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ODFL > SEC Filings for ODFL > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for OLD DOMINION FREIGHT LINE INC/VA | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for OLD DOMINION FREIGHT LINE INC/VA


8-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a leading, less-than-truckload ("LTL"), union-free motor carrier providing regional, inter-regional and national LTL service and other value-added services from a single integrated organization. In addition to our core LTL services, we offer a broad range of value-added services including worldwide freight forwarding, ground and air expedited transportation, container delivery, truckload brokerage, supply chain consulting, warehousing and consumer household pickup and delivery. More than 90% of our revenue has historically been derived from transporting LTL shipments for our customers, whose demand for our services is generally tied to industrial production and the overall health of the U.S. domestic economy.

In analyzing the components of our revenue, we monitor changes and trends in the following key metrics:

Revenue Per Hundredweight - This measurement reflects the application of our pricing policies to the services we provide, which are influenced by competitive market conditions and our growth objectives. Generally, freight is rated by a class system, which is established by the National Motor Freight Traffic Association, Inc. Light, bulky freight typically has a higher class and is priced at higher revenue per hundredweight than dense, heavy freight. Fuel surcharges, accessorial charges, revenue adjustments and revenue for undelivered freight are included in this measurement. Revenue for undelivered freight is deferred for financial statement purposes in accordance with our revenue recognition policy; however, we believe including it in our revenue per hundredweight metrics results in a better indicator of changes in our yields by matching total billed revenue with the corresponding weight of those shipments.

Revenue per hundredweight is a commonly-used indicator of pricing trends, but this metric can be influenced by many other factors, such as changes in fuel surcharges, weight per shipment, length of haul and the mix of our freight. As a result, changes in revenue per hundredweight do not necessarily indicate actual changes in underlying base rates.

Weight Per Shipment - Fluctuations in weight per shipment can indicate changes in the class, or mix, of freight we receive from our customers, as well as changes in the number of units included in a shipment. Generally, increases in weight per shipment indicate higher demand for our customers' products and overall increased economic activity. Changes in weight per shipment generally have an inverse effect on our revenue per hundredweight, as an increase in weight per shipment will typically cause a decrease in revenue per hundredweight.

Average Length of Haul - We consider lengths of haul less than 500 miles to be regional traffic, lengths of haul between 500 miles and 1,000 miles to be inter-regional traffic, and lengths of haul in excess of 1,000 miles to be national traffic. By analyzing this metric, we can determine the success and growth potential of our service products in these markets. Changes in length of haul generally have a direct effect on our revenue per hundredweight, as an increase in length of haul will typically cause an increase in revenue per hundredweight.

Our primary revenue focus is to increase "density," which is shipment and tonnage growth within our existing infrastructure. This allows us to maximize our asset utilization and labor productivity. We measure density over many different functional areas of our operations including revenue per service center, linehaul load factor, pickup and delivery ("P&D") stops per hour, P&D shipments per hour, platform pounds handled per hour and platform shipments per hour. In addition to our focus on density, it is critical for us to obtain an appropriate yield on the shipments we handle. We manage our yields by focusing on individual account profitability. We believe yield management and improvements in density are key components in our ability to produce profitable growth.

Our primary cost elements are direct wages and benefits associated with the movement of freight; fuel and equipment repair expenses; and depreciation of our equipment fleet and service center facilities. We gauge our overall success in managing these costs by monitoring our operating ratio, a measure of profitability calculated by dividing total operating expenses by revenue, which also allows industry-wide comparisons with our competition.


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We continually upgrade our technological capabilities to improve our customer service and lower our operating costs. Our technology provides our customers with visibility of their shipments throughout our network, increases the productivity of our workforce and provides key metrics from which we can monitor our processes.

The following table sets forth, for the periods indicated, expenses and other items as a percentage of revenue from operations:

                                      Three Months Ended
                                           March 31,
                                       2013          2012
Revenue from operations               100.0 %       100.0  %

Operating expenses:
Salaries, wages and benefits           50.8          51.9
Operating supplies and expenses        18.0          19.0
General supplies and expenses           3.3           2.8
Operating taxes and licenses            3.2           3.3
Insurance and claims                    1.4           1.5
Communications and utilities            1.1           1.0
Depreciation and amortization           5.6           5.1
Purchased transportation                3.3           3.3
Building and office equipment rents     0.6           0.7
Miscellaneous expenses, net             0.3           0.5
Total operating expenses               87.6          89.1

Operating income                       12.4          10.9

Interest expense, net *                 0.5           0.6
Other expense (income), net             0.0          (0.0 )

Income before income taxes             11.9          10.3

Provision for income taxes              4.3           4.0

Net income                              7.6 %         6.3  %

* For the purpose of this table, interest expense is presented net of interest income.


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Results of Operations

Key financial and operating metrics for the three-month periods ended March 31,
2013 and 2012 are presented below:
                                       Three Months Ended
                                            March 31,
                                                              %
                                  2013          2012       Change
Work days                             63            64     (1.6 )%
Revenue (in thousands)         $ 532,575     $ 497,140      7.1  %
Operating ratio                     87.6 %        89.1 %   (1.7 )%
Net income (in thousands)      $  40,553     $  31,095     30.4  %
Diluted earnings per share     $    0.47     $    0.36     30.6  %
Total tons (in thousands)          1,717         1,659      3.5  %
Shipments (in thousands)           1,922         1,873      2.6  %
Weight per shipment (lbs.)         1,787         1,771      0.9  %
Revenue per hundredweight      $   15.50     $   15.05      3.0  %
Revenue per shipment           $  276.97     $  266.58      3.9  %
Average length of haul (miles)       935           945     (1.1 )%

For the first quarter of 2013, we set new Company records in both net income and operating ratio for a first-quarter period, despite having one less workday and more severe weather conditions than the comparable first quarter of 2012. Net income increased 30.4% to $40.6 million and diluted earnings per share increased 30.6% to $0.47. We also produced quarterly revenue growth and tonnage increases that exceeded overall industry levels. The density created by these additional volumes generated cost efficiencies that, when combined with a relatively stable pricing environment, drove our improvement in profitability for the quarter.

