ARCBEST CORPORATION General
ArcBest CorporationTM (together with its subsidiaries, the "Company," "we," "us," and "our") provides a comprehensive suite of freight transportation and integrated logistics services to deliver innovative solutions. Our operations are conducted through our three reportable operating segments: Asset-Based, which consists ofABF Freight System, Inc. and certain other subsidiaries ("ABF Freight");ArcBest , our asset-light logistics operation; and FleetNet. TheArcBest and the FleetNet reportable segments combined represent our Asset-Light operations. References to the Company, including "we," "us," and "our," in this Quarterly Report on Form 10-Q are primarily to the Company and its subsidiaries on a consolidated basis. The preparation of financial statements in conformity with accounting principles generally accepted inthe 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") is provided to assist readers in understanding our financial performance during the periods presented and significant trends which may impact our future performance, including 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 endedDecember 31, 2020 . Our 2020 Annual Report on Form 10-K includes additional information about significant accounting policies, practices, and the transactions that underlie our financial results, as well as a detailed discussion of the most significant risks and uncertainties to which our financial and operating results are subject. Results of Operations Consolidated Results Three Months Ended Six Months Ended June 30 June 30 2021 2020 2021 2020 (in thousands, except per share data) REVENUES Asset-Based$ 652,832 $ 460,070 $ 1,209,124 $ 975,783 ArcBest 270,748 151,467 523,084 316,242 FleetNet 59,547 46,440 118,710 98,879 Total Asset-Light 330,295 197,907 641,794 415,121 Other and eliminations (34,154) (30,607) (72,732) (62,135) Total consolidated revenues$ 948,973 $ 627,370 $ 1,778,186 $ 1,328,769 OPERATING INCOME Asset-Based$ 63,911 $ 21,036 $ 93,966 $ 34,276 ArcBest 15,127 1,303 23,392 (106) FleetNet 1,138 782 2,161 1,822 Total Asset-Light 16,265 2,085 25,553 1,716 Other and eliminations (5,877) (2,696) (13,029) (7,748) Total consolidated operating income$ 74,299 $ 20,425 $ 106,490 $ 28,244 NET INCOME$ 60,981 $ 15,880 $ 84,342 $ 17,782 DILUTED EARNINGS PER SHARE$ 2.27 $ 0.61 $ 3.13 $ 0.68 26 Table of Contents Our consolidated revenues, which totaled$949.0 million and$1,778.2 million for the three and six months endedJune 30, 2021 , respectively, increased 51.3% and 33.8%, respectively, compared to the same prior-year periods. The revenue growth was attributable to increased demand and higher pricing for shipping and logistics services in an improving economic environment. Our revenues during the six-month period endedJune 30, 2020 were negatively impacted by the COVID-19 pandemic which disrupted businesses and the economy. The year-over-year changes in consolidated revenues for the three and six months endedJune 30, 2021 reflect an increase in our Asset-Based revenues of 41.9% and 23.9%, respectively, and an increase in revenues of our Asset-Light operations (representing the combined operations of ourArcBest and FleetNet segments) of 66.9% and 54.6%, respectively. The increased elimination of revenue amounts reported in the "Other and eliminations" line of consolidated revenues for the three and six months endedJune 30, 2021 , compared to the same period of 2020, includes the impact of increased intersegment business levels among our operating segments, reflecting continued integration of our logistics services. Our Asset-Based revenue improvement reflects an increase in billed revenue per hundredweight, including fuel surcharges, of 15.4% and 12.4% for the three and six months endedJune 30, 2021 , compared to the same periods of 2020, with per-day increases in tonnage of 22.7% and 11.7%, respectively, and shipments of 13.5% and 7.8%, respectively, for the three and six months endedJune 30, 2021 , compared to the same prior-year periods. The increase in revenues of our Asset-Light operations for the three and six months endedJune 30, 2021 primarily reflects increases in revenue per shipment of 32.9% and 29.5%, respectively, and shipments per day of 39.0% and 30.4%, respectively, for theArcBest segment, compared to the same period of 2020. An increase in roadside and maintenance service event volumes and higher revenue per event for FleetNet also contributed to the year-over-year revenue improvement. On a combined basis, the Asset-Light operating segments generated approximately 34% and 35% of our total revenues before other revenues and intercompany eliminations for the three and six months endedJune 30, 2021 , respectively, and 30% for the same periods of 2020.
Consolidated operating income totaled$74.3 million and$106.5 million for the three and six months endedJune 30, 2021 , respectively, compared to$20.4 million and$28.2 million for the same periods of 2020. The$53.9 million and$78.3 million increase in consolidated operating income for the three and six months endedJune 30, 2021 , respectively, is primarily due to the results of our operating segments (further described within the Asset-Based Segment Results and the Asset-Light Results sections of MD&A). The year-over-year comparisons of consolidated operating income were also impacted by items described in the following paragraphs, including cost reduction actions taken in second quarter 2020, costs related to investments in innovative technology, a gain on the sale of a subsidiary, certain nonunion performance-based incentive plans, certain other nonunion fringe benefits, and, for the six-month period, gains on the sales of property and equipment. The comparisons of our consolidated operating income for the three and six months endedJune 30, 2021 to the same prior-year periods are impacted by numerous actions we implemented, primarily in the second quarter of 2020, in response to the COVID-19 pandemic in anticipation of lower business levels. InApril 2020 , we implemented cost reduction actions which included a 15% reduction in the salaries of officers and nonunion employees and similar compensation adjustments for hourly nonunion employees; a 15% reduction in fees paid to members and committee chairpersons ofArcBest's Board of Directors; implementation of a hiring freeze; suspension of the employer match on our nonunion 401(k) plan; and reduction of advertising, training, travel, and other costs to better align with current business levels. These compensation reductions lowered consolidated operating expenses by approximately$15 million in second quarter 2020. We also made workforce reductions in our Asset-Based network to better align resources with business levels during second quarter 2020. We reversed our cost reductions beginning in the third quarter of 2020, including officer and nonunion employee salaries, the employer match on our nonunion 401(k) plan, and fees for our Board of Directors. Innovative technology costs related to the freight handling pilot test program at ABF Freight impacted consolidated results by$7.4 million (pre-tax), or$5.6 million (after-tax) and$0.21 per diluted share, for second quarter 2021, compared to$4.7 million (pre-tax), or$3.6 million (after-tax) and$0.14 per diluted share, for second quarter 2020. For the six months endedJune 30, 2021 , these costs impacted consolidated results by$14.3 million (pre-tax), or$10.9 million (after-tax) and$0.40 per diluted share, compared to$9.3 million (pre-tax), or$7.2 million (after-tax) and$0.27 per diluted share, for the same period of 2020. The freight handling pilot test program is discussed in the Asset-Based Operating Income section of Asset-Based Segment Results within
Asset-Based Operations.
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Consolidated operating results for the three and six months endedJune 30, 2021 also benefited from the sale of a portion of ourArcBest segment's moving labor services business in second quarter 2021 which resulted in a gain of$6.9 million (pre-tax), or$5.4 million (after-tax) and$0.20 per diluted share. For the three and six months endedJune 30, 2021 , compared to the same periods of 2020, expenses for certain nonunion performance-based incentive plans, including long-term incentive plans impacted by shareholder returns relative to peers, increased$14.0 million and$22.5 million , respectively. Nonunion healthcare expenses increased$3.4 million and$4.5 million for the three and six months endedJune 30, 2020 , respectively, versus the same prior-year periods. For the six months endedJune 30, 2021 , consolidated operating income also benefited from gains on the sale of property and equipment, which increased$5.3 million compared to the same period of 2020. The loss reported in the "Other and eliminations" line, which totaled$5.9 million and$13.0 million for the three and six months endedJune 30, 2021 , respectively, compared to$2.7 million and$7.7 million for the same periods of 2020, includes expenses related to investments to develop and design variousArcBest technology and innovations as well as expenses related to shared services for the delivery of comprehensive transportation and logistics services toArcBest's customers. The$3.2 million and$5.3 million increase in the loss reported in "Other and eliminations" for the three and six months endedJune 30, 2021 , respectively, primarily reflects higher expenses compared to the same periods of 2020, due to the previously discussed cost reductions during the second quarter of 2020 in response to the COVID-19 pandemic and increases in shared service personnel expenses related to higher business levels in the 2021 periods compared to the weaker economic environment experienced in the prior-year periods. We expect the loss reported in "Other and eliminations" for third quarter and full-year 2021 to approximate$5 million and$24 million , respectively. In addition to the above items, consolidated net income and earnings per share were impacted by changes in the cash surrender value of variable life insurance policies, tax benefits from the vesting of share-based compensation awards,
and
other changes in the effective tax rate as described within the Income Taxes section of MD&A. 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, which are reported below the operating income line in the consolidated statements of operations, increased net income by$1.2 million , or$0.05 per diluted share, and$2.5 million , or$0.09 per diluted share, for the three and six months endedJune 30, 2021 , respectively, compared to an increase in net income of$2.6 million , or$0.10 per diluted share, and a decrease of$1.2 million , or$0.05 per diluted share, respectively, for the same prior-year periods. The vesting of restricted stock units, which primarily occurs in the second quarter of each year, resulted in a tax benefit of$6.8 million , or$0.25 per diluted share, and$6.9 million , or$0.26 per diluted share, for the three and six months endedJune 30, 2021 , respectively, compared to tax expense of$0.7 million , or$0.03 per diluted share, for each of the
same periods of 2020.
