2013 10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number: 0-19582
OLD DOMINION FREIGHT LINE, INC.
(Exact name of registrant as specified in its charter)

VIRGINIA
  
56-0751714
(State or other jurisdiction of
incorporation or organization)
  
(I.R.S. Employer
Identification No.)
500 Old Dominion Way
Thomasville, NC 27360
(Address of principal executive offices)
(Zip Code)
(336) 889-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common Stock ($0.10 par value)
 
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None




Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ¨     No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý   No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
  
 
Accelerated filer  
¨
Non-accelerated filer
¨
  
 
Smaller reporting company
¨
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨     No  ý
The aggregate market value of voting stock held by non-affiliates of the registrant as of June 28, 2013 was $2,626,693,513, based on the closing sales price as reported on the NASDAQ Global Select Market.
As of February 27, 2014, the registrant had 86,164,917 outstanding shares of Common Stock ($0.10 par value).
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.




INDEX
 
 
 
 
 
 
 
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
 
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
 
Item 15
 




FORWARD-LOOKING INFORMATION

Forward-looking statements appear in this Annual Report, including but not limited to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in other written and oral statements made by or on behalf of us. These forward-looking statements include, but are not limited to, statements relating to our goals, strategies, expectations, competitive environment, regulation, availability of resources, future events and future financial performance. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements typically can be identified by such words as “anticipate,” “estimate,” “forecast,” “project,” “intend,” “expect,” “believe,” “should,” “could,” “may,” or other similar words or expressions. We caution readers that such forward-looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied herein, including, but not limited to, the risk factors detailed in this Annual Report.

Our forward-looking statements are based on our beliefs and assumptions using information available at the time the statements are made. We caution the reader not to place undue reliance on our forward-looking statements as (i) these statements are neither a prediction nor a guarantee of future events or circumstances and (ii) the assumptions, beliefs, expectations and projections about future events may differ materially from actual results. We undertake no obligation to publicly update any forward-looking statement to reflect developments occurring after the statement is made.

PART I

ITEM 1. BUSINESS

Unless the context requires otherwise, references in this report to “Old Dominion,” the “Company,” “we,” “us” and “our” refer to Old Dominion Freight Line, Inc.

Overview

We are a leading, less-than-truckload (“LTL”), union-free motor carrier providing regional, inter-regional and national LTL service and other logistics services from a single integrated organization. We are the fifth largest LTL motor carrier in the United States, as measured by 2012 revenue, according to Transport Topics. In addition to our core LTL services, we offer a broad range of value-added services including international freight forwarding, ground and air expedited transportation, container delivery, truckload brokerage, supply chain consulting, warehousing and consumer household pickup and delivery. Our services are complemented by our technological capabilities, which we believe provide the tools to improve the efficiency of our operations while empowering our customers to manage their shipping needs. More than 90% of our revenue is 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.

We have increased our revenue and customer base over the past five years primarily through organic growth. Our infrastructure allows us to provide next-day and second-day service within each of our six regions covering the continental United States, as well as inter-regional and national service between these regions. To support our ongoing expansion, we added 15 new service centers during the past five years for a total of 221 at December 31, 2013.

We believe our growth can be attributed to our focus on meeting our customers’ complete supply chain needs from a single point of contact while providing a superior level of customer service at a fair and equitable price. Our integrated structure allows us to offer our customers consistent high-quality service from origin to destination, and we believe our operating structure and proprietary information systems also enable us to efficiently manage our operating costs.

We were founded in 1934 and incorporated in Virginia in 1950. Our principal executive offices are located at 500 Old Dominion Way, Thomasville, North Carolina 27360. Please refer to the Balance Sheets and Statements of Operations included in Item 8, “Financial Statements and Supplementary Data” in this report for information regarding our total assets, revenue from operations and net income.


4



Our Industry

Trucking companies provide transportation services to virtually every industry operating in the United States and generally offer higher levels of reliability and faster transit times than other surface transportation options. The trucking industry is comprised principally of two types of motor carriers: LTL and truckload. LTL carriers typically pick up multiple shipments from multiple customers on a single truck and then route that freight for delivery through service centers where the freight may be transferred to other trucks with similar destinations. In contrast, truckload carriers generally dedicate an entire trailer to one customer from origin to destination.

