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MarketScreener Homepage  >  Equities  >  Nasdaq  >  ArcBest Corp    ARCB

ARCBEST CORP (ARCB)
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ARCBEST : DE/ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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11/08/2018 | 09:28pm CET

General




ArcBest Corporation® (together with its subsidiaries, the "Company," "we," "us,"
and "our") provides a comprehensive suite of freight transportation services and
integrated logistics solutions. Our operations are conducted through our three
reportable operating segments: Asset-Based, which consists of ABF Freight
System, Inc. and certain other subsidiaries ("ABF Freight"); ArcBest, our
asset-light logistics operation; and FleetNet. The ArcBest and the FleetNet
reportable segments combined represent our Asset-Light operations. References to
the Company, including "we," "us," and "our," in this Quarterly Report on Form
10-Q are primarily to the Company and its subsidiaries on a consolidated basis.



Effective January 1, 2018, the Company retrospectively adopted an amendment to
Accounting Standards Codification ("ASC") Topic 715, Compensation - Retirement
Benefits, ("ASC Topic 715"), which requires changes to the financial statement
presentation of certain components of net periodic benefit cost related to
pension and other postretirement benefits accounted for under ASC Topic 715. As
a result of adopting this amendment, the service cost component of net periodic
benefit cost continues to be included in operating expenses in our consolidated
financial statements, but the other components of net periodic benefit cost,
including pension settlement expense, are presented in other income (costs) for
the three and nine months ended September 30, 2018 and 2017. Reclassifications
have been made to the prior period operating segment expenses in this Quarterly
Report on Form 10-Q to conform to the current year presentation of segment
expenses and the presentation of components of net periodic benefit cost in
other income (costs) in our consolidated financial statements. There was no
change to consolidated net income or earnings per share as a result of the
change in presentation under the new standard. The adoption of this accounting
policy is further discussed in Note A to our consolidated financial statements
included in Part I, Item 1 of this Quarterly Report on Form 10­Q and the detail
of our net periodic benefit costs are presented in Note F to the consolidated
financial statements included in Part I, Item I of this Quarterly Report on
Form 10-Q.



The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.



Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") describes the principal factors affecting our results of
operations, liquidity and capital resources, and critical accounting policies.
This discussion should be read in conjunction with the accompanying quarterly
unaudited consolidated financial statements and the related notes thereto
included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our
Annual Report on Form 10-K for the year ended December 31, 2017. Our 2017 Annual
Report on Form 10-K includes additional information about significant accounting
policies, practices, and the transactions that underlie our financial results,
as well as a detailed discussion of the most significant risks and uncertainties
to which our financial and operating results are subject.



Labor Contract Agreement


As of September 2018, approximately 83% of our Asset-Based segment's employees
were covered under the ABF National Master Freight Agreement (the "2018 ABF
NMFA"), the collective bargaining agreement with the International Brotherhood
of Teamsters (the "IBT") which was ratified on May 10, 2018 by a majority of
ABF's IBT member employees who chose to vote. A majority of the supplements to
the 2018 ABF NMFA also passed. Following ratification of the remaining
supplements, the 2018 ABF NMFA was implemented on July 29, 2018, effective
retroactive to April 1, 2018, and will remain in effect through June 30, 2023.



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  Table of Contents

Results of Operations



Consolidated Results




                                         Three Months Ended            Nine Months Ended
                                             September 30                 September 30
                                          2018          2017          2018           2017
                                               (in thousands, except per share data)
REVENUES
Asset-Based                            $  585,290$  517,417$ 1,626,644$ 1,496,310

ArcBest                                   205,449       195,749        587,369        524,554
FleetNet                                   50,494        39,568        145,045        116,307
Total Asset-Light                         255,943       235,317        732,414        640,861

Other and eliminations                   (15,075)       (8,454)       (39,549)       (21,435)
Total consolidated revenues            $  826,158$  744,280$ 2,319,509$ 2,115,736

OPERATING INCOME(1)
Asset-Based(2)                         $   50,150$   23,740$    66,933$    38,287

ArcBest                                     9,993         7,838         16,865         14,859
FleetNet                                    1,088           922          3,638          2,690
Total Asset-Light                          11,081         8,760         20,503         17,549

Other and eliminations                    (5,176)       (5,758)       (15,500)       (13,227)
Total consolidated operating income    $   56,055$   26,742$    71,936$    42,609

NET INCOME(2)                          $   40,776$   14,788$    51,963$    23,158

DILUTED EARNINGS PER SHARE(2)          $     1.52$     0.56$      1.94$      0.87

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(1) As previously discussed in the General section of MD&A, we retrospectively

adopted an amendment to ASC Topic 715, effective January 1, 2018, which

requires the components of net periodic benefit cost other than service cost

to be presented within other income (costs) in the consolidated financial

statements. Therefore, these costs are no longer classified within operating

income for all periods presented.

(2) As disclosed in this Consolidated Results section, ABF Freight recorded a

one-time charge of $37.9 million (pre-tax), or $28.2 million (after-tax) and

$1.05 per diluted share, in second quarter 2018 for the multiemployer pension

plan withdrawal liability resulting from the transition agreement it entered

      into with the New England Pension Fund.




Our consolidated revenues, which totaled $826.2 million and $2,319.5 million for
the three and nine months ended September 30, 2018, respectively, increased
11.0% and 9.6% compared to the same prior-year periods. The increases in
consolidated revenues for the three and nine months ended September 30, 2018
reflect a 13.1% and 8.7% increase in our Asset-Based revenues, respectively, and
an 8.8% and 14.3% increase in revenues of our Asset-Light operations,
respectively, which represent the combined operations of our ArcBest and
FleetNet segments. Our Asset-Based revenue growth reflects a 10.1% and 9.6%
improvement in yield, as measured by billed revenue per hundredweight, including
fuel surcharges, for the three- and nine-month periods ended September 30, 2018,
respectively, versus the same periods of 2017, reflecting the impact of pricing
initiatives on the 2018 periods. Total tonnage per day increased 1.6% for the
three months ended September 30, 2018, but declined 1.0% for the nine months
ended September 30, 2018, compared to the same prior-year periods. Our
Asset-Light revenue growth for the three and nine months ended September 30,
2018, compared to the same periods of 2017, was due to an increase in revenue
per shipment for the ArcBest segment associated with higher market prices
resulting from continued tightness in available truckload capacity and higher
service event volume for the FleetNet segment. On a combined basis, the
Asset-Light operating segments generated approximately 30% and 31% of our total
revenues before other revenues and intercompany eliminations for both the three-
and nine-month periods ended September 30, 2018, respectively.



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For the three and nine months ended September 30, 2018, consolidated operating
income totaled $56.1 million and $71.9 million, compared to $26.7 million and
$42.6 million, respectively, for the same periods of 2017. Our consolidated
operating results for the three and nine months ended September 30, 2018,
compared to the same prior-year periods, improved due to the higher revenues, as
previously described, and cost management. Our operating results for the nine
months ended September 30, 2018 were impacted by a one-time charge of
$37.9 million (pre-tax), or $28.2 million (after-tax) and $1.05 per diluted
share, recorded by ABF Freight in second quarter 2018 for a multiemployer
pension plan withdrawal liability resulting from the transition agreement it
entered into with the New England Teamsters and Trucking Industry Pension Fund
(the "New England Pension Fund"), as further discussed within the Asset-Based
Segment Overview section of Results of Operations.



The year-over-year comparisons of consolidated operating results were also
impacted by higher expenses for nonunion employee retirement costs, including
long-term incentive plans impacted by shareholder returns relative to peers,
which increased $1.7 million and $6.5 million for the three and nine months
ended September 30, 2018, respectively, and defined contribution plans, which
increased $0.1 million and $5.2 million, for the three and nine months ended
September 30, 2018, respectively, compared to the same prior-year periods. The
increases in these fringe costs were partially offset by lower nonunion
healthcare costs and lower restructuring charges. Nonunion healthcare costs
decreased $1.2 million and $5.1 million for the three and nine months ended
September 30, 2018, compared to the same prior-year periods, primarily due to a
decrease in the average cost per health claim. Restructuring charges related to
the realignment of our organizational structure totaled less than $0.1 million
and $0.8 million for the three and nine months ended September 30, 2018,
respectively, compared to $0.7 million and $2.7 million, respectively, for the
same periods of 2017. Our consolidated operating results benefited from gains on
sale of subsidiaries of $1.9 million in the three and nine months ended
September 30, 2018, compared to $0.2 million in the same periods of 2017,
related to the sale of ArcBest's military moving businesses in December 2017 and
2016, respectively.



The loss reported in the "Other and eliminations" line of consolidated operating
income which totaled $5.2 million and $15.5 million for the three and nine
months ended September 30, 2018, respectively, compared to $5.8 million and
$13.2 million, respectively, for the same periods of 2017, was impacted by the
previously mentioned higher expenses for incentive plans, a portion of which are
driven by shareholder returns relative to peers. The "Other and eliminations"
line also includes less than $0.1 million and $0.6 million of the previously
mentioned restructuring charges related to our enhanced market approach for the
three and nine months ended September 30, 2018, respectively, compared to
restructuring charges of $0.6 million and $1.6 million for the same respective
periods of 2017. The "Other and eliminations" line includes expenses related to
investments for improving the delivery of services to ArcBest's customers,
investments in comprehensive transportation and logistics services across
multiple operating segments, and other investments in ArcBest technology and
innovations. As a result of these ongoing investments and other corporate costs,
we expect the loss reported in "Other and eliminations" for fourth quarter 2018
to approximate $6.0 million and to be approximately $21.5 million for full year
2018.



In addition to the above items, consolidated net income and earnings per share
were impacted by nonunion defined benefit pension expense, including settlement,
and income from changes in the cash surrender value of variable life insurance
policies, both of which are reported below the operating income line in the
consolidated statements of operations. A portion of our variable life insurance
policies have investments, through separate accounts, in equity and fixed income
securities and, therefore, are subject to market volatility. Changes in the cash
surrender value of life insurance policies contributed $0.05 and $0.08 to
diluted earnings per share for each of the three- and nine-month periods ended
September 30, 2018, and contributed $0.04 and $0.07 per diluted share for the
three- and nine-month periods ended September 30, 2017, respectively.



