filings.toolsItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
55K characters. Original on sec.gov · Markdown
Item 7. 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 value-added logistics services from a single integrated organization. In addition to our core LTL services, we offer our customers a broad range of logistics services including ground and air expedited transportation, supply chain consulting, transportation management, truckload brokerage, container delivery and warehousing services, as well as consumer household moving services. Through marketing and carrier relationships, we also offer door-to-door international freight services to and from all of North America, Central America, South America and the Far East. Approximately 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.
Table of Contents
In analyzing the components of our revenue, we monitor changes and trends in the following key metrics:
| • | Revenue Per Hundredweight – This measurement reflects our pricing policies, 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. Changes in the class, packaging of the freight and length of haul of the shipment can also affect this average. 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 measurements results in a better indicator of changes in our yields by matching total billed revenue with the corresponding weight of those shipments. |
|---|
| • | 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. |
|---|
| • | 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. |
|---|
| • | Revenue Per Shipment – This measurement is primarily determined by the three metrics listed above and is used, in conjunction with the number of shipments we receive, to calculate total revenue, excluding adjustments for undelivered freight. |
|---|
Our primary revenue focus is to increase shipment and tonnage growth within our existing infrastructure, generally referred to as increasing density, thereby maximizing asset utilization and labor productivity. We measure density over many different functional areas of our operations including revenue per service center, linehaul load factor, 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; operating supplies and expenses, which includes fuel and equipment repair costs; 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.
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.
Table of Contents
Results of Operations
The following table sets forth, for the years indicated, expenses and other items as a percentage of revenue from operations:
| 2011 | 2010 | 2009 | ||||||||||
| Revenue from operations | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
| Operating expenses: | ||||||||||||
| Salaries, wages and benefits | 50.8 | 54.6 | 57.7 | |||||||||
| Operating supplies and expenses | 18.9 | 16.5 | 14.6 | |||||||||
| General supplies and expenses | 2.6 | 2.8 | 2.8 | |||||||||
| Operating taxes and licenses | 3.4 | 3.8 | 4.0 | |||||||||
| Insurance and claims | 1.5 | 1.7 | 1.8 | |||||||||
| Communication and utilities | 1.0 | 1.0 | 1.2 | |||||||||
| Depreciation and amortization | 4.8 | 5.4 | 7.6 | |||||||||
| Purchased transportation | 3.4 | 3.4 | 2.7 | |||||||||
| Building and office equipment rents | 0.7 | 1.0 | 1.2 | |||||||||
| Miscellaneous expenses, net | 0.5 | 0.5 | 0.7 | |||||||||
| Total operating expenses | 87.6 | 90.7 | 94.3 | |||||||||
| Operating income | 12.4 | 9.3 | 5.7 | |||||||||
| Interest expense, net (1) | 0.7 | 0.8 | 1.1 | |||||||||
| Other expense, net | 0 | 0.1 | 0 | |||||||||
| Income before income taxes | 11.7 | 8.4 | 4.6 | |||||||||
| Provision for income taxes | 4.3 | 3.3 | 1.8 | |||||||||
| Net income | 7.4 | % | 5.1 | % | 2.8 | % | ||||||
| (1) | For the purpose of this table, interest expense is presented net of interest income. |
|---|
Table of Contents
2011 Compared to 2010
Key financial and operating metrics for 2011 and 2010 are presented below:
| 2011 | 2010 | Change | % Change | |||||||||||||
| Work days | 254 | 253 | 1 | 0.4 | ||||||||||||
| Revenue (in thousands) | $ | 1,882,541 | $ | 1,480,998 | $ | 401,543 | 27.1 | |||||||||
| Operating ratio | 87.6 | % | 90.7 | % | (3.1 | )% | (3.4 | ) | ||||||||
| Net income (in thousands) | $ | 139,470 | $ | 75,651 | $ | 63,819 | 84.4 | |||||||||
| Diluted earnings per share | $ | 2.44 | $ | 1.35 | $ | 1.09 | 80.7 | |||||||||
| Total tons (in thousands) | 6,397 | 5,656 | 741 | 13.1 | ||||||||||||
| Total shipments (in thousands) | 7,256 | 6,327 | 929 | 14.7 | ||||||||||||
| Weight per shipment (lbs.) | 1,763 | 1,788 | (25 | ) | (1.4 | ) | ||||||||||
| Revenue per hundredweight | $ | 14.72 | $ | 13.09 | $ | 1.63 | 12.5 | |||||||||
| Revenue per shipment | $ | 259.50 | $ | 234.09 | $ | 25.41 | 10.9 | |||||||||
| Average length of haul (miles) | 952 | 948 | 4 | 0.4 |
Our financial results for 2011 were the best we have produced in our 20 years as a public company and extended the momentum we built in 2010. We experienced strong growth in both tonnage and revenue per hundredweight, and we improved our productivity, all of which led to significant margin improvement. Tonnage growth in 2011 was primarily the result of our ability to win market share as well as a slight improvement in the overall U.S. economy. We believe our consistent strategy of providing “best-in-class” on-time and claims-free service at a fair and equitable price resonates with shippers and will continue to help us win market share and fuel our growth. Our ability to win market share is supported by our belief that shippers are making decisions based more on the overall value of the service they receive than focusing simply on prices. This change in philosophy occurred as many of our competitors implemented significant rate increases in 2011 and 2010. While we implemented a modest rate increase in 2011, we do not believe we have the headwinds that many of our competitors will face in making pricing decisions in 2012. As a result, we believe the quality of our service and the consistency of our pricing is a winning strategy that will continue to provide opportunities for us to increase tonnage and market share in 2012.
