ArcBest(ARCB) - 2021 Q4 - Annual Report

PART I Business ArcBest is a $4 billion logistics company operating three segments, focused on revenue growth, balanced mix, and cost optimization - ArcBest is a $4 billion logistics company with over 14,000 employees across more than 250 locations, offering integrated ground, air, and ocean transportation solutions[11] - Operations are segmented into Asset-Based (ABF Freight), ArcBest (asset-light), and FleetNet, with ArcBest and FleetNet forming Asset-Light operations[13] - ArcBest acquired MoLo Solutions, LLC in November 2021 to expand truckload capacity, integrating its operations into the ArcBest segment[14] - The company's strategy focuses on revenue expansion, balancing Asset-Based and Asset-Light operations, and cost optimization via technology[19] Asset-Based Segment The Asset-Based segment, ABF Freight, provides LTL services, contributing 62% of 2021 revenues with a largely unionized workforce - The Asset-Based segment, primarily ABF Freight, contributed approximately 62% of total company revenues in 2021[24] - ABF Freight is a major LTL carrier with 239 service centers across North America[25] - As of December 2021, approximately 82% of segment employees were unionized, with labor costs representing 46.6% of segment revenues in 2021[29] Profit-Sharing Bonus Performance | Year | GAAP Operating Ratio | Bonus Paid | | :--- | :--- | :--- | | 2021 | 89.9% | 3% (Maximum) | | 2020 | 95.3% | Earned | | 2019 | 95.2% | Earned | - The segment is piloting a new freight handling program utilizing patented equipment and software for improved efficiency and safety[28] Asset-Light Operations Asset-Light operations (ArcBest and FleetNet) generated 38% of 2021 revenues, providing diverse logistics and maintenance services, including truckload brokerage - Combined Asset-Light operations (ArcBest and FleetNet) accounted for approximately 38% of total company revenues in 2021[35] - The ArcBest segment provides a comprehensive suite of services, including expedite, truckload brokerage (MoLo), international shipping, and managed transportation[38][39][41] - The MoLo acquisition expanded truckload and dedicated services to a network of over 80,000 approved contract carriers[41] - The FleetNet segment offers roadside repair and vehicle maintenance management for commercial fleets across North America[48] Competition, Pricing, and Industry Factors ArcBest faces intense competition in Asset-Based and Asset-Light markets, with pricing strategies adapting to a $355 billion total addressable market - The Asset-Based segment competes with major LTL carriers, facing challenges from nonunion carriers with lower fringe benefit costs[49] - The ArcBest segment operates in a fragmented market with approximately 17,000 active brokerage authorities, competing with major logistics providers[50] - Approximately 75% of Asset-Based business uses negotiated pricing, with the company increasingly using space-based pricing to align costs with bulkier freight[54][56] Estimated Total Addressable Market | Market Segment | Potential Revenue | | :--- | :--- | | LTL Market (Asset-Based) | $42 billion | | ArcBest Segment Markets | $270 billion | | FleetNet Segment Market | $43 billion | | Total | $355 billion | Technology ArcBest invests heavily in technology via ArcBest Technologies to enhance efficiency, including a $25 million investment in Phantom Auto for remote operations - Most technology applications are developed internally by the ArcBest Technologies subsidiary[66] - In November 2021, ArcBest invested $25 million in Phantom Auto for remote operation software, planning to pilot remote-enabled forklifts in 2022 to address labor constraints[67] - The company uses advanced proprietary algorithms and machine-learning cognitive technologies to enhance productivity and simplify workflows[68] Human Capital Resources As of December 2021, ArcBest employed over 14,000 people, with 58% unionized, prioritizing employee development, retention, and DEI initiatives - As of December 2021, the company employed over 14,000 people, with approximately 58% belonging to labor unions[93] - The company maintains strong hiring partnerships with the IBT and military to address the truck driver shortage[96] - A three-year strategic roadmap for Diversity, Equity, and Inclusion (DEI) was unveiled in December 2021, focusing on workforce, workplace, community, and marketplace initiatives[100] - In 2021, 55% of new hires were diverse, and over 85% of management employees participated in DEI training[98][100] Risk Factors The company faces material risks from pandemic impacts, cybersecurity, acquisition integration, competition, supply chain, labor disputes, and underfunded pension plans - The COVID-19 pandemic presents ongoing risks to employee health, operational efficiency, customer