We also improved our primary service metrics in the first quarter of 2013 over 2012 levels, increasing our on-time delivery percentage above 99% and lowering our cargo claims ratio to a Company record of 0.34%, which is net cargo claim payments as a percent of revenue. We believe the high quality of services we provide, coupled with fair and equitable pricing, are generating the additional market share gains that we continue to achieve.

Revenue

First quarter 2013 revenue increased $35.4 million, or 7.1%, when compared to the first quarter of 2012. Our revenue growth was driven by increases in both tonnage and pricing. Tonnage increased 3.5%, primarily due to a 2.6% increase in shipments and a 0.9% increase in weight per shipment from the comparable quarter. Tonnage per day, which was not affected by the impact of one less work day in the first quarter of 2013, grew 5.2% as compared to the first quarter of 2012. While the U.S. economy was relatively stable, we primarily attribute our first quarter tonnage growth to increased market share.

Revenue per hundredweight for the first quarter of 2013 was $15.50, a 3.0% increase over the prior-year quarter. This increase reflects a commitment to our yield management philosophy as well as a positive pricing environment for the industry. We focus on obtaining an appropriate yield for our services to offset rising operating costs and to also allow us to invest in opportunities that improve our service capabilities and support our growth. We believe our prices are competitive and, when combined with the quality of our service, provide an unmatched value proposition in our industry.

Our fuel surcharges are designed to offset fluctuations in the cost of petroleum-based products and are one of the many components included in the overall negotiated price we charge for our services. Fuel surcharge revenue decreased slightly to 16.8% of our total revenue for the first quarter of 2013 from 16.9% in the first quarter of 2012. Most of our tariffs and contracts provide for a fuel surcharge that is generally indexed to the U. S. Department of


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Energy's published diesel fuel prices that reset each week. Therefore, the fluctuations in fuel surcharges between the comparable periods are primarily the result of changes in the underlying price of diesel fuel.

Operating Costs and Other Expenses

Salaries, wages and benefits increased $12.8 million, or 5.0%, from the first quarter of 2012 due to an $11.7 million increase in the costs for salaries and wages and a $1.1 million increase in benefit costs. Salaries and wages, excluding benefits, increased primarily due to a 7.5% increase in average full-time employees over the comparable prior-year period and the impact of wage increases provided to our employees in September 2012. The increase in our headcount was necessary to provide sufficient labor capacity to match the demand for our services and anticipated growth. As a result, direct labor costs for drivers, platform employees and fleet technicians increased $9.5 million, or 7.1%, in the first quarter of 2013 as compared to the comparable prior-year period. These costs improved as a percent of revenue as a result of the increased density in our operations and further improvement in the efficiency of our operations. Our platform pounds handled per hour and linehaul laden load average improved 2.9% and 0.7%, respectively, over the prior year quarter. Our pickup and delivery measurements remained relatively consistent, despite the negative impact to our operations caused by severe weather.

Employee benefit costs increased $1.1 million, or 1.6%, over the first quarter of 2012. This increase was due primarily to additional full-time employees eligible for benefits and an increase in the cost related to our employees' paid time off. Overall employee benefit costs improved to 34.3% of salaries and wages in the first quarter of 2013 from 35.9% for the first quarter of 2012.

Operating supplies and expenses increased $1.5 million, or 1.6%, in the first quarter of 2013 from the prior-year comparable quarter. Diesel fuel, excluding fuel taxes, represents the largest component of operating supplies and expenses, and its cost can vary based on both consumption and average price per gallon. As compared to the prior-year period, our intercity miles increased 3.4%, while our diesel fuel consumption increased only 2.8%. Our consumption trends have improved due to a focus on improving our average miles per gallon, which has benefited from certain operational initiatives and the increased use of newer, more fuel-efficient equipment. The increase in our consumption was partially offset by a 0.6% decrease in our average price per gallon.

General supplies and expense increased $3.6 million, or 25.5%, as compared to the prior-year first quarter. This increase was primarily due to an increase in our advertising as well as increased costs for employee training.

Depreciation and amortization expense increased to 5.6% of revenue in the first quarter of 2013 as compared to 5.1% in 2012. This increase was primarily due to additional depreciation on the $196.7 million of tractors and trailers purchased in 2012 as part of our capital expenditure program. The unit costs for tractors that were placed into service in 2012 were significantly higher than the units they replaced, due primarily to the impact of increasingly stringent emission standards. Although our 2013 capital expenditure plan is projected to be lower than 2012, our $270 million capital expenditure plan includes $150 million for tractors and trailers, which we expect will increase depreciation costs in future periods. We believe these investments are necessary to provide sufficient capacity to support our long-term growth initiatives.

Our effective income tax rate for the first quarter of 2013 was 36.1%, as compared to 39.5% for the first quarter of 2012. On January 2, 2013, Congress enacted the American Taxpayer Relief Act of 2012, which reinstated alternative fuel tax credits that previously expired on December 31, 2011 and extended those credits until December 31, 2013. As a result, our first quarter tax rate included the favorable impact of a discrete tax adjustment of $1.6 million for credits related to our use of alternative fuel in 2012. We anticipate our effective income tax rate for the remainder of 2013 will be 38.6%, which includes the benefit of the tax credits for our use of alternative fuel in 2013.


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