Consolidated after-tax pension expense, including settlement charges, recognized
for the nonunion defined benefit pension plan totaled $1.3 million, or $0.05 per
diluted share, and $4.1 million, or $0.16 per diluted share, for the three and
nine months ended September 30, 2018, respectively, compared to $1.2 million, or
$0.05 per diluted share, and $2.7 million, or $0.10 per diluted share, for the
three and nine months ended September 30, 2017, respectively. These net periodic
benefit costs (as detailed in Note F to our consolidated financial statements
included in Part I, Item 1 of this Quarterly Report on Form 10­Q) include
pension settlement charges due to lump-sum benefit distributions and an annuity
contract purchase made by the plan in first quarter 2017.



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In November 2017, an amendment was executed to terminate our nonunion defined
benefit pension plan with a termination date of December 31, 2017. In September
2018, the plan received a favorable determination letter from the Internal
Revenue Service (the "IRS") regarding qualification of the plan termination.
Following the election window in which participants may choose their form of
benefit payment, the plan will distribute immediate lump sum benefit payments
and then settle remaining plan liabilities for benefits with the purchase of
nonparticipating annuity contracts from insurance companies. In anticipation of
funding the nonunion pension plan for termination, we made a $5.5 million
contribution to the plan in September 2018 which will be deductible for income
tax purposes in our tax year ended February 28, 2018.



Nonunion pension expense, excluding settlement charges, is estimated to be
approximately $1.3 million, or $1.0 million after-tax, for fourth quarter 2018.
Based on currently available information provided by the plan's actuary, we
estimate noncash pension settlement charges could total approximately $15.0
million to $21.0 million and are expected to be recognized partially in fourth
quarter 2018 and partially in first quarter 2019, and cash funding could total
approximately $13.0 million in first quarter 2019, 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 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. Liquidation of
plan assets and settlement of plan obligations is expected to be complete in
February 2019.



For the three and nine months ended September 30, 2018, consolidated net income
and earnings per share were impacted by a provisional tax benefit of $0.8
million, or $0.03 per diluted share, and $3.5 million, or $0.13 per diluted
share, respectively, as a result of recognizing a reasonable estimate of the tax
effects of the Tax Reform Act, which was signed into law on December 22, 2017
and reduced the U.S. federal corporate tax rate from 35% to 21% effective
January 1, 2018. (The impact of the Tax Reform Act is discussed further in the
Income Taxes section of MD&A and in Note D to our consolidated financial
statements included in Part I, Item 1 of this Quarterly Report on Form 10­Q.)
Consolidated net income and earnings per share for the nine months ended
September 30, 2018 were also impacted by a tax credit of $1.2 million, or $0.05
per diluted share, for the February 2018 retroactive reinstatement of the
alternative fuel tax credit related to the year ended December 31, 2017. The tax
benefits and credits, as well as other changes in the effective tax rates, which
impacted consolidated net income and earnings per share for the three and nine
months ended September 30, 2018, are further described within the Income Taxes
section of MD&A.


Consolidated Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization ("Adjusted EBITDA")


We report our financial results in accordance with generally accepted accounting
principles ("GAAP"). However, management believes that certain non-GAAP
performance measures and ratios, such as Adjusted EBITDA, utilized for internal
analysis provide analysts, investors, and others the same information that we
use internally for purposes of assessing our core operating performance and
provides meaningful comparisons between current and prior period results, as
well as important information regarding performance trends. Accordingly, using
these measures improves comparability in analyzing our performance because it
removes the impact of items from operating results that, in management's
opinion, do not reflect our core operating performance. Management uses Adjusted
EBITDA as a key measure of performance and for business planning. The measure is
particularly meaningful for analysis of our operating performance, because it
excludes amortization of acquired intangibles and software of our Asset-Light
businesses, which are significant expenses resulting from strategic decisions
rather than core daily operations. Additionally, Adjusted EBITDA is a primary
component of the financial covenants contained in our 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.



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Consolidated Adjusted EBITDA




                                                        Three Months Ended         Nine Months Ended
                                                           September 30               September 30
                                                         2018          2017        2018         2017
                                                                       (in thousands)
Net income                                            $    40,776$ 14,788$  51,963$  23,158
Interest and other related financing costs                  2,470       1,706        6,542        4,410
Income tax provision(1)                                    13,215       9,280       11,753       12,398
Depreciation and amortization                              28,026      26,218       81,699       76,821
Amortization of share-based compensation                    2,641       1,471        6,185        5,070
Amortization of net actuarial losses of benefit
plans and pension settlement expense                        1,108       1,839        3,755        6,571
Multiemployer pension fund withdrawal liability
charge(2)                                                       -           -       37,922            -
Restructuring charges(3)                                       50         737          766        2,731
Consolidated Adjusted EBITDA                          $    88,286    $

56,039 $ 200,585$ 131,159

--------------------------------------------------------------------------------

(1) Includes a tax benefit of $0.8 million and $3.5 million for the three and

nine months ended September 30, 2018, respectively, as a result of

recognizing a reasonable estimate of the tax effects of the Tax Cuts and Jobs

Act. See the Income Taxes section of MD&A and Note D to our consolidated

financial statements included in Part I, Item 1 of this Quarterly Report on

Form 10-Q for discussion of the impact of the Tax Cuts and Jobs Act.

(2) As disclosed in this Consolidated Results section, ABF Freight recorded a

one-time $37.9 million pre-tax charge in second quarter 2018 for the

multiemployer pension plan withdrawal liability resulting from the transition

      agreement it entered into with the New England Pension Fund.


 (3)  Restructuring charges relate to the realignment of the Company's
      organizational structure.










Asset-Based Operations



Asset-Based Segment Overview



The Asset-Based segment consists of ABF Freight System, Inc., a wholly-owned
subsidiary of ArcBest Corporation, and certain other subsidiaries ("ABF
Freight"). Our Asset-Based operations are affected by general economic
conditions, as well as a number of other competitive factors that are more fully
described in Item 1 (Business) and in Item 1A (Risk Factors) of Part I of our
2017 Annual Report on Form 10­K.



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 the level

of tonnage and number of shipments 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").




As previously disclosed within the General section of MD&A, we have reclassified
certain prior period operating segment expenses in this Quarterly Report on Form
10-Q to conform to the current year presentation of segment expenses and the
presentation of components of net periodic benefit cost in other income (costs)
in our consolidated financial statements. See Note J to our consolidated
financial statements included in Part I, Item 1 of this Quarterly Report on
Form 10­Q for description of the Asset-Based segment and additional segment
information, including revenues and operating income for the three and nine
months ended September 30, 2018 and 2017.



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As previously disclosed in the General section of MD&A, as of September 2018,
approximately 83% of the Asset-Based segment's employees were covered under the
2018 ABF NMFA with the IBT, which was ratified on May 10, 2018. Following
ratification of the supplements to the contract, the 2018 ABF NMFA was
implemented on July 29, 2018, effective retroactive to April 1, 2018, and will
remain in effect through June 30, 2023.



Under the 2018 ABF NMFA, the contractual wage and benefits costs, including the ratification bonuses and vacation restoration, are estimated to increase approximately 2.0% on a compounded annual basis through the end of the agreement.

The major economic provisions of the 2018 ABF NMFA include:

· restoration of one week of vacation which begins accruing on anniversary dates

on or after April 1, 2018, with the new vacation eligibility schedule being the

same as the applicable 2008 to 2013 supplemental agreements;

· wage increases in each year of the contract, beginning July 1, 2018;

· ratification bonuses for qualifying employees;

· contributions to multiemployer pension plans at current rates for each fund;

· continuation of existing health coverage and annual multiemployer health and

welfare contribution rate increases in accordance with the contract;

· changes to purchased transportation provisions with certain protections for

road drivers as specified in the contract; and

· profit-sharing bonuses upon the Asset-Based segment's achievement of annual

operating ratios of 96.0% or below for a full calendar year under the contract

    period.




On July 9, 2018, ABF Freight reached a tentative agreement with the Teamster
bargaining representatives for the Northern and Southern New England
Supplemental Agreements on terms for new supplemental agreements for 2018-2023
(the "New England Supplemental Agreements"). The New England Supplemental
Agreements were ratified by the local unions in the region covered by the
supplements on July 25, 2018. In accordance with the New England Supplemental
Agreements, ABF Freight's multiemployer pension plan obligation with the New
England Pension Fund was restructured under a transition agreement effective on
August 1, 2018. The transition agreement resulted in ABF Freight's withdrawal as
a participating employer in the New England Pension Fund and triggered
settlement of the related withdrawal liability. ABF Freight simultaneously
re-entered the New England Pension Fund as a new participating employer free
from any pre-existing withdrawal liability and at a lower future contribution
rate.



ABF Freight recognized a one-time charge of $37.9 million (pre-tax) to record
the withdrawal liability in second quarter 2018 when the transition agreement
was determined to be probable. The withdrawal liability was partially settled
through the initial lump sum cash payment of $15.1 million made in third quarter
2018, and the remainder will be settled with monthly payments to the New England
Pension Fund over a period of 23 years with an initial aggregate present value
of $22.8 million. In accordance with current tax law, these payments are
deductible for income taxes when paid. This transition agreement allowed ABF
Freight to satisfy its withdrawal liability obligations to the existing employer
pool of the New England Pension Fund to which it had historically been a
participant; will minimize the potential for future increases in withdrawal
liability and contribution rates; and will reduce operating costs and improve
cash flow in future periods. ABF Freight transitioned to the new employer pool
of the New England Pension Fund at a lower pension contribution rate, which is
frozen for a period of 10 years, compared to its pension contribution rate under
the previous employer pool. The transition agreement with the New England
Pension Fund has no impact or bearing on any of the other multiemployer pension
plans to which ABF Freight contributes.



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.



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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.



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 individual 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 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 better aligns our pricing mechanisms with the
metrics which affect our resources and, therefore, our costs to provide
logistics services. 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 have been applied; 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. 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.