According to the American Trucking Associations, total U.S. freight transportation revenue in 2012 was $795.7 billion, of which the trucking industry accounted for 80.7%. The LTL sector had revenue in 2012 of $51.5 billion, which represented 6.5% of total U.S. freight transportation revenue. In contrast to truckload carriers, LTL motor carriers require expansive networks of local pickup and delivery (“P&D”) service centers, as well as larger breakbulk, or hub, facilities. Significant capital is required to create and maintain a network of service centers and a fleet of tractors and trailers. The high fixed costs and capital spending requirements for LTL motor carriers make it difficult for new start-up or small operators to effectively compete with established carriers. In addition, successful LTL motor carriers generally employ, and regularly update, a high level of technology-based systems and processes that provide information to customers and help reduce our operating costs.

The LTL industry is highly competitive on the basis of service and price and has consolidated significantly since the industry was deregulated in 1980. Based on 2012 revenue as reported in Transport Topics, the largest 25 LTL motor carriers accounted for approximately 60.6% of the total LTL market. We believe consolidation in our industry will continue due to customer demand for transportation providers offering both national and regional LTL as well as other complementary value-added services.

Competition

We compete with regional, inter-regional and national LTL carriers and, to a lesser extent, with truckload carriers, small package carriers, airfreight carriers and railroads. We also compete with, and provide transportation services to, third-party logistics providers that determine both the mode of transportation and the carrier. Competition is based primarily on service, price and business relationships. We believe we are able to compete effectively in our markets by providing superior-quality and timely service at a fair and equitable price.

At all levels of our organization, we seek to continuously improve customer service by maximizing on-time performance while reducing transit times and minimizing cargo claims. We believe our transit times are generally faster than those of our principal national competitors, in part because of our more efficient service center network, use of team drivers and proprietary technology. In addition, we provide greater geographic coverage than most of our regional competitors. Our diversified mix and scope of regional, inter-regional and national service, combined with our value-added service offerings, enables us to provide our customers with a single source to meet their shipping and logistics needs. We believe this provides us with a distinct advantage over most of our regional, multi-regional and national competition.

We utilize flexible scheduling and train our employees to perform multiple tasks, which we believe allows us to achieve greater productivity and higher levels of customer service than our competitors. We believe our focus on employee communication, continued education, development and motivation strengthens the relationships and trust among our employees.

We compete with several large and more diversified transportation service providers, each of which may have more equipment, a broader global network and a wider range of services than we have. Our larger competitors may also have greater financial resources and, in general, the ability to reduce prices to gain business, especially during times of reduced growth rates in the economy.

Service Center Operations

At December 31, 2013, we operated through 221 service center locations, of which we owned 158 and leased 63. We operate a total of ten major breakbulk facilities located in Rialto, California; Atlanta, Georgia; Chicago, Illinois; Indianapolis, Indiana; Greensboro, North Carolina; Harrisburg, Pennsylvania; Memphis and Morristown, Tennessee; Dallas, Texas; and Salt Lake City, Utah, while using various other service centers for limited breakbulk activity in order to serve our next-day markets. Our service centers are strategically located in six regions of the country so that we can provide the highest quality service and minimize freight rehandling costs.


5



Our service centers are responsible for the pickup and delivery of freight within their service area. Each night, our service centers load outbound freight for transport to other service centers for delivery. All inbound freight received by the service center in the evening or during the night is scheduled for local delivery the next business day, unless a customer requests a different delivery schedule. Our management reviews the productivity and service performance of each service center on a daily basis to help ensure quality service and efficient operations.

While we have established primary responsibility for customer service at the local service center level, our customers may access information and initiate transactions through our centralized customer service department located at our corporate office or through several other gateways, such as our website, mobile applications, electronic data interchange (“EDI”), email and fax notification systems and automated voice response systems. Our systems offer direct access to information such as freight tracking, shipping documents, rate quotes, rate databases and account activity. These centralized systems and our customer service department provide our customers with a single point of contact to access information across all areas of our operations and for each of our service offerings.

Linehaul Transportation

Linehaul dispatchers control the movement of freight between service centers through integrated freight movement systems. We also utilize load-planning software to optimize efficiencies in our linehaul operations. Our management team monitors freight movements, transit times, load factors and many other productivity measurements to ensure that we maintain our high levels of service and efficiency.