The increase in revenue during 2011, as well as productivity improvements, enabled us to leverage our fixed cost network and generate significant improvement in our operating results. Our net income increased in 2011 by $63.8 million, or 84.4%, to $139.5 million and our operating ratio decreased by 310 basis points to 87.6%, which is the best annual operating ratio produced in our Company’s history.
Revenue
The 27.1% increase in revenue during 2011 was the result of increases in both tonnage and revenue per hundredweight. Tonnage increased 13.1% due to a 14.7% increase in shipments that was partially offset by a 1.4% decrease in weight per shipment. While a decrease in weight per shipment has historically been an indicator of weakness in the economy, we believe the decrease we experienced in 2011 was due to a decline in the number of heavier non-traditional LTL shipments, such as full-container load and truckload shipments, as a percent of our total shipments.
Revenue per hundredweight increased 12.5% to $14.72 in 2011. This change reflects a much improved LTL pricing environment that supported our rate increases, as well as an increase in fuel surcharges. Our fuel surcharges are designed to offset fluctuations in the cost of petroleum-based products and are one of many components included in the overall price for our services. Revenue per hundredweight is a good indicator of pricing trends, but this metric is influenced by many other factors, such as changes in fuel surcharges, weight per shipment, length of haul and mix of freight; therefore, changes in revenue per hundredweight do not necessarily indicate actual changes in underlying rates. Our revenue per hundredweight, excluding fuel surcharges, increased 7.1% in 2011 but was positively influenced by the decrease in weight per shipment and an increase in length of haul.
Fuel surcharge revenue increased to 16.4% of revenue from 12.3% in 2010 due to the increased price of diesel fuel during 2011. Most of our tariffs and contracts provide for a fuel surcharge, which is recorded as additional revenue, as diesel fuel prices increase above stated levels. These levels are
Table of Contents
generally indexed to the DOE’s published fuel prices that reset each week. The fuel surcharge is one of many components included in the overall negotiated price for our transportation services with our customers, although it is generally considered to be a measure of the increase in cost of all petroleum products we use. We regularly monitor the components of our pricing, including base freight rates and fuel surcharges. We also address any individual account profitability issues with our customers as part of our effort to minimize the negative impact on our profitability that would likely result from a rapid and significant change in any of our operating expenses.
Operating Costs and Other Expenses
Salaries, wages and benefits increased $147.3 million or 18.2% in 2011, which compares favorably with our revenue growth of 27.1%. As a result, our salaries, wages and benefits improved to 50.8% of revenue from 54.6% in 2010. Salaries and wages, excluding benefits, increased $109.9 million due to a 7.6% increase in the total number of full-time employees and the impact from salary and wage increases provided to our employees in September 2011 and 2010. In addition, there was an increase in performance-based compensation due to the improvement in our financial and operational results. These increases were partially offset by the improved productivity of our linehaul, P&D and platform operations that resulted from increased density and a continued focus on efficiency. Our linehaul laden load average, P&D shipments per hour and platform pounds handled per hour improved 0.3%, 1.1% and 0.1%, respectively.
Employee benefit costs increased $37.3 million primarily due to an increase in the number of full-time employees, increased costs related to our group health plan and higher payroll-related taxes. As a percentage of salaries and wages, employee benefit costs increased slightly to 31.9% in 2011 from 31.5% in 2010. Our group health plan requires a 90-day waiting period before newly hired employees are eligible to enroll. A significant number of employees were hired in the second half 2010, and as a result, our group health costs increased as these new employees began to enroll in our plan in 2011. In addition, our group health costs increased due to changes required by the 2010 Patient Protection and Affordable Care Act, which required us to provide dependant coverage until the age of 26.
Operating supplies and expenses increased to 18.9% of revenue in 2011 from 16.5% in 2010. This increase is primarily due to the increase in diesel fuel costs, excluding fuel taxes, which is the largest component of operating supplies and expenses. These costs increased 52.8% during the year as a result of the combined effect of a 29.7% increase in our average price per gallon and a 12.7% increase in gallons consumed. The increase in fuel consumption is primarily due to a 14.7% year-over-year increase in overall miles driven that was partially offset by an improvement in our average miles per gallon. Our increased fuel consumption also resulted in an increase in our fuel tax expenses and was the principal driver of the $7.9 million increase in “Operating taxes and licenses.” We do not use diesel fuel hedging instruments and are therefore subject to market price fluctuations.
