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OPERATING SEGMENT DATA

6 Months Ended

Jun. 30, 2020

NOTE J – OPERATING SEGMENT DATA

The Company uses the “management approach” to determine its reportable operating segments, as well as to determine the basis of reporting the operating segment information. The management approach focuses on financial information that the Company’s management uses to make operating decisions. Management uses revenues, operating expense categories, operating ratios, operating income, and key operating statistics to evaluate performance and allocate resources to the Company’s operations.

The Company began a pilot test program in early 2019 to improve freight handling at ABF Freight. The pilot utilizes patented handling equipment, software, and a patented process to load and unload trailers more rapidly and safely. During the third quarter of 2019, the presentation of operating expenses was modified to present innovative technology costs

associated with the pilot test program as a separate operating expense line item for the Asset-Based segment and for the summary of consolidated expenses by category. Previously, innovative technology costs incurred directly by the segment or allocated through shared services were categorized in individual segment expense line items. Certain reclassifications have been made to the prior period operating segment expenses to conform to the current year presentation. There was no impact on total consolidated expenses or total segment expenses as a result of the reclassifications.

Shared services represent costs incurred to support all segments, including sales, pricing, customer service, marketing, capacity sourcing functions, human resources, financial services, information technology, legal, and other company-wide services. Certain overhead costs are not attributable to any segment and remain unallocated in “Other and eliminations.” Included in unallocated costs are expenses related to investor relations, legal, the ArcBest Board of Directors, and certain technology investments. Shared services costs attributable to the operating segments are predominantly allocated based upon estimated and planned resource utilization-related metrics such as estimated shipment levels, number of pricing proposals, or number of personnel supported. The bases for such charges are modified and adjusted by management when necessary or appropriate to reflect fairly and equitably the actual incidence of cost incurred by the operating segments. Management believes the methods used to allocate expenses are reasonable.

The Company’s reportable operating segments are impacted by seasonal fluctuations which affect tonnage, shipment or service event levels, and demand for services, as described below; therefore, operating results for the interim periods presented may not necessarily be indicative of the results for the fiscal year. The COVID-19 pandemic had a significant negative impact on demand for the Company’s services during the three months ended June 30, 2020, resulting in lower tonnage, shipment, and service event levels and, consequently, lower segment revenues for the second quarter of 2020. As a result, the Company’s operating segment information for the three months ended June 30, 2020 does not reflect typical seasonal trends in business levels as described below for the Company’s reportable operating segments.

The Company’s reportable operating segments are as follows:

●

The Asset-Based segment includes the results of operations of ABF Freight System, Inc. and certain other subsidiaries. The segment operations include national, inter-regional, and regional transportation of general commodities through standard, expedited, and guaranteed LTL services. In addition, the segment operations include freight transportation related to certain consumer household goods self-move services.

Freight shipments and operating costs of the Asset-Based segment can be adversely affected by inclement weather conditions. The second and third calendar quarters of each year usually have the highest tonnage levels while the first quarter generally has the lowest, although other factors, including the state of the U.S. and global economies, available capacity in the market, and the impact of other adverse external events or conditions, including the COVID-19 pandemic as previously described, may influence quarterly freight tonnage levels.

●

The ArcBest segment includes the results of operations of the Company’s service offerings in ground expedite, truckload, truckload-dedicated, intermodal, household goods moving, managed transportation, warehousing and distribution, and international freight transportation for air, ocean, and ground.

ArcBest segment operations are influenced by seasonal fluctuations that impact customers’ supply chains. The second and third calendar quarters of each year usually have the highest shipment levels while the first quarter generally has the lowest, although other factors, including the state of the U.S. and global economies, available capacity in the market, and the impact of other adverse external events or conditions, including the COVID-19 pandemic as previously described, may impact quarterly business levels. Shipments of the ArcBest segment may decline during winter months because of post-holiday slowdowns, but expedite shipments can be subject to short-term increases depending on the impact of weather disruptions to customers’ supply chains. Plant shutdowns during summer months may affect shipments for automotive and manufacturing customers of the ArcBest segment, but severe weather events can result in higher demand for expedite services. Moving services of the ArcBest segment are impacted by seasonal fluctuations, generally resulting in higher business levels in the second and third quarters as the demand for moving services is typically stronger in the summer months.

●

FleetNet includes the results of operations of FleetNet America, Inc. and certain other subsidiaries that provide roadside assistance and maintenance management services for commercial vehicles through a network of third-party service providers. FleetNet provides services to the Asset-Based and ArcBest segments. Approximately 20% of FleetNet’s revenues for both the three and six months ended June 30, 2020, are for services provided to the Asset-Based and ArcBest segments compared to approximately 19% and 16%, respectively, for the same periods of 2019.

Emergency roadside service events of the FleetNet segment are favorably impacted by extreme weather conditions that affect commercial vehicle operations, and the segment’s results of operations will be influenced by seasonal variations in service event volume and the impact of other external events or conditions, including the COVID-19 pandemic as previously described.

