10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2000. OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File No. 0-10894 ARNOLD INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-2200465 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 625 South Fifth Avenue, Lebanon, Pennsylvania (Address of principal executive offices) 17042 (Zip Code) (717) 273-9058 (Registrant's telephone number, including area code) No Change (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Common Stock, par value $1.00 per share: 24,587,226 shares outstanding (which excludes 5,355,402 treasury shares) as of August 11, 2000. PART I. FINANCIAL INFORMATION Item 1. Financial Statements. Condensed Consolidated Balance Sheets - June 30, 2000 and (Unaudited) December 31, 1999 Condensed Consolidated Statements of - June 30, 2000 Income (Three and Six Month and 1999 Periods - Unaudited) Condensed Consolidated Statements of - June 30, 2000 Cash Flows (Six Month and 1999 Periods - Unaudited) Notes to Condensed Consolidated Financial Statements
ARNOLD INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31, 2000 1999 ASSETS Current Assets Cash and Cash Equivalents 37,875,189 16,231,274 Marketable Securities 2,105,552 2,104,634 Accounts Receivable, Net 51,958,897 49,811,512 Notes Receivable, Current 1,357,600 1,357,565 Deferred Income Taxes 4,985,987 4,258,455 Prepaid Expenses and Supplies 5,248,594 7,463,640 Total Current Assets 103,531,819 81,227,080 Property and Equipment, at Cost 402,690,122 401,801,207 Less: Accumulated Depreciation 164,255,707 157,027,805 Total Property and Equipment 238,434,415 244,773,402 Other Assets Goodwill, Net 7,875,027 8,017,724 Investments in Limited Partnerships 8,332,179 8,594,525 Notes Receivable, Long-term 1,380,698 1,754,510 Other 1,291,591 1,375,752 Total Other Assets 18,879,495 19,742,511 TOTAL ASSETS 360,845,729 345,742,993 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Notes Payable 23,800,577 24,829,682 Accounts Payable 10,759,735 10,789,594 Income Taxes 1,444,958 1,297,162 Estimated Liability for Claims 6,296,866 4,302,316 Accrued Expenses - Other 15,723,562 13,906,538 Total Current Liabilities 58,025,698 55,125,292 Long-term Liabilities Estimated Liability for Claims 1,459,000 2,646,000 Deferred Income Taxes 38,046,805 37,710,984 Notes Payable - 191,557 Other 1,917,172 1,887,522 Total Long-term Liabilities 41,422,977 42,436,063 Stockholders' Equity Common Stock 29,942,628 29,942,628 Paid-In Capital 1,682,050 1,584,422 Retained Earnings 270,612,948 256,160,707 Treasury Stock, at Cost (40,840,572) (39,506,119) Total Stockholders' Equity 261,397,054 248,181,638 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 360,845,729 345,742,993 THE ACCOMPANYING NOTES, HERE AND FOLLOWING, ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ARNOLD INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six Months Ended Three Months Ended June 30, June 30, 2000 1999 2000 1999 Operating Revenues 232,172,606 205,498,683 117,340,214 105,193,036 Operating Expenses 199,906,621 177,855,193 99,593,745 90,649,205 Operating Income 32,265,985 27,643,490 17,746,469 14,543,831 Interest Expense (892,364) (665,546) (442,356) (416,139) Other Income 349,909 286,375 252,400 180,561 Income Before Income Taxes 31,723,530 27,264,319 17,556,513 14,308,253 Income Taxes 11,851,861 10,060,482 6,663,301 5,297,316 Net Income 19,871,669 17,203,837 10,893,212 9,010,937 Net Income per Common Share: Basic 0.81 0.69 0.45 0.36 Diluted 0.81 0.69 0.45 0.36 Average Common Shares Outstanding Basic 24,610,330 24,846,392 24,581,626 24,859,653 Effect of dilutive securities - Stock options 74,442 266,211 52,420 282,720 Diluted 24,684,772 25,112,603 24,634,046 25,142,373 Dividends per Common Share 0.22 0.22 0.11 0.11 THE ACCOMPANYING NOTES, HERE AND FOLLOWING, ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ARNOLD INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 2000 1999 Operating Activities Net Income 19,871,669 17,203,837 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 16,993,191 15,909,672 Provision for Deferred Taxes (391,711) 2,767,557 Other (828,705) (711,717) Changes in Operating Assets & Liabilities: (Increase) in Accounts Receivable (2,147,385) (3,065,745) Decrease in Prepaid Expenses and Supplies 2,215,046 2,497,884 Increase (Decrease) in Accounts Payable (29,859) 2,457,063 Increase (Decrease) in Estimated Liability for Claims 807,550 (9,861,324) Increase in Other Accrued Expenses 1,964,820 5,680,521 Other 29,650 47,300 Net Cash Provided By Operating Activities 38,484,266 32,925,048 Investing Activities Proceeds from Sale