Depreciation and amortization expense decreased to 4.8% of revenue in 2011 as compared to 5.4% in 2010. Although our capital expenditure requirements increased in 2011, we were able to offset the cost of these additions by utilizing the available capacity of our fleet and service center network to create operating leverage on the 13.1% increase in tonnage. Our capital expenditure plan for 2012 is projected to be higher than 2011 and, as a result, our depreciation costs will likely increase in future periods.
We purchase linehaul transportation and P&D services from other motor carriers and railroads. We also utilize independent contractors for our container operations. We utilize these services when it is economically beneficial or when there are imbalances of freight flow within our service center network. Purchased transportation expense remained consistent at 3.4% of revenue in 2011 and 2010. As it is typically more efficient and profitable for us to utilize our own personnel and equipment, we expect to continue to focus on balancing our internal resources with freight demand in an effort to reduce our use of purchased transportation in future periods.
Our effective tax rate for 2011 was 36.6% as compared to 39.2% in 2010. Our effective tax rates in 2011 and 2010 were favorably impacted by alternative fuel tax credits for the use of propane in our operations. These fuel tax credits were originally scheduled to expire on December 31, 2009; however, they were extended to December 31, 2011 with the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Our 2011 rate also includes the favorable impact of tax credits related to our investment in alternative energy-producing assets.
Table of Contents
2010 Compared to 2009
Key financial and operating metrics for 2010 and 2009 are presented below:
| 2010 | 2009 | Change | % Change | |||||||||||||
| Work days | 253 | 253 | 0 | 0 | ||||||||||||
| Revenue (in thousands) | $ | 1,480,998 | $ | 1,245,005 | $ | 235,993 | 19.0 | |||||||||
| Operating ratio | 90.7 | % | 94.3 | % | (3.6 | )% | (3.8 | ) | ||||||||
| Net income (in thousands) | $ | 75,651 | $ | 34,871 | $ | 40,780 | 116.9 | |||||||||
| Diluted earnings per share | $ | 1.35 | $ | 0.62 | $ | 0.73 | 117.7 | |||||||||
| Total tons (in thousands) | 5,656 | 4,902 | 754 | 15.4 | ||||||||||||
| Total shipments (in thousands) | 6,327 | 5,750 | 577 | 10.0 | ||||||||||||
| Weight per shipment (lbs.) | 1,788 | 1,705 | 83 | 4.9 | ||||||||||||
| Revenue per hundredweight | $ | 13.09 | $ | 12.70 | $ | 0.39 | 3.1 | |||||||||
| Revenue per shipment | $ | 234.09 | $ | 216.49 | $ | 17.60 | 8.1 | |||||||||
| Average length of haul (miles) | 948 | 928 | 20 | 2.2 |
During 2010 we achieved significant increases in our shipments and tonnage, which accelerated during the second half of the year. We believe these increases were the result of our ability to gain market share during the year as well as general growth in U.S. industrial production and manufacturing. As industry capacity tightened in 2010, many of our competitors implemented significant rate increases. This reversed an industry trend of several years in which many of our competitors had discounted prices. While we implemented a modest general rate increase in November 2010, our pricing philosophy remained consistent with our strategy throughout the recession, which was to provide “best-in-class” on-time and claims-free service at a fair and equitable price.
The significant growth in our tonnage resulted in increased density in our network that generally resulted in increased efficiency and productivity. The overall improvement in our pricing during 2010, combined with the increased density, resulted in improvements in our operating results. Net income increased in 2010 by $40.8 million, or 116.9%, to $75.7 million and our operating ratio decreased by 360 basis points to 90.7%. Our 2010 results also reflect reductions in our depreciation and amortization expenses of approximately $12.7 million, due to changes in the estimated useful lives and salvage values of certain equipment, which are described further under “Critical Accounting Policies” below.
Revenue
The 19.0% increase in revenue during 2010 was the result of increases in tonnage and revenue per hundredweight. Tonnage increased 15.4% for the year ended December 31, 2010, due to the combination of a 10.0% increase in shipments and a 4.9% increase in weight per shipment. The growth in tonnage per day and shipments per day accelerated during the second half of the year, which we believe reflects our gain in market share as well as general economic improvement. We believe the increase in our weight per shipment during this time indicated an improving economy, although we also continued to gain market share with large national shippers that typically have heavier shipments.
Revenue per hundredweight increased 3.1% to $13.09 from $12.70 in 2009. This increase primarily reflects an increase in fuel surcharges, which are designed to offset fluctuations in the cost of petroleum-based products and are one of many components included in the overall price for our services. Excluding fuel surcharges, revenue per hundredweight remained consistent between 2010 and 2009 despite the negative effect on this metric from the increase in weight per shipment. This consistency reflects our ability to initiate price increases during 2010. As industry conditions improved during the year, our ability to obtain price increases strengthened. We experienced improvement in the year-over-year change in revenue per hundredweight, excluding fuel surcharges, for each month during the second half of 2010 and also implemented a general rate increase on certain of our tariffs effective November 15, 2010.