Consolidated Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization ("Adjusted EBITDA")
We report our financial results in accordance with generally accepted accounting
principles ("GAAP"). However, management believes that certain non-GAAP
performance measures and ratios, such as Adjusted EBITDA, utilized for internal
analysis provide analysts, investors, and others the same information that we
use internally for purposes of assessing our core operating performance and
provides meaningful comparisons between current and prior period results, as
well as important information regarding performance trends. Accordingly, using
these measures improves comparability in analyzing our performance because it
removes the impact of items from operating results that, in management's
opinion, do not reflect our core operating performance. Management uses Adjusted
EBITDA as a key measure of performance and for business planning. The measure is
particularly meaningful for analysis of our operating performance, because it
excludes amortization of acquired intangibles and software of the Asset-Light
businesses, which are significant expenses resulting from strategic decisions
rather than core daily operations. Additionally, Adjusted EBITDA is a primary
component of the financial covenants contained in our Third Amended and Restated
Credit Agreement (see Note F to our consolidated financial statements included
in Part I, Item 1 of this Quarterly Report on Form 10-Q). Other companies may
calculate Adjusted EBITDA differently; therefore, our calculation of Adjusted
EBITDA may not be comparable to similarly titled measures of other companies.
Non-GAAP financial measures should be viewed in addition to, and not as an
alternative for, our reported results. Adjusted EBITDA should not be construed
as a better measurement than operating income, operating cash flow, net income,
or earnings per share, as determined under GAAP.
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Consolidated Adjusted EBITDA
Three Months Ended Six Months Ended
June 30 June 30
2021 2020 2021 2020
(in thousands)
Net income $ 60,981 $ 15,880 $ 84,342 $ 17,782
Interest and other related financing costs 2,274 3,378 4,702 6,325
Income tax provision 12,477 4,854 20,463 5,337
Depreciation and amortization 30,282 29,086 60,636 58,099
Amortization of share-based compensation 3,324 2,890 5,678 5,071
Amortization of net actuarial gains of benefit
plans and pension settlement expense(1) (134) (148) (269) (204)
Consolidated Adjusted EBITDA $ 109,204 $
55,940
(1) The six months ended
of $0.1 million related to our supplemental benefit plan.
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
2020 Annual Report on Form 10-K. The key indicators necessary to understand the
operating results of our Asset-Based segment, which are more fully described in
the Asset-Based Segment Overview within the Asset-Based Operations section of
Results of Operations in Item 7 (MD&A) of Part II of our 2020 Annual Report on
Form 10-K, are outlined below. These key indicators are used by management to
evaluate segment operating performance and measure the effectiveness of
strategic initiatives in the results of our Asset-Based segment. We quantify
certain key indicators using key operating statistics which are important
measures in analyzing segment operating results from period to period. These
statistics are defined within the key indicators below and referred to
throughout the discussion of the results of our Asset-Based segment:
? Overall customer demand for Asset-Based transportation services, including the
impact of economic factors.
Volume of transportation services provided and processed through our network
? which influences operating leverage as the level of tonnage and number of
shipments vary, primarily measured by:
Pounds or Tonnage - total weight of shipments processed during the period in
Pounds per day or Tonnage per day (average daily shipment weight) - pounds or tonnage divided by the number of workdays in the period.
Shipments per day - total number of shipments moving through the Asset-Based freight network during the period divided by the number of workdays in the period.
Pounds per shipment (weight per shipment) - total pounds divided by the number of shipments during the period.
Average length of haul (miles) - total miles between origin and destination service centers for all shipments (including shipments moved with purchased transportation) during the period, with miles weighted based on the size of shipments.
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? Prices obtained for services, including fuel surcharges, primarily measured by:
Billed revenue per hundredweight, including fuel surcharges (yield) - revenue per every 100 pounds of shipment weight, including surcharges related to fuel, systematically calculated as shipments are processed in the Asset-Based freight network. Revenue for undelivered freight is deferred for financial statement purposes in accordance with the Company's revenue recognition policy. Billed revenue used for calculating revenue per hundredweight measurements is not adjusted for the portion of revenue deferred for financial statement purposes.
? Ability to manage cost structure, primarily in the area of salaries, wages, and
benefits ("labor"), with the total cost structure primarily measured by:
Operating ratio - the percent of operating expenses to revenue levels.
We also quantify certain key operating statistics which are used by management to evaluate productivity of operations within the Asset-Based freight network and to measure the effectiveness of strategic initiatives to manage the segment's cost structure from period to period. These measures are defined below and further discussed in the Asset-Based Operating Expenses section within Asset-Based Segment Results:
Shipments per DSY hour - total shipments (including shipments handled by
purchased transportation agents) divided by dock, street, and yard ("DSY")
? hours. This metric is used to measure labor efficiency in the segment's local
operations. The shipments per DSY hour metric will generally increase when more
purchased transportation is used; however, the labor efficiency may be partially offset by increased purchase transportation expense.
Pounds per mile - total pounds divided by total miles driven during the period
(including pounds and miles moved with purchased transportation). This metric
? is used to measure labor efficiency of linehaul operations, although it 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. Other companies within our industry may present different key performance indicators or operating statistics, or they may calculate their measures differently; therefore, our key performance indicators or operating statistics may not be comparable to similarly titled measures of other companies. Key performance indicators or operating statistics should be viewed in addition to, and not as an alternative for, our reported results. Our key performance indicators or operating statistics should not be construed as better measurements of our results than operating income, operating cash flow, net income, or earnings per share, as determined under GAAP. As ofJune 2021 , approximately 82% of our Asset-Based segment's employees were covered under the ABF National Master Freight Agreement (the "2018 ABF NMFA"), the collective bargaining agreement with theInternational Brotherhood of Teamsters (the "IBT"), which will remain in effect throughJune 30, 2023 . Under the 2018 ABF NMFA, the contractual wage and benefits costs, including the ratification bonuses and vacation restoration, are estimated to increase approximately 2.0% on a compounded annual basis through the end of the agreement. Profit-sharing bonuses based on the Asset-Based segment's annual operating ratios for any full calendar year under the contract represent an additional increase in costs under the 2018 ABF NMFA. The contractual wage rate under the 2018 ABF NMFA increased
1.7% effective
approximately 2.5% effective primarily on
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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 Six Months Ended
June 30 June 30
2021 2020 2021 2020
Asset-Based Operating Expenses (Operating Ratio)
Salaries, wages, and benefits 46.3 % 54.1 % 48.6 % 54.6 %
Fuel, supplies, and expenses 9.9 9.9 10.4 11.0
Operating taxes and licenses 1.9 2.5 2.0 2.5
Insurance 1.4 1.8 1.5 1.6
Communications and utilities 0.7 1.0 0.8 0.9
Depreciation and amortization 3.6 5.1 3.9 4.8
Rents and purchased transportation 14.6 10.0 14.1 10.4
Shared services 10.6 9.9 10.4 9.7
Gain on sale of property and equipment - (0.2) (0.7) (0.3)
Innovative technology costs(1) 1.2 1.0
1.2 1.0
Other - 0.3 - 0.3
90.2 % 95.4 % 92.2 % 96.5 %
Asset-Based Operating Income 9.8 % 4.6 % 7.8 % 3.5 %
(1) Represents costs associated with the freight handling pilot test program at
ABF Freight.
