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 services, which include ground and air expedited transportation and consumer household pickup and delivery through a single integrated organization. In addition to our core LTL services, we offer a range of value-added services including container drayage, truckload brokerage, supply chain consulting and warehousing. More than 97% 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 our LTL services using the following key metrics, which exclude certain transportation and logistics services where pricing is generally not determined by weight, commodity or distance:
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|
•
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LTL 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 this metric by matching total billed revenue with the corresponding weight of those shipments.
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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 class, or mix, of our freight. As a result, changes in revenue per hundredweight do not necessarily indicate actual changes in underlying base rates.
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|
•
|
LTL Weight Per Shipment
- Fluctuations in weight per shipment can indicate changes in the 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 can also be influenced by shifts between LTL and other modes of transportation, such as truckload and intermodal, in response to capacity, service and pricing issues. Fluctuations in weight per shipment generally have an inverse effect on our revenue per hundredweight, as a decrease in weight per shipment will typically cause an increase in revenue per hundredweight.
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|
|
•
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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. This metric is used to analyze our tonnage and pricing trends for shipments with similar characteristics, and also allows for comparison with other transportation providers serving specific markets. 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. Increases in density allow us to maximize our asset utilization and labor productivity, which we measure over many different functional areas of our operations, including 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 and operating efficiencies, it is critical for us to obtain an appropriate "yield", which is measured as revenue per hundredweight, on the shipments we handle. We manage our yields by focusing on individual account profitability. We believe yield management and improvements in efficiency 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 include diesel fuel, and depreciation of our equipment fleet and service center facilities. We gauge our overall success in managing costs by monitoring our operating ratio, a measure of profitability calculated by dividing total operating expenses by revenue, which also allows for 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 that we use to monitor and enhance our processes.
Results of Operations
The following table sets forth, for the years indicated, expenses and other items as a percentage of revenue from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Revenue from operations
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
55.2
|
|
|
52.8
|
|
|
49.6
|
|
Operating supplies and expenses
|
|
10.8
|
|
|
11.9
|
|
|
15.5
|
|
General supplies and expenses
|
|
2.9
|
|
|
3.0
|
|
|
3.0
|
|
Operating taxes and licenses
|
|
3.1
|
|
|
3.1
|
|
|
3.0
|
|
Insurance and claims
|
|
1.3
|
|
|
1.3
|
|
|
1.3
|
|
Communication and utilities
|
|
0.9
|
|
|
0.9
|
|
|
0.9
|
|
Depreciation and amortization
|
|
6.3
|
|
|
5.6
|
|
|
5.3
|
|
Purchased transportation
|
|
2.5
|
|
|
3.9
|
|
|
4.6
|
|
Building and office equipment rents
|
|
0.3
|
|
|
0.3
|
|
|
0.4
|
|
Miscellaneous expenses, net
|
|
0.5
|
|
|
0.4
|
|
|
0.6
|
|
Total operating expenses
|
|
83.8
|
|
|
83.2
|
|
|
84.2
|
|
Operating income
|
|
16.2
|
|
|
16.8
|
|
|
15.8
|
|
Interest expense, net
(1)
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
Other expense, net
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
Income before income taxes
|
|
16.0
|
|
|
16.5
|
|
|
15.5
|
|
Provision for income taxes
|
|
6.1
|
|
|
6.2
|
|
|
5.9
|
|
Net income
|
|
9.9
|
%
|
|
10.3
|
%
|
|
9.6
|
%
|
|
|
(1)
|
For the purpose of this table, interest expense is presented net of interest income.
|
Although our revenue for 2016 increased slightly, we believe demand for our service during 2016 was impacted by general weakness in the domestic economy. We believe that some shippers placed more emphasis on the cost of service in 2016 rather than our high-quality total value proposition, which also resulted in some freight diversion to lower cost carriers. We nonetheless remained committed to our pricing philosophy and focused on providing superior customer service during 2016. On-time deliveries were above 99% and our cargo claims ratio was below 0.3%. We continue to believe that providing superior service at a fair price will drive additional growth in market share for us, particularly in a strong economy.
We also maintained our long-term commitment to the continuous investment in our business in 2016. We spent $417.9 million on real estate, equipment and technology to increase the capacity of our network to accommodate future growth, while also meeting the increasing service demands of our customers. As a result of these investments and lower than expected revenue growth, certain operating costs as a percent of revenue increased during 2016. This led to a 60 basis-point increase in our operating ratio to 83.8% as compared to our Company record 83.2% in 2015. Net income decreased $8.9 million, or 2.9%, and diluted earnings per share decreased 0.3% to $3.56 in 2016 as compared to $3.57 in 2015.
2016
Compared to
2015
Key financial and operating metrics for
2016
and
2015
are presented below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
% Change
|
Work days
|
|
254
|
|
|
254
|
|
|
—
|
|
|
—
|
|
Revenue
(in thousands)
|
|
$
|
2,991,517
|
|
|
$
|
2,972,442
|
|
|
$
|
19,075
|
|
|
0.6
|
|
Operating ratio
|
|
83.8
|
%
|
|
83.2
|
%
|
|
|
|
|
|
|
Net income
(in thousands)
|
|
$
|
295,765
|
|
|
$
|
304,690
|
|
|
$
|
(8,925
|
)
|
|
(2.9
|
)
|
Diluted earnings per share
|
|
$
|
3.56
|
|
|
$
|
3.57
|
|
|
$
|
(0.01
|
)
|
|
(0.3
|
)
|
LTL tons
(in thousands)
|
|
7,931
|
|
|
7,938
|
|
|
(7
|
)
|
|
(0.1
|
)
|
LTL shipments
(in thousands)
|
|
10,148
|
|
|
10,129
|
|
|
19
|
|
|
0.2
|
|
LTL weight per shipment
(lbs.)
|
|
1,563
|
|
|
1,567
|
|
|
(4
|
)
|
|
(0.3
|
)
|
LTL revenue per hundredweight
|
|
$
|
18.51
|
|
|
$
|
18.23
|
|
|
$
|
0.28
|
|
|
1.5
|
|
LTL revenue per shipment
|
|
$
|
289.36
|
|
|
$
|
285.67
|
|
|
$
|
3.69
|
|
|
1.3
|
|
LTL revenue per intercity mile
|
|
$
|
5.09
|
|
|
$
|
5.11
|
|
|
$
|
(0.02
|
)
|
|
(0.4
|
)
|
LTL intercity miles
(in thousands)
|
|
576,953
|
|
|
566,210
|
|
|
10,743
|
|
|
1.9
|
|
Average length of haul
(miles)
|
|
928
|
|
|
928
|
|
|
—
|
|
|
—
|
|
Revenue
Our revenue in 2016 increased $19.1 million, or 0.6% as compared to 2015 due to a $45.9 million increase in LTL revenue, partially offset by a $26.8 million reduction in non-LTL revenue. LTL revenue was higher in 2016 as a result of an increase in LTL revenue per hundredweight that was negatively impacted by a slight decline in LTL tonnage. The reduction in non-LTL revenue was primarily due to strategic changes in our container drayage and international freight forwarding service offerings that we initiated in the second half of 2015.
LTL revenue per hundredweight increased 1.5% to $18.51 in 2016 primarily due to our disciplined yield management process and a generally stable pricing environment. The increase in LTL revenue per hundredweight was negatively impacted by a decline in our fuel surcharges that reflected lower average diesel fuel prices. Excluding fuel surcharges, LTL revenue per hundredweight increased 2.6% in 2016 as compared to 2015.
Most of our tariffs and contracts provide for a fuel surcharge that is generally indexed to the DOE's published diesel fuel prices that reset each week. 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 to 9.5% of revenue in 2016 from 10.4% in 2015, primarily due to a decrease in the average price per gallon for diesel fuel for those comparative periods. We regularly monitor the components of our pricing, including base freight rates and fuel surcharges, and our costs at the customer level. We address individual customer profitability issues to minimize the negative impact on our profitability that would likely result from a rapid and significant change in any of our operating expenses.
First Quarter 2017 Update
Total revenue per day for January 2017 increased 5.3% as compared to January 2016, which includes a 2.2% increase in LTL tons per day.
Operating Costs and Other Expenses
Salaries, wages and benefits increased $82.3 million, or 5.2% in 2016 due to a $47.1 million increase in salaries and wages and a $35.2 million increase in benefit costs. The increase in salaries and wages, excluding benefits, was due primarily to the impact of the annual wage increases provided to employees in September 2015 and 2016 and an increase in our direct labor costs to support our strategic reduction in purchased transportation. We implemented certain operational initiatives in the second half of 2015 to decrease our reliance on purchased transportation providers, but these changes increased our utilization of Company employees and equipment. These increases were partially offset by lower performance-based compensation linked to operating results as well as improvements in productivity. Platform pounds and platform shipments per hour improved 4.0% and 3.8%, respectively, in 2016 as compared to 2015. Both P&D stops and P&D shipments per hour remained consistent between the periods compared, while our linehaul laden load average declined 1.7% as compared to 2015. Our aggregate productive labor costs increased to 28.9% of revenue in 2016 as compared to 27.9% in 2015, while our other indirect salaries and wages increased to 12.2% of revenue in 2016 as compared to 11.9% in 2015.