Fuel surcharge revenue increased to 12.3% of revenue from 9.6% in 2009, as a result of the increased price of diesel fuel during 2010. Most of our tariffs and contracts provide for a fuel surcharge, which is recorded as additional revenue, as diesel fuel prices increase above stated levels. These levels are generally indexed to the DOE’s published fuel prices that reset each week. The fuel surcharge is one
Table of Contents
of many components included in the overall negotiated price for our transportation services with our customers, although it is generally considered to be a measure of the increase in cost of all petroleum products we use. We regularly monitor the components of our pricing, including base freight rates and fuel surcharges. We also address individual account profitability issues with our customers when necessary as part of our effort to minimize the negative impact on our profitability that would likely result from a rapid and significant change in any of our operating expenses.
Operating Costs and Other Expenses
Salaries, wages and benefits increased $90.1 million or 12.5 % in 2010, which compares favorably with our revenue and tonnage growth of 19.0% and 15.4%, respectively. As a result, and due to our increased reliance on purchased transportation in 2010, our salaries, wages and benefits improved to 54.6% of revenue from 57.7% in 2009. Salaries and wages increased $76.1 million due to a 16.4% increase in the total number of full-time employees and an increase in the number of hours worked by existing employees, which was in direct response to the increase in tonnage during the year. In addition, we implemented a 2% salary and wage increase for all employees on September 3, 2010.
The increased density within our network allowed us to leverage the additional volumes at lower unit costs. Driver wages as a percentage of revenue improved to 21.7% from 23.1% in 2009 and platform wages improved to 6.6% of revenue from 6.8% in 2009. The increased density also allowed us to maintain efficient operations, although we did not experience improvement in all of our productivity measures due to the costs of hiring and training new employees. In our linehaul operations, our laden load average increased 1.5%. P&D shipments per hour remained consistent with 2009, but our P&D stops per hour decreased 0.7%.
We benefited from a decrease in employee benefit costs as a percentage of salaries and wages to 31.5% in 2010 from 33.4% in 2009. Much of this improvement is attributable to the improvement in our group health and dental costs as a percent of salaries and wages. Our group health costs were favorably impacted by a decrease in the number of claims paid for participants under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) and an overall decrease in the average severity of health insurance claims. There is also a 90-day wait period before newly hired employees are eligible to enroll in our health plan and the majority of the employees hired in 2010 were hired during the second half of the year. As a result, our group health costs are likely to increase in future periods as these new employees begin to enroll in our plan.
Operating supplies and expenses increased to 16.5% of revenue in 2010 from 14.6% in 2009. This increase is primarily due to the increase in diesel fuel costs, excluding fuel taxes, which is the largest component of operating supplies and expenses. These costs increased 44.5% during the year as a result of the combined effect of a 22.7% increase in our average price per gallon and a 12.1% increase in gallons consumed. The increase in fuel consumption is primarily due to the year-over-year increase in overall miles. Our increased consumption also resulted in the increase to our fuel tax expenses and was the principal driver of the $5.2 million increase in “Operating taxes and licenses.” We do not use diesel fuel hedging instruments and are therefore subject to market price fluctuations.
Depreciation and amortization expense decreased to 5.4% of revenue in 2010 as compared to 7.6% in 2009. Our capital expenditure requirements were reduced for 2010 due to the available capacity throughout the year in our fleet and service center network. The operating leverage created by our reduced capital expenditures and the 15.4% increase in tonnage contributed to the decrease in depreciation and amortization expense as a percent of revenue. The improvement as a percent of revenue also reflects the approximate $12.7 million decrease in depreciation expense that resulted from changes in the estimated useful lives and salvage values of certain equipment, effective January 1, 2010. The changes we made are described in more detail under “Critical Accounting Policies” below.
We purchase linehaul transportation and P&D services from other motor carriers and railroads. We also utilize independent contractors for our container operations. We utilize these services when it is economically beneficial or when there are imbalances of freight flow within our service center network. Purchased transportation expense increased to 3.4% of revenue in 2010 from 2.7% in 2009. These costs increased primarily because of certain imbalances of freight flow within our network, which is attributable to the significant increase in our tonnage. In response to our tonnage growth, we increased our full-time headcount during 2010, the majority of which were drivers and platform employees. As we begin to balance our internal resources with freight demand, we intend to reduce our use of purchased transportation, as it is more efficient and profitable to utilize our own personnel and equipment.
Table of Contents
Our effective tax rate for 2010 was 39.2% as compared to 39.0% in 2009. Our effective tax rates in 2010 and 2009 were favorably impacted by alternative fuel tax credits for the use of propane in our operations. These fuel tax credits were originally scheduled to expire on December 31, 2009; however, they were extended to December 31, 2011 with the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 in December 2010. Our effective tax rate exceeded the federal statutory rate of 35% primarily due to the impact of state taxes and certain non-deductible items.
