2015, our Asset-Based segment began voluntarily installing aerodynamic aids on its fleet of over-the-road trailers to further enhance fuel economy and reduce emissions.  In 2006, ABF Freight was accepted in the EPA’s SmartWay Transport Partnership, a collaboration between the EPA and the freight transportation industry that helps freight shippers, carriers, and logistics companies reduce greenhouse gases and diesel emissions. In recognition of ABF Freight’s industry leadership in freight supply chain environmental performance and energy efficiency, the EPA’s SmartWay Transport Partnership awarded ABF Freight a SmartWay Excellence Award in 2014. For the past eight years, ABF Freight was recognized in Inbound Logistics’ annual list of supply chain partners committed to sustainability. Furthermore, in association with the American Trucking Associations’ Sustainability Task Force, ABF Freight has participated in other opportunities to address environmental issues.

 

ArcBest Segment

ArcBest Corporation was named a “Top 50 U.S. Third-party Logistics Provider” by Armstrong & Associates, Inc. in 2017. Our ArcBest segment was recognized by Transport Topics on the “Top Freight Brokerage Firms of 2017” list, ranking eighteenth – up from twenty-first in 2016. In recognition of our Expedite operations’ commitment to quality, Panther Premium Logistics was awarded the “Quest for Quality Award” by Logistics Magazine for the fifth consecutive year. In 2016, Panther received the “National Expedited Carrier of the Year” award for the second consecutive year by the National Shippers Strategic Transportation Council. U-Pack received its first “Quest for Quality” award from Logistics Magazine in 2017, being honored in the Household Goods & High Value Goods category.

 

Financial Information About Geographic Areas

 

Classifications of operations or revenues by geographic location beyond the descriptions previously provided are impractical and, therefore, are not provided. Our foreign operations are not significant.

 

Available Information

 

We file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports, proxy and information statements, and other information electronically with the SEC. All reports and financial information filed with, or furnished to, the SEC can be obtained, free of charge, through our website located at arcb.com or through the SEC’s website located at sec.gov as soon as reasonably practical after such material is electronically filed with, or furnished to, the SEC. The information contained on our website does not constitute part of this Annual Report on Form 10-K nor shall it be deemed incorporated by reference into this Annual Report on Form 10‑K.

 

 

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ITEM 1A.RISK FACTORS

 

The nature of the business activities we conduct subjects us to certain hazards and risks. This Risk Factors section discusses some of the material risks relating to our business activities, including business risks affecting the transportation industry in general as well as risks specific to our Company that are largely out of our control. Other risks are described in “Competition, Pricing, and Industry Factors” within Part I, Item 1 (Business) and in Part II, Item 7A (Quantitative and Qualitative Disclosures About Market Risk) of this Annual Report on Form 10-K. These risks are not the only risks we face. We may also be negatively impacted by a sustained interruption in our systems or operations, including, but not limited to, infrastructure damage, the loss of a key location such as a distribution center, or a significant disruption to the electric grid, or by a significant decline in demand for our services, each of which may arise from adverse weather conditions or natural calamities; illegal acts, including terrorist attacks; and/or other market disruptions. We could also be affected by additional risks and uncertainties not currently known to us or that we currently deem to be immaterial. If any of these risks or circumstances actually occurs, it could materially harm our business, results of operations, financial condition, and cash flows and impair our ability to implement business plans or complete development activities as scheduled. In that case, the market price of our common stock could decline.

 

We are dependent on our information technology systems, and a systems failure, data breach, or other cyber incident could have a material adverse effect on our business, results of operations, and financial condition.

 

We depend on the proper functioning and availability 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 confidential data being compromised could have a significant impact on our operations. We utilize certain software applications provided by third parties, or provide underlying data which is utilized by third parties who provide certain outsourced administrative functions, either of which may increase the risk of a cybersecurity incident. Any problems caused by these third parties, including cyber attacks and security breaches at a vendor, could adversely affect our ability to provide service to our customers and otherwise conduct our business. A significant cyber incident, including denial of service, system failure, security breach, intentional or inadvertent acts by employees, 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, any of which could have a material adverse impact on our business, results of operations, and financial condition.

 

Our business interruption and cyber insurance would offset losses up to certain coverage limits in the event of a catastrophe or certain cyber incidents; however, losses arising from a catastrophe or significant cyber incident would likely exceed our insurance coverage and could have a material adverse impact on our results of operations and financial condition. Furthermore, a significant cyber incident, including denial of service, system failure, security breach, intentional or inadvertent acts by employees, 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 event. We have experienced incidents involving attempted denial of service attacks, malware attacks, and other events intended to disrupt information systems, wrongfully obtain valuable information, or cause other types of malicious events that could have resulted in harm to our business. To date, the systems employed have been effective in identifying these types of events at a point when the impact on our business could be minimized. We must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address, and mitigate the risk of unauthorized access, misuse, computer viruses, and other events that could have a security impact.

 

Certain of our information technology needs are provided by third parties, and we have limited control over the operation, quality, or maintenance of services provided by our vendors or whether they will continue to provide services that are essential to our business. The efficient and uninterrupted operation of our information technology systems depends upon the internet, global communications providers, satellite-based communications systems, the electric grid, electric utility providers, and telecommunications providers; and our information technology systems are vulnerable to interruption by adverse weather conditions or natural calamities, power loss, telecommunications failures, terrorist attacks, internet failures, computer viruses, and other events beyond our control. Disruptions or failures in the services upon which our information technology platforms rely, or in other services provided to us by outside service providers upon which we rely to operate our business and report financial results, may adversely affect our operations and the services we provide, which could increase our costs or result in a loss of customers that could have a material adverse effect on our results of operations

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and financial condition. Additionally, we license a variety of software that supports our operations, and these operations depend on our ability to maintain these licenses. We have no guarantees that we will be able to continue these licensing arrangements with the current licensors, or that we can replace the functions provided by these licenses, on commercially reasonable terms or at all.

 

We depend on our employees to support our business operations and future growth opportunities. If our relationship with our employees deteriorates, if we have difficulty attracting and retaining employees, or if our Asset-Based segment is unable to reach agreement on future collective bargaining agreements, we could be faced with labor inefficiencies, disruptions, or stoppages, or delayed growth, which could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

 

As of December 2017, approximately 83% of our Asset-Based segment’s employees were covered under the ABF NMFA, the collective bargaining agreement with the IBT which extends through March 31, 2018. Contract negotiations for the period subsequent to March 31, 2018 began in January 2018 and are in progress. The negotiation of terms of the collective bargaining agreement is a very complex process. There can be no assurances that our future collective bargaining agreements will be renewed on terms favorable to us. Future collective bargaining agreements may result in higher labor costs, including increased benefit contribution rates to multiemployer health and welfare and pension plans and additional paid time off, or insufficient operational flexibility which may increase our operating costs, and could adversely impact our results of operations, financial condition, and cash flows. The terms of future collective bargaining agreements or the inability to agree on acceptable terms for the next contract period may also result in a work stoppage, the loss of customers, or other events that could have a material adverse effect on our business, results of operations, financial condition, and cash flows. We could also experience a loss of customers or a reduction in our potential share of business in the markets we serve if shippers limit their use of unionized freight transportation service providers because of the risk of work stoppages.

 

We have not historically experienced any significant long-term difficulty in attracting or retaining qualified drivers and freight-handling personnel for our Asset-Based operations, although short-term difficulties have been encountered in certain situations, such as periods of significant increases in tonnage levels, and the available pool of drivers has been declining. Difficulty in attracting and retaining qualified drivers and freight-handling personnel or contractually required increases in compensation or fringe benefit costs could affect our profitability and our ability to grow. Government regulations or the adverse impact of certain legislative actions that result in shortages of qualified drivers could also impact our ability to grow the Company. If we are unable to continue to attract and retain qualified drivers, we could incur higher driver recruiting expenses or a loss of business. In addition to difficulties we may experience in driver retention, if we are unable to effectively manage our relationship with the IBT, we could be less effective in ongoing relations and future negotiations, which could lead to operational inefficiencies and increased operating costs.

 

Our ability to maintain and grow our business will also depend, in part, on our ability to retain and attract additional sales representatives and other key operational personnel and properly incentivize them to obtain new customers, maintain existing customer relationships, and efficiently manage our business. If we are unable to maintain or expand our sales and operational workforce, our ability to increase our revenues and operate our business could be negatively impacted.

 

The loss or reduction in business from one or more large customers, or an overall reduction in our customer base, could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

 

Although we do not have a significant customer concentration, the growth of our business could be materially impacted and our results of operations would be adversely affected if we lost all or a portion of the business of some of our large customers because they: chose to divert all or a portion of their business with us to one of our competitors; demanded pricing concessions for our services; required us to provide enhanced services that increase our costs; or developed their own shipping and distribution capabilities.

 

Effective August 1, 2017, we began applying space-based minimum charges for LTL shipments to better reflect freight shipping trends that have evolved over the last several years. Space-based pricing involves the use of freight dimensions to determine applicable cubic minimum charges (“CMC”) that will supplement weight-based metrics when appropriate. Customer acceptance of the CMC pricing mechanism is difficult to ascertain at this point. Management cannot predict, with reasonable certainty, the changes in business levels and the impact on the total revenue per hundredweight measure due to the implementation of the CMC mechanism. Some customers may not be receptive to our space-based pricing initiatives, which could result in payment delays, uncollectible accounts receivable, or a loss of business. A reduction in

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our customer base or difficulty in collecting, or the inability to collect, payments from our customers due to changes in pricing or other competitive factors could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

 

Our initiatives to grow our business operations or to manage our cost structure to business levels may take longer than anticipated or may not be successful.

 

Developing service offerings requires ongoing investment in personnel and infrastructure, including operating and management information systems. Depending upon the timing and level of revenues generated from our growth initiatives, the related results of operations and cash flows we anticipate from these initiatives and additional service offerings may not be achieved. If we are unable to manage our growth effectively, our business, results of operations, and financial condition may be adversely affected.

 

Our growth plans place significant demands on our management and operating personnel and we may not be able to hire, train, and retain the appropriate personnel to manage and grow these services. Hiring new employees may increase training costs and may result in temporary labor inefficiencies. In addition, as we focus on growing the business in our ArcBest segment, we may encounter difficulties in adapting our corporate structure or in developing and maintaining effective partnerships among our operating segments, which could hinder our operational, financial, and strategic objectives. Furthermore, we may invest significant resources to enter or expand our services in markets with established competitors and in which we will encounter new competitive challenges, and we may not be able to successfully gain market share, which could have an adverse effect on our operating results and financial condition.

 

We also face challenges and risks in implementing initiatives to manage our cost structure to business levels, as portions of salaries, wages, and benefits are fixed in nature and the adjustments which would otherwise be necessary to align the labor cost structure to corresponding business levels are limited as we strive to maintain customer service. We may not be able to appropriately adjust our cost structure to changing market demands. It is more difficult to match our staffing levels to our business needs in periods of rapid or unexpected change. We may incur additional costs related to purchased transportation and/or labor inefficiencies experienced while, and for a time following, training employees who are hired to manage growth or are brought onboard from acquired companies. These costs of managing our cost structure could have a material adverse effect on our results of operations and financial condition. We periodically evaluate and modify the network of our Asset-Based operations to reflect changes in customer demands and to reconcile the segment’s infrastructure with tonnage levels and the proximity of customer freight, and there can be no assurance that these network changes, to the extent such network changes are made, will result in a material improvement in our Asset-Based segment’s results of operations.

 

We operate in a highly competitive industry, and our business could suffer if we are unable to adequately address downward pricing pressures and other factors that could adversely affect our profitability, growth prospects, and ability to compete in the transportation industry.

 

We face significant competition in local, regional, national, and, to a lesser extent, international markets. We compete with LTL carriers of varying sizes, including both union and nonunion LTL carriers and, to a lesser extent, with truckload carriers and railroads. We also compete with domestic and global logistics service providers, including asset-light logistics companies, integrated logistics companies, and third-party freight brokers, which compete in one or more segments of the transportation industry. Numerous factors could adversely impact our ability to compete effectively in the transportation and logistics industry, retain our existing customers, or attract new customers, which could have a material adverse effect on our business, results of operations, financial condition, and cash flows. These competitive factors include, but are not limited to, the following:

·

Some of our competitors have greater capital resources, a lower cost structure, or greater market share than we do or have other competitive advantages. The trend toward consolidation in the transportation industry could continue to create larger carriers with greater financial resources and other competitive advantages relating to their size, including increased market share and stronger competitive position. Consolidations within the industry could also result in our competitors providing a more comprehensive set of services at competitive prices. These competitive pressures may cause a decrease in our freight volume or shipment levels or require us to lower the prices we charge for our services, which could adversely affect our results of operations, growth prospects and profitability.

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·

Our Asset-Based segment competes primarily with nonunion motor carriers who generally have a lower fringe benefit cost structure for their freight-handling and driving personnel than union carriers, and  have greater operating flexibility because they are subject to less stringent labor work rules. Wage and benefit concessions granted to certain union competitors allow for a lower cost structure than that of our Asset-Based segment. Under its current collective bargaining agreement, ABF Freight continues to pay some of the highest benefit contribution rates in the industry, which continues to adversely impact the operating results of our Asset-Based segment relative to our competitors in the LTL industry.

·

Some of our competitors, such as railroads, are outside the motor carrier freight transportation industry and certain challenges specific to the motor carrier freight transportation industry, including the competitive freight rate environment; capacity restraints in times of growing freight volumes; increased costs and potential shortages of commercial truck drivers; changes to driver hours-of-service requirements; increased costs of fuel and other operating expenses; and costs of compliance with existing and potential legal and environmental regulations, could result in the service offerings of these competitors being more competitive.

·

Some of our competitors periodically reduce their prices to gain business, especially during times of reduced growth rates in the economy, which limits our ability to maintain or increase prices. If customers select transportation service providers based on price alone rather than the total value offered, we may be unable to maintain our operating margins or to maintain or grow tonnage levels.

·

Customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress prices or result in the loss of some business to competitors.

·

Customers may reduce the number of carriers they use by selecting “core carriers” as approved transportation service providers, and in some instances, we may not be selected.