Employee benefit costs increased $35.2 million, or 9.1% in 2016 compared to 2015, primarily due to higher costs for our group health and dental plans and an increase in certain retirement benefit plan costs that are directly linked to the market price of our common stock. Our group health and dental costs were higher in 2016 primarily due to a 5.8% increase in the average cost per covered employee as compared to 2015. As a result, our employee benefit costs increased to 34.2% of salaries and wages in 2016 as compared to 32.6% in 2015.
Operating supplies and expenses decreased $30.9 million in 2016 as compared to 2015. These costs as a percent of revenue improved to 10.8% of revenue in 2016 from 11.9% of revenue in 2015 primarily due to a reduction in fuel costs. The cost of diesel fuel, excluding fuel taxes, represents the largest component of operating supplies and expenses, and can vary based on both average price per gallon and consumption. The decrease in our diesel fuel costs, excluding fuel taxes, during 2016 was due primarily to a 13.4% decline in our average cost per gallon, while our fuel consumption remained relatively consistent between the periods compared despite the increase in miles driven. Our fuel consumption benefited from an overall improvement in miles per gallon, which continues to improve as we add newer, more fuel-efficient equipment to our operations. We do not use diesel fuel hedging instruments and are therefore subject to market price fluctuations. Other operating supplies and expenses, excluding diesel fuel, remained relatively consistent as a percent of revenue between the periods compared.
Depreciation and amortization increased $24.5 million due primarily to the assets acquired as part of our 2015 and 2016 capital expenditure programs. As a percent of revenue, our depreciation and amortization expense increased to 6.3% in 2016 compared to 5.6% in 2015. We believe depreciation will continue to increase based on our 2017 capital expenditure plan. While our investments in real estate, equipment and technology can increase our costs in the short-term, we believe these investments are necessary to support our continued growth and strategic initiatives.
Purchased transportation decreased $42.2 million, or 36.3% in 2016 as compared to 2015. The decrease was due primarily to the strategic elimination of certain services in the second quarter of 2015 that reduced our use of third-party providers for the remainder of 2015 and throughout 2016. We continue to utilize purchased transportation services, when beneficial, to support our LTL services and other non-LTL services, including our container drayage and truckload brokerage services.
Our effective tax rate in 2016 was 38.1% as compared to 37.8% in 2015. Our effective tax rates in 2016 and 2015 were favorably impacted by various tax credits. Our effective tax rate generally exceeds the federal statutory rate of 35% due to the impact of state taxes, and to a lesser extent, certain other non-deductible items.
2015
Compared to
2014
Key financial and operating metrics for
2015
and
2014
are presented below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
2014
|
|
Change
|
|
% Change
|
Work days
|
|
254
|
|
|
254
|
|
|
—
|
|
|
—
|
|
Revenue
(in thousands)
|
|
$
|
2,972,442
|
|
|
$
|
2,787,897
|
|
|
$
|
184,545
|
|
|
6.6
|
|
Operating ratio
|
|
83.2
|
%
|
|
84.2
|
%
|
|
|
|
|
|
|
Net income
(in thousands)
|
|
$
|
304,690
|
|
|
$
|
267,514
|
|
|
$
|
37,176
|
|
|
13.9
|
|
Diluted earnings per share
|
|
$
|
3.57
|
|
|
$
|
3.10
|
|
|
$
|
0.47
|
|
|
15.2
|
|
LTL tons
(in thousands)
|
|
7,938
|
|
|
7,391
|
|
|
547
|
|
|
7.4
|
|
LTL shipments
(in thousands)
|
|
10,129
|
|
|
9,073
|
|
|
1,056
|
|
|
11.6
|
|
LTL weight per shipment
(lbs.)
|
|
1,567
|
|
|
1,629
|
|
|
(62
|
)
|
|
(3.8
|
)
|
LTL revenue per hundredweight
|
|
$
|
18.23
|
|
|
$
|
18.33
|
|
|
$
|
(0.10
|
)
|
|
(0.5
|
)
|
LTL revenue per shipment
|
|
$
|
285.67
|
|
|
$
|
298.65
|
|
|
$
|
(12.98
|
)
|
|
(4.3
|
)
|
LTL revenue per intercity mile
|
|
$
|
5.11
|
|
|
$
|
5.38
|
|
|
$
|
(0.27
|
)
|
|
(5.0
|
)
|
LTL intercity miles
(in thousands)
|
|
566,210
|
|
|
503,923
|
|
|
62,287
|
|
|
12.4
|
|
Average length of haul
(miles)
|
|
928
|
|
|
928
|
|
|
—
|
|
|
—
|
|
Revenue
Our revenue in 2015 increased $184.5 million, or 6.6% as compared to 2014. LTL tonnage increased 7.4% primarily due to an 11.6% increase in LTL shipments, although our tonnage growth was affected by a 3.8% decrease in weight per shipment. We attribute the decline in weight per shipment in 2015 to softening economic conditions and changes in the mix of our freight as compared to 2014.
LTL revenue per hundredweight decreased 0.5% to $18.23 in 2015, primarily due to declines in our fuel surcharges. LTL revenue per hundredweight, excluding fuel surcharges, increased 5.7% in 2015 as compared to 2014, which included the positive effect on this metric from a decrease in weight per shipment. We believe the increase in revenue per hundredweight, excluding fuel surcharges, reflected our continued commitment to a disciplined yield management process and a relatively stable pricing environment.
Most of our tariffs and contracts provide for a fuel surcharge that is generally indexed to the DOE's published diesel fuel prices that reset each week. 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 to 10.4% of revenue in 2015 from 15.5% in 2014, primarily due to a decrease in the average price per gallon for diesel fuel for those comparative periods.
Operating Costs and Other Expenses
Salaries, wages and benefits increased $188.5 million, or 13.6% in 2015 due to a $143.6 million increase in salaries and wages and a $44.9 million increase in benefit costs. The increase in salaries and wages, excluding benefits, was primarily due to an increase in the average number of full-time employees of 2,063, or 13.5%, over 2014, as well as annual wage increases provided to our employees in September of 2014 and 2015. The increase in full-time employees was necessary to provide capacity for the increase in shipments during the year. We also implemented certain operational initiatives that decreased our reliance on purchased transportation providers and increased our utilization of Company employees and equipment. The additional freight density contributed to a slight improvement in our P&D and platform shipments per hour, which improved 1.1% and 1.8%, respectively, from 2014. Our aggregate productive labor costs increased to 27.9% of revenue in 2015 as compared to 25.8% in 2014, while our other salaries and wages increased to 11.9% of revenue in 2015 as compared to 11.5% in 2014.
Employee benefit costs increased $44.9 million, or 13.2%, primarily due to an increase in the number of full-time employees eligible for benefits, certain enhancements to paid-time-off benefits and an increase in our workers compensation expense. These increases were partially offset by a reduction in expense for certain retirement benefit plans directly linked to the share price of our common stock. Our group health costs increased in the fourth quarter of 2015 and continued to increase into 2016. Employee benefit costs in 2015 were 32.6% of salaries and wages as compared to 32.8% in 2014.
Operating supplies and expenses decreased $78.8 million in 2015 as compared to 2014. The cost of diesel fuel, excluding fuel taxes, represents the largest component of operating supplies and expenses, and can vary based on both average price per gallon and consumption. Our diesel fuel costs decreased primarily due to a 33.7% decrease in our average cost per gallon during 2015 as compared to the prior year. This decrease was partially offset by an increase in fuel consumption of 9.1%, primarily due to an 11.6% increase in linehaul and P&D miles driven. Our fuel consumption benefited from an overall improvement in miles per gallon, which continues to improve as we add newer, more fuel-efficient equipment to our operations. The additional fuel consumption resulted in an increase in fuel taxes, which increased our operating taxes and licenses.
Depreciation and amortization expenses increased $18.9 million primarily due to the assets acquired through our 2015 and 2014 capital expenditures. As a percent of revenue, our depreciation and amortization expense increased to 5.6% in 2015 compared to 5.3% in 2014.
Purchased transportation expense decreased $13.0 million, or 10.1%, in 2015 as compared to 2014. We primarily utilized purchased transportation services from third-party providers to support our container drayage, international freight-forwarding and truckload brokerage services. We also utilized purchased transportation to perform limited services in our LTL operations. The decrease in purchased transportation was primarily due to operational improvement initiatives to reduce our use of third-party providers for the movement of our customers’ shipments.
Our effective tax rate in 2015 was 37.8% as compared to 38.1% in 2014. Our effective tax rates in 2015 and 2014 were favorably impacted by various tax credits, including credits for the use of alternative fuel in our operations. Our effective tax rate generally exceeds the federal statutory rate of 35% due to the impact of state taxes, and to a lesser extent, certain other non-deductible items.
Liquidity and Capital Resources
A summary of our cash flows is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Cash and cash equivalents at beginning of year
|
|
$
|
11,472
|
|
|
$
|
34,787
|
|
|
$
|
30,174
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
565,583
|
|
|
553,880
|
|
|
391,674
|
|
Investing activities
|
|
(407,400
|
)
|
|
(437,617
|
)
|
|
(345,814
|
)
|
Financing activities
|
|
(159,484
|
)
|
|
(139,578
|
)
|
|
(41,247
|
)
|
(Decrease) increase in cash and cash equivalents
|
|
(1,301
|
)
|
|
(23,315
|
)
|
|
4,613
|
|
Cash and cash equivalents at end of year
|
|
$
|
10,171
|
|
|
$
|
11,472
|
|
|
$
|
34,787
|
|
The change in our cash flows provided by operating activities during 2016 was impacted by an increase in depreciation and amortization of $24.5 million as compared to 2015. This increase was partially offset by an $8.9 million decrease in net income as well as other fluctuations in certain working capital accounts.