Liquidity and Capital Resources
A summary of our cash flows is presented below:
| (In thousands) | 2011 | 2010 | 2009 | |||||||||
| Cash and cash equivalents at beginning of year | $ | 5,450 | $ | 4,171 | $ | 24,104 | ||||||
| Cash flows provided by (used in): | ||||||||||||
| Operating activities | 277,380 | 141,076 | 130,716 | |||||||||
| Investing activities | (244,778 | ) | (104,297 | ) | (203,724 | ) | ||||||
| Financing activities | 37,798 | (35,500 | ) | 53,075 | ||||||||
| Increase (decrease) in cash and cash equivalents | 70,400 | 1,279 | (19,933 | ) | ||||||||
| Cash and cash equivalents at end of year | $ | 75,850 | $ | 5,450 | $ | 4,171 | ||||||
The changes in our cash flows provided by operating activities for the periods presented above are due primarily to the significant improvement in our results of operations, which are described above in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.” Changes in cash flows used in investing activities are primarily due to a significant increase in our capital expenditures for 2011 following a reduction of capital outlays during the uncertain economic environment in 2010. These changes in our capital expenditure program are more fully described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Expenditures.” Changes in cash flows provided by or used in financing activities consist of fluctuations in our senior unsecured revolving line of credit, scheduled principal payments, and debt and equity issuances during 2011. In January 2011, we completed a $95.0 million private placement of senior notes and in March 2011 we received net proceeds of $48.4 million resulting from the issuance of our common stock, as discussed in more detail below. A portion of the proceeds from these transactions was used to satisfy the outstanding balance on our senior unsecured revolving line of credit. Please refer to the Statements of Cash Flows included in Item 8, “Financial Statements and Supplementary Data” of this report for additional information regarding the changes in our cash and cash equivalents.
We have three primary sources of available liquidity: cash and cash equivalents, cash flows from operations and available borrowings under our senior unsecured revolving credit agreement, which is described below. We believe we also have sufficient access to debt and equity markets to provide another source of liquidity, if needed.
On January 3, 2011, we entered into a Note Purchase Agreement pursuant to which we issued $95.0 million of privately-placed senior notes. We entered into this Note Purchase Agreement to fund planned capital expenditures and for general corporate purposes. We used a portion of the proceeds to refinance existing indebtedness, including paying down the outstanding balance on our senior unsecured revolving credit agreement.
To facilitate our access to the equity market, we filed an automatic shelf registration statement with the Securities and Exchange Commission (the “SEC”) during the fourth quarter of 2009 that provides us with the opportunity to offer and sell shares of common stock on a delayed or continuous basis at indeterminate prices from time to time. Pursuant to this automatic shelf registration, we filed a prospectus supplement and entered into an At-The-Market Equity Offering Sales Agreement on February 2, 2011 with Stifel, Nicolaus & Company, Incorporated (“Stifel Nicolaus Weisel”) pursuant to which we had the ability to issue and sell, from time to time over a 12-month period through or to Stifel Nicolaus Weisel,
Table of Contents
shares of our common stock having an aggregate offering price of up to $100.0 million (the “ATM program”). From February 2, 2011 through December 31, 2011, we issued 1,516,379 shares of common stock at an average price of $32.69 per share pursuant to the ATM program for aggregate gross proceeds of $49.6 million and aggregate net proceeds of $48.4 million, after deducting commissions and other transaction costs of $1.2 million. There were no subsequent issuances pursuant to the ATM program through February 2, 2012, which was the date on which the ATM program expired.
Capital Expenditures
The table below sets forth our net capital expenditures for property and equipment, including those obtained through capital leases, for the years ended December 31, 2011, 2010 and 2009:
| Year Ended December 31, | ||||||||||||
| (In thousands) | 2011 | 2010 | 2009 | |||||||||
| Land and structures | $ | 73,463 | $ | 49,867 | $ | 120,569 | ||||||
| Tractors | 69,837 | 35,777 | 33,072 | |||||||||
| Trailers | 62,326 | 5,020 | 32,639 | |||||||||
| Technology | 24,767 | 11,866 | 7,413 | |||||||||
| Other | 28,391 | 5,000 | 17,663 | |||||||||
| Less: Proceeds from sale | (5,436 | ) | (2,050 | ) | (2,303 | ) | ||||||
| Total | $ | 253,348 | $ | 105,480 | $ | 209,053 | ||||||
Our capital expenditure requirements are generally based upon the projected increase in the number and size of service center facilities to support our plan for long-term growth, our planned tractor and trailer replacement cycle and forecasted revenue growth. Our capital expenditures for tractors and trailers increased in 2011, as we needed equipment for anticipated growth as well as to replace equipment being retired through our normal replacement cycle. In comparison, we made use of available equipment capacity in 2010 and 2009 and were able to limit our purchases of these assets. The increase in our expenditures for other assets increased in 2011 due to increased purchases of forklifts, yard tractors and alternative energy-producing assets.
