Old Dominion Freight Line, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; filed May 9, 2011. Old Dominion is a non-union less-than-truckload carrier with related logistics services. More than 90% of revenue has historically come from LTL shipments.
Financial results and key metrics
Amounts below are in millions except per-share and operating metrics. Comparisons are with Q1 2010 unless otherwise stated.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $422.7 | $317.8 | +33.0% |
| Operating income | $37.9 | $16.4 | +131.5% |
| Operating ratio | 91.0% | 94.8% | Improved 3.8 percentage points |
| Net income | $21.6 | $7.7 | +180.1% |
| Diluted EPS | $0.38 | $0.14 | +$0.24 |
| Net margin | 5.1% | 2.4% | Improved 2.7 percentage points |
| Operating cash flow | $73.8 | $35.0 | +$38.8 |
| Capital expenditures, net of asset-sale proceeds | $57.2 | $27.1 | Increased |
- Freight volume: tons rose 20.3% and shipments rose 20.9%; weight per shipment declined 0.6% to 1,753 pounds.
- Revenue per hundredweight increased 11.1% to $14.27; excluding fuel surcharges, it increased 6.4%. Fuel surcharge revenue was 15.5% of revenue, versus 11.6% a year earlier.
- Operating expenses grew more slowly than revenue overall. Salaries, wages and benefits fell to 52.4% of revenue from 56.9%, while operating supplies and expenses rose to 19.5% from 16.5%, primarily reflecting higher diesel costs.
- At March 31, cash was $88.1, compared with $5.5 at December 31, 2010. Total assets were $1,383.9 and shareholders’ equity was $738.6.
- Total debt was $288.9, including $36.8 of current maturities; debt was $271.2 at year-end 2010. The $225.0 revolving facility had no borrowings outstanding and $49.6 of letters of credit, leaving $175.4 of reported borrowing capacity.
Material changes and unusual items
- Management attributed revenue growth to higher tonnage, improved pricing, fuel surcharges, market-share gains and a general improvement in the U.S. economy. Improved density and productivity helped raise operating margins.
- Diesel fuel costs excluding fuel taxes increased 63.1%, reflecting a 29.1% rise in average price per gallon and 20.4% more gallons consumed. The company does not hedge diesel fuel.
- Other income included a $1.6 million gain from proceeds on two life insurance policies covering former Executive Vice President and COO John B. Yowell, who died in December 2010.
- In January, the company issued $95.0 million of fixed-rate senior notes and used part of the proceeds to refinance debt, including repaying revolving-credit borrowings. The notes carry rates of 4.00% and 4.79%, with maturities in 2018 and 2021.
- Under its ATM program, the company sold 1,516,379 shares for $49.6 million gross and $48.4 million net proceeds through March 31. This represents equity financing and dilution; no additional ATM sales had occurred through the filing date.
- Operating cash flow benefited from $35.2 million of net changes in assets and liabilities. Investing cash use was $57.2 million, principally for property and equipment.
Outlook, liquidity and risks
- Management projected 2011 capital expenditures, net of expected asset-sale proceeds, of $265 million to $300 million: approximately $120–$140 million for service centers, $130–$140 million for tractors, trailers and other equipment, and $15–$20 million for technology. It expected to fund spending with cash, operating cash flow and revolving-facility borrowings.
- The company expected to extend or replace its revolving credit agreement before its August 2011 expiration. Management said current liquidity sources were sufficient for expected capital spending and foreseeable needs, but noted that access to financing, including ATM sales, may not always be available on acceptable terms.
- Management reported compliance with debt covenants at March 31 and no plan to pay dividends during the remainder of 2011. It cautioned that a significant demand decline could weaken cash flow and profitability and potentially affect covenant compliance.
- Risks highlighted include economic and freight-demand weakness, pricing and fuel-surcharge effectiveness, volatile diesel costs, driver recruitment and compensation, claims and insurance costs, harsh weather and seasonality, environmental and other regulation, equipment costs, financing availability, IT disruption, and potential equity dilution. Management said winter weather and recruitment and training costs affected productivity in Q1.
- Management stated that ordinary-course legal proceedings, many partly or fully insured, were not expected to have a material adverse effect. It also said future environmental-law changes could impose unforeseen costs.
- The filing provides no specific revenue or earnings guidance. Management noted that first-quarter results are not necessarily indicative of full-year results and that the business is seasonal, with freight volumes typically peaking in the third or early fourth quarter.
Important facts for investors to verify
- Whether tonnage growth, pricing gains excluding fuel surcharges, and improved operating ratio persist as market and economic conditions change.
- Whether higher fuel prices and operating costs continue to be offset by fuel surcharges, and how fuel exposure affects margins.
- Actual 2011 capital expenditures versus the $265–$300 million projection, and the resulting cash flow and borrowing needs.
- Terms and completion of the planned revolving-credit renewal before August 2011, alongside debt maturities and covenant headroom.
- Further ATM share issuance, dilution, and the use of equity proceeds.
- The impact of seasonality, winter disruption, hiring and training, and claims or insurance developments on productivity and earnings.