The change in our cash flows provided by operating activities in 2015 as compared to 2014 was due primarily to fluctuations within our working capital accounts, which included changes in income taxes, customer receivables and certain accrued liabilities. In addition, an increase in our net income and higher depreciation and amortization expenses in 2015 as compared to 2014, as described above in “
Results of Operations,
” also resulted in increased cash flows provided by operating activities.
The changes in our cash flows used in investing activities for all periods were due primarily to fluctuations in our capital expenditure programs and proceeds from asset disposals each year. Changes in our capital expenditures are more fully described below in “Capital Expenditures.”
The changes in our cash flows used in financing activities for all periods were due primarily to increases in repurchases of our common stock, fluctuations in our senior unsecured revolving line of credit and scheduled principal payments under our long-term debt agreements. Our repurchases of common stock and financing arrangements are more fully described below in "
Stock Repurchase Program
" and "
Financing Agreements
," respectively.
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 other sources of liquidity, if needed.
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,
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Land and structures
|
|
$
|
161,646
|
|
|
$
|
153,460
|
|
|
$
|
117,487
|
|
Tractors
|
|
114,166
|
|
|
128,911
|
|
|
91,750
|
|
Trailers
|
|
94,040
|
|
|
114,209
|
|
|
80,853
|
|
Technology
|
|
18,428
|
|
|
32,044
|
|
|
38,264
|
|
Other equipment and assets
|
|
29,661
|
|
|
36,987
|
|
|
39,326
|
|
Less: Proceeds from sales
|
|
(10,541
|
)
|
|
(24,442
|
)
|
|
(21,866
|
)
|
Total
|
|
$
|
407,400
|
|
|
$
|
441,169
|
|
|
$
|
345,814
|
|
Our capital expenditures varied based upon the projected increase in the number and size of our service center facilities to support our plan for long-term growth, our planned tractor and trailer replacement cycle and forecasted tonnage and shipment growth. Expenditures for land and structures can be dependent upon the availability of land in the geographic areas where we are looking to expand. We expect to continue to maintain a high level of capital expenditures in order to support our long-term plan for market share growth.
We currently estimate capital expenditures will be approximately $385 million for the year ending December 31, 2017. Approximately $185 million is allocated for the purchase of service center facilities, construction of new service center facilities or expansion of existing service center facilities, subject to the availability of suitable real estate and the timing of construction projects; approximately $155 million is allocated for the purchase of tractors and trailers; and approximately $45 million is allocated for investments in technology and other assets. We expect to fund these capital expenditures primarily 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.
Stock Repurchase Program
During the second quarter of 2016, we completed our $200.0 million stock repurchase program, previously announced on November 10, 2014. On May 23, 2016, we announced that our Board of Directors had approved the 2016 Repurchase Program, under which we may repurchase up to $250.0 million of shares of our common stock from time to time in open market purchases or through privately negotiated transactions. Shares of our common stock repurchased under our repurchase programs are canceled at the time of repurchase and are authorized but unissued shares of our common stock.
During the years ended
December 31, 2016
,
2015
and
2014
, we repurchased 2,062,841, 1,682,419 and 70,620 shares of our common stock under our repurchase programs for an aggregate of $130.3 million, $114.1 million and $5.5 million, respectively. As of
December 31, 2016
, we had $200.0 million remaining authorized under the 2016 Repurchase Program.
Dividends to Shareholders
On February 2, 2017, we announced that our Board of Directors had declared a quarterly cash dividend of $0.10 per share payable on March 20, 2017, to shareholders of record at the close of business on March 6, 2017. We anticipate that the quarterly cash dividend will be funded through cash flow from operations and, if needed, borrowings under our revolving credit facility. Although we intend to pay a quarterly cash dividend on our common stock for the foreseeable future, the declaration of any future dividend is subject to approval by our Board of Directors, and is restricted by applicable state law limitations on distributions to shareholders, as well as certain covenants under our revolving credit facility. We did not declare or pay a dividend on our common stock in
2016
or
2015
.
Financing Agreements
We have one unsecured senior note agreement with an amount outstanding of $95.0 million at
December 31, 2016
. At
December 31, 2015
, we had two unsecured senior note agreements with an aggregate amount outstanding of $120.0 million. The remaining unsecured senior note agreement calls for two scheduled principal payments of $50.0 million and $45.0 million on January 3, 2018 and January 3, 2021, respectively. Interest rates on the January 3, 2018 and January 3, 2021 scheduled principal payments are 4.00% and 4.79%, respectively. The effective average interest rates on our outstanding senior note agreements were 4.37% and 4.68% at December 31, 2016 and 2015, respectively.
On December 15, 2015, we entered into an amended and restated credit agreement with Wells Fargo Bank, National Association ("Wells Fargo") serving as administrative agent for the lenders (the "Credit Agreement"). The Credit Agreement originally provided for a five-year, $250.0 million senior unsecured revolving line of credit and a $100.0 million accordion feature, which, if exercised and approved, would expand the total borrowing capacity up to an aggregate of $350.0 million.
On September 9, 2016, we exercised a portion of the accordion feature and entered into an amendment to the Credit Agreement to increase the aggregate commitments from existing lenders by $50.0 million to an aggregate of $300.0 million. Of the $300.0 million line of credit commitments under the Credit Agreement, as amended, up to $100.0 million may be used for letters of credit and $30.0 million may be used for borrowings under the Wells Fargo Sweep Plus Loan Program (the "Sweep Program"). We utilize the Sweep Program to manage our daily cash needs, as it automatically initiates borrowings to cover overnight cash requirements primarily for working capital needs. The Credit Agreement matures on December 15, 2020.
At our option, borrowings under the Credit Agreement bear interest at either: (i) LIBOR plus an applicable margin (based on our ratio of net debt-to-total capitalization) that ranges from
1.0%
to
1.50%
; or (ii) a Base Rate plus an applicable margin (based on our ratio of net debt-to-total capitalization) that ranges from
0.0%
to
0.5%
. Loans under the Sweep Program bear interest at the LIBOR plus applicable margin rate. Letter of credit fees equal to the applicable margin for LIBOR loans are charged quarterly in arrears on the daily average aggregate stated amount of all letters of credit outstanding during the quarter. Commitment fees ranging from
0.125%
to
0.2%
(based upon the ratio of net debt-to-total capitalization) are charged quarterly in arrears on the aggregate unutilized portion of the Credit Agreement. Wells Fargo, as administrative agent, also receives an annual fee for providing administrative services.
For the year ended
December 31, 2016
, the applicable margin on LIBOR loans was
1.0%
and commitment fees were
0.125%
. For the year ended
December 31, 2015
, the applicable margin on LIBOR loans was
1.0%
and commitment fees ranged from
0.125%
to
0.175%
. There were
$74.6 million
and
$67.7 million
of outstanding letters of credit at
December 31, 2016
and
2015
, respectively. Letter of credit fees remained at
1.0%
during the years ended
December 31, 2016
and
2015
.
The amounts outstanding and remaining borrowing capacity under our revolving credit facilities are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Facility limit
|
|
$
|
300,000
|
|
|
$
|
250,000
|
|
Line of credit borrowings
|
|
(9,975
|
)
|
|
(12,317
|
)
|
Outstanding letters of credit
|
|
(74,611
|
)
|
|
(67,719
|
)
|
Available borrowing capacity
|
|
$
|
215,414
|
|
|
$
|
169,964
|
|
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 senior note agreement and Credit Agreement contain 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 material domestic subsidiaries of the Company would be required to guarantee payment of all of our obligations under these agreements. The Credit Agreement also includes a provision limiting our ability to make restricted payments, including dividends and payments for share repurchases, unless, among other conditions, no defaults or events of default are ongoing (or would be caused by such restricted payment). We were in compliance with all covenants in our outstanding debt instruments for the period ended
December 31, 2016
.
A significant decrease in demand for our services could limit our ability to generate cash flow and could also affect our 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, 2016, 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.
Contractual Obligations
The following table summarizes our significant contractual obligations as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
Contractual Obligations
(1)
|
|
|
|
Less than
|
|
|
|
|
|
More than
|
(In thousands)
|
|
Total
|
|
1 year
|
|
1-3 years
|
|
3-5 years
|
|
5 years
|
Senior Notes
|
|
$
|
107,700
|
|
|
$
|
4,156
|
|
|
$
|
55,311
|
|
|
$
|
48,233
|
|
|
$
|
—
|
|
Revolving credit facility
|
|
9,975
|
|
|
—
|
|
|
—
|
|
|
9,975
|
|
|
—
|
|
Operating lease obligations
|
|
61,647
|
|
|
12,340
|
|
|
14,208
|
|
|
7,129
|
|
|
27,970
|
|
Purchase obligations
|
|
6,158
|
|
|
2,854
|
|
|
3,304
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
185,480
|
|
|
$
|
19,350
|
|
|
$
|
72,823
|
|
|
$
|
65,337
|
|
|
$
|
27,970
|
|
|
|
(1)
|
Contractual obligations include principal and interest on our senior notes; borrowings under our Credit Agreement; operating leases consisting primarily of real estate leases; and non-cancellable purchase obligations related to information technology agreements. 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 of the Notes 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 failure 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 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.