We utilize scheduled routes, and additional linehaul dispatches as necessary, to meet our published transit times. In addition, we lower our cost structure by primarily using twin 28-foot trailers in our linehaul operations. The use of twin 28-foot trailers permits us to transport freight directly from its point of origin to destination with minimal unloading and reloading, which also reduces cargo loss and damage expenses. We utilize long-combination vehicles, such as triple 28-foot trailers and combinations of 48-foot and 28-foot trailers, in states where permitted. Twin trailers and long-combination vehicles permit more freight to be transported behind a tractor than could otherwise be transported by one large trailer.

Tractors, Trailers and Maintenance

At December 31, 2013, we owned 6,296 tractors. We generally use new tractors in linehaul operations for approximately three to five years and then transfer those tractors to P&D operations for the remainder of their useful lives. In many of our service centers, tractors perform P&D functions during the day and linehaul functions at night to maximize tractor utilization.

At December 31, 2013, we owned 25,052 trailers. We primarily purchase new trailers for our operations; however, we occasionally purchase pre-owned equipment that meets our specifications. The purchase of pre-owned equipment can provide an excellent value but also can increase our fleet’s average age. The table below reflects, as of December 31, 2013, the average age of our tractors and trailers:
Type of Equipment
 
Number of
Units
 
Average Age
(In years)
Tractors
 
6,296

 
4.8

Linehaul trailers
 
18,077

 
5.7

P&D trailers
 
6,975

 
12.9


We develop certain specifications for tractors and trailers and then negotiate the production and purchase of this equipment with several manufacturers. These purchases are planned well in advance of anticipated delivery dates in order to accommodate manufacturers’ production schedules. We believe there is sufficient capacity among suppliers to ensure an uninterrupted supply of equipment to support our operations.


6



The table below sets forth our capital expenditures for tractors and trailers for the years ended December 31, 2013, 2012 and 2011. For more information concerning our capital expenditures, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” in this report.
 
 
Year Ended December 31,
(In thousands)
 
2013
 
2012
 
2011
Tractors
 
$
59,317

 
$
113,257

 
$
69,837

Trailers
 
70,042

 
83,405

 
62,326

Total
 
$
129,359

 
$
196,662

 
$
132,163


At December 31, 2013, we operated 38 maintenance centers at certain service center locations throughout our network. These maintenance centers are equipped to perform routine and preventive maintenance and repairs on our equipment.

We adhere to established maintenance policies and procedures to help ensure our fleet is properly maintained. Tractors are routed to appropriate maintenance facilities at designated mileage intervals or 90 days, whichever occurs first. Trailers are scheduled for maintenance every 90 days.

Customers

Revenue is generated by customers dispersed primarily throughout the United States and North America. In 2013, our largest customer accounted for approximately 2.6% of our revenue and our largest 5, 10 and 20 customers accounted for approximately 9.4%, 14.3% and 21.2% of our revenue, respectively. For each of the previous three years, more than 90% of our revenue was derived from transporting LTL shipments for our customers and less than 5% of our revenue was generated from international services. We believe the diversity of our customer base helps protect our business from adverse developments in a single geographic region and from the reduction or loss of business from a single customer.

We utilize an integrated freight-costing system to determine the price level at which a particular shipment of freight will be profitable. We can modify elements of this freight-costing model to simulate the actual conditions under which the freight will be moved. Many of our customers engage our services through the terms and provisions of our tariffs and through negotiated service contracts. We also compete for business by participating in bid solicitations. Customers generally solicit bids for relatively large numbers of shipments for a period of one to two years and typically choose to enter into contractual arrangements with a limited number of motor carriers based upon price and service.

Seasonality

Our operations are subject to seasonal trends common in the trucking industry. Our operating margins in the first quarter are normally lower due to reduced demand during the winter months. Harsh weather can also adversely affect our performance by reducing demand and reducing our ability to transport freight, which could result in decreased revenue and increased operating expenses.

Technology

We continually upgrade and enhance our technological capabilities, and we provide access to our systems through multiple gateways that offer our customers maximum flexibility and immediate access to information. We employ vehicle safety systems, on-board and hand-held computer systems, freight handling systems and logistics technology to reduce costs and transit times. We continue to focus on the development and enhancement of the technology used in our operations in order to improve the efficiency and effectiveness of our services.