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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 the third quarter of 2018, 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.



The year-over-year Asset-Based revenue comparison for the three and nine months
ended September 30, 2018 was impacted by higher fuel surcharge revenue due to an
increase in the nominal fuel surcharge rate, while total fuel costs were also
higher. 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 by a number of multiemployer plans, are
impacted by contractual obligations under the 2018 ABF NMFA and other related
supplemental agreements. Salaries, wages, and benefits expense of the
Asset-Based segment amounted to 49.9% and 52.2% of revenues for the three and
nine months ended September 30, 2018, respectively, compared to 55.5% and 57.0%
for the same periods of 2017, respectively. Changes in salaries, wages, and
benefits expense as a percentage of revenue 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 previous ABF NMFA, lowered cost
increases throughout the previous contract period, and increased flexibility in
labor work rules were important factors in bringing ABF Freight's labor cost
structure closer in line with that of its competitors; however, 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 did not increase ABF Freight's pension contribution rate
for the annual contribution period which began August 1, 2017. 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,
inclusive of the rate freezes in 2017. Effective July 1, 2017, the ABF NMFA
contractual wage rate increased 2.5%.



As previously outlined, the 2018 ABF NMFA provides for ABF Freight's
contributions to multiemployer pension plans to remain at the rates that were
paid under the prior ABF NMFA, while wage rates and health and welfare
contribution rates for most plans will increase annually in accordance with the
terms of the 2018 ABF NMFA. Under the 2018 ABF NMFA, the contractual wage rate
increased approximately 1.2% effective July 1, 2018, and the average health,
welfare, and pension contribution rate increased approximately 2.2% effective
primarily on August 1, 2018.



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Asset-Based Segment Results


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




                                                               Three Months Ended         Nine Months Ended
                                                                   September 30              September 30
                                                                2018          2017        2018          2017
Asset-Based Operating Expenses (Operating Ratio)
Salaries, wages, and benefits                                     49.9 %        55.5 %      52.2 %        57.0 %
Fuel, supplies, and expenses                                      10.9          11.1        11.7          11.6
Operating taxes and licenses                                       2.1           2.3         2.2           2.4
Insurance                                                          1.6           1.6         1.5           1.5
Communications and utilities                                       0.7           0.9         0.8           0.9
Depreciation and amortization                                      3.8           4.0         4.0           4.1
Rents and purchased transportation                                12.1          10.7        11.1          10.4
Shared services                                                   10.0           9.2         9.9           9.2
Multiemployer pension fund withdrawal liability charge(1)            -             -         2.3             -
Gain on sale of property and equipment                               -             -           -             -
Other                                                              0.3           0.1         0.2           0.3
Restructuring costs                                                  -             -           -             -
                                                                  91.4 %        95.4 %      95.9 %        97.4 %

Asset-Based Operating Income                                       8.6 %    

4.6 % 4.1 % 2.6 %

--------------------------------------------------------------------------------

(1) As previously disclosed in the Asset-Based Segment Overview of Results of

Operations, ABF Freight recorded a one-time $37.9 million pre-tax charge in

second quarter 2018 for the multiemployer pension plan withdrawal liability

resulting from the transition agreement it entered into with the New England

      Pension Fund.




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




                                                             Three Months Ended                                   Nine Months Ended
                                                                 September 30                                        September 30
                                                     2018               2017          % Change           2018               2017          % Change
Workdays                                                   63.0               62.5                            190.5              190.0
Billed revenue(1) per hundredweight,
including fuel surcharges                       $         35.83    $         32.53        10.1 %    $         33.92    $         30.94         9.6 %
Pounds                                            1,614,220,578      1,576,455,988         2.4 %      4,812,499,089      4,847,356,595       (0.7) %
Pounds per day                                       25,622,549         25,223,296         1.6 %         25,262,462         25,512,403       (1.0) %
Shipments per day                                        20,835             21,048       (1.0) %             19,912             21,068       (5.5) %
Shipments per DSY(2) hour                                 0.446              0.435         2.5 %              0.444              0.443         0.2 %
Pounds per DSY(2) hour                                   548.13             521.84         5.0 %             562.76             536.03         5.0 %
Pounds per shipment                                       1,230              1,198         2.7 %              1,269              1,211         4.8 %
Pounds per mile(3)                                        18.77              19.02       (1.3) %              19.56              19.61       (0.3) %
Average length of haul (miles)                            1,043              1,027         1.6 %              1,042              1,032         1.0 %


--------------------------------------------------------------------------------

(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 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.






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Asset-Based Revenues

Asset-Based segment revenues for the three and nine months ended September 30,
2018 totaled $585.3 million and $1,626.6 million, respectively, compared to
$517.4 million and $1,496.3 million, respectively, for the same periods of 2017.
Billed revenue (as described in footnote (1) to the key operating statistics
table) increased 11.9% and 8.6% on a per-day basis for the three and nine months
ended September 30, 2018, respectively, compared to the same prior-year periods.
For the three months ended September 30, 2018, the increase in billed revenue
reflects a 10.1% increase in total billed revenue per hundredweight, including
fuel surcharges, and a 1.6% increase in tonnage per day, compared to the same
period of 2017. For the nine months ended September 30, 2018, the increase in
billed revenue reflects a 9.6% increase in total billed revenue per
hundredweight, including fuel surcharges, partially offset by a 1.0% decrease in
tonnage per day, compared to the same period of 2017. The number of workdays was
higher by one-half of a day in the three- and nine-month periods ended September
2018, versus the prior year quarter, which contributed to increased total
revenues in both 2018 periods.



The increase in total billed revenue per hundredweight reflects yield
improvement initiatives, including a general rate increase, contract renewals,
and CMC pricing which was introduced in the third quarter of 2017, and higher
fuel surcharge revenues associated with increased fuel prices during the three-
and nine-month periods ended September 30, 2018, compared to the same periods of
2017. The Asset-Based segment implemented a nominal general rate increase on its
LTL base rate tariffs of 5.9% effective April 16, 2018, 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 approximately 5.3% and 4.8% for the three and nine
months ended September 30, 2018, respectively, compared to the same periods of
2017. The increase in the total revenue per hundredweight measure for the three-
and nine-month periods also reflects an increase in average length of haul and
higher pricing on truckload-rated shipments due to managing business levels with
service and due to the effect on prices of those shipments as a result of the
constrained capacity in the truckload market during the current year. For third
quarter 2018, the Asset-Based segment's average nominal fuel surcharge rate
increased approximately 370 basis points from the third quarter 2017 level and
increased approximately 330 basis points for the nine-month period ended
September 30, 2018, compared to the same period of 2017. Excluding changes in
fuel surcharges, average pricing on the Asset-Based segment's LTL business for
the three and nine months ended September 30, 2018 had high-single-digit
percentage increases when compared to the same prior-year periods. There can be
no assurances that the current pricing trend will continue. The competitive
environment could limit the Asset-Based segment from securing adequate increases
in base LTL freight rates and could limit the amount of fuel surcharge revenue
recovered.



The increase in tonnage per day for third quarter 2018 of 1.6%, reflects a 2.7%
increase in average weight per shipment, partially offset by a 1.0% decrease in
shipments per day, compared to third quarter 2017. The increase in average
weight per shipment for third quarter 2018, compared to third quarter 2017, was
driven by heavier LTL shipments, partially offset by lower average daily
truckload-rated tonnage levels as a result of pricing actions previously
mentioned to manage business levels with service. For the nine months ended
September 30, 2018, the 1.0% decline in tonnage per day, compared to the same
period of 2017, primarily reflects the effect of yield improvement initiatives,
including the space-based pricing program, that led to a 5.5% decline in total
daily shipment counts but a 4.8% increase in average weight per shipment. An
increase in weight per shipment is also influenced by the effects of positive
economic factors and other service needs of our customers.



Asset-Based Revenues - October 2018


Asset-Based billed revenues for the month of October 2018 increased
approximately 11% above October 2017 on a per-day basis, reflecting an increase
in total billed revenue per hundredweight of approximately 9% and an increase in
average daily total tonnage of approximately 2%. The higher revenue per
hundredweight measure benefited from the effect of yield improvement initiatives
and higher fuel surcharges. Tonnage levels for October 2018, compared to the
same prior-year period, reflect LTL tonnage growth, partially offset by
reductions in volume-quoted truckload-rated shipments. Total shipments per day
increased approximately 3% in October 2018, compared to October 2017. Total
weight per shipment decreased approximately 1% in October 2018 versus the same
prior-year period, reflecting a reduced number of heavy-weighted truckload-rated
shipments as a result of pricing actions to manage business levels in our
network, partially offset by an increase in weight per shipment on our LTL-rated
business. Total billed revenue per shipment increased approximately 7% in
October 2018, versus the same prior-year period.



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Asset-Based Operating Income

The Asset-Based segment generated operating income of $50.2 million and
$66.9 million, for the three and nine months ended September 30, 2018,
respectively, compared to $23.7 million and $38.3 million, respectively, for the
same periods of 2017. The nine-month period ended September 30, 2018 included
the $37.9 million one-time charge recognized in second quarter 2018 for the
multiemployer pension fund withdrawal liability previously discussed in the
Asset-Based Segment Overview. The Asset-Based segment operating ratio decreased
by 4.0 percentage and 1.5 percentage points for the three and nine months ended
September 30, 2018, from the same prior-year periods. The one-time multiemployer
pension charge negatively impacted the operating ratio by 2.3 percentage points
for the nine months ended September 30, 2018. Excluding the one-time charge, the
Asset-Based operating ratio decreased 3.8 percentage points for the nine months
ended September 30, 2018, versus the comparable 2017 period. The improvements in
the Asset-Based segment's operating results for the three and nine months ended
September 30, 2018, compared to the same periods of 2017, reflect continued
strength in account pricing and the benefits of careful cost management in-line
with business levels. 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 49.9% and 52.2% of Asset-Based segment revenues for the
three- and nine-month periods ended September 30, 2018, respectively, compared
to 55.5% and 57.0%, respectively, for the same periods of 2017. The
year-over-year decreases in labor costs as a percentage of revenue were
influenced by the effect of higher revenues, as a portion of operating costs are
fixed in nature and decrease as a percent of revenue with increases in revenue
levels. Although the costs decreased as a percentage of revenue for third
quarter 2018, salaries, wages, and benefits increased $4.8 million, compared to
third quarter 2017, primarily due to the expenses explained in the following
paragraph and the increased costs of handling higher tonnage levels during the
quarter. Salaries, wages, and benefits costs decreased $4.9 million for the nine
months ended September 30, 2018, compared to the same prior-year period,
primarily due to adjustments made to align our cost structure to business
levels, as shipment levels were 5.5% lower on a per day basis year-to-date for
2018, partially offset by increases in the expenses explained below.