Claims and Insurance Accruals
Claims and insurance accruals reflect the estimated cost of claims not covered by insurance for cargo loss and damage, BIPD, workers’ compensation, group health and dental. The related costs are charged to insurance and claims expense except for workers’ compensation, group health and dental, which are charged to employee benefits expense.
Insurers providing excess coverage above a company's self-insured retention ("SIR") or deductible levels typically adjust their premiums to cover insured losses and for other market factors. As a result, we periodically evaluate our SIR and deductible levels to determine the most cost-efficient balance between our exposure and excess coverage.
In establishing accruals for claims and 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 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. We use historical experience, certain assumptions and estimates in determining the economic life of each asset. When indicators of impairment exist, 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.
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.
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 fluctuates as diesel fuel prices change from 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 Party Transactions
Family Relationships
Each of Earl E. Congdon, David S. Congdon and John R. Congdon, Jr. are related to one another and served in various management positions and/or on our Board of Directors during 2016. Our employment agreements with Earl E. Congdon and David S. Congdon are incorporated by reference as exhibits to this report. We regularly disclose the amount of compensation that we pay to these individuals, as well as any of their family members employed by us and whose compensation from time to time may require disclosure, 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 beneficially owned by members of the Congdon family. Leasing is primarily engaged in the business of leasing tractors, trailers and other vehicles as well as providing contract dedicated fleet services. John R. Congdon, Jr. serves as Chairman of the Board of Directors of Leasing. Earl E. Congdon and David S. Congdon currently serve as members of Leasing’s Board of Directors. From time to time, we have collaborated with Leasing for the purchase of certain equipment and fuel. Our collaboration with Leasing for the purchase of fuel ended in the fourth quarter of 2015.
We purchased
$254,000
,
$313,000
and
$298,000
of maintenance and other services from Leasing in
2016
,
2015
and
2014
, respectively. We intend to continue to purchase maintenance and other services from Leasing, provided that Leasing’s
prices continue to be favorable to us. We received
$12,000
,
$12,000
and
$17,500
from Leasing for the rental of property in
2016
,
2015
and
2014
, respectively.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OLD DOMINION FREIGHT LINE, INC.
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands, except share and per share data)
|
|
2016
|
|
2015
|
ASSETS
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,171
|
|
|
$
|
11,472
|
|
Customer receivables, less allowances of $8,346 and $8,976, respectively
|
|
320,087
|
|
|
310,501
|
|
Other receivables
|
|
14,402
|
|
|
34,547
|
|
Prepaid expenses and other current assets
|
|
37,962
|
|
|
25,210
|
|
Total current assets
|
|
382,622
|
|
|
381,730
|
|
Property and equipment:
|
|
|
|
|
Revenue equipment
|
|
1,496,697
|
|
|
1,358,317
|
|
Land and structures
|
|
1,377,106
|
|
|
1,221,250
|
|
Other fixed assets
|
|
402,482
|
|
|
365,673
|
|
Leasehold improvements
|
|
8,699
|
|
|
7,585
|
|
Total property and equipment
|
|
3,284,984
|
|
|
2,952,825
|
|
Less: Accumulated depreciation
|
|
(1,043,582
|
)
|
|
(929,377
|
)
|
Net property and equipment
|
|
2,241,402
|
|
|
2,023,448
|
|
Goodwill
|
|
19,463
|
|
|
19,463
|
|
Other assets
|
|
52,760
|
|
|
41,863
|
|
Total assets
|
|
$
|
2,696,247
|
|
|
$
|
2,466,504
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
89,216
|
|
|
$
|
66,774
|
|
Compensation and benefits
|
|
129,170
|
|
|
124,589
|
|
Claims and insurance accruals
|
|
47,417
|
|
|
44,917
|
|
Other accrued liabilities
|
|
22,833
|
|
|
22,634
|
|
Current maturities of long-term debt
|
|
—
|
|
|
26,488
|
|
Total current liabilities
|
|
288,636
|
|
|
285,402
|
|
Long-term debt
|
|
104,975
|
|
|
107,317
|
|
Other non-current liabilities
|
|
178,879
|
|
|
154,094
|
|
Deferred income taxes
|
|
272,599
|
|
|
235,054
|
|
Total long-term liabilities
|
|
556,453
|
|
|
496,465
|
|
Total liabilities
|
|
845,089
|
|
|
781,867
|
|
Commitments and contingent liabilities
|
|
|
|
|
Shareholders’ equity
|
|
|
|
|
Common stock - $0.10 par value, 140,000,000 shares authorized, 82,416,657 and 84,411,878 shares outstanding at December 31, 2016 and 2015, respectively
|
|
8,242
|
|
|
8,441
|
|
Capital in excess of par value
|
|
135,466
|
|
|
134,401
|
|
Retained earnings
|
|
1,707,450
|
|
|
1,541,795
|
|
Total shareholders’ equity
|
|
1,851,158
|
|
|
1,684,637
|
|
Total liabilities and shareholders’ equity
|
|
$
|
2,696,247
|
|
|
$
|
2,466,504
|
|
The accompanying notes are an integral part of these financial statements.
OLD DOMINION FREIGHT LINE, INC.
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands, except share and per share data)
|
|
2016
|
|
2015
|
|
2014
|
Revenue from operations
|
|
$
|
2,991,517
|
|
|
$
|
2,972,442
|
|
|
$
|
2,787,897
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Salaries, wages and benefits
|
|
1,652,055
|
|
|
1,569,791
|
|
|
1,381,277
|
|
Operating supplies and expenses
|
|
322,997
|
|
|
353,889
|
|
|
432,675
|
|
General supplies and expenses
|
|
86,626
|
|
|
89,308
|
|
|
83,165
|
|
Operating taxes and licenses
|
|
92,426
|
|
|
93,292
|
|
|
83,417
|
|
Insurance and claims
|
|
37,861
|
|
|
37,368
|
|
|
36,145
|
|
Communications and utilities
|
|
27,904
|
|
|
26,913
|
|
|
25,507
|
|
Depreciation and amortization
|
|
189,867
|
|
|
165,343
|
|
|
146,466
|
|
Purchased transportation
|
|
74,051
|
|
|
116,300
|
|
|
129,312
|
|
Building and office equipment rents
|
|
7,920
|
|
|
9,620
|
|
|
10,679
|
|
Miscellaneous expenses, net
|
|
15,975
|
|
|
12,378
|
|
|
17,947
|
|
Total operating expenses
|
|
2,507,682
|
|
|
2,474,202
|
|
|
2,346,590
|
|
|
|
|
|
|
|
|
Operating income
|
|
483,835
|
|
|
498,240
|
|
|
441,307
|
|
|
|
|
|
|
|
|
Non-operating expense (income):
|
|
|
|
|
|
|
Interest expense
|
|
4,332
|
|
|
5,210
|
|
|
6,610
|
|
Interest income
|
|
(58
|
)
|
|
(209
|
)
|
|
(108
|
)
|
Other expense, net
|
|
1,974
|
|
|
3,222
|
|
|
2,291
|
|
Total non-operating expense
|
|
6,248
|
|
|
8,223
|
|
|
8,793
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
477,587
|
|
|
490,017
|
|
|
432,514
|
|
Provision for income taxes
|
|
181,822
|
|
|
185,327
|
|
|
165,000
|
|
Net income
|
|
$
|
295,765
|
|
|
$
|
304,690
|
|
|
$
|
267,514
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
Basic
|
|
$3.56
|
|
$3.57
|
|
$3.10
|
Diluted
|
|
$3.56
|
|
$3.57
|
|
$3.10
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
Basic
|
|
83,112,012
|
|
|
85,378,480
|
|
|
86,162,137
|
|
Diluted
|
|
83,153,659
|
|
|
85,378,480
|
|
|
86,162,137
|
|
The accompanying notes are an integral part of these financial statements.
OLD DOMINION FREIGHT LINE, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
|
|
|
|
Common Stock
|
|
Excess of
|
|
Retained
|
|
|
(In thousands)
|
|
Shares
|
|
Amount
|
|
Par Value
|
|
Earnings
|
|
Total
|
Balance as of December 31, 2013
|
|
86,165
|
|
|
$
|
8,616
|
|
|
$
|
134,401
|
|
|
$
|
1,089,065
|
|
|
$
|
1,232,082
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
267,514
|
|
|
267,514
|
|
Share repurchases
|
|
(71
|
)
|
|
(7
|
)
|
|
—
|
|
|
(5,525
|
)
|
|
(5,532
|
)
|
Balance as of December 31, 2014
|
|
86,094
|
|
|
$
|
8,609
|
|
|
$
|
134,401
|
|
|
$
|
1,351,054
|
|
|
$
|
1,494,064
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
304,690
|
|
|
304,690
|
|
Share repurchases
|
|
(1,682
|
)
|
|
(168
|
)
|
|
—
|
|
|
(113,949
|
)
|
|
(114,117
|
)
|
Balance as of December 31, 2015
|
|
84,412
|
|
|
$
|
8,441
|
|
|
$
|
134,401
|
|
|
$
|
1,541,795
|
|
|
$
|
1,684,637
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
295,765
|
|
|
295,765
|
|
Share repurchases
|
|
(2,063
|
)
|
|
(206
|
)
|
|
—
|
|
|
(130,110
|
)
|
|
(130,316
|
)
|
Share-based compensation and restricted share issuances, net of taxes
|
|
68
|
|
|
7
|
|
|
1,065
|
|
|
—
|
|
|
1,072
|
|
Balance as of December 31, 2016
|
|
82,417
|
|
|
$
|
8,242
|
|
|
$
|
135,466
|
|
|
$
|
1,707,450
|
|
|
$
|
1,851,158
|
|
The accompanying notes are an integral part of these financial statements.