We currently estimate that capital expenditures, net of anticipated proceeds from dispositions, will be approximately $300 million to $350 million for the year ending December 31, 2012. Of our capital expenditures, approximately $90 million to $120 million is allocated for the purchase of service center facilities, construction of new service center facilities or expansion of existing service center facilities; approximately $195 million to $210 million is allocated for the purchase of tractors, trailers and other equipment; and approximately $15 million to $20 million is allocated for investments in technology. We expect to fund these capital expenditures through cash flows from operations, our existing cash and cash equivalents and the use of our senior unsecured revolving credit facility. We believe our current sources of liquidity will be sufficient to satisfy our expected capital expenditures.
We anticipate that there will be additional environmental regulations and legislation resulting from the increased regulatory focus on climate change and greenhouse gas emissions in the United States. At this time, we cannot predict the requirements of any future regulations. However, any limitations on the emission of greenhouse gases or other environmental legislation could increase our future capital expenditures and have an adverse impact on our financial condition, results of operations and liquidity.
Financing Agreements
We entered into a five-year, $200.0 million senior unsecured revolving credit facility pursuant to the terms of a second amended and restated credit agreement on August 10, 2011 (the “Credit Agreement”), with Wells Fargo Bank, National Association (“Wells Fargo”) serving as administrative agent for the lenders. This Credit Agreement amended and restated the terms of the previous $225.0 million amended and restated senior unsecured revolving credit facility dated August 10, 2006. Of the $200.0 million line of credit commitments, $150.0 million may be used for letters of credit and $20.0 million may be used for borrowings under the Wells Fargo Sweep Plus Loan Program. We utilize the sweep program to manage our daily cash needs, as the sweep program automatically initiates borrowings to cover overnight cash requirements up to an aggregate of $20.0 million. In addition, we have the right to request an increase in the line of credit commitments up to a total of $300.0 million in minimum increments of $25.0 million.
Table of Contents
At our option, revolving loans under the facility bear interest at either: (a) the Applicable Margin Percentage for Base Rate Loans plus the higher of Wells Fargo’s prime rate, the federal funds rate plus 0.5% per annum, or the one month LIBOR Rate plus 1.0% per annum; (b) the LIBOR Rate plus the Applicable Margin Percentage for LIBOR Loans; or (c) the LIBOR Market Index Rate (“LIBOR Index Rate”) plus the Applicable Margin Percentage for LIBOR Market Index Loans. The Applicable Margin Percentage is determined by a pricing grid in the Credit Agreement and ranges from 1.0% to 1.875%. The Applicable Margin Percentage was 1.125% for the period this Credit Agreement was in effect during 2011. Revolving loans under the sweep program bear interest at the LIBOR Index Rate.
The Credit Agreement contains customary covenants, including financial covenants that require us to observe a maximum ratio of debt to total capital and a minimum fixed charge coverage ratio. Any future wholly-owned subsidiaries of Old Dominion would be required to guarantee payment of all of our obligations under the facility. The amounts outstanding and remaining borrowing capacity under our revolving credit facilities are presented below:
| December 31, | ||||||||
| (In thousands) | 2011 | 2010 | ||||||
| Facility limit | $ | 200,000 | $ | 225,000 | ||||
| Line of credit borrowings | 0 | (66,230 | ) | |||||
| Outstanding letters of credit | (49,878 | ) | (49,605 | ) | ||||
| Total borrowing capacity | $ | 150,122 | $ | 109,165 | ||||
Commitment fees ranging from 0.175% to 0.30% are charged quarterly in arrears on the aggregate unutilized portion of the Credit Agreement. Letter of credit fees equal to the applicable margin for Adjusted LIBOR Rate loans are charged quarterly in arrears on the daily average aggregate stated amount of all letters of credit outstanding during the quarter. The commitment fees and letter of credit fees were 0.20% and 1.125%, respectively, for the period the Credit Agreement was in effect during 2011. In addition, a facing fee at an annual rate of 0.125% is charged quarterly in arrears on the daily average aggregate stated amount of all letters of credit outstanding during such quarter.
We have three outstanding unsecured senior note agreements with an aggregate amount outstanding of $262.9 million at December 31, 2011. These notes call for periodic principal payments with maturities that range from 2015 to 2021, of which $35.7 million is due in the next twelve months. Interest rates on these notes are fixed and range from 4.00% to 5.85%. The effective average interest rate on our outstanding senior note agreements was 5.17% and 5.54% at December 31, 2011 and 2010, respectively.
With the exception of borrowings pursuant to the Credit Agreement, interest rates are fixed on all of our debt instruments. Therefore, short-term exposure to fluctuations in interest rates is limited to our line of credit facility. We do not currently use interest rate derivative instruments to manage exposure to interest rate changes.
Our Credit Agreement limits the amount of dividends that could be paid to shareholders to the greater of (i) $20.0 million, (ii) the amount of dividends paid in the immediately preceding fiscal year, or (iii) an amount equal to 25% of net income from the immediately preceding fiscal year. We did not declare or pay a dividend on our common stock in 2011 or 2010, and we have no plans to declare or pay a dividend in 2012.