The following table provides a comparison of key operating statistics for the Asset-Based segment, as previously defined in the Asset-Based Overview:
Three Months Ended Six Months Ended
June 30 June 30
2021 2020 % Change 2021 2020 % Change
Workdays(1) 63.5 63.5 126.5 127.5
Billed revenue per
hundredweight,
including fuel
surcharges $ 38.87 $ 33.69 15.4 % $ 37.54 $ 33.41 12.4 %
Pounds 1,701,634,637 1,386,384,302 22.7 % 3,258,464,543 2,939,320,599 10.9 %
Pounds per day 26,797,396 21,832,824 22.7 % 25,758,613 23,053,495 11.7 %
Shipments per day 19,713 17,372 13.5 % 19,504 18,090 7.8 %
Shipments per DSY hour 0.450 0.463 (2.8) % 0.452 0.450 0.4 %
Pounds per shipment 1,359 1,257 8.1 % 1,321 1,274 3.7 %
Pounds per mile 19.09 20.19 (5.4) % 19.14 20.02 (4.4) %
Average length of haul
(miles) 1,107 1,084 2.1 % 1,099 1,062 3.5 %
(1) Workdays represent the number of operating days during the period after
adjusting for holidays and weekends.
Asset-Based Revenues
Asset-Based segment revenues for the three and six months ended June 30, 2021
totaled $652.8 million and $1,209.1 million , respectively, compared to
$460.1 million and $975.8 million , respectively, for the same periods of 2020.
The increase in revenues for the three and six months ended June 30, 2021
reflects improvement in business levels compared to the significant reduction in
demand experienced in second quarter 2020 as a result of the COVID-19 pandemic.
Billed revenue (as described in the Asset-Based Segment Overview) increased
41.6% and 25.6% on a per-day basis for the three and six months ended
June 30, 2021 , respectively, compared to the same prior-year periods. For the
three and six months ended June 30, 2021 , the increase in billed revenue
reflects a 22.7% and 11.7% increase in tonnage
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per day, respectively, and a 15.4% and 12.4% increase in total billed revenue per hundredweight, including fuel surcharges, respectively, compared to the same periods of 2020. The number of workdays was the same in second quarter 2021 and fewer by one day in the first half of 2021, versus the same periods of 2020. Tonnage per day increased 22.7% and 11.7% for the three and six months endedJune 30, 2021 , respectively, compared to the same prior-year periods, due to increases in weight per shipment on higher daily shipment levels. The year-over-year increase in tonnage per day for the three months endedJune 30, 2021 reflects double-digit percentage increases in both LTL-rated and truckload-rated tonnage per day. For the six months endedJune 30, 2021 , tonnage growth reflects a double-digit percentage increase in LTL-rated tonnage per day, partially offset by a low-single-digit percentage decrease in truckload-rated spot shipment tonnage moving in the Asset-Based network. Total shipments increased 13.5% and 7.8% on a per-day basis for the three and six months endedJune 30, 2021 , respectively, compared to the same periods of 2020, primarily driven by increases in LTL-rated shipments reflecting strong customer demand. Larger-sized LTL-rated shipments, including an increase in pieces per shipment, impacted the growth in total weight per shipment for the three and six months endedJune 30, 2021 . Truckload-rated tonnage was positively impacted by strong demand for U-Pack household goods moving services in the three- and six-month periods endedJune 30, 2021 . The total truckload-rated tonnage metrics for the three and six month periods compared to the same prior-year periods were impacted by reductions in spot-quoted shipments. The 15.4% and 12.4% increase in total billed revenue per hundredweight, including fuel surcharges, for the three and six months endedJune 30, 2021 , respectively, compared to the same periods of 2020, was primarily due to a strong pricing environment and changes in freight profile and business mix to optimize revenue on shipments in the Asset-Based network. A higher mix of LTL-rated shipments and an increase in U-Pack business, as well as a longer average length of haul and higher fuel surcharge revenues associated with increased fuel prices, positively impacted the total billed revenue per hundredweight measure for the three and six months endedJune 30, 2021 , compared to the same prior-year periods. On-going yield management initiatives, including a general rate increase, also contributed to the year-over-year improvement in billed revenue per hundredweight. Excluding the impact of fuel surcharges, the increase in billed revenue per hundredweight on LTL-rated freight was in the mid-single digits for the three and six months endedJune 30, 2021 , respectively, compared to the same prior-year periods. Prices on accounts subject to deferred pricing agreements and annually negotiated contracts which were renewed during the three and six months endedJune 30, 2021 increased approximately 6.7% and 6.1%, respectively, compared to the same periods of 2020. Pricing on contractual business reflected higher than historical average increases primarily due to tight market capacity and increased customer business levels. The Asset-Based segment implemented nominal general rate increases on its LTL base rate tariffs of 5.95% and 5.9% effectiveJanuary 25, 2021 andFebruary 24, 2020 , respectively, although the rate changes vary by lane and shipment characteristics. The Asset-Based segment's average nominal fuel surcharge rate for the three and six months endedJune 30, 2021 increased approximately 440 and 220 basis points, respectively, compared to the same periods of 2020. During periods of changing diesel fuel prices, the fuel surcharge and associated direct diesel fuel costs also vary by different degrees. Depending upon the rates of these changes and the impact on costs in other fuel- and energy-related areas, operating margins could be impacted. Whether fuel prices fluctuate or remain constant, operating results may be adversely affected if competitive pressures limit our ability to recover fuel surcharges. In periods of declining fuel prices, fuel surcharge percentages also decrease, which negatively impacts the total billed revenue per hundredweight measure and, consequently, revenues. The revenue decline may be disproportionate to the change in our fuel costs. The segment's operating results will continue to be impacted by further changes in fuel prices and
the related fuel surcharges. Asset-Based Operating Income The Asset-Based segment generated operating income of$63.9 million and$94.0 million for the three and six months endedJune 30, 2021 , respectively, compared to$21.0 million and$34.3 million for the same periods of 2020. The Asset-Based segment's operating ratio improved by 5.2 and 4.3 percentage points for the three and six months endedJune 30, 2021 , respectively, compared to the same prior-year periods, reflecting the increased revenues and management of operating resources to higher shipment levels. Operating income for the six months endedJune 30, 2021 was also positively impacted by the sale of an unutilized property which contributed to the$8.6 million of total gains on the sale of property and equipment, compared to$3.3 million in the same prior-year period. 32 Table of Contents Innovative technology costs related to the freight handling pilot test program at ABF Freight impacted operating results of the Asset-Based segment by$7.5 million and$14.4 million for the three and six months endedJune 30, 2021 , respectively, compared to$4.8 million and$9.3 million , respectively, for the same periods of 2020. The pilot, which began in early 2019, is in the early stages in a limited number of locations. WhileArcBest believes the pilot has potential to provide safer and improved freight handling, a number of factors will be involved in determining proof of concept and there can be no assurances that pilot testing will be successful or expand beyond current testing locations. We anticipate innovative technology costs associated with the pilot to impact our Asset-Based operating expenses by approximately$7.5 million in third quarter 2021, compared to$6.2 million in third quarter 2020.
