Old Dominion Freight Line, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing was dated February 27, 2019. Old Dominion is a union-free less-than-truckload (LTL) carrier; LTL services produced about 98.5% of 2018 revenue.
Financial and operating performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $4.044 billion | $3.358 billion | +20.4% |
| Operating income | $817.1 million | $575.9 million | +41.9% |
| Operating ratio | 79.8% | 82.9% | Improved 3.1 percentage points |
| Net income | $605.7 million | $463.8 million | +30.6% |
| Diluted EPS | $7.38 | $5.63 | +31.1% |
| Operating cash flow | $900.1 million | $536.3 million | +67.8% |
- LTL tons rose 10.1%, shipments 9.4%, and weight per shipment 0.6%. LTL revenue per hundredweight increased 9.6% to $21.25; excluding fuel surcharges, it increased 6.9%.
- Operating margin was 20.2%, versus 17.1% in 2017; net margin was 15.0%, versus 13.8%. The effective tax rate was 25.7%, compared with 19.5% in 2017.
- Fuel surcharges were 13.3% of revenue, up from 11.1%. Average diesel cost per gallon increased 24.9%; the company does not hedge diesel prices.
- Capital expenditures were $588.3 million gross, or $581.3 million net of equipment-sale proceeds. Investing cash outflow was $580.4 million.
- At year-end, cash was $190.3 million, current assets $706.2 million, current liabilities $356.7 million, and shareholders’ equity $2.680 billion. Long-term debt was $45 million; no revolving-credit borrowings were outstanding. The $300 million revolver had $238.5 million of available capacity after letters of credit.
Fourth-quarter detail
Fourth-quarter 2018 revenue was $1.027 billion, operating income $218.8 million, net income $159.5 million, and diluted EPS $1.95. Compared with fourth-quarter 2017, revenue increased from $891.1 million and operating income from $143.5 million; net income and diluted EPS decreased from $197.3 million and $2.39. The 2017 quarter included a $104.9 million tax benefit from remeasurement of deferred taxes under the Tax Cuts and Jobs Act, making the earnings comparison unusually favorable to 2017.
Material changes and capital allocation
- Management attributed growth to a strong domestic economy, market-share gains, pricing, and greater freight density; it reported record annual revenue and profitability.
- Salaries, wages, and benefits rose 15.2%, while operating supplies and expenses rose 28.6%, principally reflecting higher diesel costs and increased miles. Employee headcount also expanded to support shipment growth.
- Cash increased by $62.8 million during 2018. The company repurchased $163.3 million of shares and paid $42.6 million in dividends. The year-end authorization remaining under the new repurchase program was $131.7 million.
- Debt declined from $95 million to $45 million after a $50 million principal payment. The remaining senior note is due January 2021; the company reported compliance with debt covenants.
Outlook, risks, and unusual items
- Management estimated 2019 capital expenditures of approximately $490 million: about $220 million for service-center facilities, $175 million for tractors and trailers, and $95 million for technology and other assets. It expected to fund these primarily with operating cash flow, cash, and, if needed, revolver borrowings.
- In January 2019, revenue per day increased 8.3% year over year; LTL tons per day decreased 1.5%, with weight per shipment down 4.4% and shipments up 3.0%. LTL revenue per hundredweight increased approximately 9.8%.
- The filing provides no full-year revenue or earnings guidance. Management cited demand and economic conditions, competitive pricing, fuel costs and surcharge recovery, driver and technician availability, labor and benefit costs, capacity investment, weather, regulation, insurance claims, and cybersecurity as material risks.
- The company expected adoption of the new lease accounting standard on January 1, 2019 to add a right-of-use asset and lease liability of approximately $65–$70 million, with no material income-statement impact expected.
- Management said ordinary-course legal proceedings, including some class-action allegations, were not expected to have a material adverse effect. The company also reported that its financial statements received an unqualified audit opinion and that internal control over financial reporting was effective.
Important facts for investors to verify
- Separate underlying pricing growth from fuel surcharges and changes in shipment mix; confirm whether 2018 yield gains can persist.
- Assess whether volume, freight density, and productivity can support margins as hiring and network investment continue.
- Track diesel prices, surcharge timing and recovery, and the effect of fuel and other cost inflation on profitability.
- Compare cash generation with the planned 2019 capital program, dividends, repurchases, and any additional borrowing.
- Consider the 2017 Tax Act benefit when comparing earnings, tax rates, and fourth-quarter results across periods.
- Monitor the January 2019 shipment and weight-per-shipment trends, lease-standard adoption, and the risks disclosed for labor, regulation, claims, weather, and cybersecurity.