OPERATING SEGMENT DATA

3 Months Ended

Mar. 31, 2020

OPERATING SEGMENT DATA

OPERATING SEGMENT DATA

NOTE J – OPERATING SEGMENT DATA

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

The Company began a pilot test program in early 2019 to improve freight handling at ABF Freight. The pilot utilizes patented handling equipment, software, and a patented process to load and unload trailers more rapidly and safely. During

the third quarter of 2019, the presentation of operating expenses was modified to present innovative technology costs associated with the pilot test program as a separate operating expense line item for the Asset-Based segment and for the summary of consolidated expenses by category. Previously, innovative technology costs incurred directly by the segment or allocated through shared services were categorized in individual segment expense line items. Certain reclassifications have been made to the prior period operating segment expenses to conform to the current year presentation. There was no impact on total consolidated expenses or total segment expenses as a result of the reclassifications.

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

The Company’s reportable operating segments are impacted by seasonal fluctuations which affect tonnage, shipment or service event levels, and demand for services, as described below; therefore, operating results for the interim periods presented may not necessarily be indicative of the results for the fiscal year.

The Company’s reportable operating segments are as follows:

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

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

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

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

● FleetNet includes the results of operations of FleetNet America, Inc. and certain other subsidiaries that provide roadside assistance and maintenance management services for commercial vehicles through a network of third-party service providers. FleetNet provides services to the Asset-Based and ArcBest segments. Approximately 20% and 14% of FleetNet’s revenues for the three months ended March 31, 2020 and 2019, respectively, are for services provided to the Asset-Based and ArcBest segments.

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

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

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

The following tables reflect reportable operating segment information:

	Three Months Ended
	March 31
	2020		2019
	(in thousands)
REVENUES
Asset-Based	$	515,713	$	506,079
ArcBest		164,775		173,204
FleetNet		52,439		53,259
Other and eliminations		(31,528)		(20,703)
Total consolidated revenues	$	701,399	$	711,839
OPERATING EXPENSES
Asset-Based
Salaries, wages, and benefits	$	283,838	$	280,276
Fuel, supplies, and expenses(1)		61,225		63,972
Operating taxes and licenses		12,794		12,398
Insurance		7,824		7,991
Communications and utilities(1)		4,711		4,616
Depreciation and amortization(1)		23,270		20,961
Rents and purchased transportation(1)		55,770		49,306
Shared services(1)		48,885		50,295
Gain on sale of property and equipment		(2,164)		(34)
Innovative technology costs(1)(2)		4,533		1,802
Other(1)		1,787		881
Total Asset-Based		502,473		492,464
ArcBest
Purchased transportation		137,182		140,105
Supplies and expenses		2,280		2,774
Depreciation and amortization		2,470		3,151
Shared services		21,727		23,031
Other		2,525		2,413
Total ArcBest		166,184		171,474
FleetNet		51,399		51,771
Other and eliminations		(26,476)		(12,461)
Total consolidated operating expenses	$	693,580	$	703,248

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

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

	Three Months Ended
	March 31
	2020		2019
	(in thousands)
OPERATING INCOME
Asset-Based	$	13,240	$	13,615
ArcBest		(1,409)		1,730
FleetNet		1,040		1,488
Other and eliminations		(5,052)		(8,242)
Total consolidated operating income	$	7,819	$	8,591
OTHER INCOME (COSTS)
Interest and dividend income	$	1,375	$	1,478
Interest and other related financing costs		(2,947)		(2,882)
Other, net(1)		(3,862)		(591)
Total other income (costs)		(5,434)		(1,995)
INCOME BEFORE INCOME TAXES	$	2,385	$	6,596

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

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

	Three Months Ended
	March 31
	2020		2019
	(in thousands)
OPERATING EXPENSES
Salaries, wages, and benefits	$	344,946	$	343,668
Rents, purchased transportation, and other costs of services		217,028		221,025
Fuel, supplies, and expenses		71,773		79,336
Depreciation and amortization(1)		29,013		26,537
Other		30,820		32,682
	$	693,580	$	703,248

(1) Includes amortization of intangible assets.