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 46.3% and 48.6% of Asset-Based segment revenues for the three and six-month period endedJune 30, 2021 , respectively, compared to 54.1% 54.6%, respectively, for the same periods of 2020. The decreases in salaries, wages, and benefits as a percentage of revenue for the three and six months endedJune 30, 2021 , compared to the same prior-year periods, were partially offset by higher utilization of purchased transportation to meet customer demand for increased shipment levels. The improvement in salaries, wages, and benefits as a percentage of revenue was also influenced by the effect of higher revenues including fuel surcharges, as a portion of operating costs are fixed in nature and decrease as a percent of revenue with increases in revenue levels. Salaries, wages, and benefits increased$53.4 million and$55.2 million for the three and six months endedJune 30, 2021 , respectively, compared to the same periods of 2020, primarily due to the increase in business levels. The increase in expense also reflects higher expense accruals for certain performance-based incentive plans, year-over-year increases in contractual wage and benefit contribution rates under the 2018 ABF NMFA, and higher nonunion wages and benefits versus the prior-year periods when cost reductions were in place in response to the COVID-19 pandemic, as previously discussed in the Consolidated Results section of MD&A. The contractual wage rate under the 2018 ABF NMFA increased 1.6% effectiveJuly 1, 2020 , and the average health, welfare, and pension benefit contribution rate increased approximately 2.2% effective primarily onAugust 1, 2020 . The Asset-Based segment manages costs with shipment levels; however, increased shipment levels, freight profile changes, challenges with hiring an adequate number of personnel, and equipment capacity constraints pressured the efficiency of dock, street, and yard tasks during the second quarter of 2021. Shipments per DSY hour declined 2.8% for the second quarter of 2021, compared to second quarter 2020, primarily due to inefficiencies driven by equipment capacity constraints related to the business growth and the effect of handling a higher number of larger LTL-rated shipments, including an increase in pieces per shipment. For the six months endedJune 30, 2021 , shipments per DSY hour improved 0.4% compared to the same period of 2020. While the Asset-Based segment has added employees to service the business growth, the segment had to supplement resources with increased utilization of higher-cost purchased transportation in certain locations to manage service levels. The decrease in pounds per mile of 5.4% and 4.4% for the three and six months endedJune 30, 2021 , respectively, compared to the same period of 2020, was due to the higher number of miles (including purchased transportation miles) incurred to service the business growth and the increase in average length of haul resulting from intended changes in business mix, which was compensated by an increase in billed revenue per shipment. Fuel, supplies, and expenses as a percentage of revenue for the second quarter of 2021 was consistent with the second quarter of 2020. For the six months endedJune 30, 2021 , fuel, supplies, and expenses as a percentage of revenue decreased 0.6 percentage points, compared to the same period of 2020. The changes in fuel, supplies, and expenses as a percentage of revenue were influenced by the effect of higher revenues including fuel surcharges, as a portion of operating costs are fixed in nature and decrease as a percent of revenue with increases in revenue levels. Fuel, supplies, and expenses increased$19.0 million and$18.6 million for the three and six months endedJune 30, 2021 , respectively, compared to the same prior-year period, primarily due to higher fuel costs as the Asset-Based segment's average fuel price per gallon (excluding taxes) increased approximately 96% and 39% during the three and six months endedJune 30, 2021 , respectively, compared to the same period of 2020. More miles driven as a result of the increase in business levels also contributed to the year-over-year increases in fuel, supplies, and expenses. For the six months endedJune 30, 2021 , fuel, supplies, and expenses was also impacted by higher expenses associated with increased business levels and weather-related service center 33 Table of Contents
expenses resulting from severe winter storms in first quarter 2021, partially offset by lower costs related to repairs and maintenance on tractors and trailers.
Depreciation and amortization as a percentage of revenue decreased 1.5 and 0.9 percentage points for the three and six months endedJune 30, 2021 , respectively, compared to the same periods of 2020; however, depreciation and amortization expense was relatively consistent across the periods. The decrease in depreciation and amortization as a percentage of revenue was influenced by the effect of higher revenues, as a portion of operating costs are fixed in nature and decrease as a percent of revenue with increases in revenue levels. Rents and purchased transportation as a percentage of revenue increased 4.6 and 3.7 percentage points for the three and six months endedJune 30, 2021 , respectively, compared to the same periods of 2020, primarily due to higher utilization of rail, local delivery agents, and linehaul purchased transportation necessary to serve the needs of our customers as freight demand increased across the Asset-Based system during the first half of 2021. For the three- and six-month periods endedJune 30, 2021 , rail miles increased approximately 53% and 39%, respectively, compared to the same prior-year periods. Shared services as a percentage of revenue increased 0.7 percentage points for each of the three- and six-month periods endedJune 30, 2021 , compared to the same periods of 2020, primarily due to the cost reductions that were in place during 2020 in response to the COVID-19 pandemic, as previously discussed in the Consolidated Results section of MD&A. In addition, the increase in costs as a percentage of revenue reflects higher expense accruals for certain performance-based incentive plans, including long-term incentive plans impacted by shareholder returns relative to peers, for which the timing of recognition was impacted by the effect of the COVID-19 pandemic on operating results for the first half of 2020. The business growth also resulted in higher shared service expense allocations for the three and six months endedJune 30, 2021 , compared to same prior-year periods.
Asset-Based Segment -
The year-over-year improvements in our Asset-Based business levels during the first half of 2021 continued duringJuly 2021 as the segment benefited from a strong pricing environment and increased customer business levels. Although statistics forJuly 2021 have not been finalized, preliminary Asset-Based billed revenues increased approximately 25% on a per-day basis inJuly 2021 , compared toJuly 2020 , reflecting an increase in average daily total tonnage of approximately 5% and an increase in total billed revenue per hundredweight, including fuel surcharges, of approximately 20%. Total shipments per day increased approximately 3% inJuly 2021 , compared toJuly 2020 . Total weight per shipment increased approximately 2% inJuly 2021 , with the weight per shipment on LTL-rated shipments up approximately 6%, versus the same prior-year period. The first quarter of each year generally has the highest operating ratio of the year, although other factors, including the current economic recovery, may influence quarterly comparisons. Current economic conditions and the Asset-Based segment's pricing approach (which is described in the Asset-Based Segment Overview within the Results of Operations section of Item 7 (MD&A) of Part II of our 2020 Annual Report on Form 10-K) will continue to impact our Asset-Based segment's tonnage levels and the prices it receives for its services and, as such, there can be no assurance that our Asset-Based segment will maintain or achieve improvements in its current operating results. Our efforts to manage operational costs in the Asset-Based network may not directly correspond to significant changes in business levels and there can be no assurance that the impact of the COVID-19 pandemic will not have an adverse effect on our operating results in future periods. The marketplace pricing environment has been positive and rational during our efforts to secure needed price increases; however, the competitive environment could limit the Asset-Based segment from securing adequate increases in base LTL freight rates and could limit the amount of fuel surcharge revenue recovered in future periods. Asset-Light Operations Asset-Light Overview TheArcBest and FleetNet reportable segments, combined, represent our Asset-Light operations. Our Asset-Light operations are a key component of our strategy to offer customers a single source of integrated logistics solutions, designed to satisfy the complex supply chain and unique shipping requirements customers encounter. 34 Table of Contents
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 2020 Annual Report on Form 10-K. The key indicators necessary to understand our Asset-Light operating results are outlined below. These key indicators are used by management to evaluate segment operating performance and measure the effectiveness of strategic initiatives in the results of our Asset-Light segments. We quantify certain key indicators using key operating statistics which are important measures in analyzing segment operating results from period to period. These statistics are defined within the key indicators below and referred to throughout the discussion of the results of our Asset-Light operations:
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, primarily measured by: Shipments per day - total shipments (excluding managed transportation solutions as discussed below) divided by the number of working days during the period, compared to the same prior-year period, for theArcBest segment.
Service events - roadside, preventative maintenance, or total service events during the period, compared to the same prior-year period, for the FleetNet segment.
? Prices obtained for services, primarily measured by:
Revenue per shipment or event - total segment revenue divided by total segment
shipments or events during the period (excluding managed transportation
solutions for the
Availability of market capacity and cost of purchased transportation to fulfill
? customer shipments of the
transportation cost expressed as:
Purchased transportation costs as a percentage of revenue - the expense incurred for third-party transportation providers to haul or deliver freight during the period, divided by segment revenues for the period, expressed as a percentage.
? Management of operating costs, primarily in the area of purchased
transportation, with the total cost structure primarily measured by:
Operating ratio - the percent of operating expenses to revenue levels.
Presentation and discussion of the key operating statistics of revenue per shipment and shipments per day for theArcBest segment exclude statistical data of the managed transportation solutions transactions. Growth in managed transportation solutions has increased the number of shipments for these services to approximately one half of theArcBest segment's total shipments, while the business represents less than 20% of segment revenues for the three and six months endedJune 30, 2021 . Due to the nature of our managed transportation solutions which typically involve a larger number of shipments at a significantly lower revenue per shipment level than the segment's other service offerings, inclusion of the managed transportation solutions data would result in key operating statistics which are not representative of the operating results of the segment as a whole. As such, the key operating statistics management uses to evaluate performance of theArcBest segment exclude managed transportation services transactions. Other companies within our industry may present different key performance indicators or they may calculate their key performance indicators differently; therefore, our key performance indicators may not be comparable to similarly titled measures of other companies. Key performance indicators should be viewed in addition to, and not as an alternative for, our reported results. Our key performance indicators should not be construed as better measurements of our results than operating income, operating cash flow, net income, or earnings per share, as determined under GAAP. 35 Table of Contents Asset-Light Results
For the three and six months endedJune 30, 2021 , the combined revenues of our Asset-Light operations totaled$330.3 million and$641.8 million , respectively, compared to$197.9 million and$415.1 million , respectively, for the same periods of 2020. The increase in revenues for the three and six months endedJune 30, 2021 reflects improvement in business levels compared to the significant reduction in demand experienced in second quarter 2020 as a result of the COVID-19 pandemic. The combined revenues of our Asset-Light operating segments generated approximately 34% and 35% of our total revenues before other revenues and intercompany eliminations for the three and six months endedJune 30, 2021 , respectively, compared to approximately 30% for both the three and six months endedJune 30, 2020 . Our Asset-Light combined operating income for the three and six months endedJune 30, 2021 improved to$16.3 million and$25.6 million , respectively, compared to$2.1 million and$1.7 million , respectively, for the same prior-year periods, primarily reflecting improved demand and higher market prices resulting from tighter truckload market capacity. The year-over-year operating income improvement also benefited from a$6.9 million gain on the sale of the labor services subsidiary within the segment's moving business during the second quarter of 2021.