OLD DOMINION FREIGHT LINE, INC.
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
295,765
|
|
|
$
|
304,690
|
|
|
$
|
267,514
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
189,867
|
|
|
165,343
|
|
|
146,466
|
|
Loss (gain) on sale of property and equipment
|
|
168
|
|
|
(3,592
|
)
|
|
(716
|
)
|
Deferred income taxes
|
|
34,808
|
|
|
43,642
|
|
|
25,544
|
|
Share-based compensation
|
|
1,410
|
|
|
—
|
|
|
—
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
Customer and other receivables, net
|
|
(11,176
|
)
|
|
(8,672
|
)
|
|
(54,443
|
)
|
Prepaid expenses and other assets
|
|
(21,227
|
)
|
|
(6,097
|
)
|
|
(4,316
|
)
|
Accounts payable
|
|
22,442
|
|
|
21,460
|
|
|
8,526
|
|
Compensation, benefits and other accrued liabilities
|
|
4,965
|
|
|
14,699
|
|
|
13,672
|
|
Claims and insurance accruals
|
|
6,548
|
|
|
11,549
|
|
|
7,225
|
|
Income taxes, net
|
|
21,184
|
|
|
11,511
|
|
|
(36,758
|
)
|
Other liabilities
|
|
20,829
|
|
|
(653
|
)
|
|
18,960
|
|
Net cash provided by operating activities
|
|
565,583
|
|
|
553,880
|
|
|
391,674
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
(417,941
|
)
|
|
(462,059
|
)
|
|
(367,680
|
)
|
Proceeds from sale of property and equipment
|
|
10,541
|
|
|
24,442
|
|
|
21,866
|
|
Net cash used in investing activities
|
|
(407,400
|
)
|
|
(437,617
|
)
|
|
(345,814
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Principal payments under long-term debt agreements
|
|
(26,488
|
)
|
|
(37,778
|
)
|
|
(35,715
|
)
|
Net (payments) proceeds on revolving line of credit
|
|
(2,342
|
)
|
|
12,317
|
|
|
—
|
|
Payments for share repurchases
|
|
(130,316
|
)
|
|
(114,117
|
)
|
|
(5,532
|
)
|
Other financing activities, net
|
|
(338
|
)
|
|
—
|
|
|
—
|
|
Net cash used in financing activities
|
|
(159,484
|
)
|
|
(139,578
|
)
|
|
(41,247
|
)
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
(1,301
|
)
|
|
(23,315
|
)
|
|
4,613
|
|
Cash and cash equivalents at beginning of year
|
|
11,472
|
|
|
34,787
|
|
|
30,174
|
|
Cash and cash equivalents at end of year
|
|
$
|
10,171
|
|
|
$
|
11,472
|
|
|
$
|
34,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
123,395
|
|
|
$
|
130,058
|
|
|
$
|
176,221
|
|
Interest paid
|
|
$
|
6,417
|
|
|
$
|
8,414
|
|
|
$
|
9,710
|
|
Capitalized interest
|
|
$
|
2,262
|
|
|
$
|
2,526
|
|
|
$
|
2,884
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Business
We are a leading, less-than-truckload (“LTL”), union-free motor carrier providing regional, inter-regional and national LTL services, which include ground and air expedited transportation and consumer household pickup and delivery, through a single integrated organization. In addition to our core LTL services, we offer a range of value-added services including container drayage, truckload brokerage, supply chain consulting and warehousing. We have one operating segment and no single customer exceeds 5% of our revenue. The composition of our revenue is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
LTL services
|
|
$
|
2,939,572
|
|
|
$
|
2,893,683
|
|
|
$
|
2,706,654
|
|
Other services
|
|
51,945
|
|
|
78,759
|
|
|
81,243
|
|
Total revenue
|
|
$
|
2,991,517
|
|
|
$
|
2,972,442
|
|
|
$
|
2,787,897
|
|
Basis of Presentation
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Certain amounts in prior years have been reclassified to conform prior years’ financial statements to the current presentation.
Unless the context requires otherwise, references in these Notes to “Old Dominion,” the “Company,” “we,” “us” and “our” refer to Old Dominion Freight Line, Inc.
Revenue and Expense 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.
Expenses are recognized when incurred.
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 of our customers. 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.
OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist principally of customer receivables. We perform initial and ongoing credit evaluations of our customers to minimize credit risk. We generally do not require collateral but may require prepayment of our services under certain circumstances. Credit risk is generally diversified due to the large number of entities comprising our customer base and their dispersion across many different industries and geographic regions.
Cash and Cash Equivalents
We consider cash on hand and deposits in banks along with certificates of deposit and short-term marketable securities with original maturities of three months or less as cash and cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Major additions and improvements are capitalized, while maintenance and repairs that do not improve or extend the lives of the respective assets are charged to expense as incurred. We capitalize the cost of tires mounted on purchased revenue equipment as a part of the total equipment cost. Subsequent replacement tires are expensed at the time those tires are placed in service. We assess the realizable value of our long-lived assets and evaluate such assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the related assets. The following table provides the estimated useful lives by asset type:
|
|
|
|
Structures
|
|
7 to 30 years
|
Revenue equipment
|
|
4 to 15 years
|
Other equipment
|
|
2 to 20 years
|
Leasehold improvements
|
|
Lesser of economic life or life of lease
|
Depreciation expense, which includes the amortization of capital leases, was
$189.6 million
,
$164.8 million
and
$145.8 million
for
2016
,
2015
and
2014
, respectively.
Goodwill
Intangible assets have been acquired in connection with business combinations and are comprised of goodwill. Goodwill is calculated as the excess cost over the fair value of assets acquired and is not subject to amortization. We review goodwill annually for impairment as a single reporting unit, unless circumstances dictate more frequent assessments, in accordance with Accounting Standards Update (“ASU”) 2011-08,
Testing Goodwill for Impairment.
ASU 2011-08 permits an initial assessment, commonly referred to as "step zero", of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and also provides a basis for determining whether it is necessary to perform the goodwill impairment test required by Accounting Standards Codification ("ASC") Topic 350.
We performed the qualitative assessment of goodwill on our annual measurement date of October 1, 2016 and determined that it was more likely than not that the fair value of our reporting unit would be greater than its carrying amount. Therefore, we determined it was not necessary to perform the quantitative goodwill impairment test. Furthermore, there has been no historical impairment of our goodwill.
OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Claims and Insurance Accruals
As of
December 31, 2016
, we maintained a self-insured retention ("SIR") of
$2.75 million
per occurrence for bodily injury and property damage (“BIPD”) claims, plus a one-time,
$2.5 million
aggregate corridor deductible applicable to any claim that exceeds
$5.0 million
and occurs after March 30, 2016; a deductible of
$100,000
per occurrence for cargo loss and damage; and a deductible of
$1.0 million
per occurrence for workers' compensation claims. We also had an SIR of
$800,000
per covered person paid during 2016 for group health claims.
Claims and insurance accruals reflect the estimated cost of claims for cargo loss and damage, BIPD, workers' compensation, group health and group dental not covered by insurance. These accruals include amounts for future claims development and claims incurred but not reported, which are primarily based on historical claims development experience. The related costs for cargo loss and damage and BIPD are charged to "Insurance and claims" on our Statements of Operations, while the related costs for workers' compensation, group health and group dental are charged to "Salaries, wages and benefits" on our Statements of Operations.
Our liability for claims and insurance totaled
$125.8 million
and
$119.2 million
at
December 31, 2016
and
2015
, respectively. The long-term portions of those reserves were
$78.4 million
and
$74.3 million
for
2016
and
2015
, respectively, which were included in “Other non-current liabilities” on our Balance Sheets.
Share-Based Compensation
We have various share-based compensation plans for our employees and non-employee directors. Our share-based compensation includes awards of phantom stock and restricted stock which are accounted for under ASC topic 718,
Compensation - Stock Compensation
. All share based compensation expense is presented in "Salaries, wages and benefits" for employees and “Miscellaneous expenses, net” for non-employee directors in the accompanying Statements of Operations.
Awards of phantom stock are accounted for as a liability under ASC topic 718 and changes in the fair value of our liability are recognized as compensation cost over the requisite service period for the percentage of requisite service rendered each period. Changes in the fair value of the liability that occur after the requisite service period are recognized as compensation cost during the period in which the changes occur. We remeasure the liability for the outstanding awards at the end of each reporting period and the compensation cost is based on the change in fair market value for each reporting period.
Awards of restricted stock are accounted for as equity under ASC topic 718. Compensation cost for restricted stock awards is measured at the fair market value of our common stock on the grant date. We recognize compensation cost, net of estimated forfeitures, on a straight-line basis over the requisite service period of each award.
Advertising
The costs of advertising our services are expensed as incurred and are included in “General supplies and expenses” on our Statements of Operations. Advertising costs charged to expense totaled
$20.5 million
,
$22.9 million
and
$19.3 million
for
2016
,
2015
and
2014
, respectively.
