FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998.
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) 274-2521
(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: 25,126,954 shares outstanding
(which excludes 4,815,674 treasury shares) as of November 9, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets - September 30, 1998
(Unaudited) and December 31, 1997
Condensed Consolidated Statements of
Income (Three and Nine Month
Periods - Unaudited) - September 30, 1998
and 1997
Condensed Consolidated Statements of
Cash Flows (Nine Month
Periods - Unaudited) - September 30, 1998
and 1997
Notes to Condensed Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
ARNOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents 28,182,824 26,504,782
Marketable Securities 5,885,095 9,786,175
Accounts Receivable, Net 43,591,245 40,426,025
Deferred Income Taxes 8,796,909 10,498,070
Prepaid Expenses and Supplies 9,009,162 4,462,413
Refundable Income Taxes -0- 577,498
Total Current Assets 95,465,235 92,254,963
Property and Equipment, at Cost 356,433,172 346,003,319
Less: Accumulated Depreciation 146,849,819 140,441,244
Total Property and Equipment 209,583,353 205,562,075
Other Assets
Goodwill, Net 8,374,470 8,493,581
Investments in Limited Partnerships 9,245,931 9,616,237
Other 1,143,331 1,113,560
Total Other Assets 18,763,732 19,223,378
TOTAL ASSETS 323,812,320 317,040,416
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes Payable 15,863,399 16,280,126
Accounts Payable 11,884,951 10,155,475
Income Taxes 1,969,756 -0-
Estimated Liability for Claims 9,996,336 6,452,754
Accrued Expenses - Other 16,298,518 13,445,250
Total Current Liabilities 56,012,960 46,333,605
Long-Term Liabilities
Estimated Liability for Claims 7,344,000 13,733,000
Deferred Income Taxes 33,836,557 35,683,538
Notes Payable 1,254,504 2,383,449
Other 1,762,918 1,653,868
Total Long-Term Liabilities 44,197,979 53,453,855
Stockholders' Equity
Common Stock 29,942,628 29,942,628
Paid-In Capital 651,648 481,849
Retained Earnings 225,551,867 208,617,019
Treasury Stock, at Cost (32,544,762) (21,788,540)
Total Stockholders' Equity 223,601,381 217,252,956
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY 323,812,320 317,040,416
The accompanying notes, herein following, are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARNOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating Revenues 300,493,801 287,054,643 102,227,461 99,174,677
Operating Expenses 259,862,263 246,168,884 87,282,983 84,887,852
Operating Income 40,631,538 40,885,759 14,944,478 14,286,825
Interest Expense (838,202) (975,794) (291,543) (324,595)
Other Income 600,041 972,178 380,818 427,850
Income Before
Income Taxes 40,393,377 40,882,143 15,033,753 14,390,080
Income Taxes 14,901,973 15,002,844 5,657,175 5,342,186
Net Income 25,491,404 25,879,299 9,376,578 9,047,894
Other Comprehensive
Income, Net of Tax
Comprehensive Income 25,491,404 25,879,299 9,376,578 9,047,894
Net Income per
Common Share:
Basic .99 .99 .37 .35
Diluted .98 .98 .36 .35
Average Common
Shares Outstanding:
Basic 25,874,471 26,267,854 25,672,976 25,866,908
Diluted 26,024,964 26,317,190 25,741,523 26,317,190
Dividends per
Common Share .33 .33 .11 .11
The accompanying notes, herein following, are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARNOLD INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Operating Activities
Net Income 25,491,404 25,879,299
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 23,126,444 22,004,132
Provision for Deferred Taxes (145,770) 1,193,241
Other (1,760,619) (333,238)
Changes in Operating Assets and Liabilities:
(Increase) in Accounts Receivable (3,165,220) (10,305,175)
(Increase) in Prepaid
Expenses and Supplies (4,546,799) (460,615)
Increase in Accounts Payable
and Accrued Expenses 4,284,580 6,158,372
Other 109,050 107,650
Net Cash Provided by
Operating Activities 43,393,070 44,243,666
Investing Activities
Proceeds from Sale of Investment Securities 4,454,497 18,953,056
Purchase of Investment Securities (557,466) (6,497,462)
Proceeds from Disposition of
Property and Equipment 7,955,550 3,039,309
Purchase of Property and Equipment (32,861,788) (26,080,372)
Capital Contributions to
Limited Partnerships (1,545,672) (1,586,963)
Other (17,171) (149,174)
Net Cash Used In Investing Activities (22,572,050) (12,321,606)
Financing Activities
Cash Dividends Paid (8,556,555) (8,668,521)
Purchase of Treasury Stock (10,964,125) (13,064,377)
Other 377,702 238,282
Net Cash Used In Financing Activities (19,142,978) (21,494,616)
Increase in Cash and Cash Equivalents 1,678,042 10,427,444
Cash and Cash Equivalents -Beginning of Year 26,504,782 19,704,303
Cash and Cash Equivalents - End of Period 28,182,824 30,131,747
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest 838,202 972,498
Income Taxes 12,526,455 14,619,874
The accompanying notes, herein following, are an integral part
of these consolidated financial statements.