ArcBest Segment
The following table sets forth a summary of operating expenses and operating
income as a percentage of revenue for the
Three Months Ended Six Months Ended
June 30 June 30
2021 2020 2021 2020 ArcBest Segment Operating Expenses (Operating Ratio) Purchased transportation
83.7 % 82.6 % 83.6 % 82.9 %
Supplies and expenses 0.9 1.3 1.0 1.3
Depreciation and amortization 0.9 1.6 0.9 1.6
Shared services 10.7 12.4 10.5 12.8
Gain on sale of subsidiaries(1) (2.6)
- (1.3) -
Other 0.8 1.2 0.8 1.4
94.4 % 99.1 % 95.5 % 100.0 %
ArcBest Segment Operating Income (Loss) 5.6 %
0.9 % 4.5 % - %
(1) Gain recognized for the three and six months ended
the sale of the labor services portion of the ArcBest segment's moving
business in May 2021 .
A comparison of key operating statistics for the ArcBest segment, as previously
defined in the Asset-Light Overview section, is presented in the following
table:
Year Over Year % Change
Three Months Ended Six Months Ended
June 30, 2021 June 30, 2021
Revenue per shipment 32.9% 29.5%
Shipments per day 39.0% 30.4%
ArcBest segment revenues totaled$270.7 million and$523.1 million for the three and six months endedJune 30, 2021 , respectively, compared to$151.5 million and$316.2 million , respectively, for the same periods of 2020. The 78.8% and 65.4% respective increases in revenues primarily reflect improved market demand compared to the same periods of 2020, which were negatively impacted by the COVID-19 pandemic. The revenue increases for the three and six months endedJune 30, 2021 , compared to the same periods of 2020, primarily reflect increases in revenue per shipment of 32.9% and 29.5%, respectively, associated with higher market prices resulting from tighter truckload capacity and increases in shipments per day (excluding managed transportation shipments) of 39.0% and 30.4%, respectively, due to strong customer 36
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demand. Customers' growing need for comprehensive, managed logistics solutions and new account growth also contributed to the year-over-year increases in revenues.
Operating income totaled$15.1 million and$23.4 million for the three and six months endedJune 30, 2021 , respectively, compared to operating income of$1.3 million and an operating loss of$0.1 million for the same periods of 2020, respectively, with the improvement primarily reflecting the increases in revenues. Increased customer shipping levels combined with limited equipment availability in the logistics marketplace positively impacted demand and pricing for ground expedite services for the three and six months endedJune 30, 2021 and contributed to the segment's operating income improvement, compared to the prior-year periods. Operating results for the three and six months endedJune 30, 2021 also benefited from a$6.9 million gain on the sale of a subsidiary within the segment's moving business, as previously mentioned, which contributed 2.6 and 1.3 percentage points to the segment's operating ratio for the three and six months endedJune 30, 2021 , respectively. The segment's purchased transportation costs as a percentage of revenue increased by 1.1 and 0.7 percentage points for the three and six months endedJune 30, 2021 , respectively, compared to the same periods of 2020. Due to changes in market conditions and freight mix, the prices paid for purchased transportation increased by a higher percentage than the prices we secured from customers, resulting in margin compression during the three and six months endedJune 30, 2021 , compared to the same periods of 2020. Significant changes in market capacity, such as those experienced during 2020 and 2021, impact the cost of sourcing such capacity which may not correspond to the timing of revisions to customer pricing and our revenue per shipment. As previously discussed in the Consolidated Results section of MD&A, prior-year operating expenses were lower due to corporate cost reductions in place during the second quarter of 2020, in response to the COVID-19 pandemic. As cost reductions were lifted, operating expenses returned to more normal levels, resulting in increases when comparing to prior-year periods. Operating results for the three and six months endedJune 30, 2021 were also impacted by higher operating expenses due to increased business levels and growth initiatives, including investments in technology and increased wages and costs to manage higher shipment volumes. These higher expenses contributed to the$10.2 million and$14.6 million increase in shared service costs for the three and six months endedJune 30, 2021 , respectively, compared to the same prior-year periods. Shared service costs as a percentage of revenue decreased 1.7 and 2.3 percentage points for the three and six months endedJune 30, 2021 , respectively, compared to the same periods of 2020, due to the effect of higher revenues, as a portion of these costs are fixed in nature and decrease as a percentage of revenue with increases in revenue levels. Although theArcBest segment manages costs with shipment levels, portions of operating expenses are fixed in nature and cost reductions can be limited as the segment strives to enhance capacity sources and maintain customer service. ArcBest Segment -July 2021 The year-over-year improvements in ourArcBest segment business levels during the first half of 2021 continued duringJuly 2021 . Although statistics forJuly 2021 have not been finalized, preliminary revenues of ourArcBest segment on a per-day basis inJuly 2021 were approximately 47% above the prior-year period, reflecting increases in shipments per day and revenue per shipment, as the segment benefited from continued customer demand in an improving economic environment and higher market prices resulting from tighter truckload market capacity. Current economic conditions will continue to impact business levels and purchased transportation costs of ourArcBest segment and, as such, there can be no assurance that the effect of the economic environment, including the impact of the COVID-19 pandemic, will not have an adverse effect on the operating results of ourArcBest segment in future periods.
FleetNet Segment
FleetNet's revenues totaled$59.5 million and$118.7 million for the three and six months endedJune 30, 2021 , respectively, compared to$46.4 million and$98.9 million , respectively, for the same periods of 2020. The 28.2% and 20.1% increases in revenues for the three and six months endedJune 30, 2021 , respectively, compared to the same periods of 2020, were driven by higher event volumes and increases in revenue per event for roadside and preventative maintenance services. FleetNet's results reflect higher demand for its services compared to the same periods of 2020, which were impacted by a reduction in miles driven by customers as a result of the COVID-19 pandemic. The increase in roadside service event volumes was also impacted by a higher number of events from customers who experienced an increase in e-commerce business and, for the six-month period, severe winter weather during the first quarter of 2021. 37 Table of Contents FleetNet's operating income totaled$1.1 million and$2.2 million for the three and six months endedJune 30, 2021 , respectively, compared to$0.8 million and$1.8 million , respectively, for the same periods of 2020, primarily reflecting the increases in revenues. FleetNet's operating income margins for the second quarter of 2021 benefited from increases in revenue per event which outpaced the increased costs to service events. For the six months endedJune 30, 2021 , the impact of higher revenue per event on FleetNet's operating income margins was offset by the effect of higher costs to service the increase in total events, compared to the same period of 2020.
Asset-Light Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization ("Adjusted EBITDA")
We report our financial results in accordance with GAAP. However, management believes that certain non-GAAP performance measures and ratios, such as Adjusted EBITDA, utilized for internal analysis provide analysts, investors, and others the same information that we use internally for purposes of assessing our core operating performance and provides meaningful comparisons between current and prior period results, as well as important information regarding performance trends. The use of certain non-GAAP measures improves comparability in analyzing our performance because it removes the impact of items from operating results that, in management's opinion, do not reflect our core operating performance. Management uses Adjusted EBITDA as a key measure of performance and for business planning. The measure is particularly meaningful for analysis of our Asset-Light businesses, because it excludes amortization of acquired intangibles and software, which are significant expenses resulting from strategic decisions rather than core daily operations. Management also believes Adjusted EBITDA to be relevant and useful information, as EBITDA is a standard measure commonly reported and widely used by analysts, investors, and others to measure financial performance of asset-light businesses and the ability to service debt obligations. Other companies may calculate Adjusted EBITDA differently; therefore, our calculation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results. Adjusted EBITDA should not be construed as a better measurement than operating income, operating cash flow, net income, or earnings per share, as determined under
GAAP.