of Investment Securities 4,555 726,036 Purchase of Investment Securities (5,473) (523,286) Proceeds from Disposition of Property and Equipment 4,185,448 5,427,340 Purchase of Property and Equipment (13,613,100) (32,534,984) Capital Contributions to Limited Partnerships (1,153,833) (1,141,407) Other 465,137 740,271 Net Cash Used In Investing Activities (10,117,266) (27,306,030) Financing Activities Cash Dividends Paid (5,419,431) (5,466,514) Purchase of Treasury Stock (1,391,250) (314,550) Proceeds from Employee Stock Options Exercised 154,425 942,766 Proceeds from Short-term Debt - 5,000,000 Other (66,829) - Net Cash Provided by (Used In) Financing Activities (6,723,085) 161,702 Increase in Cash and Cash Equivalents 21,643,915 5,780,720 Cash and Cash Equivalents - Beginning of Year 16,231,274 19,432,802 Cash and Cash Equivalents - End of Period 37,875,189 25,213,522 Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest 892,364 665,907 Income Taxes 12,125,625 4,570,519 THE ACCOMPANYING NOTES, HERE AND FOLLOWING, ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
ARNOLD INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note I: Basis of Presentation The financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal adjustments) which are, in the opinion of management, necessary for a fair statement of results for the interim period. This financial information should be read in conjunction with the Financial Statements and Notes thereto included in the Company's latest annual report on Form 10-K and any intervening reports. The results of operations for the three and six-month periods ending June 30, 2000, and June 30, 1999, are not necessarily indicative of the results to be expected for the full year. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Consolidated Operating Revenues for the second quarter of 2000 were $117,340,214, an increase of $12,147,178 or 12% from Operating Revenues for 1999's second quarter. For the same period, Operating Expenses increased $8,944,540 or 10%; Income Before Income Taxes increased $3,248,260, an increase of 23%; and Net Income increased $1,882,275 or 21%. Earnings Per Share-Basic increased from $.36 to $.45, or a 25% increase, for the respective quarters. Consolidated Operating Revenues for the six months ended June 30, 2000, were $232,172,606, an increase of $26,673,923 or 13% over the comparable period in 1999. For the same period, Operating Expenses increased $22,051,428, or 12%; Income Before Taxes increased $4,459,211, an increase of 16%; and Net Income increased $2,667,832 or 16%. Earnings Per Share-Basic increased from $.69 to $.81, a net increase of 17%, for the respective six-month periods. Set forth below is a schedule of the Unaudited Operating Revenues, Expenses and Operating Income of the LTL, TL and Fulfillment/Logistics segments:
(Dollars in Thousands) Second Quarter Ended June 30, 2000 1999 Amount % Amount % LESS-THAN-TRUCKLOAD Operating Revenues 60,601 100.0 53,137 100.0 Operating Expenses 47,345 78.1 41,936 78.9 Operating Income 13,256 21.9 11,201 21.1 TRUCKLOAD Operating Revenues 45,675 100.0 43,189 100.0 Operating Expenses 42,726 93.5 41,520 96.1 Operating Income 2,949 6.5 1,669 3.9 FULFILLMENT/LOGISTICS Operating Revenues 11,064 100.0 8,867 100.0 Operating Expenses 9,502 85.9 7,190 81.1 Operating Income 1,562 14.1 1,677 18.9 Unallocated corporate operating income (loss) (21) (3) Consolidated operating income 17,746 14,544
(Dollars in Thousands) Six-Month Period Ended June 30, 2000 1999 Amount % Amount % LESS-THAN-TRUCKLOAD Operating Revenues 118,145 100.0 102,721 100.0 Operating Expenses 93,070 78.8 80,822 78.7 Operating Income 25,075 21.2 21,899 21.3 TRUCKLOAD Operating Revenues 91,073 100.0 85,950 100.0 Operating Expenses 87,314 95.9 83,002 96.6 Operating Income 3,759 4.1 2,948 3.4 FULFILLMENT/LOGISTICS Operating Revenues 22,955 100.0 16,828 100.0 Operating Expenses 19,499 84.9 13,751 81.7 Operating Income 3,456 15.1 3,077 18.3 Unallocated corporate operating income (loss) (24) (281) Consolidated operating income 32,266 27,643