</TABLE>
<PAGE>
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, Notes and information included in
the Company's latest annual report on Form 10-K and any intervening reports.
The results of operations for the three and nine-month periods ending
September 30, 1998 and 1997 are not necessarily indicative of the results to
be expected for the full year.
NOTE II: Pending Adoption of SFAS Amendments
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131), which is effective for fiscal years beginning after December 15,
1997. This statement establishes standards for the disclosure of segment
results. It requires that segments be determined using the "management
approach," which means the way management organizes the segments within the
enterprise for making operating decisions and assessing performance. The
Company will adopt SFAS 131 in the fourth quarter of 1998, and is still
evaluating its impact on the Company's financial statement disclosures.
In January 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" (SFAS 132), which is effective for fiscal years beginning after
December 15, 1997. This statement revises current footnote disclosure
requirements for employers' pensions and other retiree benefits. It does
not address recognition or measurement issues. The adoption of SFAS 132 will
not have a material effect on the Company's financial condition or results
of operation.
In June 1998, the Financial Accounting Standards Board also issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), which is effective for all fiscal quarters for all fiscal years
beginning after June 15, 1999. This statement requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in
the fair value of derivatives are recorded each period in current earnings or
<PAGE>
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. It
is not anticipated that the adoption of SFAS 133 will have a significant
effect on the Company's results of operations or its financial position.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Operating Revenues on a consolidated basis for the third quarter of 1998
were $102,227,461, an increase of $3,052,784 or 3.1% over Operating Revenues
for 1997's third quarter. For the same period, Operating Expenses increased
$2,395,131, or 2.8%; Income before Income Taxes increased $643,673, an
increase of 4.5%; and Net Income increased $328,684, or 3.6%. Earnings Per
Share-Basic for the third quarter of 1998 increased as compared to the third
quarter of 1997 from $.35 per share to $.37 per share, an increase of 5.7%.
As indicated above, the Company's revenues for the third quarter of 1998
exceeded revenues generated during the comparable period in 1997,
notwithstanding the substantial increase in 1997 third quarter revenues
resulting from the UPS strike. Revenues at the Company's subsidiary New Penn
Motor Express, Inc. ("New Penn") fell somewhat to more realistic levels absent
a UPS strike, down from roughly $53,506,000 in the third quarter of 1997 to
$51,805,000 during the third quarter of 1998. At the same time, revenues at
the Company's subsidiary Arnold Transportation Services, Inc. ("Arnold
Transportation"), which includes the Arnold Logistics Division, increased
during the third quarter of 1998 over the comparable period of 1997 by some
$4,754,000, or 10.4%. More importantly, Arnold Transportation's Operating
Ratio improved from 96.6 for the third quarter of 1997 to 92.4 for third
quarter of 1998, meaning that more of the subsidiary's revenues are dropping
to the bottom line. New Penn's performance was strong despite the loss of
some shipping traffic that returned to UPS, and Arnold Transportation's
performance was similarly strong, reflecting on-going efforts to improve the
truckload segment of the Company's business.
Operating Income on a consolidated basis also increased during the third
quarter of 1998 relative to the comparable period of 1997. Consolidated
Operating Income rose by $657,653 from $14,286,825 to $14,944,478, an increase
of 4.6%. Operating Income on a consolidated basis rose at a greater rate
during the third quarter than Operating Revenues, reflecting greater
efficiencies within the Company.
The Company's combined Operating Revenues for the nine months ended
September 30, 1998, were $300,493,801, an increase of $13,439,158, or 4.7%
over the comparable nine-month period in 1997. For the same period, Operating
Expenses increased $13,693,379, or 5.6%; Income Before Income Taxes declined
marginally by $488,766, a decrease of 1.2%; and Net Income also declined
marginally by $387,895, a decrease of 1.5%. Earnings Per Share-Basic stayed
consistent at $.99 for both nine-month periods. The Company's ability to
maintain and increase its market share during the nine-month period ended
<PAGE>
September 30, 1998, is significant in light of the competitive pressures to
which all motor carriers are subject.
Set forth below is a schedule of the Unaudited Operating Revenues,
Expenses and Operating Income of the LTL and TL companies for the third
quarters of 1998 and 1997 and for the nine (9) month periods ended
September 30, 1998, and September 30, 1997:
<TABLE>
<CAPTION>
(Dollars in Thousands)
Third Quarter Ended September 30,
1998 1997
Amount % Amount %
<S> <C> <C> <C> <C>
NEW PENN MOTOR EXPRESS
AND RELATED COMPANIES (LTL)
Operating Revenues 51,805 100.0 53,506 100.0
Operating Expenses 40,669 78.5 40,788 76.2
Operating Income 11,136 21.5 12,718 23.8
ARNOLD TRANSPORTATION
SERVICES (TL)
Operating Revenues 50,423 100.0 45,669 100.0
Operating Expenses 46,614 92.4 44,100 96.6
Operating Income 3,809 7.6 1,569 3.4
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
Nine Months Ended September 30,
1998 1997
<S> <C> <C> <C> <C>
NEW PENN MOTOR EXPRESS
AND RELATED COMPANIES (LTL)
Operating Revenues 152,395 100.0 153,816 100.0
Operating Expenses 120,593 79.1 120,010 78.0
Operating Income 31,802 20.9 33,806 22.0
ARNOLD TRANSPORTATION
SERVICES (TL)
Operating Revenues 148,099 100.0 133,238 100.0
Operating Expenses 139,269 94.0 126,158 94.7
Operating Income 8,830 6.0 7,080 5.3
</TABLE>
The Company's working capital at the end of the third quarter of 1998 was
$39,452,275. This represents a decrease of $12,876,375 or 24.6% from the
working capital at the end of the previous quarter in 1998. The decrease in
working capital reflects the Company's use of funds to acquire capital assets
in connection with the on-going capital expansion program and re-purchase of
outstanding shares.
The Company's investment in Property and Equipment (Less Accumulated
Depreciation) as of the end of the third quarter of 1998 stood at
$209,583,353. This figure represents an increase from June 30, 1998, of
$2,042,187, or 1.0%, and reflects the on-going results of the Company's
<PAGE>
capital expansion program. Future funding for the Company's capital expansion
program will likely be accomplished through the use of cash generated from
current operating and investment activities, supplemented, when necessary, by
short or long-term financing. Management continues to seek opportunities for
profitable expansion of the Company.
On November 2, 1998, the Company announced its quarterly cash dividend of
$.11 per share.
The Company continues its on-going program to assure the Company's
readiness with respect to Year 2000 issues. The Company completed its
assessment of internal Year 2000 compliance issues; it has not yet completed
its correction and replacement program relative to software identified to be
defective during the assessment. The Company also continues to monitor and
assess the progress of outside vendors upon whom the Company relies for such
items as fuel, parts, etc. and the progress of significant customers upon
whose continued business the Company relies for revenues.
The Company's internal program to correct and/or replace software used by
the Company is approximately 95% complete as of November 1, 1998, and is
likely to be 100% complete by March 1999. The Company's major business units
are either complete or near completion at this time. Arnold Transportation
has fully completed its correction and/or replacement program. New Penn is
near completion and will be completed by the end of December 1998. The Arnold
Logistics Division of Arnold Transportation is 75% completed and will be fully
completed by March 1999. Earlier predictions of completion by all of the
Company's business units by the end of December 1998 proved to be overly
optimistic, with mid to late March being more realistic in light of the work
yet to be completed. Reasons for the delay include turnover of programming
personnel and development of a revised implementation plan which calls for a
more gradual installation process. The cost to complete the internal program
is currently estimated to be $150,000 as of November 1, 1998, down from
$250,000 on August 13, 1998. The cost of completion could be higher or lower
depending upon availability of programming personnel, as well as such other
factors as the ability to complete the work within the targeted time frame.
The cost of monitoring and assessing the compliance programs of third parties
is expected to be minimal, in that it will be accomplished by the Company's
internal MIS personnel. The Company has expended approximately $1,500,000 to
date in its internal and external assessment program and in correction and
replacement activities.
The Company faces the risk of disruptions to service if either it or its
significant suppliers do not become Year 2000 compliant in a timely manner.
Although the Company fully anticipates becoming Year 2000 compliant in a
timely manner, failure to become compliant would result in the loss of systems
<PAGE>
controlling dispatch, billing and payroll, among other essential functions of
the Company. The Company does not believe that these risks will come to
fruition because of the efforts to date to become Year 2000 compliant.
The Company has developed contingency plans to purchase electricity, fuel
and essential parts from other vendors in the event of a Year 2000 malfunction
by a prime supplier. The Company has no contingency plans for loss of revenue
from shippers who are not Year 2000 compliant.
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 uncertain-
ties. 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 (5) 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, such as the
obligation to provide quarterly up-dates as to progress toward Year 2000
readiness.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 - Financial Data Schedule
(b) None.
<PAGE>
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: November 13, 1998 By /s/ Heath L. Allen
Heath L. Allen, Secretary
Date: November 13, 1998 By /s/ Ronald E. Walborn
Ronald E. Walborn, Treasurer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN ARNOLD INDUSTRIES, INC.'S FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 28,182,824
<SECURITIES> 5,885,095
<RECEIVABLES> 45,350,686
<ALLOWANCES> 1,956,287
<INVENTORY> 0
<CURRENT-ASSETS> 95,465,235
<PP&E> 356,433,172
<DEPRECIATION> 146,849,819
<TOTAL-ASSETS> 323,812,320
<CURRENT-LIABILITIES> 56,012,960
<BONDS> 0
0
0
<COMMON> 29,942,628
<OTHER-SE> 193,658,753
<TOTAL-LIABILITY-AND-EQUITY> 323,812,320
<SALES> 0
<TOTAL-REVENUES> 300,493,801
<CGS> 0
<TOTAL-COSTS> 259,862,263
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 861,750
<INTEREST-EXPENSE> 838,202
<INCOME-PRETAX> 40,393,377
<INCOME-TAX> 14,901,973
<INCOME-CONTINUING> 25,491,404
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,491,404
<EPS-PRIMARY> .99
<EPS-DILUTED> .98
</TABLE>