demand, and supply chain stability[126][127] - Heavy reliance on IT systems exposes the company to cybersecurity attacks, system failures, and data breaches, potentially leading to operational interruptions and reputational damage[133][134] - Integrating acquisitions like MoLo poses risks such as key employee loss, operational and IT synchronization difficulties, and failure to achieve anticipated benefits[154][155][156] - The Asset-Based segment faces intense competition from nonunion carriers with lower cost structures, with ABF Freight incurring some of the industry's highest benefit contribution rates[167][169] - ABF Freight contributes to several significantly underfunded multiemployer pension plans, where withdrawal could result in material liabilities[183][184] - Reclassification of independent contractor drivers as employees could expose the company to significant liabilities and increased costs for taxes, workers' compensation, and benefits[195] Properties ArcBest owns its corporate office; Asset-Based operates 239 facilities (108 owned), while Asset-Light segments own or lease various offices - The Asset-Based segment operates 239 revenue-producing facilities, with 108 owned and the rest leased[234] - The ArcBest segment owns a facility in Medina, Ohio, and leases key locations in Sparks, Nevada; Chicago, Illinois; and Plano, Texas[235] Legal Proceedings The company is involved in routine legal actions, which management does not expect to materially impact its financial condition, operations, or cash flows - Pending legal actions, primarily from normal business operations, are not expected to materially affect the company's financial condition or results[236] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ArcBest common stock (ARCB) trades on Nasdaq, pays a $0.08 quarterly dividend, and initiated a $100.0 million ASR program - The company's common stock (ARCB) trades on the Nasdaq Global Select Market, with 24,597,758 shares outstanding as of February 25, 2022[241] - A quarterly dividend of $0.08 per share was declared on January 28, 2022[241] - In November 2021, the company executed a $100.0 million accelerated share repurchase (ASR) program, purchasing 709,287 shares in Q4 2021[242][243] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, consolidated revenues grew 35.4% to $4.0 billion, with net income reaching $213.5 million, driven by strong demand and the MoLo acquisition Results of Operations In 2021, consolidated revenues increased 35.4% to $4.0 billion, with operating income surging to $281.0 million and net income reaching $213.5 million Consolidated Financial Highlights (2021 vs. 2020) | Metric | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $3,980.1M | $2,940.2M | +35.4% | | Operating Income | $281.0M | $98.3M | +185.9% | | Net Income | $213.5M | $71.1M | +200.3% | | Diluted EPS | $7.98 | $2.69 | +196.7% | - Asset-Based revenues grew 23.0% year-over-year, driven by a 14.7% increase in billed revenue per hundredweight and a 7.6% increase in tonnage per day[253][254] - Asset-Light operations revenues increased by 58.0%, reflecting a 31.0% rise in revenue per shipment and a 30.6% increase in shipments per day, bolstered by the MoLo acquisition[253][254] - Consolidated 2021 results were impacted by $6.0 million in MoLo acquisition transaction costs and $32.8 million in innovative technology costs[258][260] Liquidity and Capital Resources Liquidity sources include cash from operations and credit facilities, with cash decreasing to $125.0 million in 2021 due to the MoLo acquisition, debt repayments, and share repurchases - Cash, cash equivalents, and short-term investments decreased by $244.4 million to $125.0 million at year-end 2021, primarily due to the $239.4 million MoLo acquisition, $71.9 million in net debt repayments, and $108.1 million in share repurchases[372] - Cash provided by operating activities increased to $323.5 million in 2021, up from $206.0 million in 2020, driven by higher net income[373] - As of December 31, 2021, the company had $200.0 million available under its revolving credit facility and $40.0 million under its A/R securitization program[389] - Estimated net capital expenditures for 2022 are projected to be between $270.0 million and $290.0 million, an increase from historical levels to support growth[388] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment in revenue recognition, credit loss allowances, asset impairment, self-insured claims, and business combinations - Revenue recognition is based on relative transit time, requiring estimates for revenue in transit at period end[413] - The company is self-insured for workers' compensation and third-party casualty claims, with liabilities based on case reserves and actuarial estimates for IBNR claims[434][437] - Accounting for the MoLo acquisition