A significant decrease in demand for our services could limit our ability to generate cash flow and affect profitability. Most of our debt agreements have covenants that require stated levels of financial performance, which if not achieved could cause acceleration of the payment schedules. As of December 31, 2011, we were in compliance with these covenants. We do not anticipate a significant decline in business levels or financial performance that would cause us to violate any such covenants in the future, and we believe the combination of our existing Credit Agreement along with our additional borrowing capacity will be sufficient to meet foreseeable seasonal and long-term capital needs.
Table of Contents
Common Stock Split
On July 30, 2010, our Board of Directors approved a three-for-two common stock split for shareholders of record as of the close of business on August 9, 2010. On August 23, 2010, those shareholders received one additional share of common stock for every two shares owned. In lieu of fractional shares, shareholders received a cash payment based on the average of the high and low sales prices of the common stock on the record date.
All references in this report to shares outstanding, weighted average shares outstanding and earnings per share amounts have been restated retroactively to reflect this stock split.
Contractual Obligations
The following table summarizes our significant contractual obligations as of December 31, 2011:
| Payments due by period | ||||||||||||||||||||
| Contractual Obligations (1) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
| (In thousands) | ||||||||||||||||||||
| Long-term debt obligations, exclusive of interest | $ | 262,857 | $ | 35,715 | $ | 71,428 | $ | 60,714 | $ | 95,000 | ||||||||||
| Capital lease obligations, exclusive of interest | 6,328 | 3,639 | 2,689 | 0 | 0 | |||||||||||||||
| Operating lease obligations | 73,312 | 16,256 | 22,121 | 11,319 | 23,616 | |||||||||||||||
| Purchase obligations | 55,138 | 55,138 | 0 | 0 | 0 | |||||||||||||||
| Total | $ | 397,635 | $ | 110,748 | $ | 96,238 | $ | 72,033 | $ | 118,616 | ||||||||||
| (1) | Contractual obligations include long-term debt consisting of senior notes totaling $262.9 million; capital lease obligations for computer equipment; operating leases consisting primarily of real estate leases; and purchase obligations relating to non-cancellable purchase orders for equipment scheduled for delivery in 2012. Please refer to the information regarding interest rates and the balance on our revolving credit facility in this section above and also in Note 2 to the Financial Statements included in Item 8 of this report. |
|---|
Critical Accounting Policies
In preparing our financial statements, we apply the following critical accounting policies that we believe affect our judgments and estimates of amounts recorded in certain assets, liabilities, revenue and expenses. These critical accounting policies are further described in Note 1 of the Notes to the Financial Statements included in Item 8 of this report.
Revenue Recognition
We recognize revenue based upon when our transportation services have been completed in accordance with the bill of lading contract, our general tariff provisions or contractual agreements with our customers. Generally, this occurs when we complete the delivery of a shipment. For transportation services not completed at the end of a reporting period, we use a percentage of completion method to allocate the appropriate revenue to each separate reporting period. Under this method, we develop a factor for each uncompleted shipment by dividing the actual number of days in transit at the end of a reporting period by that shipment’s standard delivery time schedule. This factor is applied to the total revenue for that shipment and revenue is allocated between reporting periods accordingly.
Allowances for Uncollectible Accounts and Revenue Adjustments
We maintain an allowance for uncollectible accounts for estimated losses resulting from the inability of our customers to make required payments. We estimate this allowance by analyzing the aging of our customer receivables, our historical loss experience and other trends and factors affecting the credit risk
Table of Contents
of our customers. We determine customer receivables to be past due when payment has not been received by the invoice due date. Write-offs occur when we determine an account to be uncollectible and could differ from our allowance estimate as a result of factors such as changes in the overall economic environment or risks surrounding our customers. Additional allowances may be required if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments. We periodically review the underlying assumptions in our estimate of the allowance for uncollectible accounts to ensure that the allowance reflects the most recent trends and factors.
We also maintain an allowance for estimated revenue adjustments resulting from future billing corrections, customer allowances, money-back service guarantees and other miscellaneous revenue adjustments. These revenue adjustments are recorded in our revenue from operations. We use historical experience, trends and current information to update and evaluate these estimates.
Management believes the methodologies for estimating these allowances to be reliable based on the accuracy of our estimates in prior periods. As such, we do not anticipate any near-term changes in our methodologies for these estimates.
Claims and Insurance Accruals
Claims and insurance accruals reflect the estimated cost of claims for cargo loss and damage, BIPD, workers’ compensation, long-term disability, group health and dental not covered by insurance. The related costs are charged to insurance and claims expense except for workers’ compensation, long-term disability, group health and dental, which are charged to employee benefits expense.
Insurers providing excess coverage above retention levels adjust their premiums to cover insured losses and for other market factors. As a result, we periodically evaluate our self-insured retention levels to determine the most cost-efficient balance between self-insurance and excess coverage.
