Old Dominion Freight Line, Inc. — Q3 2011 Form 10-Q
Business context and reporting period. Old Dominion is a non-union less-than-truckload carrier, with more than 90% of revenue historically derived from LTL freight transportation. This filing reports the quarter and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $494.5 | $396.0 | $1,397.4 | $1,082.0 |
| Operating income | $68.2 | $43.4 | $170.8 | $99.8 |
| Operating ratio | 86.2% | 89.0% | 87.8% | 90.8% |
| Net income | $38.6 | $24.4 | $99.6 | $53.6 |
| Diluted EPS | $0.67 | $0.44 | $1.75 | $0.96 |
- Revenue rose 24.9% in Q3 and 29.1% for 9M; net income increased 58.4% and 85.8%, respectively. Management reported record quarterly revenue and its lowest operating ratio in 20 years as a public company.
- Q3 tonnage increased 9.6%, shipments 12.2%, and revenue per hundredweight 13.7%; for 9M, increases were 14.3%, 16.4%, and 13.0%. Weight per shipment declined 2.2% in Q3 and 1.8% for 9M.
- Fuel surcharges were 16.6% of Q3 revenue and 16.5% of 9M revenue, up from 12.0% in comparable 2010 periods. Excluding fuel surcharges, revenue per hundredweight grew 7.8% in Q3 and 7.5% for 9M.
- Operating cash flow for 9M was $200.3, versus $110.2 in 2010. Net cash used in investing was $204.7, primarily reflecting increased capital spending; net cash from financing was $41.2. Cash increased to $42.3 from $5.5 at year-end 2010.
- At September 30, total debt was $264.5, including $37.3 current maturities; debt was $271.2 at year-end 2010. The company had no revolving borrowings and reported $149.2 of available capacity under its $200.0 million facility after letters of credit.
- Total assets were $1,473.2 and shareholders’ equity was $816.6 at September 30, 2011. Current assets were $318.6 and current liabilities $220.1.
Material changes and management commentary
- Management attributed growth primarily to market-share gains, higher tonnage and improved pricing, with only a lesser contribution from improvement in the domestic economy. A 4.9% general base-rate increase took effect September 6, 2011.
- The operating ratio improved 2.8 percentage points in Q3 and 3.0 points for 9M. Higher density supported productivity and operating leverage; Q3 pickup-and-delivery shipments per hour increased 1.6% and platform pounds handled per hour increased 3.6% year over year.
- Fuel costs and labor costs increased. Diesel fuel costs, excluding fuel taxes, rose 52.5% in Q3 and 60.1% for 9M year over year. Full-time headcount increased 11.0% to 11,980; management also cited higher benefits and employee recruiting and training costs.
- Other expense in Q3 included a $1.3 million net loss tied to variable life insurance contract values amid declining equity markets. 9M results included a $1.6 million first-quarter gain from life insurance policy proceeds. The 9M effective tax rate was 37.5%, including a favorable $2.0 million prior-year tax adjustment in Q2.
Outlook, financing and risks
- Management projected 2011 capital expenditures, net of anticipated disposals, of $245–$265 million: approximately $80–$90 million for service centers, $150–$155 million for tractors, trailers and other equipment, and $15–$20 million for technology. It expected to fund spending from cash, operations and borrowing capacity.
- Management anticipated depreciation and amortization would increase as a percentage of revenue after 2011 capital spending and higher planned 2012 spending. It expected a 38.8% effective tax rate for Q4 2011. No specific revenue or earnings guidance was provided.
- In January 2011, the company issued $95.0 million of fixed-rate senior notes, using part of the proceeds to refinance debt. It also sold 1,516,379 shares through its ATM program for $48.4 million net proceeds; no ATM shares were issued in Q2 or Q3. The credit facility was amended in August to a five-year, $200.0 million commitment.
- The company reported compliance with debt covenants and no dividend declared or paid in the first nine months; it said it had no plans to pay a dividend during the remainder of 2011. Debt covenants limit dividends.
- Key risks include economic and freight-demand weakness, pricing and competition, fuel-price volatility and the effectiveness of surcharges, recruiting and retaining drivers, claims and insurance costs, capital availability and equipment costs, regulation, seasonality and severe weather. The company does not hedge diesel fuel. Management said ordinary-course legal matters, many partly insured, were not expected to have a material adverse effect; it also said current environmental compliance costs were not expected to be material for the remainder of 2011 or 2012.
Important facts for investors to verify
- Whether shipment and tonnage growth, market-share gains and pricing improvements continued after Q3, and how much revenue growth reflected fuel surcharges.
- Whether fuel surcharges kept pace with diesel costs and whether higher labor, benefit and recruiting costs affected operating margins.
- Actual 2011 capital expenditures versus the $245–$265 million projection and the effect of planned 2012 investment on depreciation, cash flow and debt.
- Ongoing liquidity, covenant compliance and available revolver capacity, including letters of credit and the $35.7 million of senior-note principal due within 12 months.
- Potential dilution from additional ATM share sales and the impact of fuel, economic, regulatory, claims and seasonal risks.