required significant estimates for the fair value of acquired intangible assets ($76.9 million), goodwill ($214.0 million), and contingent consideration ($93.7 million)[423][424] - Goodwill is evaluated for impairment annually, with the 2021 qualitative assessment concluding no impairment[429][430] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates, diesel fuel prices, and security volatility, partially mitigated by interest rate swaps and fuel surcharges - The company is exposed to interest rate risk on its variable-rate Credit Facility, partially hedged by interest rate swap agreements with a notional amount of $50.0 million[441][442] - The company mitigates market risk from diesel fuel price increases through fuel surcharge revenues, not hedging instruments[456] - The cash surrender value of variable life insurance policies is subject to market volatility, with $26.9 million exposed at year-end 2021, where a 10% change would impact pre-tax income by $2.7 million[455] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2021, including Balance Sheets, Operations, Cash Flows, and Notes, with Ernst & Young LLP's report Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on 2021 financial statements and internal controls, noting critical audit matters for insurance reserves and the MoLo acquisition - Ernst & Young LLP provided an unqualified opinion, affirming the fair presentation of financial statements in conformity with U.S. GAAP[461] - The audit of internal control over financial reporting also received an unqualified opinion, excluding the newly acquired MoLo Solutions, LLC[462][714] - Critical Audit Matters identified include insurance reserves due to measurement uncertainty and the MoLo acquisition accounting due to judgment in valuing intangible assets, goodwill, and contingent consideration[466][469] Consolidated Financial Statements Consolidated financial statements show total assets grew to $2.11 billion in 2021, revenues reached $4.0 billion, and net income was $213.5 million Consolidated Balance Sheet Highlights (2021 vs 2020) | Account | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $2,112.7M | $1,779.0M | | Goodwill | $300.3M | $88.3M | | Total Liabilities | $1,183.6M | $950.4M | | Total Stockholders' Equity | $929.1M | $828.6M | Consolidated Statement of Operations Highlights (2021) | Metric | 2021 | | :--- | :--- | | Revenues | $3,980.1M | | Operating Income | $281.0M | | Net Income | $213.5M | | Diluted EPS | $7.98 | Consolidated Statement of Cash Flows Highlights (2021) | Cash Flow Activity | 2021 | | :--- | :--- | | Net Cash from Operating | $323.5M | | Net Cash used in Investing | ($303.2M) | | Net Cash used in Financing | ($247.6M) | Notes to Consolidated Financial Statements The notes detail accounting policies, the MoLo acquisition, long-term debt, multiemployer pension plans, and segment financial performance - The MoLo acquisition on November 1, 2021, had a total purchase consideration of $333.1 million, including $239.4 million in net cash and $93.7 million in contingent consideration, adding $214.0 million in goodwill and $76.9 million in intangible assets (Note D)[556][558][560] - As of December 31, 2021, the company had $50.0 million outstanding on its $250.0 million credit facility and $175.5 million in notes payable (Note H)[594] - ABF Freight contributes to 25 multiemployer pension plans, with 56% of 2021 contributions going to plans in "critical and declining status," including the Central States Pension Plan (Note J)[641][645][647] Segment Operating Income (2021) | Segment | Operating Income | | :--- | :--- | | Asset-Based | $260.7M | | ArcBest | $46.4M | | FleetNet | $4.5M | Controls and Procedures Management concluded disclosure controls and procedures were effective as of December 31, 2021, excluding the MoLo acquisition from internal control assessment - The Principal Executive Officer and Principal Financial Officer concluded the company's disclosure controls and procedures were effective as of December 31, 2021[704] - Management's assessment of internal control over financial reporting excluded the newly acquired MoLo Solutions, LLC, acquired on November 1, 2021[705][711] PART III Directors, Executive Officers, Corporate Governance, and Related Matters Information for Items 10-14, covering directors, executive officers, corporate governance, and compensation, is incorporated by reference from the 2022 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's Definitive Proxy Statement for the Annual Stockholders' Meeting on April 27, 2022[719][720][721] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including Schedule II and various corporate documents - This section lists all financial statements, schedules (including Schedule II - Valuation and Qualifying Accounts), and exhibits filed with the report[724][725]