As previously discussed in the Asset-Based Segment Overview, contractual wage
and benefit contribution rates increased versus the prior-year periods.
Salaries, wages, and benefits for the three and nine months ended September 30,
2018, versus the comparable 2017 periods, also include additional costs
associated with the 2018 ABF NMFA, including $1.5 million and $2.1 million,
respectively, related to restoration of one week of vacation and $0.4 million
and $0.8 million, respectively, related to the ratification bonus. The
additional week of vacation under the new labor agreement is accrued as it is
earned for anniversary dates that begin on or after April 1, 2018. The one-time,
lump sum ratification bonus was paid during third quarter 2018 and is being
amortized over the duration of the contract beginning April 1, 2018. Salaries,
wages, and benefits costs for the three and nine months ended September 30,
2018, compared to the same periods of 2017, were also impacted by higher
expenses for nonunion incentive plans, a portion of which are driven by
shareholder returns relative to peers, and higher accruals for defined
contribution plans, partially offset by lower nonunion healthcare costs,
primarily due to a decrease in the average cost per claim and, for the
nine-month period, a decrease in the number of health claims filed.



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. In
third quarter 2018, higher tonnage levels handled throughout the ABF Freight
network reversed a trend experienced in the first half of the year and
contributed to improvement in several key productivity metrics. Shipments per
DSY hour improved 2.5% and 0.2% for the three and nine months ended September
30, 2018, respectively, compared to the same prior-year periods, partially
impacted by increased usage of purchased transportation agents to efficiently
manage local delivery effort. The increases in pounds per shipment for the three
and nine months ended September 30, 2018, which reflect the impact of yield
initiatives on changes in tonnage and shipment levels previously discussed,
contributed to the 5.0% improvement in pounds per DSY hour, compared to the same
periods of 2017.



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Fuel, supplies, and expenses as a percentage of revenue decreased 0.2 percentage
points and increased 0.1 percentage points for the three and nine months ended
September 30, 2018, respectively. These changes as a percentage of revenue were
impacted by higher revenues in the 2018 periods, as fuel, supplies, and expenses
increased $6.7 million and $17.0 million for the three- and nine-month periods
ended September 30, 2018, respectively, primarily due to year-over-year
increases in average fuel price per gallon (excluding taxes) of approximately
30%. The increase in fuel, supplies, and expenses was partially offset by fewer
miles driven during the 2018 periods versus the same periods of 2017.



Rents and purchased transportation as a percentage of revenue increased 1.4 and
0.7 percentage points for the three and nine months ended September 30, 2018,
respectively, compared to the same periods of 2017, primarily due to both higher
utilization and higher costs of purchased linehaul and local transportation
agents to maintain customer service. Rail miles increased approximately 32% and
22% for the three- and nine-month periods ended September 30, 2018,
respectively, compared to the same prior-year periods. The Asset-Based segment
remains focused on improving utilization of owned assets, as well as aligning
purchased transportation costs with lower shipment levels which were experienced
during 2018.



Shared services as a percentage of revenue increased 0.8 and 0.7 percentage
points for the three and nine months ended September 30, 2018, respectively,
compared to the same prior-year periods, due to increases in employee benefit
costs, including higher expenses for incentive plans, a portion of which are
driven by shareholder returns relative to peers; higher advertising costs; and
investments to improve the customer experience.



Asset-Light Operations



Asset-Light Overview



The ArcBest and FleetNet reportable segments, combined, represent our
Asset-Light operations. Our Asset-Light operations are a key component of our
strategy to offer customers a single source of end-to-end logistics solutions,
designed to satisfy the complex supply chain and unique shipping requirements
customers encounter. We have unified our sales, pricing, customer service,
marketing, and capacity sourcing functions to better serve our customers through
delivery of integrated logistics solutions.



Our Asset-Light operations are affected by general economic conditions, as well
as a number of other competitive factors that are more fully described in Item 1
(Business) and in Item 1A (Risk Factors) of Part I of our 2017 Annual Report on
Form 10­K. The key indicators necessary to understand our Asset-Light operating
results include:

· customer demand for logistics and premium transportation services combined with

economic factors which influence the number of shipments or service events used

to measure changes in business levels;

· prices obtained for services, primarily measured by revenue per shipment or

event;

· availability of market capacity and cost of purchased transportation to fulfill

customer shipments;

· net revenue for the ArcBest segment, which is defined as revenues less

purchased transportation costs; and

· management of operating costs.





As previously disclosed within the General section of MD&A, we have reclassified
certain prior period operating segment expenses in this Quarterly Report on Form
10-Q to conform to the current year presentation of segment expenses and the
presentation of components of net periodic benefit cost in other income (costs)
in our consolidated financial statements. See Note J to our consolidated
financial statements included in Part I, Item 1 of this Quarterly Report on
Form 10­Q for descriptions of the ArcBest and FleetNet segments and additional
segment information, including revenues and operating income for the three and
nine months ended September 30, 2018 and 2017.



Asset-Light Results



For the three and nine months ended September 30, 2018, the combined revenues of
our Asset-Light operations totaled $255.9 million and $732.4 million,
respectively, compared to $235.3 million and $640.9 million, respectively, for
the same periods of 2017. The combined revenues of our Asset-Light operating
segments generated approximately 30% and 31% of our total revenues before other
revenues and intercompany eliminations for the three and nine months ended
September 30, 2018, respectively, compared to 31% and 30% for the three and nine
months ended September 30, 2017, respectively.

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ArcBest Segment

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




                                                               Three Months Ended         Nine Months Ended
                                                                   September 30September 30
                                                                2018

2017 2018 2017 ArcBest Segment Operating Expenses (Operating Ratio) Purchased transportation

                                          80.0 %        79.6 %       81.0 %       79.6 %
Supplies and expenses                                              1.7           2.0          1.7          2.1
Depreciation and amortization                                      1.7           1.5          1.8          1.8
Shared services                                                   11.4          11.5         11.7         11.9
Other                                                              1.2           1.5          1.2          1.6
Restructuring costs                                                  -             -            -          0.2
Gain on sale of subsidiaries(1)                                  (0.9)         (0.1)        (0.3)            -
                                                                  95.1 %    

96.0 % 97.1 % 97.2 %


ArcBest Segment Operating Income                                   4.9 %    

4.0 % 2.9 % 2.8 %

--------------------------------------------------------------------------------

(1) Gains recognized in the 2018 and 2017 periods relate to the sale of the

ArcBest segment's military moving businesses in December 2017 and 2016,

      respectively.




Under our enhanced marketing approach to offer customers a single source of
end-to-end logistics, the service offerings of the ArcBest segment continue to
become more integrated. Management's operating decisions have become more
focused on the ArcBest segment's combined operations, rather than individual
service offerings within the segment's operations. As such, the comparison of
key operating statistics for the ArcBest segment presented in the following
table was revised beginning in first quarter 2018 to reflect the segment's
combined operations, including the expedite, truckload, and truckload-dedicated
operations for which statistics were previously separately reported, as well as
other service offerings of the segment.




                             Year Over Year % Change
                    Three Months Ended      Nine Months Ended
                    September 30, 2018September 30, 2018
Revenue / Shipment            8.4%                   15.6%

Shipments / Day              (7.4%)                 (6.4%)




The ArcBest segment revenues totaled $205.4 million and $587.4 million for the
three and nine months ended September 30, 2018, respectively, compared to
$195.7 million and $524.6 million, respectively, for the same periods of 2017.
The 5.0% and 12.0% increase in revenues for the three and nine months ended
September 30, 2018, respectively, compared to the same prior-year periods,
primarily reflects increases in revenue per shipment associated with higher
market prices resulting from continued tightness in available truckload
capacity, partially offset by lower shipments per day. ArcBest segment net
revenue, which is a non-GAAP measure of revenues less costs of purchased
transportation (see Reconciliations of Asset-Light Non-GAAP Measures within this
Asset-Light Results section), increased 3.2% and 4.2%, for the three and nine
months ended September 30, 2018, respectively, compared to the same periods of
2017. Tight market capacity compressed the segment's net revenue margin, which
was 20.0% and 19.0% for the three and nine months ended September 30, 2018,
respectively, versus 20.4% for the same prior-year periods, with the
year-over-year declines reflecting the increased cost of purchased
transportation outpacing improvements in customer rates. However, the rate of
margin compression experienced by the ArcBest segment in third quarter 2018 was
significantly less than in the first half of 2018. Purchased transportation
costs as a percentage of revenue increased 0.4 and 1.4 percentage points for the
three and nine months ended September 30, 2018, respectively, compared to the
same periods of 2017, as capacity in the spot market was tighter than in the
prior-year periods. The year-over-year net revenue comparison for the ArcBest
segment was also impacted by $0.9 million and $2.2 million of net revenue
included in the three- and nine-month periods ended

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September 30, 2017, respectively, from our military moving business for which a portion was sold in December 2016 and the remainder was sold in December 2017.