New Penn Motor Express, Inc. ("New Penn"), the Company's less-than-truckload carrier, increased revenues by 14% over the revenues generated during the second quarter of 1999. Operating Income increased 18% over the comparable period of 1999, as the operating ratio improved from 78.9 to 78.1. Growth at New Penn is related to several factors, including a service improvement initiative begun one year ago to deliver shipments by noon, improved information services through the web site, the reduction in industry capacity that occurred in the third quarter of 1999 and an expanding economy. Delivering shipments earlier in the day is preferred by customers, as they are able to utilize the product the same day it is received. This before noon capability has made New Penn's services preferable to services of competitors delivering later in the day, and has resulted in an increase of New Penn's market share. As more competitors add morning delivery to their service offerings, the shift in market share is likely to diminish. Because customers are now requiring higher levels of information, the New Penn web site provides real-time shipment tracking information and fast access to other information, including proof of delivery and bill of lading documents, shipment report summaries and rate quotes. Such information makes New Penn preferable to competitors that cannot provide the same level of information services, and again has resulted in improved market share. New Penn continued the rollout of on-board computers in the quarter, and 85% of the fleet is so equipped. On-boards are one example of information technology that helps maximize efficiencies by improving operations planning and productivity. Revenue comparisons at New Penn were also positively impacted, as they had been in the previous three quarters, by additional revenues secured after a competitor, Preston Trucking, discontinued operations in July 1999. The demise of Preston has now had a positive impact on four consecutive quarters and will not positively impact comparisons in future quarters. Expansion by competitors into the New Penn territory did not have a material impact on New Penn revenues during the second quarter, but is expected to have some impact in future quarters. A relatively stable pricing environment and the use of advanced information technology to maximize efficiencies contributed to the improvement in operating margins at New Penn. Price increases have been successfully implemented, with less discounting than in the past. Less-than-truckload carriers, including New Penn, were also successful in implementing fuel surcharges to help offset the increase in fuel costs experienced in the second quarter. New Penn continued efforts to add capacity at several locations. Construction is underway at the Buffalo and Reading facilities. Expansion of facilities in Syracuse, NY, Albany, NY, Kearny, NJ, and Trenton, NJ (South Brunswick) is at various stages of land acquisition and construction planning. During 2000, New Penn anticipates expenditures of $10.1 million for new real estate and improvements to existing properties. An additional $10.4 million will be invested in new rolling stock and computer equipment. Arnold Transportation Services, Inc. ("ATS"), the Company's truckload carrier, experienced revenue growth of 6% and operating income increased 77% during the second quarter of 2000 over the second quarter of 1999. Revenue growth was hindered by the continuing shortage of qualified drivers. However, new business acquisition and price increases on existing business did support an increase in revenue. ATS significantly improved operating margins despite rising fuel costs, primarily due to a strategic shift in the freight mix. Adjustments in the mix of regional, interregional and dedicated services contributed to improved revenue yield. ATS re-deployed assets to increase revenues in more profitable regional markets while reducing the amount of less profitable interregional freight. ATS anticipates expenditures of $3.5 million this year for new equipment and real estate improvements. Sales of real estate were recorded during the second quarter, and contributed approximately $300,000 to ATS's operating income. Additional sales of excess real estate are projected for the balance of the year. Arnold Logistics ("ARLO"), a division of ATS which conducts a fulfillment and logistics business, experienced a 25% increase in revenues during the second quarter of 2000 over the second quarter of 1999 while operating income declined 7%. Arnold Logistics continues to balance expansion in e-commerce fulfillment, distribution and contract packaging services to support revenue growth. Revenue increased primarily due to the opening of the facility in Lancaster, PA, during the third and fourth quarters of 1999. The rate of growth declined as compared to the prior quarter, as the growth projected by several key customers failed to materialize. The fact that revenue growth did not meet projections had a negative impact on margins. The company had prepared to meet the higher demand projected by customers. Although cost controls were