Asset-Light Adjusted EBITDA
Three Months Ended Six Months Ended
June 30 June 30
2021 2020 2021 2020
(in thousands)
ArcBest Segment
Operating Income (Loss)(1) $ 15,127 $ 1,303 $ 23,392 $ (106) Depreciation and amortization(2) 2,366 2,449 4,752
4,919 Adjusted EBITDA$ 17,493 $ 3,752 $ 28,144 $ 4,813 FleetNet Segment Operating Income(1)$ 1,138 $ 782 $ 2,161 $ 1,822 Depreciation and amortization 413 402 828 793 Adjusted EBITDA$ 1,551 $ 1,184 $ 2,989 $ 2,615 Total Asset-Light Operating Income(1)$ 16,265 $ 2,085 $ 25,553 $ 1,716 Depreciation and amortization 2,779 2,851 5,580 5,712 Adjusted EBITDA$ 19,044 $ 4,936 $ 31,133 $ 7,428
(1) The calculation of Adjusted EBITDA as presented in this table begins with
operating income (loss), 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 toconsolidated net income in the Consolidated Results section of Results of
Operations.
(2) For the
$1.0 million and$1.9 million for the three and six months endedJune 30, 2021 and 2020, respectively. 38 Table of Contents Current Economic Conditions The COVID-19 pandemic negatively impacted the economy and challenged business operations and supply chains during 2020, which resulted in declines in our business levels and operating results primarily in the second quarter of 2020. Economic conditions continued to improve during the first half of 2021. During the first quarter of 2021, certain COVID-19 vaccines were approved by theU.S. Food and Drug Administration for emergency use and a roll-out process began to provide the vaccines to qualified individuals. Vaccinations and other health and safety measures implemented in response to the pandemic slowed the spread of COVID-19 in many geographical areas and lessened the severity of COVID-related restrictions throughout portions ofthe United States . However, the Delta variant, a highly contagious coronavirus strain which was first identified inIndia inDecember 2020 , spread tothe United States inMarch 2021 and is now the dominant variant of the virus. Cases have been rising inthe United States since early July, especially in certain geographic regions. Inlate-July 2021 , theCenters for Disease Control and Prevention updated their guidance to recommend fully vaccinated people (along with unvaccinated people) should wear masks indoors in public in areas of substantial or high transmission of COVID-19. The recent surge in the Delta variant has increased the uncertainty of the future impact of the COVID-19 pandemic on the economy and business operations. We are encouraged by the growth in theU.S. real gross domestic product (the "real GDP") since the second quarter of 2020, when theNational Bureau of Economic Research declared that a recession began inthe United States inFebruary 2020 , and the improvements in other recent economic measures, including theInstitute for Supply Management (ISM) Purchasing Managers' Index ("PMI") and the Industrial Production Index issued by theFederal Reserve . According to the advance estimate released by theBureau of Economic Analysis onJuly 29, 2021 , real GDP increased at an annual rate of 6.5% for second quarter 2021. The Industrial Production Index, while still below pre-pandemic levels, increased at an annual rate of 5.5% for second quarter 2021. PMI, which is a leading indicator for demand in the freight transportation and logistics industry, was 59.5% forJuly 2021 , compared to 53.7% forJuly 2020 and 41.5% inApril 2020 , which was the lowest monthly PMI during the pandemic. The improvement in PMI reflects continued economic expansion in the manufacturing sector and growth in the overall economy. Manufacturing and trade inventory levels remain well below the range we consider optimal for businesses which is considered a positive for freight demand; although there can be no assurance that the economic environment, including the impact of the COVID-19 pandemic, will be favorable for our freight services in future periods. Given the uncertainties regarding the economic environment and the potential impact of the COVID-19 pandemic on our business in future periods, there can be no assurance that our estimates and assumptions regarding the pricing environment and economic conditions, which are made for purposes of impairment tests related to operating assets and deferred tax assets, will prove to be accurate. Extended periods of economic disruption and resulting declines in industrial production and manufacturing and consumer spending could negatively impact demand for our services and have an adverse effect on our results of operations, financial condition, and cash flows. Significant declines in business levels or other changes in cash flow assumptions or other factors that negatively impact the fair value of the operations of our reporting units could result in impairment and a resulting non-cash write-off of a significant portion of the goodwill and intangible assets of ourArcBest segment, which would have an adverse effect on our financial condition and operating results. Effects of Inflation
Most of our expenses are affected by inflation, which generally results in increased operating costs. As such, there can be no assurances of the potential impact of inflationary conditions on our business. Generally, inflationary increases in labor, fuel costs, and other operating expenses as they relate to our Asset-Based operations have historically been mostly offset through price increases and fuel surcharges. In periods of increasing fuel prices, the effect of higher associated fuel surcharges on the overall price to the customer influences our ability to obtain increases in base freight rates. In addition, certain nonstandard arrangements with some of our customers have limited the amount of fuel surcharge recovered. The timing and extent of base price increases on our Asset-Based revenues may not correspond with contractual increases in wage rates and other inflationary increases in cost elements and, as a result, could adversely impact our operating results. Generally, inflationary increases in labor and operating costs regarding our Asset-Light operations have historically been offset through price increases. The pricing environment, however, generally becomes more competitive during
economic
39
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downturns, which may, as it has in the past, affect the ability to obtain price increases from customers both during and following such periods.
Supply chain disruptions and component shortages due in part to closure of suppliers' and manufacturers' operations during the COVID-19 pandemic as well as strong demand in recent quarters have limited the availability and production of certain revenue equipment and certain other equipment used in our business operations. Consequently, prices for these items have also increased. Partly as a result of inflationary pressures, our revenue equipment (tractors and trailers) has been and will very likely continue to be replaced at higher per unit costs, which could result in higher depreciation charges on a per-unit basis. We consider these costs in setting our pricing policies, although the overall freight rate structure is governed by market forces based on value provided to the customer. The Asset-Based segment's ability to fully offset inflationary and contractual cost increases can be challenging during periods of recessionary and uncertain economic conditions.
In addition to general effects of inflation, the motor carrier freight transportation industry faces rising costs related to insurance claims and coverage and 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 K to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion of the environmental matters to which we are subject. 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. See Note K to our consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further discussion of legal matters in which we are currently involved.
Information Technology and Cybersecurity
We depend on the proper functioning, availability, and security of our
information systems, including communications, data processing, financial, and
operating systems, as well as proprietary software programs that are integral to
the efficient operation of our business. Any significant failure or other
disruption in our critical information systems, including ransomware attacks and
other cybersecurity attacks and other cyber incidents that impact the
availability, reliability, speed, accuracy, or other proper functioning of these
systems or that result in proprietary information or sensitive or confidential
data, including personal information of customers, employees and others, being
compromised could have a significant impact on our operations. Any new or
enhanced technology that we may develop and implement may also be subject to
cybersecurity attacks and may be more prone to related incidents. We also
utilize certain software applications provided by third parties; provide
underlying data to third parties; grant access to certain of our systems to
third parties who provide certain outsourced administrative functions or other
services; and increasingly store and transmit data with our customers and third
parties by means of connected information technology systems, any of which may
increase the risk of a cybersecurity incident. Although we strive to carefully
select our third-party vendors, we do not control their actions and any problems
caused by or impacting these third parties, including cyber attacks and security
breaches at a vendor, could result in claims, litigation, losses, and/or
liabilities and materially adversely affect our ability to provide service to
our customers and otherwise conduct our business.
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Our information technology systems are protected through physical and software
safeguards as well as backup systems considered appropriate by management.
However, these systems are vulnerable to interruption by adverse weather
conditions or natural disasters, power loss, telecommunications failures,
terrorist attacks, internet failures, computer viruses, and other events beyond
our control. It is not practicable to protect against the possibility of these
events or cybersecurity attacks and other cyber events in every potential
circumstance that may arise. To mitigate the potential for such occurrences at
our primary data center, we have implemented various systems, including
redundant telecommunication facilities; replication of critical data to an
offsite location; a fire suppression system to protect our on-site data center;
and electrical power protection and generation facilities. We also have a
catastrophic disaster recovery plan and alternate processing capability
available for our critical data processes in the event of a catastrophe that
renders one of our data centers unusable. In response to the health and safety
risks posed by the COVID-19 pandemic and in an effort to mitigate the spread of
COVID-19, we transitioned a significant portion of our office personnel to
remote work arrangements during 2020, and many of these employees are still
working remotely, which may increase our exposure to cybersecurity risks,
including an increased demand for information technology resources, an increased
risk of phishing, and an increased risk of other cybersecurity attacks. We
continue to implement physical and cybersecurity measures in an attempt to
safeguard our systems in order to serve our operational needs in a remote
working environment and to provide uninterrupted service to our customers.
Our property and cyber insurance would offset losses up to certain coverage
limits in the event of a catastrophe or certain cyber incidents, including
certain business interruption events related to these incidents; however, losses
arising from a catastrophe or significant cyber incident would likely exceed our
insurance coverage and could have a material adverse impact on our results of
operations and financial condition. We do not have insurance coverage specific
to losses resulting from a pandemic. A significant disruption in our information
technology systems or a significant cybersecurity incident, including denial of
service, system failure, security breach, intentional or inadvertent acts by
employees or vendors with access to our systems or data, disruption by malware,
or other damage, could interrupt or delay our operations, damage our reputation,
cause a loss of customers, cause errors or delays in financial reporting, expose
us to a risk of loss or litigation, and/or cause us to incur significant time
and expense to remedy such an event.
We have experienced incidents involving attempted denial of service attacks,
malware attacks, and other events intended to disrupt information systems,
wrongfully obtain valuable information, or cause other types of malicious events
that could have resulted in harm to our business. To our knowledge, the various
protections we have employed have been effective to date in identifying these
types of events at a point when the impact on our business could be minimized.
We must continuously monitor and develop our information technology networks and
infrastructure to prevent, detect, address, and mitigate the risk of
unauthorized access, misuse, computer viruses, and other events that could have
a security impact. We have made and continue to make significant financial
investments in technologies and processes to mitigate these risks. We also
provide employee awareness training around phishing, malware, and other cyber
risks. Despite our efforts, due to the increasing sophistication of cyber
criminals and the development of new techniques for attack, we may be unable to
anticipate or promptly detect, or implement adequate protective or remedial
measures against, the activities of perpetrators of cyber attacks. 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:
June 30 December 31
2021 2020
(in thousands)
Cash and cash equivalents(1) $ 362,619 $ 303,954
Short-term investments(2) 59,967 65,408
Total(3) $ 422,586 $ 369,362 (1) Cash equivalents consist of money market funds and variable rate demand
notes.
(2) Short-term investments consist of certificates of deposit and, at December
31, 2020,
(3) 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.
are recorded at amortized cost plus accrued interest. At
totaling
insured nor direct obligations of the U.S. government.
Cash, cash equivalents, and short-term investments increased$53.2 million fromDecember 31, 2020 toJune 30, 2021 . During the six-month period endedJune 30, 2021 , cash on hand and cash provided by operations was used to repay$54.6 million of long-term debt (including$20.0 million repaid on the Credit Facility); fund$14.5 million of capital expenditures, net of proceeds from asset sales (and an additional$8.1 million of certain Asset-Based revenue equipment was financed with notes payable); fund$9.5 million of internally developed software; purchase$8.1 million of treasury stock; and pay dividends of$4.1 million on common stock. The comparisons of our consolidated cash flows and liquidity for the six months endedJune 30, 2021 to the same period of 2020 are impacted by actions we implemented during 2020 in response to the COVID-19 pandemic. In addition to the cost reductions previously discussed in the Consolidated Results section of MD&A, the following actions should be considered when analyzing our year-over-year cash flows and liquidity for the six months endedJune 30, 2021 . OnMarch 26, 2020 , we drew down the$180.0 million remaining available borrowing capacity under the initial maximum credit amount of our revolving credit facility (the "Credit Facility") under our Third Amended and Restated Credit Agreement and borrowed$45.0 million under our accounts receivable securitization program. These borrowings were a proactive measure to increase our cash position and preserve financial flexibility in consideration of general economic and financial market uncertainty and the potential for cash flow disruption resulting from the COVID-19 outbreak. These funds supplemented our already strong cash and short-term investments position and were repaid during third quarter 2020. We also lowered our planned capital expenditures for 2020 by 30%, including a reduction in revenue equipment purchases of$18.0 million . Cash provided by operating activities during the six months endedJune 30, 2021 was$145.9 million compared to$82.1 million in the same prior-year period. Net income increased$66.6 million for the six months endedJune 30, 2021 , compared to the same period of 2020. The increase in net income includes a$6.9 million gain on the sale of the labor services subsidiary of theArcBest segment's moving business during second quarter 2021 and a$4.8 million increase in gains on the sale of property and equipment for the six months endedJune 30, 2021 , compared to the same period of 2020, primarily related to the sale of an unutilized property in the Asset-Based segment. Changes in operating assets and liabilities contributed$9.7 million to the increase in cash provided by operating activities during the six months endedJune 30, 2021 , compared to the same period of 2020. The increases in accounts payable and accrued expenses for the six months endedJune 30, 2021 which were primarily due to the impact of higher business levels, compared to the decreases in these accounts for the same prior-year period, resulted in higher cash flows from operations. These cash flows were partially offset by the business-driven increase in accounts receivable for the six months endedJune 30, 2021 , versus a decrease in accounts receivable for the same period of 2020. Cash provided by operating activities also reflected federal 42 Table of Contents
and state income tax payments, net of refunds, of$15.2 million for the six months endedJune 30, 2021 , compared to state and foreign income tax payments, net of refunds of federal and state income taxes, of$1.9 million for the six months endedJune 30, 2020 . Financing Arrangements InJune 2021 , we repaid$20.0 million of borrowings under our Credit Facility. We had available borrowing capacity of$199.4 million under the initial maximum credit amount of the Credit Facility, as ofJune 30, 2021 . We amended and restated our accounts receivable securitization program inJune 2021 . The amendment extended the maturity date of this program fromOctober 1, 2021 toJuly 1, 2024 , decreased the amount of available cash proceeds under the facility from$125.0 million to$50.0 million , and increased the amount of additional borrowings we may request under the accordion feature of the program from$25.0 million to$100.0 million , subject to certain conditions. As ofJune 30, 2021 , our available borrowing capacity under the accounts receivable securitization program was$39.9 million , as reduced for standby letters of credit issued under the program.
Our financing arrangements are further discussed in Note F to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Contractual Obligations We have purchase obligations, consisting of authorizations to purchase and binding agreements with vendors, relating to revenue equipment used in our Asset-Based operations, other equipment, facility improvements, software, certain service contracts, and other items for which amounts were not accrued in the consolidated balance sheet as ofJune 30, 2021 . These purchase obligations totaled$138.3 million as ofJune 30, 2021 , with$131.9 million estimated to be paid within the next year,$6.1 million estimated to be paid in the following two-year period, and$0.3 million to be paid within five years, provided that vendors complete their commitments to us. As ofJune 30, 2021 , the amount of our purchase obligations has increased$93.7 million fromDecember 31, 2020 , primarily related to revenue equipment, real estate projects, and technology advancements which are included in our 2021 capital expenditure plan. As ofJune 30, 2021 , contractual obligations for operating lease liabilities, primarily related to our Asset-Based service centers, totaled$127.7 million , including imputed interest. The scheduled maturities of our operating lease liabilities as ofJune 30, 2021 are disclosed in Note E to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Our contractual obligations related to our notes payable, which provide financing for revenue equipment and software purchases, totaled$196.3 million , including interest, as ofJune 30, 2021 , for a decrease of$29.1 million fromDecember 31, 2020 . The scheduled maturities of our long-term debt obligations as ofJune 30, 2021 are disclosed in Note F to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no other material changes in the contractual obligations disclosed in our 2020 Annual Report on Form 10-K during the six months endedJune 30, 2021 . Our total capital expenditures for 2021, including amounts financed, are estimated to range from$160.0 million to$170.0 million , net of asset sales, reflecting a$10.0 million increase from our previously disclosed range related to planned real estate investments in the second half of 2021. Our estimated net capital expenditures for 2021 include revenue equipment purchases of$100.0 million , primarily for our Asset-Based operations. The remainder of 2021 expected capital expenditures include real estate projects, dock equipment upgrades and enhancements for our Asset-Based operations, and technology investments across the enterprise. We have the flexibility to adjust certain planned 2021 capital expenditures as business levels dictate. Depreciation and amortization expense, excluding amortization of intangibles, is estimated to be in the range of$115.0 million to$120.0 million in 2021. The amortization of intangible assets is estimated to be approximately$4.0 million in 2021. As we continue to make investments to provide assured capacity solutions to our customers, we expect to increase our revenue equipment purchases in 2022 by an estimated$50.0 million to$60.0 million from 2021 projected levels, and we preliminarily expect to increase our annualized capital expenditures above historical levels by an estimated$50.0 million to$75.0 million to upgrade and expand our Asset-Based service centers. 43 Table of ContentsABF Freight System, Inc. and certain other subsidiaries reported in our Asset-Based operating segment contribute to multiemployer health, welfare, and pension plans based generally on the time worked by their contractual employees, as specified in the collective bargaining agreement and other supporting supplemental agreements (see Note G to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q).