Operating income increased $2.2 million and $2.0 million for the three and nine
months ended September 30, 2018, respectively, compared to the same periods of
2017, primarily reflecting net revenue improvement and the impact of the
$1.9 million gain recognized in third quarter 2018, versus $0.2 million
recognized during third quarter 2017, related to the previously discussed sale
of ArcBest's military moving businesses. The third quarter recognition of the
gain on these sales was triggered when the required government approvals of the
transactions were obtained in September 2018 and 2017. For the nine months ended
September 30, 2018, versus the same period of 2017, operating income also
benefited from a $0.7 million decrease in restructuring charges related to our
corporate realignment under our enhanced marketing approach. The year-over-year
operating income improvements were partially offset by a reduction in business
levels from the sale of the military moving business and the associated net
revenue reduction. Shared services expense increased in both 2018 periods,
reflecting investments in technology and personnel associated with managed
transportation solutions and maintaining customer service and, for the nine
months ended September 30, 2018, higher purchase accounting expense related to
an earn-out agreement for the transaction completed in third quarter 2016 to
enhance the segment's dedicated truckload service offerings.



FleetNet Segment


FleetNet's revenues totaled $50.5 million and $145.0 million for the three and
nine months ended September 30, 2018, respectively, compared to $39.6 million
and $116.3 million, respectively, for the same periods of 2017. The 27.6% and
24.7% increase in revenues for the three and nine months ended September 30,
2018, respectively, compared to the same periods of 2017, was due primarily to
increased service event volume.



FleetNet's operating income improved to $1.1 million and $3.6 million for the
three and nine months ended September 30, 2018, respectively, from $0.9 million
and $2.7 million, respectively, in the same prior-year periods. The
year-over-year operating income improvements reflect the revenue growth combined
with improved labor efficiencies.



Asset-Light Revenues - October 2018


Revenues of our Asset-Light operations, on a combined basis (ArcBest and
FleetNet), increased approximately 6% on a per-day basis in October 2018 above
the same prior-year period, primarily due to an increase in ArcBest segment
revenue per shipment, partially offset by a reduction in daily shipments. An
increase in FleetNet's daily service event volume also contributed to the
year-over-year increase in revenues.



Reconciliations of Asset-Light Non-GAAP Measures


We report our financial results in accordance with generally accepted accounting
principles ("GAAP"). However, management believes that certain non-GAAP
performance measures and ratios utilized for internal analysis provide analysts,
investors, and others the same information that we use internally for purposes
of assessing our core operating performance and provides meaningful comparisons
between current and prior period results, as well as important information
regarding performance trends. The use of certain non-GAAP measures improves
comparability in analyzing our performance because it removes the impact of
items from operating results that, in management's opinion, do not reflect our
core operating performance. Other companies may calculate non-GAAP measures
differently; therefore, our calculation of Adjusted EBITDA, Net Revenue, and Net
Revenue Margin 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. These financial measures should not
be construed as better measurements than operating income, operating cash flow,
net income, or earnings per share, as determined under GAAP.



Net Revenue and Net Revenue Margin


Management uses net revenue, defined as revenues less purchased transportation
costs, as a key performance measure of our ArcBest segment which primarily
sources transportation services from third-party providers. Non-GAAP net revenue
margin for the ArcBest segment is calculated as net revenue divided by revenues.



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ArcBest Segment Net Revenue and Net Revenue Margin


                                               Three Months Ended                   Nine Months Ended
                                                  September 30                         September 30
                                          2018         2017      % Change      2018         2017      % Change
                                                                    (in thousands)
Revenue                                 $ 205,449$ 195,749       5.0%    $ 587,369$ 524,554      12.0%
Purchased transportation                  164,322      155,894       5.4%      475,614      417,313      14.0%
Non-GAAP Net Revenue                    $  41,127$  39,855       3.2%   

$ 111,755$ 107,241 4.2%


Non-GAAP Net Revenue Margin                 20.0%        20.4%                   19.0%        20.4%



Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization ("Adjusted EBITDA")


Management uses Adjusted EBITDA as a key measure of performance and for business
planning. The measure is particularly meaningful for analysis of our Asset-Light
businesses, because it excludes amortization of acquired intangibles and
software, which are significant expenses resulting from strategic decisions
rather than core daily operations. Management also believes Adjusted EBITDA to
be relevant and useful information, as EBITDA is a standard measure commonly
reported and widely used by analysts, investors, and others to measure financial
performance of asset-light businesses and the ability to service debt
obligations.



Asset-Light Adjusted EBITDA




                                      Three Months Ended        Nine Months Ended
                                         September 30              September 30
                                       2018          2017        2018         2017
                                                     (in thousands)
ArcBest
Operating Income(1)(2)              $     9,993$  7,838$   16,865$ 14,859
Depreciation and amortization(3)          3,558       3,015        10,563      9,511
Restructuring charges(4)                      -           -           152        875
Adjusted EBITDA                     $    13,551$ 10,853$    27,580$ 25,245

FleetNet
Operating Income(1)(2)              $     1,088$    922$    3,638$  2,690
Depreciation and amortization               291         272           834        823
Adjusted EBITDA                     $     1,379$  1,194$     4,472$  3,513

Total Asset-Light
Operating Income(1)(2)              $    11,081$  8,760$   20,503$ 17,549
Depreciation and amortization(3)          3,849       3,287        11,397     10,334
Restructuring charges(4)                      -           -           152        875
Adjusted EBITDA                     $    14,930$ 12,047$    32,052$ 28,758

--------------------------------------------------------------------------------

(1) The calculation of Adjusted EBITDA as presented in this table begins with

operating income, as other income (costs), income taxes, and net income are

reported at the consolidated level and not included in the operating segment

financial information evaluated by management to make operating decisions.

Consolidated Adjusted EBITDA is reconciled to consolidated net income in the

Consolidated Results section of Results of Operations.

(2) Certain reclassifications have been made to the prior year's operating

segment data to conform to the current year presentation of segment expenses

and the presentation of components of net periodic benefit cost in other

income (costs).

(3) For the ArcBest segment, depreciation and amortization includes amortization

of acquired intangibles of $1.1 million and $3.4 million for three and nine

months ended September 30, 2018, respectively, compared to $1.1 million and

$3.2 million for the same respective prior-year periods, and amortization of

acquired software of $0.5 million and $1.6 million for the three and nine

months ended September 30, 2018, respectively, compared to $0.5 million and

$2.1 million for the same respective prior-year periods.

(4) Restructuring costs relate to the realignment of our corporate structure.




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Seasonality



Our operations are impacted by seasonal fluctuations which affect tonnage,
shipment levels, and demand for our services and, consequently, revenues and
operating results. Freight shipments and operating costs of our Asset-Based and
ArcBest segments can be adversely affected by inclement weather conditions. The
second and third calendar quarters of each year usually have the highest tonnage
levels, while the first quarter generally has the lowest, although other
factors, including the state of the U.S. and global economies, may influence
quarterly freight tonnage levels.



Shipments of the ArcBest segment may decline during winter months because of
post-holiday slowdowns, but expedite shipments can be subject to short-term
increases depending on the impact of weather disruptions to customers' supply
chains. Plant shutdowns during summer months may affect shipments for automotive
and manufacturing customers of the ArcBest segment, but severe weather events
can result in higher demand for expedite services. Moving services of the
ArcBest segment are impacted by seasonal fluctuations, generally resulting in
higher business levels in the second and third quarters as the demand for moving
services is typically stronger in the summer months.



Emergency roadside service events of the FleetNet segment are favorably impacted
by extreme weather conditions that affect commercial vehicle operations, and the
segment's results of operations will be influenced by seasonal variations in
service event volume.



Effects of Inflation



Generally, inflationary increases in labor and fuel costs as they relate to our
Asset-Based operations have historically been mostly offset through price
increases and fuel surcharges. In periods of increasing fuel prices, the effect
of higher associated fuel surcharges on the overall price to the customer
influences our ability to obtain increases in base freight rates. In addition,
certain nonstandard arrangements with some of our customers have limited the
amount of fuel surcharge recovered. The timing and extent of base price
increases on our Asset-Based revenues may not correspond with contractual
increases in wage rates and other inflationary increases in cost elements and,
as a result, could adversely impact our operating results.



In addition, partly as a result of inflationary pressures, our revenue equipment
(tractors and trailers) have been and will very likely continue to be replaced
at higher per unit costs, which could result in higher depreciation charges on a
per-unit basis; however, in recent periods, improved mileage and lower
maintenance costs on newer equipment have partially offset increases in
depreciation expense. We consider these costs in setting our pricing policies,
although the overall freight rate structure is governed by market forces based
on value provided to the customer. The Asset-Based segment's ability to fully
offset inflationary and contractual cost increases can be challenging during
periods of recessionary and uncertain economic conditions.



Generally, inflationary increases in labor and operating costs regarding our
Asset-Light operations have historically been offset through price increases.
The pricing environment, however, generally becomes more competitive during
economic downturns, which may, as it has in the past, affect the ability to
obtain price increases from customers.



In addition to general effects of inflation, the motor carrier freight
transportation industry faces rising costs related to compliance with government
regulations on safety, equipment design and maintenance, driver utilization,
emissions, and fuel economy.


Environmental and Legal Matters




We are subject to federal, state, and local environmental laws and regulations
relating to, among other things: emissions control, transportation or handling
of hazardous materials, underground and aboveground storage tanks, stormwater
pollution prevention, contingency planning for spills of petroleum products, and
disposal of waste oil. We may transport or arrange for the transportation of
hazardous materials and explosives, and we operate in industrial areas where
truck service centers and other industrial activities are located and where
groundwater or other forms of environmental contamination could occur. See
Note L to our consolidated financial statements included in Part I, Item 1 of
this Quarterly

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Report on Form 10-Q for further discussion of the environmental matters to which
we are subject and the reserves we currently have recorded in our consolidated
financial statements for amounts related to such matters.



We are involved in various legal actions, the majority of which arise in the
ordinary course of business. We maintain liability insurance against certain
risks arising out of the normal course of our business, subject to certain
self-insured retention limits. We routinely establish and review the adequacy of
reserves for estimated legal, environmental, and self-insurance exposures. While
management believes that amounts accrued in the consolidated financial
statements are adequate, estimates of these liabilities may change as
circumstances develop. Considering amounts recorded, routine legal matters are
not expected to have a material adverse effect on our financial condition,
results of operations, or cash flows.