maintained throughout the quarter, investments had been made in people, equipment and facilities to support higher business levels and future growth in subsequent quarters. Arnold Logistics' capital expenditures will approximate $3.0 million for new equipment and real estate improvements in 2000. The Company's working capital at the end of the second quarter of 2000 was $45,506,121, which is an increase of $10,825,012 or 31% from the end of the first quarter of 2000. For the first six months of 2000, working capital increased by a total of $19,404,333, or 74%, from working capital at the end of 1999. The Company's investment in Property and Equipment (Less Accumulated Depreciation) as of the end of the second quarter of 2000 stood at $238,434,415. This figure represents a decrease from March 31, 2000, of $3,176,162, reflecting depreciation in the capital assets of the Company. Funding for the Company's ongoing capital expansion program is being accomplished through the use of cash generated from current operating and investment activities. Year 2000 Compliance As previously reported, the Company's program to correct and/or replace internally produced software was fully completed prior to December 31, 1999. The cost of the Company's internal program, all of which has been incurred and paid, was $1,675,000. During the second quarter of 2000, the Company continued to monitor and assess the status of third parties upon whom the Company relies for externally produced software, including communications software, as well as suppliers of basic materials, such as fuel, parts, tires, etc. The Company also monitored the status of significant customers upon whose continued business the Company relies for revenues. During 1998 and 1999, the Company incurred expense of $125,000 to correct and/or replace software acquired from third parties. The Company had no significant Y2K problems with its vendors, suppliers or customers, and does not anticipate significant problems in the future. No further Y2K reports will be provided unless an unforeseen development should occur. Cautionary Remarks as to Forward-Looking Statements: The nature of the Company's operations subject it to changing economic, competitive, regulatory and technological conditions, risks and uncertainties. In accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions that there are important factors which, among others, could cause future results to differ materially from the forward-looking statements about our management confidence and strategies for performance; expectations for new and existing technologies and opportunities; and expectations for market segment and industry growth. These factors include, but are not limited to: (1) changes in the business environment in which the Company operates, including licensing restrictions, interest rates and capital costs; (2) changes in governmental law and regulations, including taxes; (3) market and competitive changes, including market demand and acceptance for new services and technologies; and (4) other risk factors specifically identified from time to time in Company releases and disclosure documents, including SEC reports and the annual proxy solicitation and report to stockholders. The Company will update forward-looking statements as required by law. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Neither the Company nor any of its subsidiaries, including Maris, Inc., own derivative financial instruments. Accordingly, the Company has no exposure to sudden changes in the financial and commodities markets and the impact that those changes may have on the value of market risk sensitive derivative securities. Maris, Inc., however, does own certain market risk sensitive instruments, including money market funds, time deposits, tax-free bonds and other like instruments. The Company believes that the risk inherent in owning these types of investments is no greater than the market risk of owning any security traded on various exchanges in the United States and elsewhere. Item 4. Matters Brought to a Vote of Shareholders. At the Annual Meeting, held May 3, 2000, stockholders re-elected E. H. Arnold, Ronald E. Walborn and Arthur L. Peterson to serve as members of the Board of Directors, each for a two-year term. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit 27 - Financial Data Schedule (b) NONE SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARNOLD INDUSTRIES, INC. (Registrant) Date: August 14, 2000 By /s/ Heath L. Allen Heath L. Allen, Secretary Date: August 14, 2000 By /s/ Ronald E. Walborn Ronald E. Walborn, Treasurer