Fair Values of Financial Instruments
The carrying values of financial instruments in current assets and current liabilities approximate their fair value due to the short maturities of these instruments. The carrying value of our revolving credit facility approximates fair value due to the variable interest rates of the facility that correlate with current market rates. The carrying value of our total long-term debt, including current maturities, and capital lease obligations was
$105.0 million
and
$133.8 million
at
December 31, 2016
and
2015
, respectively. The estimated fair value of our total long-term debt, including current maturities, and capital lease obligations was
$108.3 million
and
$139.1 million
at
December 31, 2016
and
2015
, respectively. The fair value measurement of our senior notes was determined using a discounted cash flow analysis that factors in current market yields for comparable borrowing arrangements under our credit profile. Since this methodology is based upon market yields for comparable arrangements, the measurement is categorized as Level 2 under the three-level fair value hierarchy as established by the Financial Accounting Standards Board (the “FASB”).
OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Stock Repurchase Program
During the second quarter of 2016, we completed our stock repurchase program to repurchase up to an aggregate of
$200.0 million
of our outstanding common stock, previously announced on November 10, 2014. On May 23, 2016, we announced that our Board of Directors had approved a new two-year stock repurchase program authorizing us to repurchase up to an aggregate of
$250.0 million
of our outstanding common stock (the “2016 Repurchase Program”). Under the 2016 Repurchase Program, we may repurchase shares from time to time in open market purchases or through privately negotiated transactions. Shares of our common stock repurchased under our repurchase programs are canceled at the time of repurchase and are authorized but unissued shares of our common stock. As of
December 31, 2016
, we had
$200.0 million
remaining authorized under the 2016 Repurchase Program.
Comprehensive Income
The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods presented in this report.
Supplemental Disclosure of Noncash Investing and Financing Activities
Investing and financing activities that are not reported in the Statements of Cash Flows due to their non-cash nature are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Acquisition of property and equipment by capital lease
|
|
$
|
—
|
|
|
$
|
3,552
|
|
|
$
|
—
|
|
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, "
Revenue from Contracts with Customers
" (Topic 606). This ASU supersedes the previous revenue recognition requirements in ASC Topic 605—Revenue Recognition and most industry-specific guidance throughout the ASC. The core principle within this ASU is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers", which deferred the effective date for ASU 2014-09 by one year to fiscal years beginning after December 15, 2017, while providing the option to early adopt for fiscal years beginning after December 15, 2016. Transition methods under ASU 2014-09 must be through either (i) retrospective application to each prior reporting period presented, or (ii) retrospective application with a cumulative effect adjustment at the date of initial application. We are continuing to evaluate the impact of this new standard on our financial reporting and disclosures, including but not limited to a review of accounting policies, internal controls and processes. We expect to complete our evaluation in the second half of 2017 and intend to adopt the new standard effective January 1, 2018.
In February 2016, the FASB issued ASU 2016-02, “
Leases
” (Topic 842). This ASU requires a lessee to recognize a right-of-use asset and a lease liability under most operating leases in its balance sheet. The ASU is effective for annual and interim periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We are continuing to evaluate the impact of this new standard on our financial reporting and disclosures.
In April 2015, the FASB issued ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" (Topic 350). This ASU provides additional guidance for software licenses within a cloud computing arrangement. Under ASU 2015-05, if a cloud computing arrangement contains a software license, customers should account for the license element of the arrangement in a manner consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, customers should account for the arrangement as a service contract. We adopted the provisions of ASU 2015-05 in the first quarter of 2016 without a material impact on our financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs" (Topic 835-30). This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the related debt's carrying value, which is consistent with the presentation of debt
OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
discounts. In June 2015, the FASB issued ASU 2015-15, "Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements". This ASU adds further clarity to ASU 2015-03 for debt issuance costs related to line-of-credit-arrangements. We adopted the provisions of ASU 2015-03 and ASU 2015-15 in the first quarter of 2016 without a material impact on our financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09, "Improvements to Employee Share-Based Payment Accounting" (Topic 718). This ASU is intended to simplify various aspects of the accounting for employee share-based payment transactions, including accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The guidance in ASU 2016-09 is required for annual reporting periods beginning after December 15, 2016, with early adoption permitted. We adopted the provisions of ASU 2016-09 in the second quarter of 2016 with retrospective application beginning January 1, 2016. The adoption did not have an impact on our financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows" (Topic 230). This ASU is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2017. We do not believe the adoption of ASU 2016-15 will have a material impact on our financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other" (Topic 350). This ASU is intended to simplify the subsequent measurement of goodwill and reduces the complexity of evaluating goodwill for impairment. Under this ASU, an entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. This ASU is effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not believe the adoption of ASU 2017-04 will have a material impact on our financial position, results of operations or cash flows.
Note 2. Long-term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Senior notes
|
|
$
|
95,000
|
|
|
$
|
120,000
|
|
Revolving credit facility
|
|
9,975
|
|
|
12,317
|
|
Capitalized lease obligations
|
|
—
|
|
|
1,488
|
|
Total long-term debt
|
|
104,975
|
|
|
133,805
|
|
Less: Current maturities
|
|
—
|
|
|
(26,488
|
)
|
Total maturities due after one year
|
|
$
|
104,975
|
|
|
$
|
107,317
|
|
We have one unsecured senior note agreement with an amount outstanding of
$95.0 million
at
December 31, 2016
. At
December 31, 2015
, we had two unsecured senior note agreements with an aggregate amount outstanding of
$120.0 million
. The remaining unsecured senior note agreement calls for two scheduled principal payments of
$50.0 million
and
$45.0 million
on January 3, 2018 and January 3, 2021, respectively. Interest rates on the January 3, 2018 and January 3, 2021 scheduled principal payments are
4.00%
and
4.79%
, respectively. The effective average interest rates on our outstanding senior note agreements were
4.37%
and
4.68%
at
December 31, 2016
and
2015
, respectively.
On December 15, 2015, we entered into an amended and restated credit agreement with Wells Fargo Bank, National Association ("Wells Fargo") serving as administrative agent for the lenders (the "Credit Agreement"). The Credit Agreement originally provided for a five-year,
$250.0 million
senior unsecured revolving line of credit and a
$100.0 million
accordion feature, which if exercised and approved, would expand the total borrowing capacity up to an aggregate of
$350.0 million
.
On September 9, 2016, we exercised a portion of the accordion feature and entered into an amendment to the Credit Agreement to increase the aggregate commitments from existing lenders by
$50.0 million
to an aggregate of
$300.0 million
. Of the
$300.0 million
line of credit commitments under the Credit Agreement, as amended, up to
$100.0 million
may be used for
OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
letters of credit and
$30.0 million
may be used for borrowings under the Wells Fargo Sweep Plus Loan Program (the "Sweep Program"). We utilize the Sweep Program to manage our daily cash needs, as it automatically initiates borrowings to cover overnight cash requirements primarily for working capital needs. The Credit Agreement matures on December 15, 2020.
At our option, borrowings under the Credit Agreement bear interest at either: (i) LIBOR plus an applicable margin (based on our ratio of net debt-to-total capitalization) that ranges from
1.0%
to
1.50%
; or (ii) a Base Rate plus an applicable margin (based on our ratio of net debt-to-total capitalization) that ranges from
0.0%
to
0.5%
. Loans under the Sweep Program bear interest at the LIBOR plus applicable margin rate. Letter of credit fees equal to the applicable margin for LIBOR loans are charged quarterly in arrears on the daily average aggregate stated amount of all letters of credit outstanding during the quarter. Commitment fees ranging from
0.125%
to
0.2%
(based upon the ratio of net debt-to-total capitalization) are charged quarterly in arrears on the aggregate unutilized portion of the Credit Agreement. Wells Fargo, as administrative agent, also receives an annual fee for providing administrative services.
For the year ended
December 31, 2016
, the applicable margin on LIBOR loans was
1.0%
and commitment fees were
0.125%
. For the year ended
December 31, 2015
, the applicable margin on LIBOR loans was
1.0%
and commitment fees ranged from
0.125%
to
0.175%
. There were
$74.6 million
and
$67.7 million
of outstanding letters of credit at
December 31, 2016
and
2015
, respectively. Letter of credit fees remained at
1.0%
during the years ended
December 31, 2016
and
2015
.
The Credit Agreement includes a provision limiting our ability to make restricted payments, including dividends and payments for share repurchases, unless, among other conditions, no defaults or events of default under the Credit Agreement are ongoing (or would be caused by such restricted payment).
Our senior note agreement and Credit Agreement contain 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 material domestic subsidiaries of the Company would be required to guarantee payment of all of our obligations under these agreements.
As of
December 31, 2016
, aggregate maturities of long-term debt are as follows:
|
|
|
|
|
(In thousands)
|
Total
|
2017
|
$
|
—
|
|
2018
|
50,000
|
|
2019
|
—
|
|
2020
|
9,975
|
|
2021
|
45,000
|
|
Thereafter
|
—
|
|
|
$
|
104,975
|
|
|
|
Note 3. Leases
We lease certain assets under operating leases, which primarily consist of real estate leases for
44
of our
226
service center locations at
December 31, 2016
. Certain operating leases provide for renewal options, which can vary by lease and are typically offered at their fair rental value. We have not made any residual value guarantees related to our operating leases; therefore, we have no corresponding liability recorded on our Balance Sheets.
OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Future minimum annual lease payments for assets under operating leases as of
December 31, 2016
are as follows:
|
|
|
|
|
|
(In thousands)
|
|
Total
|
2017
|
|
$
|
12,340
|
|
2018
|
|
8,591
|
|
2019
|
|
5,617
|
|
2020
|
|
3,895
|
|
2021
|
|
3,234
|
|
Thereafter
|
|
27,970
|
|
|
|
$
|
61,647
|
|
Aggregate expense under operating leases was
$13.8 million
,
$15.2 million
and
$16.5 million
for
2016
,
2015
and
2014
, respectively. Certain operating leases include rent escalation provisions, which we recognize as expense on a straight-line basis.
We did not have any assets under capital leases at
December 31, 2016
. At
December 31, 2015
, we leased certain information systems under capital leases with a gross carrying value of
$3.6 million
and accumulated amortization of
$0.4 million
.
Note 4. Income Taxes
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
126,903
|
|
|
$
|
120,437
|
|
|
$
|
123,598
|
|
State
|
|
20,111
|
|
|
21,248
|
|
|
15,858
|
|
|
|
147,014
|
|
|
141,685
|
|
|
139,456
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
29,354
|
|
|
38,549
|
|
|
21,542
|
|
State
|
|
5,454
|
|
|
5,093
|
|
|
4,002
|
|
|
|
34,808
|
|
|
43,642
|
|
|
25,544
|
|
Total provision for income taxes
|
|
$
|
181,822
|
|
|
$
|
185,327
|
|
|
$
|
165,000
|
|
The following is a reconciliation of income tax expense calculated using the U.S. statutory federal income tax rate with our income tax expense for
2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Tax provision at statutory rate
|
|
$
|
167,156
|
|
|
$
|
171,506
|
|
|
$
|
151,380
|
|
State income taxes, net of federal benefit
|
|
16,711
|
|
|
17,097
|
|
|
14,120
|
|
Meals and entertainment disallowance
|
|
964
|
|
|
1,035
|
|
|
959
|
|
Tax credits
|
|
(2,408
|
)
|
|
(3,036
|
)
|
|
(1,307
|
)
|
Other, net
|
|
(601
|
)
|
|
(1,275
|
)
|
|
(152
|
)
|
Total provision for income taxes
|
|
$
|
181,822
|
|
|
$
|
185,327
|
|
|
$
|
165,000
|
|
OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets and liabilities, which are included in "Other assets" and "Deferred income taxes" on our Balance Sheets, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
|
Claims and insurance reserves
|
|
$
|
43,409
|
|
|
$
|
41,576
|
|
Allowance for doubtful accounts
|
|
1,198
|
|
|
1,730
|
|
Accrued vacation
|
|
24,227
|
|
|
22,174
|
|
Deferred compensation
|
|
40,742
|
|
|
33,382
|
|
Other
|
|
10,395
|
|
|
12,008
|
|
Total deferred tax assets
|
|
119,971
|
|
|
110,870
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Depreciation and amortization
|
|
(376,034
|
)
|
|
(334,379
|
)
|
Unrecognized revenue
|
|
(11,465
|
)
|
|
(10,062
|
)
|
Other
|
|
(2,334
|
)
|
|
(1,483
|
)
|
Total deferred tax liabilities
|
|
(389,833
|
)
|
|
(345,924
|
)
|
Net deferred tax liability
|
|
$
|
(269,862
|
)
|
|
$
|
(235,054
|
)
|
As of
December 31, 2016
, the Company had various state tax credit carryforwards of approximately
$4.0 million
that are scheduled to expire in
one
to
fifteen
years.
We are subject to U.S. federal income tax, as well as income tax of multiple state tax jurisdictions. We remain open to examination by the Internal Revenue Service for tax years
2013
through
2016
. We remain open to examination by various state tax jurisdictions for tax years
2012
through
2016
.
The Company's liability for unrecognized tax benefits was immaterial as of
December 31, 2016
and
2015
. Interest and penalties related to uncertain tax positions, which are immaterial, are recorded in our "Provision for income taxes" on our Statements of Operations. Changes in our liability for unrecognized tax benefits could affect our effective tax rate, if recognized, but we do not expect any material changes within the next twelve months.
Note 5. Related Party Transactions
Family Relationships
Each of Earl E. Congdon, David S. Congdon and John R. Congdon, Jr. are related to one another and served in various management positions and/or on our Board of Directors during
2016
. Our employment agreements with Earl E. Congdon and David S. Congdon are incorporated by reference as exhibits to this Annual Report on Form 10-K. We regularly disclose the amount of compensation that we pay to these individuals, as well as any of their family members employed by us and whose compensation from time to time may require disclosure, 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 beneficially owned by members of the Congdon family. Leasing is primarily engaged in the business of leasing tractors, trailers and other vehicles as well as providing contract dedicated fleet services. John R. Congdon, Jr. serves as Chairman of the Board of Directors of Leasing. Earl E. Congdon and David S. Congdon currently serve as members of Leasing’s Board of Directors. From time to time, we have collaborated with Leasing for the purchase of certain equipment and fuel. Our collaboration with Leasing for the purchase of fuel ended in the fourth quarter of 2015.
OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
We purchased
$254,000
,
$313,000
and
$298,000
of maintenance and other services from Leasing in
2016
,
2015
and
2014
, respectively. We intend to continue to purchase maintenance and other services from Leasing, provided that Leasing’s prices continue to be favorable to us. In addition, we received
$12,000
,
$12,000
and
$17,500
from Leasing for the rental of property in
2016
,
2015
and
2014
, respectively.
Note 6. Employee Benefit Plans
Defined Contribution Plan
Substantially all employees meeting certain service requirements are eligible to participate in our 401(k) employee retirement plan. Employee contributions are limited to a percentage of the employee’s compensation, as defined in the plan. We match a percentage of our employees’ contributions up to certain maximum limits. In addition, we may also provide a discretionary matching contribution as specified in the plan. Our employer contributions, net of forfeitures, for
2016
,
2015
and
2014
were
$28.9 million
,
$30.3 million
and
$26.4 million
, respectively.
Deferred Compensation Plan
We maintain a nonqualified deferred compensation plan for the benefit of certain eligible employees, including those whose contributions to the 401(k) employee retirement plan are limited due to provisions of the Internal Revenue Code. Participating employees may elect to defer receipt of a percentage of their compensation, as defined in the plan, and the deferred amount is credited to each participant’s deferred compensation account. The plan is not funded, and the Company does not make a matching contribution to this plan. Although the plan is not funded, participants are allowed to select investment options for which their deferrals and future earnings are deemed to be invested. Participant accounts are adjusted to reflect participant deferrals and the performance of their deemed investments. The amounts owed to the participants totaled
$53.8 million
and
$48.7 million
at December 31,
2016
and
2015
, respectively, of which
$51.0 million
and
$44.5 million
were included in "Other non-current liabilities" on our Balance Sheets as of December 31,
2016
and
2015
, respectively.
Note 7. Earnings Per Share
Basic earnings per share is computed by dividing net income by the daily weighted average number of shares of our common stock outstanding for the period, excluding unvested restricted stock. Unvested restricted stock is included in common shares outstanding on our Balance Sheets. Diluted earnings per share is computed using the treasury stock method and includes the impact of shares of unvested restricted stock.
The following table provides a reconciliation of the number of common shares used in computing basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Weighted average shares outstanding - basic
|
|
83,112,012
|
|
|
85,378,480
|
|
|
86,162,137
|
|
Dilutive effect of share-based awards
|
|
41,647
|
|
|
—
|
|
|
—
|
|
Weighted average shares outstanding - diluted
|
|
83,153,659
|
|
|
85,378,480
|
|
|
86,162,137
|
|
Note 8. Share-Based Compensation
Stock Incentive Plan
On May 19, 2016, our shareholders approved the Old Dominion Freight Line, Inc. 2016 Stock Incentive Plan (the "Stock Incentive Plan") previously approved by our Board of Directors. The Stock Incentive Plan, under which awards may be granted until May 18, 2026 or the Stock Incentive Plan’s earlier termination, serves as our primary equity incentive plan and provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards, performance awards, phantom stock awards and other stock-based awards or dividend equivalent awards to selected employees and non-employee directors. The maximum number of shares of common stock that we may issue or deliver pursuant to awards granted under the Stock Incentive Plan is
2,000,000
shares.
OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
Restricted Stock Awards
During 2016, we granted restricted stock awards to selected employees and non-employee directors under the Stock Incentive Plan. The employee restricted stock awards vest in three equal annual installments on each anniversary of the grant date, and the non-employee director restricted stock awards vest in full on the first anniversary of the grant date. In both cases, the restricted stock awards are subject to accelerated vesting due to death, total disability, or change in control of the Company. Subject to the foregoing, unvested restricted stock awards are generally forfeited upon termination of employment or service. The restricted stock awards only carry rights to receive dividends to the extent vested.
Compensation cost for restricted stock awards is measured at the grant date based on the fair market value per share of our common stock. Compensation cost is recognized on a straight-line basis over the requisite service period of each award and is presented in "Salaries, wages and benefits" for employees and “Miscellaneous expenses, net” for non-employee directors in the accompanying Statements of Operations.