Information Technology and Cybersecurity




We depend on the proper functioning and availability of our information systems,
including communications, data processing, financial, and operating systems and
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. Although we strive to
carefully select our third-party vendors, we do not control their actions and
any problems caused by these third parties, including cyber attacks and security
breaches at a vendor, could adversely affect our ability to provide service to
our customers and otherwise conduct our business. Our information systems are
protected through physical and software safeguards as well as backup systems
considered appropriate by management. However, it is not practicable to protect
against the possibility of power loss, telecommunications failures,
cybersecurity attacks, and other cyber events in every potential circumstance
that may arise. To mitigate the potential for such occurrences at our corporate
headquarters, we have implemented various systems, including redundant
telecommunication facilities; replication of critical data to an offsite
location; a fire suppression system to protect our on-site data center; and
electrical power protection and generation facilities. We also have a
catastrophic disaster recovery plan and alternate processing capability
available for our critical data processes in the event of a catastrophe that
renders our corporate headquarters unusable.



Our business interruption and cyber insurance would offset losses up to certain
coverage limits in the event of a catastrophe or certain cyber incidents;
however, losses arising from a catastrophe or significant cyber incident would
likely exceed our insurance coverage and could have a material adverse impact on
our results of operations and financial condition. Furthermore, a significant
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. We have made and continue to make significant financial
investments in technologies and processes to mitigate these risks. We also
provide employee awareness training around phishing, malware, and other cyber
risks. Management is not aware of any cybersecurity incident that has had a
material effect on our operations, although there can be no assurances that a
cyber incident that could have a material impact to our operations could not
occur.





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Liquidity and Capital Resources

Our primary sources of liquidity are cash, cash equivalents, and short-term investments, cash generated by operations, and borrowing capacity under our revolving credit facility or accounts receivable securitization program.

Cash Flow and Short-Term Investments




Components of cash and cash equivalents and short-term investments were as
follows:




                                                               September 30      December 31
                                                                   2018             2017
                                                                      (in thousands)
Cash and cash equivalents(1)                                  $      177,436$     120,772
Short-term investments, primarily FDIC-insured certificates
of deposit                                                            75,879           56,401
Total(2)                                                      $      253,315$     177,173

--------------------------------------------------------------------------------

(1) Cash equivalents consist of money market funds and variable rate demand

notes.

(2) Cash, variable rate demand notes, and certificates of deposit are recorded at

cost plus accrued interest, which approximates fair value. Money market funds

are recorded at fair value based on quoted prices. At September 30, 2018 and

December 31, 2017 cash and cash equivalents totaling $85.2 million and

      $61.1 million, respectively, were not FDIC insured.




Cash, cash equivalents, and short-term investments increased $76.1 million from
December 31, 2017 to September 30, 2018. During the nine-month period ended
September 30, 2018, cash provided by operations of $173.6 million was used to
repay $50.0 million of notes payable; fund $36.3 million of capital expenditures
(and an additional $71.6 million of certain Asset-Based revenue equipment was
financed with notes payable), net of proceeds from asset sales; and pay
dividends of $6.2 million on common stock.



Cash provided by operating activities during the nine months ended September 30,
2018 increased $77.2 million compared to the same prior-year period, primarily
due to improved operating results and changes in working capital. The comparison
of cash provided by operating activities was also impacted by the $5.5 million
contribution we made to our nonunion defined benefit pension plan in third
quarter 2018 and the $15.3 million of cash payments toward the multiemployer
pension withdrawal liability charge recognized in second quarter 2018 related to
the transition agreement ABF Freight entered into with the New England Pension
Fund (as further discussed within the Asset-Based Segment Overview section of
Results of Operations).



Cash, cash equivalents, and short-term investments decreased $6.0 million from
December 31, 2016 to September 30, 2017. During the nine-month period ended
September 30, 2017, cash provided by operations of $98.3 million, $10.0 million
of borrowings under the accounts receivable securitization program, and cash on
hand was used to repay $52.3 million of notes payable; fund $40.8 million of
capital expenditures (and an additional $61.6 million of certain Asset-Based
revenue equipment purchases were financed with notes payable), net of proceeds
from asset sales; pay dividends of $6.2 million on common stock; and purchase
$6.0 million of treasury stock.



Financing Arrangements


Our financing arrangements are discussed further in Note E to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.




Credit Facility

We have a revolving credit facility (the "Credit Facility") under our second
amended and restated credit agreement. Our Credit Facility has an initial
maximum credit amount of $200.0 million, including a swing line facility in an
aggregate amount of up to $20.0 million and a letter of credit sub-facility
providing for the issuance of letters of credit up to an aggregate amount of
$20.0 million. We may request additional revolving commitments or incremental
term loans thereunder up to an aggregate additional amount of $100.0 million,
subject to certain additional conditions as provided in the Credit Agreement.
Principal payments under the Credit Facility are due upon maturity of the
facility on July 7, 2022;

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however, borrowings may be repaid at our discretion in whole or in part at any
time, without penalty, subject to required notice periods and compliance with
minimum prepayment amounts. The Credit Agreement includes certain conditions,
including limitations on incurrence of debt. As of September 30, 2018, we had
available borrowing capacity of $130.0 million under our Credit Facility.



Interest Rate Swaps


We have a five-year interest rate swap agreement with a $50.0 million notional
amount maturing on January 2, 2020. Under the interest rate swap agreement, we
receive floating-rate interest amounts based on one-month LIBOR in exchange for
fixed-rate interest payments of 1.85% over the life of the agreement. The
interest rate swap mitigates interest rate risk by effectively converting $50.0
million of borrowings under our Credit Facility from variable-rate interest to
fixed-rate interest with a per annum rate of 3.10% based on the margin of the
Credit Facility as of September 30, 2018. The fair value of the interest rate
swap asset of $0.5 million and $0.1 million was recorded in other long-term
assets in the consolidated balance sheet at September 30, 2018 and December 31,
2017, respectively.



In June 2017, we entered into a second forward-starting interest rate swap
agreement with a $50.0 million notional amount which will start on January 2,
2020 upon maturity of the current interest rate swap agreement, and mature on
June 30, 2022. Under the swap agreement we will receive floating-rate interest
amounts based on one-month LIBOR in exchange for fixed-rate interest payments of
1.99% over the life of the agreement. The interest rate swap mitigates interest
rate risk by effectively converting $50.0 million of borrowings under the Credit
Facility from variable-rate interest to fixed-rate interest with a per annum
rate of 3.24% based on the margin of the Credit Facility as of September 30,
2018. The fair value of the interest rate swap asset of $1.2 million and $0.4
million was recorded in other long-term assets in the consolidated balance sheet
at September 30, 2018 and December 31, 2017, respectively.



Accounts Receivable Securitization Program


Our accounts receivable securitization program was amended and extended in
August 2018 to modify certain covenants and conditions and extend the maturity
date of the program to October 1, 2021. The program allows for cash proceeds of
$125.0 million to be provided under the facility and has an accordion feature
allowing us to request additional borrowings up to $25.0 million, subject to
certain conditions. Under this program, certain of our subsidiaries continuously
sell a designated pool of trade accounts receivables to a wholly owned
subsidiary which, in turn, may borrow funds on a revolving basis. As of
September 30, 2018, we have $45.0 million borrowed under the program.



The accounts receivable securitization program includes a provision under which
we may request, and the letter of credit issuer may issue, standby letters of
credit, primarily in support of workers' compensation and third-party casualty
claims liabilities in various states in which we are self-insured. The
outstanding standby letters of credit reduce the availability of borrowings
under the program. As of September 30, 2018, we had available borrowing capacity
of $62.4 million under the accounts receivable securitization program.



In October 2018, we repaid $5.0 million of the amount borrowed under the accounts receivable securitization program which reduced our long-term debt and increased our available borrowing capacity.

Letter of Credit Agreements and Surety Bond Programs


As of September 30, 2018, we had letters of credit outstanding of $18.2 million
(including $17.6 million issued under the accounts receivable securitization
program). We have programs in place with multiple surety companies for the
issuance of surety bonds in support of our self-insurance program. As of
September 30, 2018, surety bonds outstanding related to our self-insurance
program totaled $49.4 million.



Notes Payable and Capital Leases

We have financed the purchase of certain revenue equipment, other equipment, and software through promissory note arrangements, including $57.2 million and $71.6 million for revenue equipment and software during the three and nine months ended September 30, 2018, respectively.

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We financed the purchase of an additional $16.7 million of revenue equipment
through promissory note arrangements as of November 1, 2018. We intend to
utilize promissory note arrangements and will consider utilizing capital lease
agreements to finance future purchases of certain revenue equipment, provided
such financing is available and the terms are acceptable to us.



Contractual Obligations



We have purchase obligations, consisting of authorizations to purchase and
binding agreements with vendors, relating to revenue equipment used in our
Asset-Based operations, other equipment, software, certain service contracts,
and other items for which amounts were not accrued in the consolidated balance
sheet as of September 30, 2018. These purchase obligations totaled $58.4 million
as of September 30, 2018, with $54.8 million estimated to be paid within the
next year, $3.5 million estimated to be paid in the following two-year period,
and $0.1 million to be paid within five years, provided that vendors complete
their commitments to us. Purchase obligations for revenue equipment, and other
equipment are included in our 2018 capital expenditure plan. We also have
contractual obligations for operating leases, primarily related to our
Asset-Based service centers, which totaled $84.2 million, net of noncancelable
subleases, as of September 30, 2018, with $19.2 million estimated to be paid
within the next year, $31.3 million estimated to be paid in the following
two-year period, $15.5 million to be paid within five years, and $18.2 million
to be paid thereafter.



Our contractual obligations related to our notes payable, which provide
financing for revenue equipment and software purchases, totaled $188.0 million,
including interest, as of September 30, 2018, an increase of $26.8 million from
December 31, 2017. The scheduled maturities of our long-term debt obligations as
of September 30, 2018 are disclosed in Note E to our consolidated financial
statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
There have been no other material changes in the contractual obligations
disclosed in our 2017 Annual Report on Form 10­K during the nine months ended
September 30, 2018.