·

Certain of our competitors may offer a broader portfolio of services or more effectively bundle their service offerings, which could impair our ability to maintain or grow our share of one or more markets in which we compete.

·

The industry has experienced evolving freight shipping trends over the last several years, including overall growth and ongoing profile shift of bulkier shipments across the entire supply chain, the acceleration in e-commerce, and more unique requirements of many shipping and logistics solutions. An increasing percentage of freight is taking up more space in trailers without a corresponding increase in weight, which contributes to lower average weight per shipment. As the retail industry continues to undergo a shift away from the traditional brick and mortar model towards e-commerce, the manner in which our customers source or utilize our services will be impacted and our operating results could be adversely affected.

·

Competition in the LTL industry from asset-light logistics and freight brokerage companies may adversely affect customer relationships and prices in our Asset-Based operations. Conversely, the operations of our ArcBest segment may be adversely impacted if customers develop their own logistics operations, thus reducing demand for our services, or if shippers shift business to truckload brokerage companies or asset-based trucking companies that also offer brokerage services in order to secure access to those companies’ trucking capacity, particularly in times of tight industry-wide capacity. Our FleetNet operations also face a competitive disadvantage from companies which insource their fleet repair and maintenance services.

·

To keep pace with advances in technology and client demands, we must anticipate market trends and enhance our information technology systems and continue to develop innovative services and capabilities in order to remain competitive. Our customers may not be willing to accept higher freight rates to cover the costs of our increased investments in technology.

 

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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.

 

Our business is cyclical in nature and tends to reflect general economic conditions. Our performance is affected by recessionary economic cycles, downturns in customers’ business cycles, and changes in their business practices. Our tonnage and shipment levels are directly affected by industrial production and manufacturing, distribution, residential and commercial construction, and consumer spending, in each case, primarily in the North American economy, as well as our customers’ inventory levels. We are also subject to risks related to disruption of world markets that could affect shipments between countries and could adversely affect the volume of freight in the market and related pricing. Recessionary economic conditions may result in a general decline in demand for freight transportation and logistics services. The pricing environment generally becomes more competitive during periods of slow economic growth and economic recessions, which adversely affects the profit margin for our services. In certain market conditions, we may have to accept more freight from freight brokers, where freight rates are typically lower, or we may be forced to incur more non-revenue miles to obtain loads. Economic conditions could adversely affect our customers’ business levels, the amount of transportation services they require, and their ability to pay for our services, thus negatively impacting our working capital and our ability to satisfy our financial obligations and covenants of our financing arrangements. Because a portion of our costs are fixed, it may be difficult for us to quickly adjust our cost structure proportionately with fluctuations in volume levels. Customers encountering adverse economic conditions or facing credit issues could experience cash flow difficulties and, thus, represent a greater potential for payment delays or uncollectible accounts receivable, and, as a result, we may be required to increase our allowances for uncollectible accounts receivable. Our obligation to pay third-party service providers is not contingent upon payment from our customers, and we extend credit to certain of these customers which increases our exposure to uncollectible receivables.

 

Given the economic conditions of recent years, current economic uncertainties, and the potential impact on our business, there can be no assurance that our estimates and assumptions regarding the pricing environment and economic conditions, which are made for purposes of impairment tests related to operating assets and deferred tax assets, will prove to be accurate.

 

We depend on suppliers for equipment, parts, and services that are critical to our operations. A disruption in the availability or a significant increase in the cost to obtain these supplies, resulting from the effect of adverse economic conditions or related financial constraints on our suppliers’ business levels or otherwise, could adversely impact our business and results of operations. Our operations and the rates we obtain for our services may also be negatively impacted when economic conditions lead to a decrease in shipping demand and excess tractor and trailer capacity in the industry.

 

We are affected by the instability in the financial and credit markets that from time to time has created volatility in various interest rates and returns on invested assets in recent years. We are subject to market risk due to variable interest rates on our accounts receivable securitization program and the revolving credit facility (“Credit Facility”) outstanding under our Second Amended and Restated Credit Agreement (the “Credit Agreement”). Although we have an interest rate swap agreement to mitigate a portion of our interest rate risk by effectively converting $50.0 million of borrowings under our Credit Facility, of which $130.0 million remains outstanding at the end of February 2018, from variable-rate interest to fixed-rate interest, changes in interest rates may increase our financing costs related to our Credit Facility, future borrowings against our accounts receivable securitization program, new note payable or capital lease arrangements, or additional sources of financing. Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control. Furthermore, future financial market disruptions may adversely affect our ability to refinance our Credit Facility and accounts receivable securitization program, maintain our letter of credit arrangements or, if needed, secure alternative sources of financing. If any of the financial institutions that have extended credit commitments to us are adversely affected by economic conditions, disruption to the capital and credit markets, or increased regulation, they may become unable to fund borrowings under their credit commitments or otherwise fulfill their obligations to us, which could have an adverse impact on our ability to borrow additional funds, and thus have an adverse effect on our operations and financial condition. (See Note G to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion of our financing arrangements.)

 

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Our nonunion defined benefit pension plan trust holds investments in short-duration debt securities and cash equivalent, fixed income, and floating rate loan mutual funds. Declines in the value of plan assets resulting from instability in the financial markets, general economic downturn, or other economic factors beyond our control could diminish the funded status of the nonunion defined benefit pension plan and potentially increase our requirement to make contributions to the plan, including an increase in our cash funding requirement prior to the final distribution of benefits to plan participants. A change in the interest rates used to calculate our funding requirements under the Pension Protection Act of 2006 (the “PPA”) may also impact contributions required to fund our plan. Significant plan contribution requirements could reduce the cash available for working capital and other business needs and opportunities. An increase in required pension plan contributions may adversely impact our financial condition and liquidity. Substantial future investment losses on pension plan assets would increase pension expense in the years following the losses. In addition, a change in the discount rate used to calculate our obligations for our nonunion defined benefit pension plan and postretirement health benefit plan for financial statement purposes would impact the accumulated benefit obligation and expense for these plans. An increase in expense for these pension and postretirement plans may adversely impact our results of operations.

 

We could also experience losses on investments related to our cash surrender value of variable life insurance policies, which may negatively impact our results of operations.

 

Furthermore, it is not possible to predict the effects of actual or threatened armed conflicts, terrorist attacks, or political and/or civil unrest on the economy or on consumer confidence in the United States or the impact, if any, on our future results of operations or financial condition. 

 

Our nonunion defined benefit pension plan could have greater than anticipated funding requirements, which may adversely affect our financial condition and liquidity.

 

In the fourth quarter of 2017, an amendment was executed to terminate our nonunion defined benefit pension plan as of December 31, 2017, as further discussed in Note I to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. Lump sum benefit distributions to participants and the purchase of an annuity contract to settle the pension obligation related to benefits for which participants elect to defer payment until a later date, are likely to occur primarily in the second half of 2018. Our requirement to fund the plan prior to the final distribution of benefits to plan participants, the amount of which will be determined by the plan’s actuary, is currently estimated to require a cash payment of approximately $10.0 million, although there can be no assurances in this regard, as the actual amount is dependent on various factors, including final benefit calculations, the benefit elections made by plan participants, interest rates, the value of plan assets, and the cost to purchase an annuity contract to settle the pension obligation related to benefits for which participants elect to defer payment until a later date.

 

We depend on services provided by third parties, and increased costs or disruption of these services, and claims arising from these services, could adversely affect our business, results of operations, financial condition, cash flows, and customer relationships.

 

A reduction in the availability of rail services or services provided by third-party capacity providers to meet customer requirements, as well as higher utilization of third-party agents to maintain service levels in periods of tonnage growth, could increase purchased transportation costs which we may be unable to pass along to our customers. If a disruption or reduction in transportation services from our rail or other third-party service providers were to occur, we could be faced with business interruptions that could cause us to fail to meet the needs of our customers. In addition, we may not be able to negotiate competitive contracts with railroads or other third-party service providers to expand our capacity, add additional routes, or obtain services at costs that are acceptable to us or our customers. If these situations occur, our business, results of operations, financial condition, cash flows, and customer relationships could be adversely impacted.

 

Our ability to secure the services of third-party service providers is affected by many risks beyond our control, including the inability to obtain the services of reliable third parties at competitive prices; the shortage of quality third-party providers, including owner operators for our Expedite operations and drivers of contracted carriers for our Truckload and Truckload-Dedicated operations; shortages in available cargo capacity; equipment shortages in the transportation industry, particularly among contracted truckload carriers; changes in government regulations affecting the transportation industry and their related impact on operations, such as hours-of-service rules and the ELD mandate discussed in “Competition, Pricing, and Industry Factors” within Part I, Item 1 (Business) of this Annual Report on Form 10-K; labor disputes; or a significant interruption in service or stoppage in third-party transportation services. Each of these risks could have a material adverse effect on the operating results of our Asset-Light businesses.

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Third-party providers can be expected to increase their prices based on market conditions or to cover increases in operating expenses. These providers are subject to industry regulations which may have a significant impact on their operations, causing them to increase prices or exit the industry. Increased industry demand for these transportation services may reduce available capacity and such a reduction or other changes in these services offered by third parties may increase pricing or otherwise change the services we are able to offer to our customers. If we are unable to correspondingly increase the prices we charge to our customers, including the effect of third-party carrier rate increases outpacing customer pricing, or if we are unable to secure sufficient third-party services to meet our commitments to our customers, there could be a material adverse impact on the operations, revenues, and profitability of our Asset-Light businesses and our customer relationships.

 

In addition, we may be subject to claims arising from services provided by third parties, particularly in connection with the operations of our ArcBest segment, which are dependent on third-party contract carriers. From time to time, the drivers who are owner operators, independent contractors, or employees working for third-party carriers that we contract with are involved in accidents that may result in cargo loss or damage, other property damage, or serious personal injuries. As a result, claims may be asserted against us for actions by such drivers or for our actions in retaining them. We may also incur claims in connection with third-party vendors utilized in FleetNet’s operations. Our third-party contract carriers and other vendors may not agree to bear responsibility for such claims or we may become responsible if they are unable to pay the claims, for example, due to bankruptcy proceedings, and such claims may exceed the amount of our insurance coverage or may not be covered by insurance at all.

 

Our engagement of independent contractor drivers to provide a portion of the capacity for our Expedite operations within our ArcBest segment exposes us to different risks than we face with our employee drivers. If we have difficulty in securing independent owner operators or if we experience operational or regulatory issues related to our use of these contract drivers, our financial condition, results of operations, and cash flows could be adversely affected.

 

The driver fleet of the Expedite operations within our ArcBest segment is made up of independent owner operators and individuals. We face intense competition in attracting and retaining qualified owner operators from the available pool of drivers and fleets, and we may be required to increase owner operator compensation or take other measures to remain an attractive option for owner operators, which may negatively impact our results of operations. If we are not able to maintain our delivery schedules due to a shortage of drivers or if we are required to increase our rates to offset increases in labor costs, our services may be less competitive, which could have an adverse effect on our business. Furthermore, as these independent owner operators and individuals are third-party service providers, rather than our employees, they may decline loads of freight from time to time, which may impede our ability to deliver freight in a timely manner. If we fail to meet certain customer needs or incur increased expenses to do so, this could adversely affect the business, financial condition, and results of operations of our ArcBest segment.

 

We pay independent contractor drivers a fuel surcharge that increases with the increase in fuel prices. A significant increase or rapid fluctuation in fuel prices could cause the fuel surcharge we pay to independent contractors to be higher than the revenue we receive under our customer fuel surcharge programs, which could adversely impact the results of operations of our ArcBest segment.

 

Many states have initiated enforcement programs to evaluate the classification of independent contractors, and class actions and other lawsuits have arisen in our industry seeking to reclassify independent contractor drivers as employees for a variety of purposes, including workers’ compensation, wage-and-hour, and health care coverage. There can be no assurance that legislative, judicial, or regulatory authorities will not introduce proposals or assert interpretations of existing rules and regulations resulting in the reclassification of the owner operators of the Expedite operations within our ArcBest segment as employees. In the event of such reclassification of our owner operators, we could be exposed to various liabilities and additional costs and our business and results of operations could be adversely affected. These liabilities and additional costs could include exposure, for both future and prior periods, under federal, state, and local tax laws, and workers’ compensation, unemployment benefits, labor, and employment laws, as well as potential liability for penalties and interest and under vicarious liability principles, which could have a material adverse effect on the results of operations and financial condition of our ArcBest segment.

 

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Our business operations are subject to numerous governmental regulations, and costs of compliance with, or liability for violations of, existing or future regulations could have a material adverse effect on our financial condition and results of operations.

 

Various federal and state agencies exercise broad regulatory powers over the transportation industry, generally governing such activities as operations of and authorization to engage in motor carrier freight transportation, operations of non-vessel-operating common carriers, operations of ocean freight forwarders and ocean transportation intermediaries, safety, contract compliance, insurance and bonding requirements, tariff and trade policies, customs, import and export, food safety, employment practices, licensing and registration, taxation, environmental matters, data privacy and security, and financial reporting. We could become subject to new or more restrictive regulations, such as regulations relating to engine emissions, drivers’ hours of service, occupational safety and health, ergonomics, or cargo security. Increases in costs to comply with such regulations or the failure to comply, which could subject us to penalties or revocation of our permits or licenses, could increase our operating expenses or otherwise have a material adverse effect on the results of our operations. Such regulations could also influence the demand for transportation services.

 

We operate in the United States pursuant to federal operating authority granted by the DOT. Our failures, or the failures of our contracted owner operators and third-party carriers, to comply with DOT safety regulations or downgrades in our safety rating could have a material adverse impact on our operations or financial condition. A downgrade in our safety rating could cause us to lose the ability to self-insure. The loss of our ability to self-insure for any significant period of time could materially increase insurance costs or we could experience difficulty in obtaining adequate levels of insurance coverage.

 

Our ArcBest segment utilizes third-party service providers who are subject to similar regulation requirements as previously mentioned. If the operations of these providers are impacted to the extent that a shortage of quality third-party service providers occurs, there could be a material adverse effect on our ArcBest segment’s business and results of operations. Also, activities by these providers that violate applicable laws or regulations could result in government or third party actions against us. Although third-party service providers with whom we contract agree to abide by our policies and procedures, we may not be aware of, and may therefore be unable to remedy, violations by them.