Other Liquidity Information
General economic conditions, including the effects of the COVID-19 pandemic in future periods, along with competitive market factors and the related impact on our business, primarily tonnage and shipment levels and the pricing that we receive for our services in future periods, could affect our ability to generate cash from operations and maintain cash, cash equivalents, and short-term investments on hand as operating costs increase. Our Credit Facility and our accounts receivable securitization program provide available sources of liquidity with flexible borrowing and payment options. We had available borrowing capacity under our Credit Facility and our accounts receivable securitization program of$199.4 million and$39.9 million , respectively, atJune 30, 2021 . We believe these agreements provide borrowing capacity options necessary for growth of our businesses. We believe existing cash, cash equivalents, short-term investments, cash generated by operations, and amounts available under our Credit Facility or our accounts receivable securitization program will be sufficient to finance our operating expenses, fund our ongoing investments in technology, and repay amounts due under our financing arrangements. Notes payable, finance leases, and other secured financing may also be used to fund capital expenditures, provided that such arrangements are available and the terms are acceptable to us. OnJuly 27, 2021 , our Board of Directors declared a dividend of$0.08 per share to stockholders of record as ofAugust 11, 2021 . 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 six months endedJune 30, 2021 , we purchased 126,289 shares of our common stock for an aggregate cost of$8.1 million , leaving$41.9 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 ofJune 30, 2021 . We have an interest rate swap agreement in place which is discussed in Note F to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on
Form 10-Q. Balance Sheet Changes Accounts Receivable
Accounts receivable increased
Accounts Payable
Accounts payable increased
Accrued Expenses
Accrued expenses increased
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Long-term Debt
The $46.5 million decrease in long-term debt, including current portion, from
December 31, 2020 to June 30, 2021 is primarily due to the $20.0 million
repayment of borrowings under our Credit Facility during second quarter 2021 and
payments on note payables during the six months ended June 30, 2021 .
Off-Balance Sheet Arrangements
AtJune 30, 2021 , our off-balance sheet arrangements for purchase obligations totaled$138.3 million , as previously discussed in the Contractual Obligations section of Liquidity and Capital Resources. We have no investments, loans, or any other known contractual arrangements with unconsolidated special-purpose entities, variable interest entities, or financial partnerships and have no outstanding loans with executive officers or directors. Income Taxes Our effective tax rate was 17.0% and 19.5% for the three and six months endedJune 30, 2021 , respectively, compared to 23.4% and 23.1%, respectively, for the same periods of 2020. The federal statutory tax rate is 21.0%, and the average state tax rate, net of the associated federal deduction, is approximately 5%. However, various factors and significant changes in nondeductible expenses, such as cash surrender value of life insurance and the settlement of share-based payment awards primarily vesting in the second quarter, may cause the full-year 2021 tax rate to vary significantly from the statutory rate.
Reconciliation between the effective income tax rate, as computed on income before income taxes, and the statutory federal income tax rate is presented in the following table:
Three Months Ended Six Months Ended
June 30 June 30
2021 2020 2021 2020
(inthousands, except percentages)
Income tax provision at the statutory federal rate$ 15,426 21.0 %$ 4,354 21.0 %$ 22,009 21.0 %$ 4,855 21.0 % Federal income tax effects of: Alternative fuel credit - - % (247) (1.2) % - - % (698) (3.0) % Nondeductible expenses and other 1,012 1.4 % (24)
(0.1) % 1,493 1.4 % 380 1.6 % Increase in valuation allowances
35 - % 41 0.2 % 127 0.1 % 235 1.0 %
Decrease in uncertain tax
positions(1) - - % - - % - - % (933) (4.0) %
Tax expense (benefit) from vested
RSUs (6,796) (9.2) % 659 3.1 % (6,931) (6.6) % 679 3.0 %
Federal research and development
tax credits (125) (0.2) % (193) (0.9) % (253) (0.2) % (443) (1.9) %
Life insurance proceeds and changes
in cash surrender value (262) (0.4) % (537) (2.6) % (528) (0.5) % 262 1.1 %
Federal income tax provision $ 9,290 12.6 % $ 4,053 19.5 % $ 15,917 15.2 % $ 4,337 18.8 %
State income tax provision 3,187 4.4 % 801
3.9 % 4,546 4.3 % 1,000 4.3 %
Total provision for income taxes
(1) The statute of limitations expired in the first quarter of 2020 for the
federal tax refund for which the reserve for uncertain tax positions was
established in 2018.
At June 30, 2021 , we had $58.5 million of net deferred tax liabilities after
valuation allowances. We evaluated the need for a valuation allowance for
deferred tax assets at June 30, 2021 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
$1.4 million and $1.3 million at June 30, 2021 and December 31, 2020 ,
respectively. As of June 30, 2021 , deferred tax liabilities which will reverse
in future years exceeded deferred tax assets.
Financial reporting income may differ significantly from taxable income because
of items such as revenue recognition, accelerated depreciation for tax purposes,
and a significant number of liabilities such as vacation pay, workers'
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compensation, and other liabilities, which, for tax purposes, are generally
deductible only when paid. For the three months ended
During the six months endedJune 30, 2021 , we made federal and state tax payments of$15.3 million , and received refunds of less than$0.1 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 2020 Annual Report on Form 10-K. There have been no updates to our critical accounting policies during the six months endedJune 30, 2021 . Management believes that there is no new accounting guidance issued but not yet effective that will impact our critical accounting policies. Forward-Looking Statements Certain statements and information in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Terms such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "foresee," "intend," "may," "plan," "predict," "project," "scheduled," "should," "would," and similar expressions and the negatives of such terms are intended to identify forward-looking statements. These statements are based on management's beliefs, assumptions, and expectations based on currently available information, are not guarantees of future performance, and involve certain risks and uncertainties (some of which are beyond our control). Although we believe that the expectations reflected in these forward-looking statements are reasonable as and when made, we cannot provide assurance that our expectations will prove to be correct. Actual outcomes and results could materially differ from what is expressed, implied, or forecasted in these statements due to a number of factors, including, but not limited to: widespread outbreak of an illness or disease, including the COVID-19 pandemic and its effects, or any other public health crisis, as well as regulatory measures implemented in response to such events; external events which may adversely affect us or the third parties who provide services for us, for which our business continuity plans may not adequately prepare us; 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; interruption or failure of third-party software or information technology systems or licenses; untimely or ineffective development and implementation of, or failure to realize potential benefits associated with, new or enhanced technology or processes, including the pilot test program at ABF Freight; the loss or reduction of business from large customers; the ability to manage our cost structure, and the timing and performance of growth initiatives; maintaining our corporate reputation and intellectual property rights; competitive initiatives and pricing pressures; increased prices for and decreased availability of new revenue equipment, decreases in value of used revenue equipment, and higher costs of equipment-related operating expenses such as maintenance, fuel, and related taxes; 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; relationships with employees, including unions, and our ability to attract, retain, and develop employees; unfavorable terms of, or the inability to reach agreement on, future collective bargaining agreements or a workforce stoppage by our employees covered under ABF Freight's collective bargaining agreement; union employee wages and benefits, including changes in required contributions to multiemployer plans; 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; litigation or claims asserted against us; governmental regulations; environmental laws and regulations, including emissions-control regulations; default on covenants of financing arrangements and the availability and terms of future financing arrangements; self-insurance claims and insurance premium costs; potential impairment of goodwill and intangible assets; 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; seasonal fluctuations and adverse weather conditions; and other financial, operational, and legal risks and uncertainties detailed from time to time inArcBest Corporation's public filings with theSecurities and Exchange Commission (the "SEC"). 46 Table of Contents For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see our filings with theSEC , including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events, or otherwise. 47 Table of Contents
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