For 2018, our total net capital expenditures, including amounts financed, are
estimated to range from $145.0 million to $150.0 million, net of asset sales.
These 2018 estimated net capital expenditures include revenue equipment
purchases of $90.0 million, primarily for our Asset-Based operations. The
remainder of 2018 expected capital expenditures includes costs of other facility
and handling equipment for our Asset-Based operations and technology investments
across the enterprise. We have the flexibility to adjust certain planned 2018
capital expenditures as business levels dictate. Depreciation and amortization
expense, excluding amortization of intangibles, is estimated to be approximately
$105.0 million in 2018.



As previously disclosed within the Consolidated Results section of Results of
Operations, an amendment was executed in November 2017 to terminate our nonunion
defined benefit pension plan with an effective date of December 31, 2017. In
September 2018, the plan received a favorable determination letter from the IRS
regarding qualification of the plan termination. Following the election window
in which participants may choose their form of benefit payment, the plan will
distribute immediate lump sum benefit payments and then settle remaining plan
liabilities for benefits with the purchase of nonparticipating annuity contracts
from insurance companies. In anticipation of funding the nonunion pension plan
for termination, we made a $5.5 million voluntary contribution to the plan in
September 2018 which will be deductible for income tax purposes in our tax year
ended February 28, 2018.



Based on currently available information provided by the plan's actuary, we
estimate noncash pension settlement charges could total approximately $15.0
million to $21.0 million and are expected to be recognized partially in fourth
quarter 2018 and partially in first quarter 2019, and cash funding could total
approximately $13.0 million in first quarter 2019, 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 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. Liquidation of
plan assets and settlement of plan obligations is expected to be complete in
February 2019.



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ABF Freight System, Inc. and certain other subsidiaries reported in our
Asset-Based operating segment contribute to multiemployer health, welfare, and
pension plans based generally on the time worked by their contractual employees,
as specified in the collective bargaining agreement and other supporting
supplemental agreements (see Note F to our consolidated financial statements
included in Part I, Item 1 of this Quarterly Report on Form 10-Q).



As previously discussed within the Asset-Based Segment Overview section of
Results of Operations, the New England Supplemental Agreements for the 2018-2023
contract period were ratified by the local unions in the region covered by the
supplements on July 25, 2018. In accordance with the New England Supplemental
Agreements, ABF Freight's multiemployer pension plan obligation with the New
England Pension Fund was restructured under a transition agreement effective on
August 1, 2018. The transition agreement resulted in ABF Freight's withdrawal as
a participating employer in the New England Pension Fund and triggered
settlement of the related withdrawal liability. ABF Freight simultaneously
re-entered the New England Pension Fund as a new participating employer free
from any pre-existing withdrawal liability and at a lower future contribution
rate. The withdrawal liability was partially settled through the initial lump
sum cash payment of $15.1 million made in third quarter 2018, and the remainder
will be settled with monthly payments to the New England Pension Fund over a
period of 23 years with an initial aggregate present value of $22.8 million. The
first monthly payment was made in September 2018. In accordance with current tax
law, these payments are deductible for income taxes when paid.



Other Liquidity Information



Cash, cash equivalents, and short-term investment totaled $253.3 million at
September 30, 2018. General economic conditions, along with competitive market
factors and the related impact on our business, primarily the tonnage and
pricing levels that the Asset-Based segment receives for its services, could
affect our ability to generate cash from operations and maintain cash, cash
equivalents, and short-term investments on hand as operating costs increase. Our
Credit Facility and accounts receivable securitization program provide available
sources of liquidity with flexible borrowing and payment options. We believe
these agreements will continue to provide borrowing capacity options necessary
for growth of our businesses. We believe existing cash, cash equivalents,
short-term investments, cash generated by operations, and amounts available
under our Credit Agreement or accounts receivable securitization program will be
sufficient to meet our liquidity needs, including financing potential
acquisitions and the repayment of amounts due under our financing arrangements,
for the foreseeable future. Notes payable, capital leases, and other secured
financing may also be used to fund capital expenditures, provided that such
arrangements are available and the terms are acceptable to us.



On October 30, 2018, the Company's Board of Directors declared a dividend of
$0.08 per share to stockholders of record as of November 13, 2018. We expect to
continue to pay quarterly dividends on our common  stock in the foreseeable
future, although there can be no assurances in this regard since future
dividends will be at the discretion of the Board of Directors and are dependent
upon our future earnings, capital requirements, and financial condition;
contractual restrictions applying to the payment of dividends under our Credit
Agreement; and other factors.



We have a program in place to repurchase our common stock in the open market or
in privately negotiated transactions. The program has no expiration date but may
be terminated at any time at the Board of Directors' discretion. Repurchases may
be made using cash reserves or other available sources. During the nine months
ended September 30, 2018, we purchased 5,882 shares of our common stock leaving
$31.5 million available for repurchase under the current buyback program.



Financial Instruments



We have not historically entered into financial instruments for trading
purposes, nor have we historically engaged in a program for fuel price hedging.
No such instruments were outstanding as of September 30, 2018. We have interest
rate swap agreements in place which are discussed in the Financing Arrangements
section of Liquidity and Capital Resources.



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Balance Sheet Changes



Accounts Receivable

Accounts receivable increased $44.1 million from December 31, 2017 to September 30, 2018, reflecting higher business levels in September 2018 compared to December 2017.




Other Long-Term Assets

The $10.4 million increase in other long-term assets from December 31, 2017 to
September 30, 2018, includes $5.9 million related to the one-time, lump sum
ratification bonus under the 2018 ABF NMFA which was paid during third quarter
2018 and is being amortized over the duration of the contract beginning April 1,
2018. The year-to-date change in other long-term assets was also impacted by
increases in cash surrender value of life insurance policies and increases in
the fair value of our interest rate swap agreements.



Accounts Payable


Accounts payable increased $25.4 million from December 31, 2017 to September 30,
2018, primarily due to increased business levels in September 2018 compared to
December 2017.



Accrued Expenses

Accrued expenses increased $22.6 million from December 31, 2017 to September 30,
2018, primarily due to certain incentive accruals related to our improved
operating performance and the current portion of long-term incentive plans, a
portion of which are driven by shareholder returns relative to peers; higher
accruals for contributions to defined contribution plans; and an increase in
holiday and vacation accruals for union employees related, in part, to the
restoration of a week of vacation under the 2018 ABF NMFA.



Pension and Postretirement Liabilities


Following receipt in September 2018 of the favorable termination letter from the
IRS regarding the qualification of the termination of the nonunion defined
benefit pension plan, the $11.9 million unfunded pension liability was
reclassified from long-term to current on the consolidated balance sheet as of
September 30, 2018.



Other Long-Term Liabilities

Other long-term liabilities increased $24.8 million from December 31, 2017 to
September 30, 2018, primarily due to recognition of the long-term portion of the
New England Pension Fund withdrawal liability, of which $22.2 million remains
outstanding at September 30, 2018, and higher accruals for long-term incentive
plans which are impacted by shareholder returns relative to peers.



Off-Balance Sheet Arrangements

At September 30, 2018, our off-balance sheet arrangements of $142.6 million included purchase obligations, as previously discussed in the Contractual Obligations section of Liquidity and Capital Resources, and future minimum rental commitments, net of noncancelable subleases, under operating lease agreements primarily for our Asset-Based service centers.




We have no investments, loans, or any other known contractual arrangements with
unconsolidated special-purpose entities, variable interest entities, or
financial partnerships and have no outstanding loans with executive officers or
directors.



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Income Taxes



Our effective tax rate was 24.5% and 18.4% for the three months and nine months
ended September 30, 2018, respectively. Our effective tax rate was 38.6% and
34.9% for the three months and nine months ended September 30, 2017,
respectively. As a result of the Tax Reform Act and our use of a fiscal year
rather than a calendar year for U.S. income tax filing, taxes are required to be
calculated by applying a blended rate to the taxable income for the tax year
ended February 28, 2018. In computing total tax expense for the three and nine
months ended September 30, 2018, a 32.74% blended rate was applied to the two
months ended February 28, 2018, and a 21.0% federal statutory rate was applied
to the months of March 2018 through September 2018. The average state tax rate,
net of the associated federal deduction, is approximately 5%. However, various
factors may cause the full-year 2018 tax rate to vary significantly from the
statutory rate.



At December 31, 2017, we remeasured deferred tax assets and liabilities based on
the rate at which they are expected to reverse in the future. Existing deferred
tax assets and liabilities at December 31, 2017 that were reasonably estimated
to reverse in the tax year ending February 28, 2018 were remeasured at a rate of
32.74%. Existing deferred tax assets and liabilities at December 31, 2017 that
were reasonably estimated to reverse after the tax year ending February 28, 2018
were remeasured at a rate of 21.0%. In the first nine months of 2018, a
provisional reduction of net deferred income tax liabilities was recognized
related to the reversal of temporary differences through our tax year end of
February 28, 2018. As a result, we recognized a provisional deferred tax benefit
in continuing operations of $0.8 million and $3.5 million in the three and nine
months ended September 30, 2018, respectively, which impacted the effective tax
benefit rate as noted in the following table.



