Old Dominion Freight Line, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. The company is a non-union less-than-truckload carrier offering regional, inter-regional, national and logistics services. This unaudited filing covers the quarter and six months ended June 30, 2011, compared with the corresponding 2010 periods. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Revenue | $480.3 | $368.3 | $902.9 | $686.0 |
| Operating income | $64.6 | $40.0 | $102.6 | $56.4 |
| Net income | $39.4 | $21.5 | $61.0 | $29.2 |
| Diluted EPS | $0.69 | $0.38 | $1.07 | $0.52 |
| Operating ratio | 86.5% | 89.1% | 88.6% | 91.8% |
| Net margin | 8.2% | 5.8% | 6.8% | 4.3% |
- Q2 revenue grew 30.4%, net income 83.1%, and diluted EPS 81.6% year over year. For H1, revenue rose 31.6%, net income 108.7%, and diluted EPS 105.8%.
- Q2 tonnage increased 14.0% and shipments 16.8%; H1 tonnage grew 17.0% and shipments 18.8%. Revenue per hundredweight increased 14.2% in Q2 and 12.8% in H1, including fuel surcharges. Excluding surcharges, it increased 8.1% and 7.2%, respectively. Weight per shipment declined 2.3% in Q2 and 1.5% in H1.
- Cash from operating activities was $119.2 million for H1, versus $69.2 million in 2010. Property and equipment purchases were $142.4 million; cash used in investing activities was $138.4 million. Cash increased $23.2 million to $28.7 million.
- At June 30, cash was $28.7 million, total debt $265.2 million (including $38.1 million current maturities), and shareholders’ equity $778.0 million. The company had no revolving-credit borrowings and $174.2 million of borrowing capacity after letters of credit.
Material changes and management commentary
- Management attributed revenue growth to market-share gains, more shipments, improved pricing and higher fuel surcharges. Fuel surcharges represented 17.2% of Q2 revenue versus 12.5% a year earlier, and 16.4% of H1 revenue versus 12.0%.
- Improved network density and operating leverage helped lower the operating ratio by 2.6 percentage points in Q2 and 3.2 points in H1. Salaries, wages and benefits fell as a share of revenue, while fuel-related operating supplies increased as a share of revenue.
- Diesel fuel costs excluding fuel taxes rose 65.4% in Q2 and 64.3% in H1 year over year, reflecting higher prices and greater consumption. The company does not hedge diesel fuel.
- H1 financing included $95.0 million of privately placed senior notes and $48.4 million net proceeds from an at-the-market stock offering. The company sold 1,516,379 shares at an average $32.69 per share; no additional ATM shares were sold in Q2.
- Q2 and H1 tax rates were 35.3% and 36.7%, respectively, compared with 40.0% in the prior-year periods. A favorable $2.0 million adjustment for prior tax years benefited both 2011 periods. A $1.6 million life-insurance gain contributed to other income in Q1.
Outlook, liquidity, risks and contingencies
- Management projected 2011 capital expenditures, net of anticipated asset-sale proceeds, of $260 million to $295 million: approximately $100–$120 million for service centers, $145–$155 million for tractors, trailers and other equipment, and $15–$20 million for technology. It expected to fund spending through cash, operating cash flow and borrowing capacity.
- Management expected an effective tax rate of 38.8% for the remainder of 2011. It expected to enter a new five-year, $200 million revolving credit facility on August 10, 2011, replacing the expiring $225 million facility; this was an expectation, not a completed transaction in this filing.
- Senior notes totaled $262.9 million, with fixed rates of 4.00%–5.85% and maturities from 2015 to 2021; $35.7 million was due within 12 months. The company reported compliance with debt covenants at June 30. It planned no dividends for the remainder of 2011.
- Key risks include economic and freight-demand weakness, competition and pricing, fuel prices and the ability to recover them through surcharges, driver availability and compensation, claims and insurance costs, capital availability, equipment costs, regulation, seasonality and potential IT disruptions. Environmental compliance and ordinary-course legal matters were not expected by management to have a material adverse effect; outcomes remain uncertain.
- Management noted that first-quarter volumes and margins are seasonally weaker, while freight typically peaks in the third or early fourth quarter. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether volume growth and pricing gains persist, and how much revenue growth reflects fuel surcharges versus underlying rates.
- Execution and funding of the $260–$295 million capital expenditure plan, and the actual terms and completion of the replacement revolving credit facility.
- Fuel-cost recovery, labor and benefit-cost trends, and whether productivity improvements continue as hiring supports higher freight volumes.
- The effect of ATM share issuance on per-share results and dilution, alongside the company’s debt and cash-flow needs.
- Whether the favorable $2.0 million prior-tax-year adjustment and $1.6 million insurance gain should be treated as nonrecurring when assessing earnings.