Insurance

We carry a significant amount of insurance with third-party insurance carriers, but we are exposed to the risk of loss on claims up to the limit for which we hold either a self-insured retention ("SIR") or deductible. At December 31, 2013, the amounts for our SIR and/or deductibles were as follows: $2.75 million per occurrence for bodily injury and property damage (“BIPD”) claims, $100,000 per claim for cargo loss and damage, $1.0 million per occurrence for workers’ compensation claims and $400,000 per occurrence (with a $400,000 aggregate over our retention level) for group health claims.


7



We believe that our policy of maintaining an SIR or deductible for a portion of our risks, supported by our safety and loss prevention programs, is an effective means of managing insurance costs. We periodically review our risks and insurance coverage applicable to those risks and we believe that we maintain sufficient insurance coverage.

Diesel Fuel Availability and Cost

Our industry depends heavily upon the availability of diesel fuel. Although we currently maintain fuel storage and pumping facilities at 58, or 26%, of our service center locations, we may be susceptible to fuel shortages at certain locations that could cause us to incur additional expense to help ensure adequate supply on a timely basis to prevent a disruption to our service schedules.

Diesel fuel costs, including fuel taxes, totaled 13.2%, 14.3% and 14.9% of revenue in 2013, 2012 and 2011, respectively. We believe our operations and financial condition are susceptible to the same diesel fuel price increases or shortages as those of our competitors. We implemented a fuel surcharge program in August 1999, which has remained in effect since that time and is one of many components that we use to determine the overall price for our transportation services. Our fuel surcharges are generally indexed to fuel prices published by the U.S. Department of Energy (the “DOE”) that reset each week.

Employees

As of December 31, 2013, we employed 14,073 individuals on a full-time basis, none of which were represented under a collective bargaining agreement. Our full-time employees work in the following roles:
Full-Time Employees
 
Number of
Employees
Drivers
 
7,480

Platform
 
2,260

Sales
 
518

Fleet technicians
 
481

Salaried, clerical and other
 
3,334

 
 
 
Total
 
14,073


As of December 31, 2013, we employed 3,791 linehaul drivers and 3,689 P&D drivers on a full-time basis. We select our drivers primarily based upon safe driving records and experience. Among other requirements, our drivers must pass a drug test, have a current U.S. Department of Transportation (“DOT”) physical and have a valid commercial driver’s license prior to employment. Once employed, drivers are required to obtain and maintain hazardous materials endorsements to their commercial driver’s licenses. Drivers, as well as all employees, are required to take pre-employment drug and alcohol tests and are randomly selected for periodic additional testing.

Since 1988, we have provided the opportunity for qualified employees to become drivers through the “Old Dominion Driver Training Program.” There are currently 1,975 active drivers who have successfully completed this training, which was approximately 26% of our driver workforce as of December 31, 2013. We believe our driver training and qualification programs have been important factors in improving our safety record and retaining qualified drivers. We reward our drivers who maintain safe driving records through bonuses of up to $3,000 per driver payable each year. Our driver safety bonuses totaled $2.8 million, $2.6 million and $2.3 million in 2013, 2012 and 2011, respectively. In addition, we have experienced an annual turnover rate for our driver graduates of approximately 6.0%, which is below our Company-wide turnover rate for all drivers of approximately 10.4%.

At December 31, 2013, we had a sales staff of 518 employees. We compensate our sales force, in part, based upon certain operating metrics to help motivate our sales employees to achieve our service, growth and profitability objectives.

Governmental Regulation

We are subject to regulation by many federal governmental agencies, including the Federal Motor Carrier Safety Administration (the “FMCSA”), the Pipeline and Hazardous Materials Safety Agency and the Surface Transportation Board, which are agencies within the DOT. We are also subject to rules and regulations of various state agencies. These regulatory authorities have broad powers, generally governing matters such as authority to engage in motor carrier operations, motor carrier registration, driver hours of service, safety and fitness of transportation equipment and drivers, certain mergers,

8



consolidations and acquisitions and periodic financial reporting. In addition, we are subject to compliance with cargo-security and transportation regulations issued by the Transportation Security Administration ("TSA") within the U.S. Department of Homeland Security.