Reconciliation between the effective income tax rate, as computed on income before income taxes, and the statutory federal income tax rate is presented in the following table:




                                                   Three Months Ended                          Nine Months Ended
                                                      September 30                                September 30
                                                2018                 2017                 2018                   2017
                                                                            (in thousands)

Income tax provision at the statutory
federal rate(1)                           $ 11,338    21.0 %    $ 8,423    35.0 %   $  13,380    21.0 %    $  12,444    35.0 %
Federal income tax effects of:
Impact of the Tax Reform Act on
deferred tax                                 (825)   (1.5) %          -       - %     (3,466)   (5.4) %            -       - %
Impact of the Tax Reform Act on
current tax                                     22       - %          -       - %        (47)   (0.1) %            -       - %
Alternative fuel credit(2)                       -       - %          -       - %     (1,203)   (1.9) %            -       - %
Nondeductible expenses and other             1,055     2.0 %        394     

1.6 % 2,153 3.3 % 1,124 3.2 % Increase (decrease) in valuation allowances

                                     205     0.4 %        (3)     

- % (79) (0.1) % (246) (0.7) % Tax benefit from vested RSUs

                  (24)       - %         16     

0.1 % (325) (0.5) % (1,229) (3.4) % Life insurance proceeds and changes in cash surrender value

                         (242)   (0.5) %      (330)   

(1.4) % (438) (0.7) % (675) (1.9) % Future state tax rate changes

                    -       - %         39     0.2 %       (130)   (0.2) %           39     0.1 %

Federal employment and R&D tax credits (63) (0.1) % (36) (0.1) % (120) (0.2) % (170) (0.5) % Federal income tax provision (benefit) $ 128 0.3 % $ 80 0.4 % $ (3,655) (5.8) % $ (1,157) (3.2) % State income tax provision

                   1,749     3.2 %        777     

3.2 % 2,028 3.2 % 1,111 3.1 % Total provision for income taxes $ 13,215 24.5 % $ 9,280 38.6 % $ 11,753 18.4 % $ 12,398 34.9 %

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 (1)  For the three and nine months ended September 30, 2018, the effect of the
      change in the U.S. corporate tax rate to 21% in accordance with the Tax

Reform Act is reflected in separate components of the reconciliation. For the

three and nine months ended September 30, 2017, amounts in this

reconciliation reflect the 35% statutory U.S. income tax rate in effect prior

to the enactment of the Tax Reform Act.

(2) The nine-month period ended September 30, 2018 was impacted by the February

2018 passage of the Bipartisan Budget Act of 2018 which retroactively

reinstated the alternative fuel tax credit that had previously expired on

December 31, 2016. The credit was reinstated through December 31, 2017 and

the $1.2 million credit related to 2017 was recognized in the first quarter

      of 2018.




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At September 30, 2018, we had $47.8 million of net deferred tax liabilities
after valuation allowances. We evaluated the need for a valuation allowance for
deferred tax assets at September 30, 2018 by considering the future reversal of
existing taxable temporary differences, future taxable income, and available tax
planning strategies. Valuation allowances for deferred tax assets totaled $0.9
million and $0.8 million at September 30, 2018 and December 31, 2017,
respectively. As of September 30, 2018, deferred tax liabilities which will
reverse in future years exceeded deferred tax assets.



Financial reporting income differs significantly from taxable income because of
such items as revenue recognition, accelerated depreciation for tax purposes,
pension accounting rules, and a significant number of liabilities such as
vacation pay, workers' compensation, and other liabilities, which, for tax
purposes, are generally deductible only when paid. For the nine months ended
September 30, 2018 and September 30, 2017, financial reporting income exceeded
income determined under income tax law.



During the nine months ended September 30, 2018, we made state and foreign tax
payments of $3.6 million, and received refunds of $1.1 million of federal and
state income taxes that were paid in prior years. Management does not expect the
cash outlays for income taxes will materially exceed reported income tax expense
for the foreseeable future.



Critical Accounting Policies




The accounting policies that are "critical," or the most important, to
understand our financial condition and results of operations and that require
management to make the most difficult judgments are described in our 2017 Annual
Report on Form 10-K. The following policies have been updated during the nine
months ended September 30, 2018 for the adoption of accounting standard updates
disclosed within this section of MD&A.



Goodwill


Effective January 1, 2018, we early adopted an amendment to ASC Topic 350,
Intangibles - Goodwill and Other, Simplifying the Test of Goodwill Impairment,
which removes Step 2 of the goodwill impairment test, and we updated our
critical accounting policy related to goodwill accordingly. The adoption of the
amendment did not have an impact on our consolidated financial statements for
the nine months ended September 30, 2018.



Goodwill is recorded as the excess of an acquired entity's purchase price over
the value of the amounts assigned to identifiable assets acquired and
liabilities assumed. Goodwill is not amortized, but rather is evaluated for
impairment annually or more frequently if indicators of impairment exist. Our
measurement of goodwill impairment involves a comparison of the estimated fair
value of a reporting unit to its carrying value. Fair value is derived using a
combination of valuation methods, including earnings before interest, taxes,
depreciation, and amortization (EBITDA) and revenue multiples (market approach)
and the present value of discounted cash flows (income approach). For annual and
interim impairment tests, we are required to record an impairment charge, if
any, by the amount a reporting unit's fair value is exceeded by the carrying
value of the reporting unit, limited to the carrying value of goodwill included
in the reporting unit. Our annual impairment testing is performed as of October
1.



Revenue Recognition

On January 1, 2018, we adopted ASC Topic 606, Revenue from Contracts with
Customers, ("ASC Topic 606") which provides a single comprehensive revenue
recognition model for all contracts with customers and contains principles to
apply to determine the measurement of revenue and the timing of when it is
recognized. We adopted ASC Topic 606 using the modified retrospective method
applied to those contracts which were not completed as of January 1, 2018.
Results for reporting periods beginning after January 1, 2018 are presented
under ASC Topic 606, while prior period amounts are not adjusted and continue to
be reported in accordance with the Company's historic method of accounting under
ASC Topic 605, Revenue Recognition.



Revenues are recognized when or as control of the promised services is
transferred to our customers, in an amount that reflects the consideration we
expect to be entitled to in exchange for those services. Our performance
obligations are primarily satisfied upon final delivery of the freight to the
specified destination. Revenue is recognized based on the relative transit time
in each reporting period with expenses recognized as incurred using a
bill-by-bill or standard delivery times to establish estimates of revenue in
transit for recognition in the appropriate period. This methodology utilizes the

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approximate location of the shipment in the delivery process to determine the revenue to recognize, and management believes it to be a reliable method.




Certain contracts may provide for volume-based or other discounts which are
accounted for as variable consideration. We estimate these amounts based on the
expected discounts earned by customers and revenue is recognized based on the
estimates. Revenue adjustments may also occur due to rating or other billing
adjustments. We estimate revenue adjustments based on historical information and
revenue is recognized accordingly at the time of shipment. We believe that
actual amounts will not vary significantly from estimates of variable
consideration.



Revenue, purchased transportation expense, and third-party service expenses are
reported on a gross basis for certain shipments and services where we utilize a
third-party carrier for pickup, linehaul, delivery of freight, or performance of
services but remains primarily responsible for fulfilling delivery to the
customer and maintains discretion in setting the price for the services.
Purchased transportation expense is recognized as incurred.



For our FleetNet segment, service fee revenue is recognized upon response to the
service event and repair revenue is recognized upon completion of the service by
third-party vendors. Revenue and expense from repair and maintenance services
performed by third-party vendors are reported on a gross basis as FleetNet
controls the services prior to transfer to the customer and remains primarily
responsible to the customer for completion of the services.



We record deferred revenue when cash payments are received or due in advance of
performance under the contract. Deferred revenues totaled $0.8 million and $0.6
million at September 30, 2018 and December 31, 2017, respectively, and are
recorded in accrued expenses in the consolidated balance sheet.



Payment terms with customers may vary depending on the service provided,
location or specific agreement with the customer. The time between invoicing and
when payment is due is not significant. For certain services, we require payment
before the services are delivered to the customer.



We expense sales commissions when incurred because the amortization period is one year or less.

Accounting Pronouncements Not Yet Adopted

New accounting rules and disclosure requirements can significantly impact our reported results and the comparability of financial statements. Accounting pronouncements which have been issued but are not yet effective for our financial statements are disclosed in Note A to our consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.




ASC Topic 842, Leases, ("ASC Topic 842") which is effective for us beginning
January 1, 2019, requires lessees to recognize right-of-use assets and lease
liabilities for operating leases with terms greater than 12 months. The standard
also requires additional qualitative and quantitative disclosures designed to
assess the amount, timing, and uncertainty of cash flows arising from leases. In
July 2018, the Financial Accounting Standards Board issued an amendment to ASC
Topic 842 which provides an optional transition method that will give companies
the option to use the effective date as the date of initial application upon
transition. We plan to elect this transition method and, as a result, we will
not adjust our comparative period financial information or make the new required
lease disclosures for periods before the effective date. We have established an
implementation team which is in the process of implementing the new accounting
standard, including accumulating necessary information, assessing the current
lease portfolio, and implementing software to meet the new reporting
requirements. We are also evaluating current processes and controls and
identifying necessary changes to support the adoption of the new standard. We
anticipate we will exclude short-term leases from accounting under ASC Topic 842
and plan to elect the package of practical expedients upon transition that will
retain lease classification and other accounting conclusions made in the
assessment of existing lease contracts. Management expects the new standard to
have a material impact on our consolidated balance sheets related to the
addition of the right-of-use asset and associated lease liabilities; however,
the impact on our consolidated statements of operations is expected to be
minimal, if any. As the impact of this standard is non-cash in nature, no impact
is expected on our consolidated statements of cash flows.



Management believes that there is no other new accounting guidance issued but not yet effective that will impact our critical accounting policies.

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Forward-Looking Statements



Certain statements and information in this report may constitute
"forward-looking statements." Terms such as "anticipate," "believe," "could,"
"estimate," "expect," "forecast," "foresee," "intend," "may," "plan," "predict,"
"project," "scheduled," "should," "would," and similar expressions and the
negatives of such terms are intended to identify forward-looking statements.
These statements are based on management's beliefs, assumptions, and
expectations based on currently available information, are not guarantees of
future performance, and involve certain risks and uncertainties (some of which
are beyond our control). Although we believe that the expectations reflected in
these forward-looking statements are reasonable as and when made, we cannot
provide assurance that our expectations will prove to be correct. Actual
outcomes and results could materially differ from what is expressed, implied, or
forecasted in these statements due to a number of factors, including, but not
limited to: a failure of our information systems, including disruptions or
failures of services essential to our operations or upon which our information
technology platforms rely, data breach, and/or cybersecurity incidents;
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 expected 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's public filings with the Securities and
Exchange Commission ("SEC").



For additional information regarding known material factors that could cause our
actual results to differ from our projected results, refer to "Risk Factors" in
Part I, Item 1A in our 2017 Annual Report on Form 10-K.



Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date made and, other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

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                             FINANCIAL INFORMATION

                              ARCBEST CORPORATION

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