 

Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties. The costs of compliance with existing and future environmental laws and regulations may be significant and could adversely impact our results of operations.

 

We are subject to various environmental laws and regulations dealing with the handling and transportation of hazardous materials and similar matters. We may transport or arrange for the transportation of hazardous materials and explosives, and we operate in industrial areas where service centers and other industrial activities are located and where groundwater or other forms of environmental contamination could occur. At certain facilities of our Asset-Based operations, we store fuel in underground and aboveground tanks and/or we operate with non-discharge certifications or stormwater permits under the federal Clean Water Act. We may be subject to substantial fines or civil penalties if we fail to obtain proper certifications or permits or if we do not comply with required testing provisions. Our operations involve the risks of, among others, fuel spillage or leakage, environmental damage, a spill or accident involving hazardous substances, and hazardous waste disposal. Under certain environmental laws, we could be subject to strict liability for any costs relating to contamination at our past or present facilities and at third-party waste disposal sites, as well as costs associated with the cleanup of accidents involving our vehicles. Although we have instituted programs to monitor and control environmental risks and promote compliance with applicable environmental laws and regulations, violations of applicable laws or regulations may subject us to cleanup costs and liabilities not covered by insurance or in excess of our applicable insurance coverage, including substantial fines, civil penalties, or civil and criminal liability, as well as bans on making future shipments in particular geographic areas, any of which could adversely affect our business, results of operations, financial condition, and cash flows. In addition, if any damage or injury occurs as a result of our transportation of hazardous materials or explosives, we may be subject to claims from third parties and bear liability for such damage or injury.

 

Concern over climate change, including the impact of global warming, has led to significant legislative and regulatory efforts to limit carbon and other greenhouse gas emissions, and some form of federal, state, or regional climate change legislation is possible in the future. We are unable to determine with any certainty the effects of any future climate change legislation. However, emission-related regulatory actions have historically resulted in increased costs of revenue equipment, diesel fuel, and equipment maintenance, and future legislation, if enacted, could impose substantial costs on us that may adversely impact our results of operations. Such regulatory actions have also required vendors to introduce

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new engines, and the maintenance demands and reliability of vehicles equipped with these newly designed engines, as well as the residual values realized from the disposition of these vehicles, is uncertain. Such regulatory actions may also require changes in our operating practices and impair equipment productivity. We are also subject to increasing customer sensitivity to sustainability issues, and we may be subject to additional requirements related to customer-led initiatives or their efforts to comply with environmental programs. Until the timing, scope, and extent of any future regulation or customer requirements become known, we cannot predict their effect on our cost structure, business, or results of operations. Furthermore, although we are committed to mandatory and voluntary sustainability practices, increased awareness and any adverse publicity about greenhouse gas emissions emitted by companies in the transportation industry could harm our reputation or reduce customer demand for our services.

 

We may be unsuccessful in realizing all or any part of the anticipated benefits of any recent or future acquisitions.

 

As part of our long-term strategy to ensure we are positioned to serve our customers within the changing marketplace by providing a comprehensive suite of transportation and logistics services, we strategically invested in our ArcBest segment with the acquisitions of Logistics & Distribution Services, LLC, in 2016 and Smart Lines Transportation Group, LLC and Bear Transportation Services, L.P., in 2015. We continue to evaluate acquisition candidates and may acquire assets and businesses that we believe complement our existing assets and business or enhance our service offerings. The processes of evaluating acquisitions and performing due diligence procedures include risks which may adversely impact the success of our selection of candidates, pricing of the transaction, and ability to integrate critical functional areas of the acquired business. Further, we may not be able to acquire any additional companies at all or on terms favorable to us, even though we may have incurred expenses in evaluating and pursuing the strategic transactions.

 

Acquisitions may require substantial capital or the incurrence of substantial indebtedness or may involve the dilutive issuance of equity securities. If we consummate any future acquisitions, our capitalization and results of operations may change significantly. We may be unable to generate sufficient revenue or earnings from the operation of an acquired business to offset our acquisition or investment costs. The degree of success of our acquisitions will depend, in part, on our ability to realize anticipated cost savings and growth opportunities. Our success in realizing these benefits and the timing of this realization depends, in part, upon the successful integration of any acquired businesses. The possible difficulties of integration include, among others:

·

retention of customers, key employees, and third-party service providers;

·

combining operations of the companies, including the integration of workforces at different locations while continuing to provide consistent, high-quality service to customers;

·

unanticipated issues in the assimilation and consolidation of information technology, communications, and other systems, including additional systems training and other labor inefficiencies;

·

consolidation of corporate and administrative infrastructures;

·

difficulties and costs of on-boarding employees to our policies, procedures, business culture, and benefits and compensation programs, which may be inconsistent with those of the acquired company;

·

difficulties managing businesses that are outside our historical core competency;

·

inefficiencies and difficulties that arise because of unfamiliarity with potentially new markets or geographic areas and new assets and the businesses associated with them;

·

the effect on internal controls and compliance with the regulatory requirements under the Sarbanes-Oxley Act of 2002;

·

increased tax liability or other tax risk if future earnings are less than anticipated or there is a change in the tax deductibility of certain items; and

·

other unanticipated issues, expenses, and liabilities, including previously unknown liabilities associated with the acquired business for which we have no recourse under applicable indemnification provisions.

 

The risks involved in successful integration could be heightened if we complete a large acquisition or multiple acquisitions within a short period of time. The diversion of management’s attention from our current operations to the acquired operations and any difficulties encountered in combining operations, including underestimation of the resources required to support the acquisitions, could prevent us from realizing the full benefits anticipated from the acquisitions, and within the anticipated timeframe, and could adversely impact our business, results of operations, and financial condition. If acquired operations fail to generate sufficient cash flows, we may incur impairments of goodwill, intangibles, and other assets in the future.

 

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We may not achieve some or all of the expected financial and operating benefits of our corporate restructuring and the restructuring may adversely affect our business, results of operations, financial condition, and cash flows.

 

Effective January 1, 2017, our new corporate structure was implemented to unify our sales, pricing, customer service, marketing, and capacity sourcing functions, allowing us to operate as one logistics provider under the ArcBest® brand, as previously discussed in Part I, Item 1 (Business) of this Annual Report on Form 10-K. Implementation of the restructuring plan has been costly and disruptive to certain aspects of our business. We may incur additional, unexpected costs, and we may not be able to realize the long-term cost savings and benefits that were initially anticipated in connection with our restructuring. If we incur additional costs or fail to achieve some or all of the expected benefits of restructuring, it could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

 

We could be obligated to make additional significant contributions to multiemployer pension plans.

 

ABF Freight System, Inc. and certain other subsidiaries reported in our Asset-Based operating segment (“ABF Freight”) contribute to multiemployer pension and health and welfare plans 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 its collective bargaining agreement with the IBT and other related supplemental agreements.

 

The multiemployer plans to which ABF Freight contributes, which have been established pursuant to the Taft-Hartley Act, are jointly-trusteed (half of the trustees of each plan are selected by the participating employers, the other half by the IBT) and cover collectively-bargained employees of multiple unrelated employers. Due to the inherent nature of multiemployer pension plans, there are risks associated with participation in these plans that differ from single-employer plans. Assets received by the plans are not segregated by employer, and contributions made by one employer can be and are used to provide benefits to current and former employees of other employers. If a participating employer in a multiemployer pension plan no longer contributes to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. If a participating employer in a multiemployer pension plan completely withdraws from the plan, it owes to the plan its proportionate share of the plan’s unfunded vested benefits, referred to as a withdrawal liability. A complete withdrawal generally occurs when the employer permanently ceases to have an obligation to contribute to the plan. Withdrawal liability is also owed in the event the employer withdraws from a plan in connection with a mass withdrawal, which generally occurs when all or substantially all employers withdraw from the plan pursuant to an agreement in a relatively short period of time. Were ABF Freight to completely withdraw from certain multiemployer pension plans, whether in connection with a mass withdrawal or otherwise, under current law, we would have material liabilities for our share of the unfunded vested liabilities of each such plan.

 

The 25 multiemployer pension plans to which ABF Freight contributes vary greatly in size and in funded status. ABF Freight’s obligations to these plans are generally specified in the ABF NMFA, which was implemented on November 3, 2013 and will remain in effect through March 31, 2018. The funding obligations to the multiemployer pension plans are intended to satisfy the requirements imposed by PPA, which was permanently extended by the Reform Act under the CFCAA. Through the term of its current collective bargaining agreement, ABF Freight’s obligations generally will be satisfied by making the specified contributions when due. However, we cannot determine with any certainty the contribution amounts that will be required under future collective bargaining agreements for ABF Freight’s contractual employees.

 

Several of the multiemployer pension plans to which ABF Freight contributes are underfunded and, in some cases, significantly underfunded. The underfunded status of these plans developed over many years, and we believe that an improved funded status will also take time to be achieved, if it can be achieved at all. In addition, the highly competitive industry in which we operate could impact the viability of contributing employers. The reduction or loss of contributions by member employers, the impact of market risk or instability in the financial markets on plan assets and liabilities, and the effect of any one or combination of the aforementioned business risks, all of which are beyond our control, have the potential to adversely affect the funded status of the multiemployer pension plans, potential withdrawal liabilities, and our future contribution requirements.

 

Based on the most recent annual funding notices we have received, most of which are for plan years ended December 31, 2016, approximately 60% of ABF Freight’s contributions to multiemployer pension plans are made to plans that are in “critical and declining status”, including the Central States, Southeast and Southwest Areas Pension Plan (the “Central States Pension Plan”). “Critical and declining status” is applicable to critical status plans under the PPA that are projected to become insolvent anytime in the current plan year or during the next 14 plan years, or if the plan is projected to become

24


 

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%. Approximately 1% of ABF Freight’s contributions to multiemployer pension plans are made to plans that are in “critical status” (generally less than 65% funded) but not in “critical and declining status” and approximately 6% of its contributions are made to plans that are in “endangered status” (generally more than 65% but less than 80% funded), as defined by the PPA.

 

Approximately one-half of ABF Freight’s multiemployer pension contributions are made to the Central States Pension Plan. The funded percentage of the Central States Pension Plan, as set forth in information provided by the Central States Pension Plan, was 37.8%, 42.1%, and 47.9% as of January 1, 2017, 2016, and 2015, respectively. In September 2015, the Central States Pension Plan filed an application with the Treasury Department seeking approval under the Reform Act for a pension rescue plan, which included benefit reductions for participants in the Central States Pension Plan in an attempt to avoid the insolvency of the plan that otherwise is projected by the plan to occur. In May 2016, the Treasury Department denied the Central States Pension Plan’s proposed rescue plan. The trustees of the Central States Pension Plan subsequently announced that a new rescue plan would not be submitted and stated that it is not possible to develop and implement a new rescue plan that complies with the final Reform Act regulations issued by the Treasury Department on April 26, 2016. Although the future of the Central States Pension Plan is impacted by a number of factors, without legislative action, the plan is currently projected to become insolvent within 10 years or less. ABF Freight’s current collective bargaining agreement with the IBT provides for contributions to the Central States Pension Plan through March 31, 2018, and it is ABF Freight’s understanding that its contribution rate is not expected to increase during the remainder of this period (though there are no guarantees). ABF Freight’s contribution rates are made in accordance with its collective bargaining agreements with the IBT and other related supplemental agreements. In consideration of high multiemployer plan contribution rates, several of the plans to which ABF Freight contributes, including the Central States Pension Plan, have frozen contribution rates at current levels under ABF Freight’s current collective bargaining agreement. Future contribution rates will be determined through the negotiation process for contract periods following the term of the current collective bargaining agreement. ABF Freight pays some of the highest benefit contribution rates in the industry and continues to address the effect of the segment’s wage and benefit cost structure on its operating results in discussions with the IBT. ABF Freight is currently negotiating with the IBT for a new collective bargaining agreement for the period subsequent to March 31, 2018, and cannot determine with any certainty the minimum contributions which will be required under future collective bargaining agreements or the impact they will have on our results of operations and financial condition.

 

We are subject to litigation risks that could result in significant expenditures and have other material adverse effects on our business, results of operations, and financial condition.

 

The nature of our business exposes us to the potential for various claims and litigation, including class-action litigation and other legal proceedings brought by customers, suppliers, employees, or other parties, related to labor and employment, competitive matters, personal injury, property damage, cargo claims, safety and contract compliance, environmental liability, and other matters. We are subject to risk and uncertainties related to liabilities, including damages, fines, penalties, and substantial legal and related costs, that may result from these claims and litigation. Some or all of our expenditures to defend, settle, or litigate these matters may not be covered by insurance or could impact our cost and ability to obtain insurance in the future. Also, litigation can be disruptive to normal business operations and could require a substantial amount of time and effort by our management team.  Any material litigation or a catastrophic accident or series of accidents could have a material adverse effect on our business, results of operations, and financial condition. Our business reputation and our relationship with our customers, suppliers, and employees may also be adversely impacted by our involvement in legal proceedings.

 

We establish reserves based on our assessment of legal matters and contingencies. Subsequent developments related to legal claims asserted against us may affect our assessment and estimates of our recorded legal reserves and may require us to make payments in excess of our reserves, which could have an adverse effect on our financial condition or results of operations.

 

25


 

Our management team is an important part of our business and loss of key employees could impair our business, results of operations, and financial condition.

 

We benefit from the leadership and experience of our senior management team and other key employees and depend on their continued services to successfully implement our business strategy. The unexpected loss of key employees or inability to execute our training and succession planning strategies could have an adverse effect on our business, results of operations, and financial condition if we are unable to secure replacement personnel that have sufficient experience in our industry and in the management of our business.

 

Our Credit Facility and accounts receivable securitization program contain customary financial and other customary restrictive covenants that may limit our future operations. A default under these financing arrangements or changes in regulations which impact the availability of funds or our costs to borrow under our financing arrangements could cause a material adverse effect on our liquidity, financial condition, and results of operations.