The following table summarizes our restricted stock award activity for employees and non-employee directors:
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value Per Share
|
|
|
|
|
|
|
Granted during 2016
|
|
74,376
|
|
|
$
|
63.94
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(1,681
|
)
|
|
63.94
|
|
Unvested at December 31, 2016
|
|
72,695
|
|
|
$
|
63.94
|
|
At December 31, 2016, the Company had $
3.0 million
of unrecognized stock-based compensation cost, net of estimated forfeitures, related to unvested restricted stock awards that will be recognized over a weighted average period of
2.23
years.
Phantom Stock Plan
On October 30, 2012, our Board of Directors approved and we adopted the Old Dominion Freight Line, Inc. 2012 Phantom Stock Plan, as amended on January 29, 2015 (the "2012 Phantom Stock Plan"). Under the 2012 Phantom Stock Plan,
1,000,000
shares of phantom stock may be awarded, each of which represents a contractual right to receive an amount in cash equal to the fair market value of a share of our common stock on the settlement date, which is the earliest of the date of the participant's (i) termination of employment for any reason other than for cause, (ii) death or (iii) total disability. Each award vests in 20% increments on the anniversary of the grant date provided that the participant (i) has been continuously employed by us since the grant date, (ii) has been continuously employed by us for ten years and (iii) has reached the age of
65
. Vesting also occurs on the earliest of (i) a change in control, (ii) death or (iii) total disability. Awards are settled in cash after the required vesting period has been satisfied and upon termination of employment. Unvested shares are forfeited upon termination of employment, although our Board of Directors has authority to modify and/or accelerate the vesting of awards.
On May 16, 2005, our Board of Directors approved, and the Company adopted, the Old Dominion Freight Line, Inc. Phantom Stock Plan, as amended, effective January 1, 2009, May 18, 2009, May 17, 2011 and January 29, 2015 (the “2005 Phantom Stock Plan” and together with the 2012 Phantom Stock Plan, the “Employee Phantom Plans”). The 2005 Phantom Stock Plan expired in May 2012; however, grants under the 2005 Phantom Stock Plan remain outstanding. Each share of phantom stock awarded to eligible employees under the 2005 Phantom Stock Plan represents a contractual right to receive an amount in cash equal to the fair market value of a share of our common stock on the settlement date, which generally is the earlier of the eligible employee’s (i) termination from the Company after reaching 55 years of age, (ii) death or (iii) total disability. Awards are settled in cash after the required vesting period has been satisfied and upon termination of employment.
Awards under the 2005 Phantom Stock Plan vest upon the earlier to occur of the following: (i) the date of a change of control in our ownership; (ii) the fifth anniversary of the grant date of the award, provided the participant is employed by us on that date; (iii) the date of the participant’s death while employed by us; (iv) the date of the participant’s total disability; or (v) the date the participant attains the age of 65 while employed by us. Awards that are not vested upon termination of employment are forfeited. If termination occurs prior to attaining the age of 55, all vested and unvested awards are generally forfeited unless
OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
the termination results from death or total disability. The 2005 Phantom Stock Plan does, however, provide the Board of Directors with discretionary authority to modify and/or accelerate the vesting of awards.
A summary of cash payments for settled shares and compensation costs recognized in “Salaries, wages and benefits” on our Statements of Operations for the Employee Phantom Plans is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Cash payments for settled shares
|
|
$
|
2,442
|
|
|
$
|
1,682
|
|
|
$
|
2,401
|
|
Compensation expense (benefit)
|
|
12,694
|
|
|
(1,612
|
)
|
|
11,249
|
|
Unrecognized compensation cost for all unvested shares under the Employee Phantom Plans as of
December 31, 2016
was
$11.3 million
based on the fair market value of the award on that date.
On May 28, 2008, our Board of Directors approved, and the Company adopted, the Old Dominion Freight Line, Inc. Director Phantom Stock Plan, as amended on April 1, 2011, February 20, 2014, August 7, 2014 and February 25, 2016 (the “Director Phantom Stock Plan” and together with the Employee Phantom Plans, the “Phantom Plans”). Under the Director Phantom Stock Plan, each eligible non-employee director was granted an annual award of phantom shares. Our Board of Directors approved the initial grant under this plan at its May 2008 meeting and authorized the subsequent annual grants to be made thereafter. For each vested phantom share, participants are entitled to an amount in cash equal to the fair market value of the award on the date that service as a director terminates for any reason. Our shareholders approved the Stock Incentive Plan at our 2016 Annual Meeting of Shareholders; therefore, no phantom shares were granted under the Director Phantom Stock Plan in 2016.
Director Phantom Stock Plan awards vest upon the earlier to occur of the following: (i) the one-year anniversary of the grant date; (ii) the date of the first annual meeting of shareholders that occurs after the grant date provided the participant is still in service as a director; (iii) the date of a change of control in our ownership provided that the participant is still in service as a director; or (iv) the date of the participant’s death or total disability while still in service as a director. Awards that are not vested upon termination of service as a director are forfeited.
A summary of cash payments for settled shares and compensation costs recognized in “Miscellaneous expenses, net” on our Statements of Operations for the Director Phantom Stock Plan is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
|
2014
|
Cash payments for settled shares
|
|
$
|
278
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Compensation expense (benefit)
|
|
2,098
|
|
|
(916
|
)
|
|
2,193
|
|
A summary of the changes in the number of outstanding phantom stock awards during the year ended
December 31, 2016
for the Phantom Plans is provided below. Of these awards,
333,570
and
294,184
phantom shares were vested at
December 31, 2016
and
2015
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Phantom Plans
|
|
Director
Phantom
Stock Plan
|
|
Total
|
Balance of shares outstanding at December 31, 2015
|
|
519,351
|
|
|
82,253
|
|
|
601,604
|
|
Granted
|
|
—
|
|
|
—
|
|
|
—
|
|
Settled
|
|
(1,658
|
)
|
|
(14,091
|
)
|
|
(15,749
|
)
|
Forfeited
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance of shares outstanding at December 31, 2016
|
|
517,693
|
|
|
68,162
|
|
|
585,855
|
|
OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
The liability for unsettled phantom stock awards under the Phantom Plans consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Employee Phantom Plans
|
|
$
|
33,116
|
|
|
$
|
20,566
|
|
Director Phantom Stock Plan
|
|
5,848
|
|
|
4,698
|
|
Total
|
|
$
|
38,964
|
|
|
$
|
25,264
|
|
While the Stock Incentive Plan currently serves as our primary equity plan, the terms of the Phantom Stock Plans will continue to govern all awards granted under the Phantom Stock Plans until such awards have been settled, forfeited, canceled or have otherwise expired or terminated.
Note 9. Commitments and Contingencies
We are involved in various legal proceedings, governmental inquiries and claims that have arisen in the ordinary course of our business and have not been fully adjudicated, some of which are covered in whole or in part by insurance. Certain of these matters include class-action allegations. We do not believe that the resolution of any of these legal proceedings, governmental inquiries or claims will have a material adverse effect upon our financial position, results of operations or cash flows.
Note 10. Quarterly Financial Information (Unaudited)
A summary of our unaudited quarterly financial information for
2016
and
2015
is provided below. Our tonnage levels and revenue mix are subject to seasonal trends common in the motor carrier industry. Our revenue and operating margins in the first and fourth quarters are typically lower than those during the second and third quarters due to reduced shipments during the winter months. Harsh winter weather or natural disasters, such as hurricanes, tornadoes and floods, can also adversely impact our performance by reducing demand and increasing operating expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
(In thousands, except per share data)
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
2016
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
707,733
|
|
|
$
|
755,435
|
|
|
$
|
782,611
|
|
|
$
|
745,738
|
|
|
$
|
2,991,517
|
|
Operating income
|
|
99,548
|
|
|
133,436
|
|
|
137,404
|
|
|
113,447
|
|
|
483,835
|
|
Net income
|
|
60,285
|
|
|
81,388
|
|
|
85,581
|
|
|
68,511
|
|
|
295,765
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
0.72
|
|
|
0.98
|
|
|
1.03
|
|
|
0.83
|
|
|
3.56
|
|
Diluted
|
|
0.72
|
|
|
0.98
|
|
|
1.03
|
|
|
0.83
|
|
|
3.56
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
696,245
|
|
|
$
|
762,151
|
|
|
$
|
779,474
|
|
|
$
|
734,572
|
|
|
$
|
2,972,442
|
|
Operating income
|
|
103,565
|
|
|
140,899
|
|
|
139,854
|
|
|
113,922
|
|
|
498,240
|
|
Net income
|
|
62,524
|
|
|
85,574
|
|
|
84,368
|
|
|
72,224
|
|
|
304,690
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
0.73
|
|
|
1.00
|
|
|
0.99
|
|
|
0.85
|
|
|
3.57
|
|
Diluted
|
|
0.73
|
|
|
1.00
|
|
|
0.99
|
|
|
0.85
|
|
|
3.57
|
|
Note 11. Subsequent Events
On February 2, 2017, we announced that our Board of Directors had declared a cash dividend of
$0.10
per share payable on March 20, 2017, to shareholders of record at the close of business on March 6, 2017.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Old Dominion Freight Line, Inc.
We have audited the accompanying balance sheets of Old Dominion Freight Line, Inc. as of December 31, 2016 and 2015, and the related statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Old Dominion Freight Line, Inc. at December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Old Dominion Freight Line, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2017, expressed an unqualified opinion thereon.
Raleigh, North Carolina
February 27, 2017