Old Dominion Freight Line, Inc. — Q3 2019 Form 10-Q
Business and period. Old Dominion is a union-free less-than-truckload carrier, with related transportation and logistics services. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Revenue | $1,048.5m | $1,058.2m | $3,099.9m | $3,016.8m |
| Operating income | $217.5m | $228.4m | $630.4m | $598.2m |
| Net income | $164.1m | $173.4m | $471.5m | $446.2m |
| Diluted EPS | $2.05 | $2.12 | $5.85 | $5.43 |
| Operating ratio | 79.3% | 78.4% | 79.7% | 80.2% |
| Operating margin | 20.7% | 21.6% | 20.3% | 19.8% |
- Revenue mix: LTL generated $1,035.1m of Q3 revenue and $3,058.9m for the nine months. Other services contributed $13.4m and $41.0m, respectively.
- Volumes and yield: Q3 LTL tons fell 3.7%, shipments fell 3.0%, and weight per shipment declined 0.8%; LTL revenue per hundredweight rose 4.4% to $22.87. For nine months, tons decreased 4.4%, shipments decreased 1.6%, and revenue per hundredweight increased 7.8% to $22.57.
- Cash flow: Nine-month operating cash flow was $747.5m, versus $675.4m. Investing cash use was $367.7m, versus $465.7m; financing cash use was $247.8m, versus $159.7m. Cash increased $132.0m to $322.3m.
- Balance sheet and liquidity: At September 30, cash was $322.3m, current assets $807.0m, and current liabilities $396.9m. Debt was $45.0m, all due after one year; cash exceeded debt by $277.3m. The $300m revolving facility had no borrowings and $251.0m of available capacity after letters of credit.
- Capital and shareholder returns: Property and equipment purchases totaled $370.3m over nine months. The company estimated 2019 capital expenditures of approximately $480m. It repurchased $205.3m of stock and paid $41.0m in dividends over the nine-month period. Dividends declared were $0.17 per share each quarter in 2019.
Changes versus the prior period
- Q3 revenue declined 0.9%, operating income declined 4.8%, net income declined 5.4%, and diluted EPS declined 3.3%. The operating ratio worsened by 90 basis points.
- Nine-month revenue increased 2.8%, operating income increased 5.4%, net income increased 5.7%, and diluted EPS increased 7.7%. The operating ratio improved by 50 basis points.
- Management attributed weaker Q3 revenue mainly to lower LTL volume amid sluggish domestic demand, partly offset by higher yield. It cited higher fixed overhead and depreciation as factors weighing on quarterly profitability, despite lower direct costs as a percentage of revenue.
- Q3 operating supplies expense fell, primarily reflecting lower diesel costs. Average diesel cost per gallon declined 13.8% in the quarter; the company does not hedge diesel fuel. Depreciation and amortization increased $5.4m in Q3, primarily due to recent capital investments.
Outlook, risks, and unusual items
- October update: Revenue per day declined 1.6% year over year; LTL tons per day fell 4.0%. LTL revenue per hundredweight increased approximately 2.7%, or 4.3% excluding fuel surcharges.
- Investment outlook: Management expected approximately $480m of 2019 capital expenditures, including about $220m for service centers, $165m for tractors and trailers, and $95m for technology and other assets. It expected to fund spending primarily with operating cash flow and existing cash, with the revolving facility available if needed. No full-year revenue or earnings guidance is provided in the filing text.
- Key risks: Demand and pricing are exposed to economic conditions, industry competition, and freight volumes. Other stated exposures include diesel prices and fuel-surcharge recovery, labor availability and costs, employee benefits, equipment costs, seasonal weather, regulation, environmental matters, claims, and technology and cybersecurity risks.
- Debt and contingencies: The $45m senior note is due January 3, 2021, at 4.79%. The company reported compliance with debt covenants at September 30, 2019. Ordinary-course legal matters include some collective or class-action allegations; management did not expect their resolution to materially adversely affect financial position, results, or cash flows.
- Accounting and other items: Adoption of the lease standard on January 1, 2019 resulted in recognition of $68.0m in right-of-use assets and $69.1m in lease liabilities, with no material effect on results or cash flows. At September 30, lease liabilities were $68.6m. Q3 miscellaneous expense increased, primarily due to net losses on disposals of operating assets.
Important facts for investors to verify
- Whether subsequent filings and results confirm a recovery in LTL shipment and tonnage trends after the October update.
- Whether higher pricing and operating efficiency can offset fixed-cost growth and support operating margins if volumes remain weak.
- Actual 2019 capital expenditures versus the approximately $480m estimate, and their impact on cash and capacity utilization.
- Future share repurchases and dividends relative to operating cash flow, the remaining $276.4m authorization, and available revolver capacity.
- Developments in legal claims, labor and benefit costs, fuel-price exposure, debt covenants, and the January 2021 note maturity.