 

Our Credit Agreement, which governs our Credit Facility, contains representations and warranties, conditions, and events of default that are customary for financings of this type including, but not limited to, a minimum interest coverage ratio, a maximum adjusted leverage ratio, and limitations on incurrence of debt, investments, liens on assets, certain sale and leaseback transactions, transactions with affiliates, mergers, consolidations, and sales of assets. Our accounts receivable securitization program also contains affirmative and negative covenants, and events of default that are customary for financings of this type, including a maximum adjusted leverage ratio and requirements to maintain certain characteristics of the receivables, such as rates of delinquency, default, and dilution.

 

If we default under the terms of the Credit Agreement or our accounts receivable securitization program and fail to obtain appropriate amendments to or waivers under the applicable financing arrangement, our borrowings under such facilities could be immediately declared due and payable. In the event of a default under either of these facilities, we could automatically default on the other of these facilities and on our outstanding notes payable and other financing agreements, unless the lenders to these facilities choose not to exercise remedies or to otherwise allow us to cure the default. If we fail to pay the amount due under our Credit Facility or accounts receivable securitization program, the lenders could proceed against the collateral by which our Credit Facility is secured, our borrowing capacity may be limited, or the facilities could be terminated. If acceleration of outstanding borrowings occurs or if the facilities are terminated, we may have difficulty borrowing additional funds sufficient to refinance the accelerated debt or entering into new credit or debt arrangements, and, if available, the terms of the financing may not be acceptable. A default under the Credit Agreement or accounts receivable securitization program, changes in regulations which impact the availability of funds or our costs to borrow under our financing arrangements, or our inability to renew our financing arrangements with terms that are acceptable to us, could have a material adverse effect on our liquidity and financial condition.

 

In addition, failing to achieve certain financial ratios as required by our Credit Facility and accounts receivable securitization program could adversely affect our ability to finance our operations, make strategic acquisitions or investments, or plan for or react to market conditions or otherwise execute our business strategies.

 

We have significant ongoing capital requirements that could have a material adverse effect on our business, profitability, and growth if we are unable to generate sufficient cash from operations or obtain sufficient financing on favorable terms or properly forecast capital needs to correspond with business volumes.

 

We have significant ongoing capital requirements. If we are not able to generate sufficient cash from operations in the future, our growth could be limited; it may be necessary for us to utilize our existing financing arrangements to a greater extent or enter into additional financing or leasing arrangements, possibly on less favorable terms; or our revenue equipment may have to be held for longer periods, which would result in increased expenditures for maintenance. Forecasting business volumes involves many factors, including general economic trends and the impact of competition, which are subject to uncertainty and beyond our control. If we do not accurately forecast our future capital investment needs, especially for revenue equipment, in relation to corresponding business levels, we could have excess capacity or insufficient capacity. In addition, our Credit Facility contains provisions that could limit our level of annual capital expenditures. If we were unable to properly forecast capital needs and/or were unable to generate sufficient cash from operations, obtain adequate financing at acceptable terms, or if our capital spending was otherwise limited, there could be an adverse effect on our business, profitability, and growth. 

 

26


 

Claims expenses or the cost of maintaining our insurance could have a material adverse effect on our results of operations and financial condition.

 

Claims may be asserted against us for accidents or for cargo loss or damage, property damage, personal injury, and workers’ compensation occurring in our operations. Claims may also be asserted against us for accidents involving the operations of third-party service providers that we utilize for our Asset-Light businesses, for our actions in retaining their services, or for loss or damage to our customers’ goods for which we are determined to be responsible. Such claims against us may not be covered by insurance policies or may exceed the amount of insurance coverage, which could adversely impact our results of operations and financial condition. We have established liabilities which are adjusted to reflect our claims experience; however, actual claims costs and legal expenses may exceed our estimates. If the frequency and/or severity of claims increase, our operating results could be adversely affected. The timing of the incurrence of these costs could significantly and adversely impact our operating results. We are primarily self-insured for workers’ compensation, third-party casualty loss, and cargo loss and damage claims for the operations of our Asset-Based segment and certain of our other subsidiaries. We also self-insure for medical benefits for our eligible nonunion personnel. Because we self-insure for a significant portion of our claims exposure and related expenses, our insurance and claims expense may be volatile. If we lose our ability to self-insure for any significant period of time, insurance costs could materially increase and we could experience difficulty in obtaining adequate levels of insurance coverage in that event. Our self-insurance program for third-party casualty claims is conducted under a federal program administered by a government agency. If the government were to terminate the program or if we were to be excluded from the program, our insurance costs could increase. Additionally, if our third-party insurance carriers or underwriters leave the trucking sector, it could materially increase our insurance costs or collateral requirements, or create difficulties in finding insurance in excess of our self-insured retention limits. We could also experience additional increases in our insurance premiums or deductibles in the future due to market conditions or if our claims experience worsens. If our insurance or claims expense increases, or if we decide to increase our insurance coverage in the future, and we are unable to offset any increase in expense with higher revenues, our earnings could be adversely affected. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our results of operations and financial condition.

 

Significant increases in health care costs related to medical inflation, claims experience, current and future federal and state laws and regulations, and other cost components that are beyond our control could significantly increase the costs of our self-insured medical plans and postretirement medical costs, or require us to adjust the level of benefits offered to our employees. In particular, with the passage in 2010 of the U.S. Patient Protection and Affordable Care Act (the “PPACA”), we are required to provide health care benefits to all full-time employees that meet certain minimum requirements of coverage and affordability, or otherwise be subject to a payment per employee based on the affordability criteria set forth in the PPACA. Many of these requirements have been phased in over time; the majority of the provisions that impact us the most became effective during 2015. The PPACA also requires individuals to obtain coverage or face individual penalties, so employees who are currently eligible but have elected not to participate in our health care plans may ultimately find it more advantageous to do so. In general, implementing the requirements of health care reform has imposed additional administrative costs. The costs of maintaining and monitoring compliance and reports and other effects of these new healthcare requirements, including any failure to comply, may significantly increase our health care coverage costs and could materially adversely affect our financial condition and results of operations. Changes in healthcare legislation could potentially occur in the near term, which could result in changes to healthcare eligibility, design, and cost structure that could have an adverse impact on our business and operating costs; however, we cannot currently determine the impact of future regulatory action on our health care plans and the related costs.

 

We have programs in place with multiple surety companies for the issuance of unsecured surety bonds in support of our self-insurance program for workers’ compensation and third-party casualty liability. Estimates made by the states and the surety companies of our future exposure for our self-insurance liabilities could influence the amount and cost of additional letters of credit and surety bonds required to support our self-insurance program, and we may be required to maintain secured surety bonds in the future which could increase the amount of our cash equivalents and short-term investments restricted for use and unavailable for operational or capital requirements.

 

27


 

We depend heavily on the availability of fuel for our trucks. Fuel shortages, changes in fuel prices, and the inability to collect fuel surcharges could have a material adverse effect on our business, results of operations, financial condition, and cash flows.

 

The transportation industry is dependent upon the availability of adequate fuel supplies. A disruption in our fuel supply resulting from natural or man-made disasters; armed conflicts; terrorist attacks; actions by producers, including a decrease in drilling activity or the use of crude oil and oil reserves for purposes other than fuel production; or other political, economic, and market factors that are beyond our control could have a material adverse effect on our business, results of operations, financial condition, and cash flows. We maintain fuel storage and pumping facilities at our distribution centers and certain other service centers; however, we may experience shortages in the availability of fuel at certain locations and may be forced to incur additional expense to ensure adequate supply on a timely basis to prevent a disruption to our service schedules.

 

Fuel represents a significant operating expense for us, and we do not have any long-term fuel purchase contracts or any hedging arrangements to protect against fuel price increases. Fuel prices fluctuate greatly due to factors beyond our control, such as global supply and demand for crude oil, political events, price and supply decisions by oil producing countries and cartels, terrorist activities, and hurricanes and other natural or man-made disasters; and fuel prices have fluctuated significantly in recent years. Significant increases in fuel prices or fuel taxes resulting from these or other economic or regulatory changes which are not offset by base freight rate increases or fuel surcharges could have an adverse impact on our results of operations.

 

Our Asset-Based segment and the Expedite and Truckload-Dedicated operations of our ArcBest segment assess a fuel surcharge based on an index of national diesel fuel prices. Although revenues from fuel surcharges generally offset increases in direct diesel fuel costs, we incur certain fuel costs that cannot be recovered with fuel surcharges, and other operating costs have been, and may continue to be, impacted by fluctuating fuel prices. The total impact of energy prices on other nonfuel-related expenses is difficult to ascertain. We cannot predict, with reasonable certainty, future fuel price fluctuations, the impact of energy prices on other cost elements, recoverability of fuel costs through fuel surcharges, and the effect of fuel surcharges on our overall rate structure or the total price that we will receive from our customers. Whether fuel prices fluctuate or remain constant, operating results may be adversely affected if competitive pressures limit our ability to recover fuel surcharges. Throughout 2017, the fuel surcharge mechanism generally continued to have market acceptance among our customers; however, certain nonstandard pricing arrangements have limited the amount of fuel surcharge recovered. The negative impact on operating margins of capped fuel surcharge revenue during periods of increasing fuel costs is more evident when fuel prices remain above the maximum levels recovered through the fuel surcharge mechanism on certain accounts. Also, because our fuel surcharge recovery lags behind changes in fuel prices, our fuel surcharge recovery may not capture in any particular period the increased costs we pay for fuel, especially in periods in which fuel prices rapidly increase. In periods of declining fuel prices, our fuel surcharge percentages also decrease, which negatively impacts our revenues, and the revenue decline may be disproportionate to the corresponding decline in our fuel costs. While the fuel surcharge is one of several components in our overall rate structure, the actual rate paid by customers is governed by market forces and the overall value of services provided to the customer. When fuel surcharges constitute a higher proportion of the total freight rate paid, our customers are less receptive to increases in base freight rates. Prolonged periods of inadequate base rate improvements could adversely impact operating results as elements of costs, including contractual wage rates, continue to increase. Further, during periods of low freight volumes, shippers can use their negotiating leverage to impose less compensatory fuel surcharge policies.

 

Higher fuel prices cause customers of our FleetNet segment to seek cost savings throughout their businesses which may result in a reduction of miles driven and/or a deferral of maintenance practices that may reduce the volume of our maintenance service events, resulting in an adverse impact on the segment’s results of operations, financial condition and cash flows.

 

Increased prices for, or decreases in the availability of, new revenue equipment and decreases in the value of used revenue equipment, as well as higher costs of equipment-related operating expenses, could adversely affect our results of operations and cash flows.

 

In recent years, manufacturers have raised the prices of new revenue equipment significantly due to increased costs of materials and, in part, to offset their costs of compliance with new tractor engine and emissions system design requirements intended to reduce emissions, which have been mandated by the EPA, the NHTSA, and various state agencies such as those described in “Environmental and Other Government Regulations” within Part I, Item 1 (Business) of this Annual

28


 

Report on Form 10-K. Greenhouse gas emissions regulations are likely to continue to impact the design and cost of equipment utilized in our operations as well as fuel costs. A number of states have mandated, and California and certain other states may continue to individually mandate, additional emission-control requirements for equipment which could increase equipment and fuel costs for entire fleets that operate in interstate commerce. If new equipment prices increase more than anticipated, we could incur higher depreciation and rental expenses than anticipated. Our third-party capacity providers, including owner operators of the Expedite operations of our ArcBest segment, are also subject to increased regulations and higher equipment and fuel prices which will, in turn, increase our costs for utilizing their services or may cause certain providers to exit the industry which could lead to a capacity shortage and further increase our costs of securing third-party services. If we are unable to fully offset any such increases in expenses with freight rate increases and/or improved fuel economy, our results of operations could be adversely affected. 

 

Reduced fuel demand due to improved fuel economy may result in legislative efforts to increase fuel taxes which, if enacted, could increase our costs. If we are not able to adequately increase our freight rates, recover fuel surcharges, or recognize fuel economy savings to offset increases in equipment and maintenance costs, and if we are not able to offset fuel tax increases through reductions in other excise taxes or through increases in the rates we charge our customers, our business, results of operations, and financial condition could be adversely affected.

 

We may face difficulty in purchasing new equipment due to decreased supply. From time to time, some original equipment manufacturers (“OEMs”) of tractors and trailers may reduce their manufacturing output due to, for example, lower demand for their products in economic downturns or a shortage of component parts. Component suppliers may either reduce production or be unable to increase production to meet OEM demand, creating periodic difficulty for OEMs to react in a timely manner to increased demand for new equipment and/or increased demand for replacement components as economic conditions change. At times, market forces may create market situations in which demand outstrips supply. In those situations, we may face reduced supply levels and/or increased acquisition costs. An inability to continue to obtain an adequate supply of new tractors or trailers for our Asset-Based operations could have a material adverse effect on our business, results of operations, and financial condition.

 

During prolonged periods of decreased business levels, we and other trucking companies may make strategic fleet reductions, which could result in an increase in the supply of used equipment. When the supply exceeds the demand for used revenue equipment, the general market value of used revenue equipment decreases. Used equipment prices are also subject to substantial fluctuations based on availability of financing and commodity prices for scrap metal. If market prices for used revenue equipment decline, corresponding decreases in our established salvage values on equipment being used in our Asset-Based operations would increase our depreciation expense, and we could incur impairment losses on assets held for sale which could have an adverse effect on our results of operations.

 

Our total assets include goodwill and intangibles. If we determine that these items have become impaired in the future, our earnings could be adversely affected.

 

As of December 31, 2017, we had recorded goodwill of $108.3 million and intangible assets, net of accumulated amortization, of $73.5 million. Our goodwill and intangible assets resulted primarily from acquisitions in the ArcBest segment. Our annual impairment evaluations of goodwill and indefinite-lived intangible assets in 2017, 2016, and 2015 produced no indication of impairment of the recorded balances. However, 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 our goodwill and intangible assets, which would have an adverse effect on our financial condition and results of operations.

 

Our corporate reputation and our business depend on a variety of intellectual property rights, including trademarks, domain names, trade secrets, copyrights, patents, and licenses and other contractual rights.  If we are unable to maintain our corporate reputation, our brands, and other intellectual property rights, or if we face claims of infringement of third-party rights, our business may suffer.  The costs and resources expended to enforce or protect our rights or to defend against infringement claims could adversely impact our business, results of operations, and financial condition.

 

ArcBest is recognized as a multi-faceted logistics provider with creative problem solvers who deliver integrated logistics solutions. Beyond this fundamental marketplace recognition of our collective brand identity, our other key brands represent additional unique value in their target markets. The ABF Freight brand is well-recognized in the industry for our Asset-Based operations’ leadership in commitment to quality, customer service, safety, and technology. The Panther Premium

29


 

Logistics brand within the operations of our ArcBest segment is recognized for solving the toughest shipping and logistics challenges, delivering time-sensitive, mission-critical, and high-value freight with speed and precision. Our business depends, in part, on our ability to maintain the image of our brands. Service, performance, and safety issues, whether actual or perceived and whether as a result of our actions or those of our third-party contract carriers and their drivers and owner operators or other third-party service providers, could adversely impact our customers’ image of our brands, including ArcBest, ABF Freight, Panther Premium Logistics, and U‑Pack, and result in the loss of business or impede our growth initiatives. Adverse publicity regarding labor relations, legal matters, environmental concerns, and similar matters, whether or not justified, could have a negative impact on our reputation and may result in the loss of customers and our inability to secure new customer relationships. Our business and our image could also be negatively impacted by a breach of our corporate policies by employees or vendors. With the increased use of social media outlets, adverse publicity can be disseminated quickly and broadly, making it increasingly difficult for us to effectively respond. Damage to our reputation and loss of brand equity could reduce demand for our services and thus have an adverse effect on our business, results of operations, and financial condition, as well as require additional resources to rebuild our reputation and restore the value of our brands.

 

We have registered or are pursuing registration of various marks and designs as trademarks in the United States, including but not limited to “ArcBest,” “ABF Freight,” “FleetNet America,” “Panther Premium Logistics,” “U-Pack,” and “The Skill & The Will.”  For some marks, we also have registered or are pursuing registration in certain other countries. At times, competitors may adopt service or trade names or logos or designs similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered trademarks. From time to time, we have acquired or attempted to acquire internet domain names held by others when such names have caused consumer confusion or had the potential to cause consumer confusion. Additionally, our business and operations utilize and depend upon both internally developed and purchased technology, either of which could be infringed upon, or subject to claims of infringement.  Any of our intellectual property rights related to trademarks, trade secrets, domain names, copyrights, patents, or other intellectual property, whether owned or licensed, could be challenged or invalidated, or misappropriated or infringed upon, by third parties. Our efforts to obtain, enforce, or protect our proprietary rights, or to defend against a third-party infringement claim, may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our corporate reputation, business, results of operations, and financial condition.

 

Our results of operations could be impacted by seasonal fluctuations, adverse weather conditions, and natural disasters.

 

Our operations are impacted by seasonal fluctuations which affect tonnage and shipment levels and, consequently, revenues and operating results. Freight shipments and operating costs of our Asset-Based and ArcBest operating segments can be adversely affected by inclement weather conditions. The first quarter of each year generally has the lowest tonnage levels, although other factors, including the state of the U.S. and global economies, may influence quarterly freight tonnage levels. At the same time, first quarter operating expenses may increase due to, among other things, a decline in fuel economy because of higher fuel density in colder temperatures, higher accident frequency, increased claims, and potentially higher equipment repair expenditures caused by harsh weather. ArcBest segment operations are influenced by seasonal fluctuations that impact customers’ supply chains and the resulting demand for expedited services. Expedite shipments of our ArcBest segment may decline due to post-holiday slowdowns during winter months and plant shutdowns during summer months. Emergency roadside service events of the FleetNet segment are influenced by seasonal variations, and service event volume is generally lower during mild weather conditions. Business levels of the household goods moving services provided by our ArcBest segment are generally lower in the non-summer months when demand for moving services is typically lower. In addition to the impact of weather on seasonal business trends, severe weather events and natural disasters, such as harsh winter weather, floods, hurricanes, earthquakes, tornadoes, or lightning strikes, could disrupt our operations or the operations of our customers, destroy our assets, affect regional economies, or disrupt fuel supplies or increase fuel costs, each of which could adversely affect our business levels and operating results. Climate change may have an influence on the severity of weather conditions, which could adversely affect our freight shipments and business levels and, consequently, our operating results.

 

30


 

We are subject to certain risks arising from our international business.

 

We provide transportation and logistics services to and from international locations and are, therefore, subject to risks of international business, including, but not limited to, changes in the economic strength of certain foreign countries; social, political, and economic instability; the ability to secure space or services from third-party aircraft, ocean vessels, and other modes of transportation or suppliers; burdens of complying with a wide variety of international and United States regulations, including export and import laws as well as different liability standards and less developed legal systems; difficulties in enforcing contractual obligations and intellectual property rights; and changes in foreign exchange rates. Additional risks associated with our international business include restrictive trade policies and imposition of duties, taxes, or government royalties imposed by foreign governments, and changes in international tax laws and regulations. In addition, natural disasters, pandemics, acts of terrorism, and insurrections could impede our ability to provide satisfactory services to customers in international locations.

 

We are also subject to compliance with the Foreign Corrupt Practices Act (“FCPA”) and hold Customs-Trade Partnership Against Terrorism (“C-TPAT”) status for businesses within our Asset-Based and ArcBest segments. Failure to comply with the FCPA and local regulations in the conduct of our international business operations may result in criminal and civil penalties against us. If we are unable to maintain our C-TPAT status, we may face a loss of certain business due to customer requirements to deal only with C-TPAT participating carriers, because of the enhanced levels of supply chain security provided by participating in the C-TPAT program. In addition, loss of C-TPAT status may result in significant border delays, which could cause our international operations to be less efficient than competitors also operating internationally.

 

We operate in various Canadian provinces pursuant to operating authority granted by the Ministries of Transportation and Communications in such provinces, and we operate in Mexico by utilizing third-party carriers within the country. If the United States withdraws from or materially modifies the North American Free Trade Agreement (“NAFTA”) or certain other international trade agreements or border policies, there could be more restrictive trade policies or increased regulatory complexities, which may result in increased costs and/or a reduction in the volume of freight shipped by our customers. Any such changes in trade policies and corresponding actions by other countries could have a material adverse effect on our business, results of operations, and financial condition.

 

Our business could be harmed by antiterrorism measures.

 

As a result of actual or threatened terrorist attacks on the United States, federal, state, and municipal authorities have implemented, continue to implement, and may implement in the future various security measures, including checkpoints and travel restrictions on large trucks. Although many companies would be adversely affected by any slowdown in the availability of freight transportation, the negative impact could affect our business disproportionately. For example, we offer specialized services that guarantee on-time delivery. If security measures disrupt the timing of deliveries, we could fail to meet the needs of our customers or could incur increased costs in order to do so. Additional security measures may also reduce productivity of our drivers and third-party transportation service providers, which would increase our operating costs. There can be no assurance regarding the implementation of new antiterrorism measures and such new measures may have a material adverse effect on our business, results of operations, or financial condition.

 

 

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ITEM 1B.UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.PROPERTIES

 

The Company believes that its facilities are suitable and adequate and that they have sufficient capacity to meet current business requirements. The Company owns a call center facility and office building in Fort Smith, Arkansas containing 205,000 square feet, which provides space for certain corporate and subsidiary functions. Construction of this new building was completed during 2017 to support growth of the Company’s operating subsidiaries and replace a portion of leased space. The Company leases a secondary office building in Fort Smith, Arkansas, which contains 18,000 square feet.

 

Asset-Based Segment

 

As of December 31, 2017, the Asset-Based segment operated out of its general office building located in Fort Smith, Arkansas, which contains 196,800 square feet, and 245 service center facilities, 10 of which also serve as distribution centers. The Company owns 113 of these facilities and leases the remainder from nonaffiliates. Asset-Based distribution centers are as follows:

 

 

 

 

 

 

 

 

    

No. of Doors

    

Square Footage

 

Owned:

 

 

 

 

 

Dayton, Ohio

 

330

 

250,700

 

Carlisle, Pennsylvania

 

333

 

196,200

 

Winston-Salem, North Carolina

 

150

 

174,600

 

Kansas City, Missouri

 

252

 

166,200

 

Atlanta, Georgia

 

226

 

158,200

 

South Chicago, Illinois

 

274

 

152,800

 

North Little Rock, Arkansas

 

196

 

150,500

 

Dallas, Texas

 

196

 

144,200

 

Albuquerque, New Mexico

 

85

 

71,000

 

 

 

 

 

 

 

Leased from nonaffiliate:

 

 

 

 

 

Salt Lake City, Utah

 

89

 

53,900

 

 

Asset-Light Operations

 

The ArcBest segment owns a general office building and service bay in Medina, Ohio totaling 59,600 square feet. Additionally, the ArcBest segment leases an office and warehouse location in Sparks, Nevada totaling approximately 129,600 square feet and nine other locations with approximately 94,700 square feet of office and warehouse space. The Company sold certain properties located in Wichita Falls, Texas as part of the divesting of certain subsidiaries on December 30, 2016. See Note A to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for more specific disclosures regarding this transaction.

 

The FleetNet segment owns its offices located in Cherryville, North Carolina containing approximately 38,900 square feet.

 

ITEM 3.LEGAL PROCEEDINGS

 

Various legal actions, the majority of which arise in the normal course of business, are pending. These legal actions are not expected to have a material adverse effect, individually or in the aggregate, on our financial condition, results of operations, or cash flows. We maintain liability insurance against certain risks arising out of the normal course of its business, subject to certain self-insured retention limits. We have accruals for certain legal, environmental, and self-insurance exposures. For additional information related to our environmental and legal matters, see Note O to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

 

ITEM 4.MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information, Dividends and Holders

 

The common stock of ArcBest Corporation trades on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “ARCB.” The following table sets forth the high and low recorded sale prices of the common stock during the periods indicated as reported by NASDAQ and the cash dividends declared:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

    

High

    

Low

    

Dividend

 

2016

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

23.92

 

$

16.43

 

$

0.08

 

Second quarter

 

 

22.52

 

 

14.85

 

 

0.08

 

Third quarter

 

 

20.00

 

 

15.40

 

 

0.08

 

Fourth quarter

 

 

33.95

 

 

18.60

 

 

0.08

 

 

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

First quarter

 

$

32.70

 

$

24.55

 

$

0.08

 

Second quarter

 

 

27.40

 

 

16.95

 

 

0.08

 

Third quarter

 

 

33.85

 

 

20.40

 

 

0.08

 

Fourth quarter

 

 

38.75

 

 

29.40

 

 

0.08

 

 

As of February 22, 2018, there were 25,641,511 shares of the Company’s common stock outstanding, which were held by 244 stockholders of record.

 

On January 26, 2018, the Board of Directors declared a quarterly dividend of $0.08 per share to stockholders of record as of February 9, 2018. The Company expects to continue to pay quarterly dividends in the foreseeable future, although there can be no assurance in this regard since future dividends will be at the discretion of the Board of Directors and will depend upon the Company’s future earnings, capital requirements, and financial condition, contractual restrictions applying to the payment of dividends under the Company’s Second Amended and Restated Credit Agreement, and other factors.

 

Issuer Purchases of Equity Securities

 

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 either from the Company’s cash reserves or from other available sources. In January 2003, the Board of Directors authorized a $25.0 million common stock repurchase program and authorized an additional $50.0 million in July 2005. In October 2015, the Board of Directors extended the share repurchase program, making a total of $50.0 million available for purchases at that time.

 

As of December 31, 2017 and 2016, treasury shares totaled 2,851,578 and 2,565,399, respectively. Under the repurchase program, the Company purchased 286,179 shares during the nine months ended September 30, 2017, and made no share purchases during the three months ended December 31, 2017, leaving $31.7 million available for repurchase under the program.

 

 

33


 

ITEM 6.SELECTED FINANCIAL DATA

 

The following table includes selected financial and operating data for the Company as of and for each of the five years in the period ended December 31, 2017. This information should be read in conjunction with Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) and Item 8 (Financial Statements and Supplementary Data) in Part II of this Annual Report on Form 10-K.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

    

2017

    

2016

    

2015

    

2014

    

2013

 

 

 

(in thousands, except per share data)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

2,826,457

 

$

2,700,219

 

$

2,666,905

 

$

2,612,693

 

$

2,299,549

 

Operating income(1)

 

 

53,510

 

 

28,970

 

 

75,496

 

 

69,239

 

 

19,070

 

Income before income taxes(1)

 

 

51,576

 

 

28,287

 

 

72,734

 

 

70,612

 

 

19,461

 

Income tax provision (benefit)(2)

 

 

(8,150)

 

 

9,635

 

 

27,880

 

 

24,435

 

 

3,650

 

Net income(1)(2)

 

 

59,726

 

 

18,652

 

 

44,854

 

 

46,177

 

 

15,811

 

Earnings per common share, diluted(1)(2)

 

 

2.25

 

 

0.71

 

 

1.67

 

 

1.69

 

 

0.59

 

Cash dividends declared per common share(3)

 

 

0.32

 

 

0.32

 

 

0.26

 

 

0.15

 

 

0.12

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets(4)(5)

 

 

1,365,641

 

 

1,282,078

 

 

1,273,377

 

 

1,136,158

 

 

1,026,654

 

Current portion of long-term debt

 

 

61,930

 

 

64,143

 

 

44,910

 

 

25,256

 

 

31,513

 

Long-term debt (including notes payable and capital leases, excluding current portion)

 

 

206,989

 

 

179,530

 

 

167,599

 

 

102,474

 

 

81,332

 

Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net capital expenditures, including assets acquired through notes payable and capital leases(6)

 

 

145,672

 

 

142,833

 

 

152,378

 

 

85,880

 

 

24,211

 

Depreciation and amortization of fixed assets

 

 

98,530

 

 

98,814

 

 

89,040

 

 

81,870

 

 

84,215

 

Amortization of intangibles

 

 

4,538

 

 

4,239

 

 

4,002

 

 

4,352

 

 

4,174

 

 


(1)

Includes restructuring costs of $3.0 million (pre-tax), or $1.8 million (after-tax) and $0.07 per diluted share for 2017, and $10.3 million (pre-tax), or $6.3 million (after-tax) and $0.24 per diluted share, for 2016, related to the realignment of the Company’s corporate structure (see Note N to the Company’s consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K). 

(2)

For 2017, includes a provisional tax benefit of $25.8 million and $0.98 per diluted share as a result of recognizing a reasonable estimate of the tax effects of the Tax Cuts and Jobs Act that was signed into law on December 22, 2017 (see Note E to the Company’s consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K). 

(3)

The Company’s Board of Directors increased the quarterly cash dividend to $0.06 per share in October 2014 and to $0.08 per share in October 2015.

(4)

For 2016, reflects reclassification of deferred taxes for the Company’s retrospective adoption of the amendment to Accounting Standards Codification Topic 740 for Balance Sheet Classification of Deferred Taxes in 2017, as further discussed in Adopted Accounting Pronouncements of Note B to the Company’s consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.

(5)

For all prior years presented, includes reclassification of the insurance receivable for the amount of workers’ compensation and third-party casualty claims in excess of self-insurance limits to conform to the current year presentation (see Note A to the Company’s consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K).

(6)

Capital expenditures are shown net of proceeds from the sale of property, plant, and equipment.

34


 

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

ArcBest Corporation (together with its subsidiaries, the “Company,” “we,” “us,” and “our”) provides a comprehensive suite of freight transportation services and integrated logistics solutions. On November 3, 2016, we announced our plan to implement a new corporate structure that unified our sales, pricing, customer service, marketing, and capacity sourcing functions effective January 1, 2017, and allows us to operate as one logistics provider under the ArcBest® brand.

 

Our operations are conducted through 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 FleetNet reportable segments combined represent our Asset-Light operations. See additional segment descriptions in Part I, Item 1 (Business) and in Note M to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K. References to the Company, including “we,” “us,” and “our,” in this Annual Report on Form 10-K are primarily to the Company and its subsidiaries on a consolidated basis.

 

Contract Negotiations

As further discussed within the Asset-Based Operations section of Results of Operations, contract negotiations for the terms of ABF Freight’s union labor contract for the period subsequent to March 31, 2018, are in progress. The negotiation of terms of the collective bargaining agreement is a very complex process. As further discussed in Part I, Item 1A (Risk Factors) of this Annual Report on Form 10-K, the inability to agree on acceptable terms for the next period prior to the expiration of the current collective bargaining agreement could result in a work stoppage, the loss of customers, or other events that could have a material adverse effect on the Company’s competitive position, results of operations, cash flows, and financial position in 2018 and subsequent years.

 

Reclassifications

During the third quarter of 2017, we modified the presentation of segment expenses allocated from shared services. 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.” Previously, expenses related to company-wide functions were allocated to segment expense line items by type of expense. Allocated expenses are now presented on a single shared services line within our operating segment disclosures. Reclassifications have been made to the prior period operating segment expenses to conform to the current year presentation. There was no impact on each segment’s total expenses as a result of the reclassifications.

 

ORGANIZATION OF INFORMATION

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided to assist readers in understanding our financial performance during the periods presented and significant trends which may impact our future performance. This discussion should be read in conjunction with our consolidated financial statements and the related notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. MD&A includes forward-looking statements that are subject to risks and uncertainties. Actual results may differ materially from the statements made in this section due to a number of factors that are discussed in Part I (Forward-Looking Statements) and Part I, Item 1A (Risk Factors) of this Annual Report on Form 10-K. MD&A is comprised of the following:

 

·

Results of Operations includes:

·

an overview of consolidated results with 2017 compared to 2016 and 2016 compared to 2015, and a consolidated Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”) schedule;

·

a financial summary and analysis of our Asset-Based segment results of 2017 compared to 2016 and 2016 compared to 2015, including a discussion of key actions and events that impacted the results;

·

a financial summary and analysis of the results of our Asset-Light operations for 2017 compared to 2016 and 2016 compared to 2015, including a discussion of key actions and events that impacted the results; and

·

a discussion of other matters impacting operating results, including seasonality, effects of inflation, environmental and legal matters, and information technology and cybersecurity.

35


 

 

·

Liquidity and Capital Resources provides an analysis of key elements of the cash flow statements, borrowing capacity, and contractual cash obligations, including a discussion of financing arrangements and financial commitments.

 

·

Income Taxes provides an analysis of the effective tax rates and deferred tax balances, including deferred tax asset valuation allowances.

 

·

Critical Accounting Policies discusses those accounting policies that are important to understanding certain material judgments and assumptions incorporated in the reported financial results.

 

·

Recent Accounting Pronouncements discusses accounting standards that are not yet effective for our financial statements but are expected to have a material effect on our future results of operations or financial condition.

 

 

RESULTS OF OPERATIONS

 

Consolidated Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

 

2017

    

2016

    

2015

 

 

 

(in thousands, except per share data)

 

REVENUES

 

 

 

 

 

 

 

 

 

 

Asset-Based

 

$

1,993,314

 

$

1,916,394

 

$

1,916,579

 

 

 

 

 

 

 

 

 

 

 

 

ArcBest

 

 

706,698

 

 

640,734

 

 

590,436

 

FleetNet

 

 

156,341

 

 

162,629

 

 

174,952

 

Total Asset-Light

 

 

863,039

 

 

803,363

 

 

765,388

 

 

 

 

 

 

 

 

 

 

 

 

Other and eliminations

 

 

(29,896)

 

 

(19,538)

 

 

(15,062)

 

Total consolidated revenues

 

$

2,826,457

 

$

2,700,219

 

$

2,666,905

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

 

 

 

 

 

 

 

 

 

Asset-Based

 

$

51,878

 

$

33,571

 

$

62,436

 

 

 

 

 

 

 

 

 

 

 

 

ArcBest

 

 

18,801

 

 

6,864

 

 

20,792

 

FleetNet

 

 

3,324

 

 

2,425

 

 

2,954

 

Total Asset-Light

 

 

22,125

 

 

9,289

 

 

23,746

 

 

 

 

 

 

 

 

 

 

 

 

Other and eliminations

 

 

(20,493)

 

 

(13,890)

 

 

(10,686)

 

Total consolidated operating income

 

$

53,510

 

$

28,970

 

$

75,496

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

59,726

 

$

18,652

 

$

44,854

 

 

 

 

 

 

 

 

 

 

 

 

DILUTED EARNINGS PER SHARE

 

$

2.25

 

$

0.71

 

$

1.67

 

 

Our consolidated revenues, which totaled $2.8 billion for 2017, increased 4.7% compared to 2016, preceded by a 1.2% increase in 2016 revenues compared to 2015. The year-over-year increase in consolidated revenues for 2017 was favorably influenced by an improved economic environment and reflects a 4.0% increase in our Asset-Based revenues and a 7.4% increase in revenues of our Asset-Light operations (representing the combined operations of our ArcBest and FleetNet segments). The increase in consolidated revenues for 2016, compared to 2015, reflects a 5.0% increase in our Asset-Light revenues on a combined basis.

 

Asset-Based revenues represented 70%, 70%, and 71% of total revenues before other revenues and intercompany eliminations for 2017, 2016, and 2015, respectively. On a per-day basis, Asset-Based revenues increased 4.4% in 2017, compared to 2016, reflecting a 6.5% improvement in yield, as measured by billed revenue per hundredweight, including fuel surcharges, and changes in freight profile effects, partially offset by 2.1% decline in total tonnage per day. The increase in billed revenue per hundredweight achieved in 2017 reflects pricing initiatives we implemented during the year as part

36


 

of our continued focus on yield improvement. Asset-Based revenues for 2016 were relatively consistent with 2015, as a 1.3% improvement in revenue per hundredweight was offset by a 1.8% decline in tonnage per day.

 

As a result of business acquisitions and growth due to strategic investments in personnel and infrastructure in recent years, our Asset-Light operations have become a significant proportion of consolidated revenues, generating 30%, 30%, and 29% of total revenues before other revenues and intercompany eliminations for 2017, 2016, and 2015, respectively. The 7.4% increase in Asset-Light revenues for 2017, on a combined basis, compared to 2016, was primarily due to incremental revenues from the September 2016 acquisition of Logistics & Distribution Services, LLC (“LDS”) and an increase in Expedite revenues due to improved revenue per shipment. The 5.0% increase in revenues of our Asset-Light operations for 2016, compared to 2015, reflects an 8.5% increase in revenues of the ArcBest segment resulting from incremental revenues related to the LDS acquisition and the December 2015 acquisition of Bear Transportation Services, L.P. (“Bear”), offset, in part, by a decline in revenues of the FleetNet segment due to lower service event volume.

 

Consolidated operating income increased $24.5 million in 2017, compared to 2016, with each reportable operating segment experiencing year-over-year operating income improvements. The increase in our consolidated operating income for 2017, compared to 2016, was primarily due to higher revenues, favorable results from yield improvement initiatives, and lower restructuring costs related to the realignment of our corporate structure, which totaled $3.0 million in 2017 versus $10.3 million in 2016 (see Note N to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for further details). Consolidated operating income decreased $46.5 million in 2016 compared to 2015. The soft economic environment combined with a surplus of transportation capacity which impacted available business levels and operating margins contributed to the decline in our consolidated operating income for 2016 versus 2015. The operating income decline was also impacted by the 2016 restructuring costs. The year-over-year changes in consolidated operating income, net income, and per share amounts for 2017 and 2016 reflect the operating results of our operating segments, which are discussed in further detail within the Results of Operations, as well as the items described below.

 

Consolidated operating income for 2017 was impacted by nonunion fringe benefit costs, which increased $3.6 million, compared to 2016, primarily due to additional costs related to contributions to our defined contribution plan, increased nonunion pension costs, and higher costs of long-term incentive plans related to total shareholder returns relative to our industry peer group, partially offset by lower nonunion healthcare costs. Consolidated operating income for 2016, compared to 2015, was impacted by higher nonunion healthcare costs, which increased $9.7 million, primarily due to an increase in both the number of health claims filed and in the average cost per claim, and unfavorable experience in third-party casualty and workers’ compensation claims of our Asset-Based segment which resulted in $5.4 million, or 13.2%, higher costs in 2016 than 2015. The impact of these costs on the year-over-year comparison for 2016 was partially offset by decreases in other nonunion benefit costs of $4.2 million compared to 2015.

 

Consolidated pre-tax pension expense, including settlement charges, recognized for the nonunion defined benefit pension plan totaled $6.1 million for 2017, compared to $3.1 million in 2016 and $2.4 million in 2015. These expenses represent net periodic pension costs (as detailed in Note I to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K), including pension settlement charges due to lump-sum benefit distributions and an annuity contract purchase made by the plan in first quarter 2017. In 2013, the nonunion defined benefit plan was amended to freeze the participants’ final average compensation and years of credited service. In October 2017, our Board of Directors adopted a resolution authorizing the execution of an amendment to terminate the nonunion defined benefit pension plan, and such amendment was executed in November 2017 with a termination date of December 31, 2017. The plan has filed for a determination letter from the Internal Revenue Service (the “IRS”) regarding the qualification of the plan termination. Following receipt of a favorable determination letter, benefit election forms will be provided to plan participants, and they will have an election window in which they can choose any form of payment allowed by the plan for immediate commencement of payment or defer payment until a later date. Pension settlement charges related to the plan termination, including settlements for lump sum benefit distributions and the cost to purchase an annuity contract to settle the pension obligation related to benefits for which participants elect to defer payment until a later date, are likely to occur primarily in the second half of 2018. However, the timing of recognizing these settlements in our financial statements is highly dependent on when and if we receive the favorable determination letter from the IRS.

 

We expect to continue to recognize pre-tax pension settlement expense related to the nonunion defined benefit pension plan, the amount of which will fluctuate based on the amount of lump-sum benefit distributions paid to participants, actual returns on plan assets, and changes in the discount rate used to remeasure the projected benefit obligation of the plan upon settlement. Total nonunion pension expense, including settlement, is estimated to be approximately $2.0 million to $2.5 million for the first quarter of 2018; however, settlement charges could be higher if eligible plan participants elect to

37


 

receive a lump sum distribution of their pension benefit ahead of the plan termination. We may be required to fund the plan prior to the final distribution of benefits to plan participants, the amount of which will be determined by the plan’s actuary. Based on currently available information provided by the plan’s actuary, we estimate cash funding of approximately $10.0 million and noncash pension settlement charges of approximately $20.0 million in 2018, although there can be no assurances in this regard. The final pension settlement charges and the actual amount we will be required to contribute to the plan to fund benefit distributions in excess of plan assets cannot be determined at this time, as the actual amounts are dependent on various factors, including final benefit calculations, the benefit elections made by plan participants, interest rates, the value of plan assets, and the cost to purchase an annuity contract to settle the pension obligation related to benefits for which participants elect to defer payment until a later date.

 

The “Other and eliminations” line of operating income includes restructuring charges of $1.7 million and $0.9 million for 2017 and 2016, respectively, and transaction costs of $0.6 million in 2016 associated with the acquisition of Logistics and Distribution Services, LLC (“LDS”) and $1.4 million in 2015 associated with the acquisitions of Smart Lines Transportation Group, LLC (“Smart Lines”) and Bear Transportation Services, L.P. (“Bear”). For each of the years presented, “Other and eliminations” also includes personnel and technology expenses related to investments in improving the ArcBest experience and solutions for our customers to provide an improved platform for revenue growth and to enhance our ability to offer our comprehensive transportation and logistics services across multiple operating segments. As a result of these ongoing investments and modifications to our shared service cost allocations, we expect the loss reported in “Other and eliminations” to be approximately $5.5 million to $6.0 million for the first quarter of 2018 and approximately $20.0 million for full year 2018.

 

For 2017, consolidated net income and earnings per share were impacted by a provisional tax benefit of $25.8 million, or $0.98 per diluted share, as a result of recognizing a reasonable estimate of the tax effects of the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017 and reduces the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. (The impact of the Tax Cuts and Jobs Act is discussed further in the Income Taxes section of MD&A and in Note E to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K.) An additional $1.2 million tax benefit, or $0.05 per diluted share, was recognized in 2017 for the vesting of share-based compensation in accordance with an amendment to ASC Topic 718, Compensation – Stock Compensation, which became effective in the first quarter of 2017.

 

The year-over-year comparisons of consolidated net income and earnings per share for 2017 and 2016 were also impacted by other changes in the effective tax rates, as further described within the Income Taxes section of MD&A, and changes in the cash surrender value of life insurance policies, which is reported below the operating income line on the consolidated statements of operations. A portion of these policies have investments, through separate accounts, in equity and fixed income securities and, therefore, are subject to market volatility. Life insurance proceeds and changes in the cash surrender value of life insurance policies contributed $0.10 to diluted earnings per share in 2017, compared to $0.11 per share in 2016 and $0.01 per share in 2015.

 

38


 

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 Second Amended and Restated Credit Agreement (see Financing Arrangements within the Liquidity and Capital Resources section of MD&A). 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

 

2017

    

2016

    

2015

 

 

 

($ thousands)

 

Net income

 

$

59,726

 

$

18,652

 

$

44,854

 

Interest and other related financing costs

 

 

6,342

 

 

5,150

 

 

4,400

 

Income tax provision (benefit)(1)

 

 

(8,150)

 

 

9,635

 

 

27,880

 

Depreciation and amortization

 

 

103,068

 

 

103,053

 

 

93,042

 

Amortization of share-based compensation

 

 

6,958

 

 

7,588

 

 

8,029

 

Amortization of net actuarial losses of benefit plans and pension settlement expense

 

 

8,064

 

 

8,173

 

 

7,432

 

Restructuring charges(2)

 

 

2,963

 

 

10,313

 

 

 —

 

Transaction costs(3)

 

 

 —

 

 

601

 

 

1,408

 

Consolidated Adjusted EBITDA

 

$

178,971

 

$

163,165

 

$

187,045

 

 

 


(1)

Includes a tax benefit of $25.8 million in 2017 as a result of recognizing a reasonable estimate of the tax effects of the Tax Cuts and Jobs Act. See Note E to the consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for discussion of the impact of the Tax Cuts and Jobs Act.

(2)

Restructuring charges relate to the realignment of the Company’s organizational structure.

(3)

Transaction costs for 2016 are associated with the acquisition of LDS and transaction costs for 2015 are associated with the acquisitions of Smart Lines and Bear.

 

 

 

 

 

 

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. Our Asset-Based operations are affected by general economic conditions, as well as a number of other factors that are more fully described in Item 1 (Business) and in Item 1A (Risk Factors) of Part I of this Annual Report on Form 10-K.

 

The key indicators necessary to understand the operating results of our Asset-Based segment include:

 

·

overall customer demand for Asset-Based transportation services, including the impact of economic factors;

·

volume of transportation services provided, primarily measured by average daily shipment weight (“tonnage”), which influences operating leverage as tonnage levels vary;

·

prices obtained for services, primarily measured by yield (“revenue per hundredweight”), including fuel surcharges; and

·

ability to manage cost structure, primarily in the area of salaries, wages, and benefits (“labor”), with the total cost structure measured by the percent of operating expenses to revenue levels (“operating ratio”).

 

39


 

As previously disclosed within the introduction to MD&A, we have reclassed certain prior period segment operating expenses in this Annual Report on Form 10-K to conform to the current year presentation of segment expenses allocated from shared services. See Note M to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K for a description of the Asset-Based segment and additional segment information, including revenues and operating income for the years ended December 31, 2017, 2016, and 2015, as well as explanation of the expense category reclassifications for shared services.  

 

The Asset-Based segment represented approximately 70% of our 2017 total revenues before other revenues and intercompany eliminations. As part of our corporate restructuring, effective January 1, 2017, certain nonunion employees in the areas of sales, pricing, customer service, financial services, marketing, and capacity sourcing were transferred to our shared services (reported in “Other and eliminations”), which increased the percentage of union employees within the Asset-Based segment. As of December 2017, approximately 83% of Asset-Based employees were covered under a collective bargaining agreement, the ABF National Master Freight Agreement (the “ABF NMFA”), with the International Brotherhood of Teamsters (the “IBT”), which extends through March 31, 2018. The ABF NMFA included a 7% wage rate reduction effective on the November 3, 2013 implementation date, followed by wage rate increases of 2% on July 1 in each of the next three years, which began in 2014, and a 2.5% increase on July 1, 2017; a one-week reduction in annual compensated vacation effective for employee anniversary dates on or after April 1, 2013; the option to expand the use of purchased transportation; and increased flexibility in labor work rules. The ABF NMFA and the related supplemental agreements provide for continued contributions to various multiemployer health, welfare, and pension plans maintained for the benefit of Asset-Based employees who are members of the IBT. The estimated net effect of the November 3, 2013 wage rate reduction and the benefit rate increase which was applied retroactively to August 1, 2013 was an initial reduction of approximately 4% to the combined total contractual wage and benefit rate under the ABF NMFA. Following the initial reduction, the combined contractual wage and benefit contribution rate under the ABF NMFA increased approximately 2.5% on a compounded annual basis throughout the contract period, which extends through March 31, 2018. Management cannot make any assurances as to the contractual wage and benefit contribution rates beyond the current contract period.

 

Contract negotiations for the terms of the collective bargaining agreement with the IBT for the period subsequent to March 31, 2018 began in January 2018 and are in progress. The negotiation of terms of the collective bargaining agreement is a very complex process. As further discussed in Part I, Item 1A (Risk Factors) of this Annual Report on Form 10-K, the inability to agree on acceptable terms for the next period prior to the expiration of the current ABF NMFA could result in a work stoppage, the loss of customers, or other events that could have a material adverse effect on the Company’s competitive position, results of operations, cash flows, and financial position in 2018 and subsequent years.

 

Improving the Asset-Based operating ratio is dependent upon: managing the segment’s cost structure (as discussed in Labor Costs within this section of the Asset-Based Segment Overview) and securing price increases to cover contractual wage and benefit rate increases, costs of maintaining customer service levels, and other inflationary increases in cost elements.

 

Tonnage

The level of tonnage managed by the Asset-Based segment is directly affected by industrial production and manufacturing, distribution, residential and commercial construction, consumer spending, primarily in the North American economy, and capacity in the trucking industry. Operating results are affected by economic cycles, customers’ business cycles, and changes in customers’ business practices. The Asset-Based segment actively competes for freight business based primarily on price, service, and availability of flexible shipping options to customers. The Asset-Based segment seeks to offer value through identifying specific customer needs, then providing operational flexibility and seamless access to its services and those of our Asset-Light operations in order to respond with customized solutions.

 

Pricing

The industry pricing environment, another key factor to our Asset-Based results, influences the ability to obtain appropriate margins and price increases on customer accounts. Generally, freight is rated by a class system, which is established by the National Motor Freight Traffic Association, Inc. Light, bulky freight typically has a higher class and is priced at a higher revenue per hundredweight than dense, heavy freight. Changes in the rated class and packaging of the freight, along with changes in other freight profile factors such as average shipment size, average length of haul, freight density, and customer and geographic mix, can affect the average billed revenue per hundredweight measure.

 

40


 

Approximately 30% of Asset-Based business is subject to base LTL tariffs, which are affected by general rate increases, combined with individually negotiated discounts. Rates on the other 70% of Asset-Based business, including business priced in the spot market, are subject to individual pricing arrangements that are negotiated at various times throughout the year. The majority of the business that is subject to negotiated pricing arrangements is associated with larger customer accounts with annually negotiated pricing arrangements, and the remaining business is priced on an individual shipment basis considering each shipment’s unique profile, value provided to the customer, and current market conditions. Since pricing is established individually by account, the Asset-Based segment focuses on individual account profitability rather than a single measure of billed revenue per hundredweight when considering customer account or market evaluations. This is due to the difficulty of quantifying, with sufficient accuracy, the impact of changes in freight profile characteristics, which is necessary in estimating true price changes.

 

Effective August 1, 2017, we began applying space-based pricing on shipments subject to LTL tariffs to better reflect freight shipping trends that have evolved over the last several years. These trends include the overall growth and ongoing profile shift of bulkier shipments across the entire supply chain, the acceleration in e-commerce, and the unique requirements of many shipping and logistics solutions. An increasing percentage of freight is taking up more space in trailers without a corresponding increase in weight.

 

Space-based pricing involves the use of freight dimensions (length, width, and height) to determine applicable cubic minimum charges (“CMC”) that will supplement weight-based metrics when appropriate. Traditional LTL pricing is generally weight-based, while our linehaul costs are generally space-based (i.e., costs are impacted by the volume of space required for each shipment). Management believes space-based pricing will better align our pricing mechanisms with the metrics which affect our costs to ship the freight. We seek to provide logistics solutions to our customers’ business and the unique shipment characteristics of their various products and commodities, and we believe that we are particularly experienced in handling complicated freight. The CMC is an additional pricing mechanism to better capture the value we provide in transporting these shipments. Management believes the implementation of space-based pricing has been well-accepted by customers with shipments to which CMC charges were applied during 2017; however, overall customer acceptance of the CMC is difficult to ascertain. Management cannot predict, with reasonable certainty, the effect of changes in business levels and the impact on the total revenue per hundredweight measure due to the implementation of the CMC mechanism.

 

Fuel

The transportation industry is dependent upon the availability of adequate fuel supplies. The Asset-Based segment assesses a fuel surcharge based on the index of national on-highway average diesel fuel prices published weekly by the U.S. Department of Energy. To better align fuel surcharges to fuel- and energy-related expenses and provide more stability to account profitability as fuel prices change, we may, from time to time, revise our standard fuel surcharge program which impacts approximately 35% of Asset-Based shipments and primarily affects noncontractual customers. The Asset-Based segment made revisions to the fuel surcharge scale effective February 4, 2015, and again effective February 1, 2016, to establish surcharge rates for fuel prices at the lower end of the scale and to better align with expected fuel costs. While fuel surcharge revenue generally more than offsets the increase in direct diesel fuel costs when applied, the total impact of energy prices on other nonfuel-related expenses is difficult to ascertain. Management cannot predict, with reasonable certainty, future fuel price fluctuations, the impact of energy prices on other cost elements, recoverability of fuel costs through fuel surcharges, and the effect of fuel surcharges on the overall rate structure or the total price that the segment will receive from its customers. While the fuel surcharge is one of several components in the overall rate structure, the actual rate paid by customers is governed by market forces and the overall value of services provided to the customer.

 

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. Fuel prices have fluctuated significantly in recent years. Whether fuel prices fluctuate or remain constant, operating results may be adversely affected if competitive pressures limit our ability to recover fuel surcharges. Throughout 2017, the fuel surcharge mechanism generally continued to have market acceptance among customers; however, certain nonstandard pricing arrangements have limited the amount of fuel surcharge recovered. The negative impact on operating margins of capped fuel surcharge revenue during periods of increasing fuel costs is more evident when fuel prices remain above the maximum levels recovered through the fuel surcharge mechanism on certain accounts. 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.

 

41


 

The Asset-Based revenues for 2017 compared to 2016 were positively impacted by higher fuel surcharge revenue due to an increase in the nominal fuel surcharge rate, while total fuel costs were also higher. The Asset-Based revenues for 2016 compared to 2015 were negatively impacted by lower fuel surcharge revenue due to a decline in the nominal fuel surcharge rate, while total fuel costs were also lower. The segment’s operating results will continue to be impacted by further changes in fuel prices and the related fuel surcharges.

 

Labor Costs

Our Asset-Based labor costs, including retirement and healthcare benefits for contractual employees that are provided through a number of multiemployer plans (see Note I to our consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K), are impacted by contractual obligations under the ABF NMFA and other related supplemental agreements. Total salaries, wages, and benefits, amounted to 56.5%, 57.6%, and 55.5% of revenues for 2017, 2016, and 2015, respectively. Changes in salaries, wages, and benefits expense as a percentage of revenues are discussed in the following Asset-Based Segment Results section.

 

ABF Freight operates in a highly competitive industry which consists predominantly of nonunion motor carriers. Nonunion competitors have a lower fringe benefit cost structure and less stringent labor work rules, and certain carriers also have lower wage rates for their freight-handling and driving personnel. Wage and benefit concessions granted to certain union competitors also allow for a lower cost structure. ABF Freight has continued to address with the IBT the effect of the segment’s wage and benefit cost structure on its operating results.

 

The combined effect of cost reductions under the ABF NMFA, lower cost increases throughout the contract period, and increased flexibility in labor work rules are important factors in bringing ABF Freight’s labor cost structure closer in line with that of its competitors; however, under its collective bargaining agreement, ABF Freight continues to pay some of the highest benefit contribution rates in the industry. These rates include contributions to multiemployer plans, a portion of which are used to fund benefits for individuals who were never employed by ABF Freight. Information provided by a large multiemployer pension plan to which ABF Freight contributes indicates that approximately 50% of the plan’s benefit payments are made to retirees of companies that are no longer contributing employers to that plan. In consideration of the impact of high multiemployer pension contribution rates, certain funds have not increased ABF Freight’s pension contribution rate for the annual contribution periods which began August 1, 2017, 2016, and 2015. Rate freezes for the annual contribution periods which began August 1, 2017, 2016, and 2015 impacted multiemployer pension plans to which ABF Freight made approximately 65% to 70% of its total multiemployer pension contributions for the years ended December 31, 2017, 2016, and 2015. ABF Freight’s multiemployer pension contributions totaled $158.4 million, $154.1 million, and $151.9 million, for 2017, 2016, and 2015, respectively.

 

The Multiemployer Pension Reform Act of 2014 (the “Reform Act”), which was included in the Consolidated and Further Continuing Appropriations Act of 2015, includes provisions to address the funding of multiemployer pension plans in critical and declining status, including certain of those in which ABF Freight participates. 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 (the “Treasury Department”) for the suspension of certain benefits.

 

In September 2015, the Central States, Southeast and Southwest Areas Pension Plan (the “Central States Pension Plan”) filed an application with the Treasury Department seeking approval under the Reform Act for a pension rescue plan, which included benefit reductions for participants of the Central States Pension Plan in an attempt to avoid the insolvency of the plan that otherwise is projected by the plan to occur. In May 2016, the Treasury Department denied the Central States Pension Plan’s proposed rescue plan. The trustees of the Central States Pension Plan subsequently announced that a new rescue plan would not be submitted and stated that it is not possible to develop and implement a new rescue plan that complies with the final Reform Act regulations issued by the Treasury Department in April 2016. Although the future of the Central States Pension Plan is impacted by a number of factors, without legislative action, the plan is currently projected to become insolvent within 10 years. ABF Freight’s current collective bargaining agreement with the IBT provides for contributions to the Central States Pension Plan through March 31, 2018, and it is our understanding that ABF Freight’s benefit contribution rate is not expected to increase during the remainder of this period (though there are no guarantees). ABF Freight’s contribution rates are made in accordance with its collective bargaining agreements with the IBT and other related supplemental agreements. In consideration of high multiemployer plan contribution rates, several of the plans to which ABF Freight contributes, including the Central States Pension Plan, have frozen contribution rates at current levels under ABF Freight’s current collective bargaining agreement. Future contribution rates will be determined through the negotiation process for contract periods following the term of the current collective bargaining agreement. The Asset-

42


 

Based segment pays some of the highest benefit contribution rates in the industry and continues to address the effect of the segment’s wage and benefit cost structure on its operating results in discussions with the IBT.

 

ABF Freight received a Notice of Insolvency from the Road Carriers Local 707 Pension Fund (the “707 Pension Fund”) for the plan year beginning February 1, 2016. On March 1, 2017, the Pension Benefit Guaranty Corporation (“PBGC”) announced that beginning February 1, 2017 benefits to retirees were reduced to PBGC guarantee limits for insolvent multiemployer plans. The PBGC provides financial assistance to insolvent multiemployer plans to pay retiree benefits not to exceed guaranteed limits. The 707 Pension Fund will continue to administer the fund as the PBGC provides financial assistance. Approximately 1% of ABF Freight’s total multiemployer pension contributions are made to the 707 Pension Fund.

 

As certified by the plan’s actuary, the New York State Teamsters Conference Pension and Retirement Fund (the “New York State Pension Fund”) was in critical and declining status for the plan years beginning January 1, 2017 and 2016. The New York State Pension Fund submitted the application for a reduction in benefits to the Treasury Department in May 2017. The Treasury Department reviewed the application for compliance with the applicable regulations and administered a vote of eligible participants and beneficiaries, of which a majority did not reject the proposed benefit reduction during the voting period which ended on September 6, 2017. In September 2017, the Treasury Department issued an authorization to reduce benefits under the New York State Pension Fund effective October 1, 2017. After the benefit reduction goes into effect, the plan sponsor of the New York State Pension Fund must make an annual determination that, despite all reasonable measures to avoid insolvency, the fund is projected to become insolvent unless a benefit reduction continues. Approximately 2% of ABF Freight’s total multiemployer pension contributions are made to the New York State Pension Fund.

 

Some employer companies that participate in multiemployer plans, in which ABF Freight also participates, have received proposals from, and entered into transition agreements with, certain multiemployer plans to restructure future plan contributions to be more in-line with benefit levels. These transition agreements, which require mutual agreement on numerous elements between the multiemployer plan and the contributing employer, may also result in recognition of significant withdrawal liabilities. We monitor and evaluate any such proposals we receive, including the potential economic impact to our business. At the current time, there are no proposals that have been provided to ABF Freight that management considers acceptable.

 

Asset-Based Segment Results — 2017 Compared to 2016

 

The following table sets forth a summary of operating expenses and operating income as a percentage of revenue for the Asset-Based segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

 

2017

    

2016

 

Asset-Based Operating Expenses (Operating Ratio)

 

 

 

 

 

Salaries, wages, and benefits

 

56.5

%  

57.6

%  

Fuel, supplies, and expenses

 

11.7

 

11.3

 

Operating taxes and licenses

 

2.4

 

2.5

 

Insurance

 

1.5

 

1.5

 

Communications and utilities

 

0.9

 

0.8

 

Depreciation and amortization

 

4.1

 

4.2

 

Rents and purchased transportation

 

10.4

 

10.4

 

Shared services

 

9.4

 

9.6

 

Gain on sale of property and equipment

 

 —

 

(0.2)

 

Nonunion pension expense, including settlement

 

0.2

 

0.1

 

Other

 

0.3

 

0.3

 

Restructuring costs

 

 —

 

0.1

 

 

 

97.4

%  

98.2

%  

 

 

 

 

 

 

Asset-Based Operating Income

 

2.6

%  

1.8

%  

 

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The following table provides a comparison of key operating statistics for the Asset-Based segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

 

2017

    

2016

    

% Change

 

Workdays

 

 

251.5

 

 

252.5

 

 

 

Billed revenue(1) per hundredweight, including fuel surcharges

 

$

31.27

 

$

29.35

 

6.5

%  

Pounds

 

 

6,366,455,380

 

 

6,526,049,524

 

(2.4)

%  

Pounds per day

 

 

25,313,938

 

 

25,845,741

 

(2.1)

%  

Shipments per day

 

 

20,749

 

 

20,744

 

 —

%  

Shipments per DSY(2) hour

 

 

0.440

 

 

0.449

 

(2.0)

%

Pounds per DSY(2) hour

 

 

537.38

 

 

558.97

 

(3.9)

%

Pounds per shipment

 

 

1,220

 

 

1,246

 

(2.1)

%

Pounds per mile(3)

 

 

19.46

 

 

19.35

 

0.6

%

 


(1)

Revenue for undelivered freight is deferred for financial statement purposes in accordance with the revenue recognition policy. Billed revenue used for calculating revenue per hundredweight measurements has not been adjusted for the portion of revenue deferred for financial statement purposes.

(2)

Dock, street, and yard (“DSY”) measures are further discussed in Asset-Based Operating Expenses within this section of Asset-Based Segment Results. The Asset-Based segment uses shipments per DSY hour to measure labor efficiency in its local operations, although total pounds per DSY hour is also a relevant measure when the average shipment size is changing.

(3)

Total pounds per mile is used to measure labor efficiency of its linehaul operations, although this metric is influenced by other factors including freight density, loading efficiency, average length of haul, and the degree to which purchased transportation (including rail service) is used.

 

Asset-Based Revenues

Asset-Based segment revenues for the year ended December 31, 2017 totaled $1,993.3 million, compared to $1,916.4 million in 2016. Billed revenue (as described in footnote (1) to the key operating statistics table directly above) increased 4.4% on a per-day basis in 2017 compared to 2016, primarily reflecting a 6.5% increase in total billed revenue per hundredweight, including fuel surcharges, partially offset by a 2.1% decrease in tonnage per day. There was one less workday in 2017 than in 2016.

 

The increase in total billed revenue per hundredweight compared to 2016 was influenced by yield improvement initiatives, including general rate increases, contract renewals, and the introduction of CMC pricing; freight profile effects; and higher fuel surcharge revenues associated with increased fuel prices during 2017. The Asset-Based segment implemented nominal general rate increases on its LTL base rate tariffs of 4.9% and 5.25% effective May 22, 2017 and August 29, 2016, respectively, 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 period increased 5.1% compared to the prior year. The Asset-Based segment’s average nominal fuel surcharge rate for 2017 increased approximately 200 basis points from 2016 levels. Excluding changes in fuel surcharges, average pricing on the Asset-Based segment’s LTL business had a mid-single digit percentage increase compared to 2016.

 

Tonnage per day decreased 2.1% for 2017 compared to 2016, reflecting declines in both LTL and volume-quoted, truckload-rated tonnage levels. Daily tonnage was relatively flat on a year-over-year basis through the first six months of 2017, with shipments per day 5.0% higher driven by growth in e-commerce-related shipments which generally have smaller average shipment sizes; and an increase in bulkier cube-dominant shipments across the supply chain. Management believes that yield management actions including the implementation of space-based pricing beginning in August 2017, as previously described, had the effect of reducing tonnage while improving the overall account base profitability. As a result of the yield actions, daily tonnage declined 3.0% in third quarter and 4.7% in fourth quarter 2017, compared to the same 2016 periods, while shipments per day declined 1.4% in third quarter and 8.1% in fourth quarter. While average weight per shipment declined 2.1% for the full year 2017 compared to 2016, fourth quarter average weight per shipment increased 3.7% versus the prior year period, reflecting effects on the overall freight profile associated with the yield actions.

 

Asset-Based Revenues – First Quarter to-date 2018

Asset-Based billed revenues quarter to-date through late-February 2018 increased approximately 4% above the same period of 2017 on a per-day basis, reflecting an increase in total billed revenue per hundredweight of approximately 10%, partially offset by a decrease in average daily total tonnage of 5% to 6%. The higher revenue per hundredweight measure benefited from the yield improvement initiatives we began implementing in 2017 and from higher fuel surcharges. The decrease in tonnage levels quarter to-date through late-February 2018, compared to the same prior-year period, reflects

44


 

reductions in LTL tonnage related to our ongoing yield management initiatives and changes in account mix, partially offset by year-over-year growth in our Asset-Based truckload-rated business. As a result of the Asset-Based segment handling more volume-quoted, truckload-rated shipments during January and February 2018, total weight per shipment increased approximately 5% versus the same prior-year period, while LTL weight per shipment increased 1% to 2%.

 

Tonnage levels are seasonally lower during January and February while March provides a disproportionately higher amount of the first quarter’s business. The first quarter of each year generally has the highest operating ratio of the year, although other factors, including the state of the economy, may influence quarterly comparisons. The impact of general economic conditions and the Asset-Based segment’s pricing approach, as previously discussed in the Pricing section of the Asset-Based Segment Overview within Results of Operations, may continue to impact tonnage levels and, as such, there can be no assurance that the Asset-Based segment will achieve improvements in its current operating results. There can also be no assurance that the current pricing trends will continue. The competitive environment could limit the Asset-Based segment from securing adequate increases in base LTL freight rates and could limit the amount of fuel surcharge revenue recovered.

 

Asset-Based Operating Income

The Asset-Based segment operating ratio improved by 0.8 percentage points to 97.4% in 2017 from 98.2% in 2016. Operating income increased to $51.9 million in 2017, compared to $33.6 million in 2016. The operating income increase primarily reflects yield improvement initiatives and managing operating resources through challenging changes in freight profile characteristics during 2017, including changes in shipment levels and weight per shipment. Operating results in 2017 also reflect lower restructuring charges associated with our corporate realignment, which totaled $0.3 million in 2017 versus $1.2 million in 2016. The operating income comparison reflects a $2.5 million increase in nonunion pension expense, including settlement, for 2017 compared to 2016, and $2.3 million lower gains on sale of property and equipment in 2017, primarily due to a second quarter 2016 sale of certain real estate. The segment’s operating ratio was also impacted by changes in operating expenses as discussed in the following paragraphs.

 

Asset-Based Operating Expenses

Labor costs, which are reported in operating expenses as salaries, wages, and benefits, amounted to 56.5% and 57.6% of Asset-Based segment revenues for 2017 and 2016, respectively. The year-over-year decrease as a percentage of revenue was influenced by the effect of higher revenues, including the influence of yield improvement initiatives and fuel surcharges, 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 costs increased $21.3 million in 2017, compared to 2016, primarily reflecting year-over-year increases in contractual wage and benefit contribution rates under the ABF NMFA. The contractual wage rate increased 2.5% effective July 1, 2017 and 2.0% effective July 1, 2016, and the average health, welfare, and pension benefit contribution rate increased approximately 2.8% and 2.0% effective primarily on August 1, 2017 and 2016, respectively, including the effect of the multiemployer pension plan rate freezes previously discussed in the Asset-Based Segment Overview section of Results of Operations.

 

Although the Asset-Based segment manages costs with shipment levels, portions of salaries, wages, and benefits are fixed in nature and the adjustments which would otherwise be necessary to align the labor cost structure throughout the system to corresponding tonnage levels are limited as the segment strives to maintain customer service. Management believes that this service emphasis provides for the opportunity to generate improved yields and business levels. Returning productivity to historical levels is an important priority for the management team in order to reduce costs. Shipments per DSY hour decreased 2.0% for 2017 compared to 2016, reflecting the lower weight per shipment associated with an increase in lighter but bulkier shipments and an increase in residential delivery shipments. Lower weight per shipment during 2017 also contributed to the 3.9% decrease in pounds per DSY hour for 2017 versus 2016. The 0.6% increase in pounds per mile for 2017 reflects more efficient linehaul operations compared to the prior year.

 

Fuel, supplies, and expenses as a percentage of revenue increased 0.4 percentage points in 2017, compared to 2016, primarily due to an increase in the Asset-Based segment’s average fuel price per gallon (excluding taxes) of approximately 22%. The increase in fuel, supplies, and expenses was partially offset by fewer miles driven during 2017.

 

45


 

Asset-Based Segment Results — 2016 Compared to 2015

 

The following table sets forth a summary of operating expenses and operating income as a percentage of revenue for the Asset-Based segment:

 

 

 

 

 

 

 

 

 

Year Ended December 31

 

 

    

2016

    

2015

 

Asset-Based Segment Operating Expenses (Operating Ratio)

 

 

 

 

 

Salaries, wages, and benefits

 

57.6

%  

55.5

%  

Fuel, supplies, and expenses

 

11.3

 

12.8

 

Operating taxes and licenses

 

2.5

 

2.5

 

Insurance

 

1.5

 

1.5

 

Communications and utilities

 

0.8

 

0.7

 

Depreciation and amortization

 

4.2

 

3.7

 

Rents and purchased transportation

 

10.4

 

10.3

 

Shared services

 

9.6

 

9.4

 

Gain on sale of property and equipment

 

(0.2)

 

(0.1)

 

Pension settlement expense

 

0.1

 

0.1

 

Other

 

0.3

 

0.3

 

Restructuring costs

 

0.1

 

 —

 

 

 

98.2

%  

96.7

%  

 

 

 

 

 

 

Asset-Based Segment Operating Income

 

1.8

%