The Company’s other business activities and operating segments that are not reportable include ArcBest Corporation and certain other subsidiaries. Certain costs incurred by the parent holding company and the Company’s shared services subsidiary are allocated to the reporting segments. The Company eliminates intercompany transactions in consolidation. However, the information used by the Company’s management with respect to its reportable segments is before intersegment eliminations of revenues and expenses.

Further classifications of operations or revenues by geographic location are impracticable and, therefore, are not provided. The Company’s foreign operations are not significant.

The following tables reflect reportable operating segment information:


	Three Months Ended				Six Months Ended
	June 30				June 30
	2020		2019		2020		2019

	(in thousands)
REVENUES
Asset-Based	$	460,070	$	559,648	$	975,783	$	1,065,727
ArcBest		151,467		181,173		316,242		354,377
FleetNet		46,440		51,722		98,879		104,981
Other and eliminations		(30,607)		(21,053)		(62,135)		(41,756)
Total consolidated revenues	$	627,370	$	771,490	$	1,328,769	$	1,483,329

OPERATING EXPENSES
Asset-Based
Salaries, wages, and benefits	$	248,995	$	297,016	$	532,833	$	577,292
Fuel, supplies, and expenses⁽¹⁾		45,675		65,791		106,900		129,764
Operating taxes and licenses		11,629		12,214		24,423		24,612
Insurance		8,247		7,598		16,071		15,589
Communications and utilities⁽¹⁾		4,342		4,500		9,053		9,117
Depreciation and amortization⁽¹⁾		23,327		21,633		46,597		42,594
Rents and purchased transportation⁽¹⁾		46,152		56,826		101,922		106,132
Shared services⁽¹⁾		45,605		55,338		94,490		105,633
Gain on sale of property and equipment		(1,175)		(1,587)		(3,339)		(1,621)
Innovative technology costs⁽¹⁾⁽²⁾		4,789		2,735		9,322		4,536
Other⁽¹⁾		1,448		1,406		3,235		2,286
Total Asset-Based		439,034		523,470		941,507		1,015,934

ArcBest
Purchased transportation		125,090		147,552		262,272		287,657
Supplies and expenses		1,989		2,858		4,269		5,632
Depreciation and amortization		2,449		3,055		4,919		6,206
Shared services		18,840		23,141		40,567		46,172
Other		1,796		2,445		4,321		4,858
Total ArcBest		150,164		179,051		316,348		350,525

FleetNet		45,658		50,696		97,057		102,467
Other and eliminations		(27,911)		(16,927)		(54,387)		(29,388)
Total consolidated operating expenses	$	606,945	$	736,290	$	1,300,525	$	1,439,538

(1)

As previously discussed in this Note, the presentation of Asset-Based segment expenses was modified in third quarter 2019 to present innovative technology costs as a separate operating expense line item. Certain reclassifications have been made to the prior period operating segment expenses to conform to the current year presentation.

(2)	Represents costs associated with the freight handling pilot test program at ABF Freight previously discussed in this Note.


	Three Months Ended				Six Months Ended
	June 30				June 30
	2020		2019		2020		2019

	(in thousands)
OPERATING INCOME (LOSS)
Asset-Based	$	21,036	$	36,178	$	34,276	$	49,793
ArcBest		1,303		2,122		(106)		3,852
FleetNet		782		1,026		1,822		2,514
Other and eliminations		(2,696)		(4,126)		(7,748)		(12,368)
Total consolidated operating income	$	20,425	$	35,200	$	28,244	$	43,791

OTHER INCOME (COSTS)
Interest and dividend income	$	991	$	1,616	$	2,366	$	3,094
Interest and other related financing costs		(3,378)		(2,811)		(6,325)		(5,693)
Other, net⁽¹⁾		2,696		(445)		(1,166)		(1,036)
Total other income (costs)		309		(1,640)		(5,125)		(3,635)
INCOME BEFORE INCOME TAXES	$	20,734	$	33,560	$	23,119	$	40,156

(1)	Includes the components of net periodic benefit cost other than service cost related to the Company’s nonunion pension, SBP, and postretirement plans (see Note G) and proceeds and changes in cash surrender value of life insurance policies.

The following table presents operating expenses by category on a consolidated basis:


	Three Months Ended				Six Months Ended
	June 30				June 30
	2020		2019		2020		2019

	(in thousands)
OPERATING EXPENSES
Salaries, wages, and benefits	$	305,220	$	361,116	$	650,166	$	704,784
Rents, purchased transportation, and other costs of services		187,914		236,053		404,942		457,078
Fuel, supplies, and expenses		54,838		80,700		126,611		160,036
Depreciation and amortization⁽¹⁾		29,086		27,434		58,099		53,971
Other		29,887		30,987		60,707		63,669
	$	606,945	$	736,290	$	1,300,525	$	1,439,538

(1)	Includes amortization of intangible assets.