In establishing accruals for claims and insurance expenses, we evaluate and monitor each claim individually, and we use factors such as historical claims development experience, known trends and third-party estimates to determine the appropriate reserves for potential liability. We believe the assumptions and methods used to estimate these liabilities are reasonable; however, any changes in the severity of previously-reported claims, significant changes in the medical costs and regulatory changes affecting the administration of our plans could significantly impact the determination of appropriate reserves in future periods.
Property and Equipment
Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated economic lives. Management uses historical experience, certain assumptions and estimates in determining the economic life of each asset. Periodically, we review property and equipment for impairment due to changes in operational and market conditions, and we adjust the carrying value and economic life of any impaired asset as appropriate.
Effective January 1, 2010, estimated economic lives for structures are 7 to 30 years; revenue equipment is 4 to 15 years; other equipment is 2 to 20 years; and leasehold improvements are the lesser of the economic life of the leasehold improvement or the remaining life of the lease. The use of different assumptions, estimates or significant changes in the resale market for our equipment could result in material changes in the carrying value and related depreciation of our assets.
During the first quarter of 2010, we completed an evaluation of the estimated useful lives and salvage values for our equipment and determined that the actual period of service of certain revenue equipment exceeded that of our previously estimated useful lives. As a result, we extended the estimated useful lives of most of our tractors to 9 years from 7 years and extended the estimated useful lives of our trailers to 15 years from 12 years. In addition, we reduced the estimated salvage values associated with this equipment to more accurately reflect the value we believe such equipment will have at the end of its respective useful life. We made similar changes to the estimated useful lives and salvage values for certain of our other equipment but the results of these changes had less of an impact on our future depreciation expense. As a result of the impact on depreciation from these changes that were effective January 1, 2010, income from continuing operations and net income in 2010 increased by approximately $12.7 million and $7.7 million, respectively.
Table of Contents
Inflation
Most of our expenses are affected by inflation, which typically results in increased operating costs. In response to fluctuations in the cost of petroleum products, particularly diesel fuel, we generally include a fuel surcharge in our tariffs and contractual agreements. The fuel surcharge is designed to offset the cost of diesel fuel above a base price and increases as diesel fuel prices escalate over the base, which is generally indexed to the DOE’s published fuel prices that reset each week. Volatility in the price of diesel fuel, independent of inflation, has impacted our business, as described in this report. However, we do not believe inflation has had a material effect on our results of operations for each of the past three years.
Related Person Transactions
Family Relationships
Each of Earl E. Congdon, John R. Congdon, David S. Congdon and John R. Congdon, Jr. are related to one another and served in various executive management positions and/or on our Board of Directors during 2011. We have entered into amended and restated employment agreements with Earl E. Congdon, John R. Congdon and David S. Congdon, which are incorporated by reference as exhibits to our Annual Report on Form 10-K. We regularly disclose the amount of compensation that we pay to these individuals in the proxy statement for our Annual Meeting of Shareholders.
Transactions with Old Dominion Truck Leasing, Inc.
Old Dominion Truck Leasing, Inc. (“Leasing”) is a North Carolina corporation whose voting stock is owned by an Earl E. Congdon Revocable Trust; the John R. Congdon Revocable Trust; and members of Earl E. Congdon’s and John R. Congdon’s families. Leasing is primarily engaged in the business of purchasing and leasing tractors, trailers and other vehicles. John R. Congdon is Chairman of the Board of Leasing, and Earl E. Congdon is Vice Chairman of the Board of Leasing. Since 1986, we have combined our requirements with Leasing for the purchase of tractors, trailers, equipment, parts, tires and fuel. We believe that the termination of this arrangement would not have a material adverse impact on our financial results.
We purchased $278,000, $242,000 and $231,000 of maintenance and other services from Leasing in 2011, 2010 and 2009, respectively. We believe that the prices we pay for such services are no more than what would be charged by unaffiliated third parties for the same quality of work, and we intend to continue to purchase maintenance and other services from Leasing, provided that Leasing’s prices continue to be favorable to us.
We also paid Leasing $86,000 and $114,000 for leased equipment in 2010 and 2009, respectively. These payments were for long-term leases for tractors used in our linehaul operations. We received no commission or other financial benefit from Leasing or any other party in connection with these lease transactions. We did not lease any equipment from Leasing in 2011.
We charged Leasing $18,000, $17,000 and $12,000 for the rental of property in 2011, 2010 and 2009, respectively. No other services were provided to Leasing for the years ended December 31, 2011, 2010 and 2009.
Split Dollar Life Insurance Policies
We are the owner of two split-dollar life insurance contracts insuring the life of John R. Congdon. The net cash surrender value for these policies was $6.6 million and $6.3 million at December 31, 2011 and 2010, respectively, and is included on our Balance Sheets under the caption “Other assets.” At December 31, 2011, these policies provided for an aggregate of $8.7 million in net death benefits due to the Company, of which we have endorsed $2.0 million to Mr. Congdon’s children.
Table of Contents
Audit Committee Approval
The Audit Committee of our Board of Directors reviewed and approved all of the related person transactions described above in accordance with our Related Person Transactions Policy.
Previous: Item 6. SELECTED FINANCIAL DATA · Next: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK