NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 through a single integrated organization. Our service offerings, which include expedited transportation, are provided through an expansive network of service centers located throughout the continental United States. Through strategic alliances, we also provide LTL services throughout North America. 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 the composition of our revenue is summarized below:
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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(In thousands)
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2018
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2017
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2018
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2017
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LTL services
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$
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1,018,491
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$
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826,401
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$
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1,929,545
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$
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1,566,587
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Other services
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15,007
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13,511
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28,973
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27,421
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Total revenue from operations
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$
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1,033,498
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$
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839,912
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$
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1,958,518
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$
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1,594,008
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Basis of Presentation
The accompanying unaudited, interim condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and, in management’s opinion, contain all adjustments (consisting of normal recurring items) necessary for a fair presentation, in all material respects, of the financial position and results of operations for the periods presented. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements.
The preparation of condensed financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Our operating results are subject to seasonal trends; therefore, the results of operations for the interim period ended
June 30, 2018
are not necessarily indicative of the results that may be expected for the subsequent quarterly period or the year ending
December 31, 2018
.
The condensed financial statements should be read in conjunction with the financial statements and related notes, which appear in our Annual Report on Form 10-K for the year ended
December 31, 2017
. There have been no significant changes in the accounting principles and policies, long-term contracts or estimates inherent in the preparation of the condensed financial statements of Old Dominion Freight Line, Inc. as previously described in our Annual Report on Form 10-K for the year ended
December 31, 2017
, other than those disclosed in this Form 10-Q.
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.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 total long-term debt, including current maturities, was
$45.0 million
and
$95.0 million
at
June 30, 2018
and
December 31, 2017
, respectively. The estimated fair value of our total long-term debt, including current maturities, was
$45.8 million
and
$97.1 million
at
June 30, 2018
and
December 31, 2017
, 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”).
Stock Repurchase Program
Our stock repurchase program, which was previously announced on May 23, 2016 and pursuant to which we could repurchase up to an aggregate of $250.0 million of our outstanding common stock, expired in accordance with its terms during the second quarter of 2018. On May 17, 2018, 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 “2018 Repurchase Program”). Under the 2018 Repurchase Program, which became effective upon the expiration of our prior stock 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 classified as authorized but unissued shares of our common stock.
During the three and six months ended
June 30, 2018
, we repurchased
205,354
shares of our common stock for
$30.1 million
and
327,341
shares of our common stock for
$47.4 million
under our repurchase programs, respectively. As of
June 30, 2018
, we had
$247.6 million
remaining authorized under the 2018 Repurchase Program.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" (Topic 606). This ASU supersedes the previous revenue recognition requirements in Accounting Standards Codification Topic 605 - Revenue Recognition. The guidance provides a five-step analysis to determine when and how revenue is recognized and further enhances disclosure requirements. Transition methods under ASU 2014-09 must be through (i) retrospective application to each prior reporting period presented, or (ii) modified retrospective application with a cumulative effect adjustment at the date of initial application.
Our revenue is generated from providing transportation and related services to customers in accordance with the bill of lading ("BOL") contract, our general tariff provisions and contractual agreements. Generally, our performance obligations begin when we receive a BOL from a customer and are satisfied when we complete the delivery of a shipment and related services. We recognize revenue for our performance obligations under our customer contracts over time, as our customers receive the benefits of our services in accordance with ASU 2014-09. With respect to 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. Payment terms vary by customer and are short-term in nature.
We adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective application. The adoption of this standard did not have a material impact on how we recognize revenue or to our financial position, results of operations or cash flows for the three or six months ended June 30, 2018.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 on its balance sheet. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Although we are continuing to evaluate the impact of adoption, we expect ASU 2016-02 to have a material impact on our Condensed Balance Sheet due to the requirement to recognize right-of-use assets and lease liabilities.
Note 2. 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 Condensed 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:
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2018
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2017
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2018
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2017
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Weighted average shares outstanding - basic
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82,067,872
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82,318,623
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82,160,159
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82,333,739
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Dilutive effect of share-based awards
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101,680
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109,352
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102,126
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102,431
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Weighted average shares outstanding - diluted
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82,169,552
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82,427,975
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82,262,285
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82,436,170
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Note 3. Long-Term Debt
Long-term debt consisted of the following:
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(In thousands)
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June 30,
2018
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December 31,
2017
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Senior notes
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$
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45,000
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$
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95,000
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Revolving credit facility
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—
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—
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Total long-term debt
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45,000
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95,000
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Less: Current maturities
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—
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(50,000
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)
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Total maturities due after one year
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$
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45,000
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$
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45,000
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We had one unsecured senior note agreement with an amount outstanding of
$45.0 million
and
$95.0 million
at June 30, 2018 and December 31, 2017, respectively. Our unsecured senior note agreement calls for a scheduled principal payment of
$50.0 million
, which was paid on January 3, 2018, and a scheduled principal payment of
$45.0 million
, which is due on January 3, 2021. Interest rates on the January 3, 2018 and January 3, 2021 scheduled principal payments were
4.00%
and
4.79%
, respectively. The effective average interest rate on our outstanding senior note agreement was
4.79%
and
4.37%
at June 30, 2018 and December 31, 2017, 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 fully 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
NOTES TO THE CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
$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.
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 periods covered under the Credit Agreement, the applicable margin on LIBOR loans and letter of credit fees were
1.0%
and commitment fees were
0.125%
. There were
$61.5 million
and
$71.4 million
of outstanding letters of credit at
June 30, 2018
and
December 31, 2017
, respectively.
Note 4. Commitments and Contingencies
We are involved in or addressing various legal proceedings and claims, governmental inquiries, notices and investigations that have arisen in the ordinary course of our business and have not been fully adjudicated, some of which may be 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 matters will have a material adverse effect upon our financial position, results of operations or cash flows.
Note 5. Income Taxes
On December 22, 2017, the U.S. government enacted tax reform legislation as part of the Tax Cuts and Jobs Act (the "Act") that reduced the corporate income tax rate from 35% to 21% and included a broad range of complex provisions affecting the taxation of businesses. Generally, financial statement recognition of the new legislation would be required to be completed in the period of enactment; however, in response to the complexities of this new legislation, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 118 to provide companies with transitional relief. Specifically, when the initial accounting for items under the new legislation is incomplete, the guidance allows (i) recognition of provisional amounts when reasonable estimates can be made, or (ii) continued application of the prior tax law if a reasonable estimate of the effect cannot be made. The SEC staff has provided up to one year from the date of enactment for companies to finalize the accounting for the effects of this new legislation. Although no material changes were made to provisional amounts during the three or six months ended June 30, 2018, we will continue to refine our estimates related to the new legislation as clarifying guidance and interpretations are issued and our 2017 tax returns are completed.
The Company's effective tax rate for the second quarter and first six months of 2018 was 26.2% and 26.1%, respectively, as compared to 38.6% for the same periods of 2017. The decrease in the tax rate was primarily due to the positive impact of the Act. The Company’s effective tax rate generally exceeds the federal statutory rate due to the impact of state taxes and, to a lesser extent, certain other non-deductible items.