In October 2009, the U.S. Court of Appeals for the District of Columbia Circuit ordered the FMCSA to review and re-issue rules governing hours of service for commercial truck drivers by July 26, 2011. This deadline was extended and on December 22, 2011, the FMCSA issued its final rule, which mandated compliance by July 1, 2013. The final rule reduces the maximum number of hours a truck driver can work each week to 70 hours from the former 82-hour limit. The rule maintains a maximum 11-hour daily driving limit, but requires drivers to take a 30-minute break prior to working beyond eight hours. The rule also includes changes to the “34-hour restart” provision. Implementation of the new rule has required certain changes in our operating procedures and has increased our operating costs by limiting the productivity of our drivers. As a result, we have hired additional drivers to supplement our labor requirements, which have increased our costs. While we are unable to fully quantify all of the effects of implementing the new rule, we do not believe these additional costs had a material impact on our operating costs. We are, however, subject to future rulemaking by the FMCSA and other regulatory agencies, which could be more stringent, require additional changes to our operations, increase our operating costs or otherwise adversely impact our results of operations.

The trucking industry is subject to regulatory and legislative changes from a variety of other governmental authorities, which address matters such as: (i) increasingly stringent environmental and occupational safety and health regulations; (ii) limits on vehicle weight and size; (iii) ergonomics; (iv) port security; and (v) hours of service. These changes may affect our business or the economics of our industry by requiring changes in operating practices, or by influencing the demand for and increasing the costs of providing our services.

Environmental Regulation

We are subject to various federal, state and local environmental laws and regulations that focus on, among other things: the emission and discharge of hazardous materials into the environment or their presence at our properties or in our vehicles; fuel storage tanks; transportation of certain materials; and the discharge or retention of storm water. Under specific environmental laws, we could also be held responsible for any costs relating to contamination at our past or present facilities and at third-party waste disposal sites, as well as costs associated with clean-up of accidents involving our vehicles. We do not believe that the cost of future compliance with current environmental laws or regulations will have a material adverse effect on our operations, financial condition, competitive position or capital expenditures for the remainder of 2014. However, future changes to laws or regulations may adversely affect our operations and could result in unforeseen costs to our business.

Available Information

Through our website, http://www.odfl.com, we make available, free of charge, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as practicable after we electronically file the material with or furnish it to the U.S. Securities and Exchange Commission (the “SEC”). The public may read or copy any document we file with the SEC at the SEC’s website, http://www.sec.gov (File No. 0-19582), or at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549-2736. The SEC can be reached at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Information contained on our website is neither part of nor incorporated by reference into this Form 10-K or any other report we file with or furnish to the SEC.

ITEM 1A. RISK FACTORS

Various factors exist that could cause our actual results to differ materially from those projected in any forward-looking statement. In addition to the factors discussed elsewhere in this report, we believe the following are some of the important risks and uncertainties that could materially affect our business, financial condition or results of operations:

We operate in a highly competitive industry, and our business will suffer if we are unable to adequately address potential downward pricing pressures and other factors that may adversely affect our operations and profitability.

Numerous competitive factors could impair our ability to maintain our current profitability. These factors include, but are not limited to, the following:

we compete with other transportation service providers of varying sizes, some of which may have more equipment, a broader global network, a wider range of services, greater capital resources or other competitive advantages;

9



some of our competitors periodically reduce their prices to gain business, especially during times of reduced growth rates in the economy, which may limit our ability to maintain or increase prices or maintain revenue;
we may be unable to continue to collect fuel surcharges or our fuel surcharge program may become ineffective in mitigating the impact of fluctuating costs for fuel and other petroleum-based products;
many customers reduce the number of carriers they use by selecting “core carriers” as approved transportation service providers and we may not be selected;
many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress prices or result in the loss of some business to competitors;
some customers may choose to operate their own private trucking fleet or may choose to increase the volume of freight they transport if they have an existing private trucking fleet;
some customers may choose to consolidate certain LTL shipments through a different mode of transportation, such as truckload, intermodal or rail;
the trend towards consolidation in the ground transportation industry may create other large carriers with greater financial resources and other competitive advantages relating to their size;
advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher prices to cover the cost of these investments; and
competition from non-asset-based logistics and freight brokerage companies may adversely affect our customer relationships and ability to maintain sufficient pricing.

If we are unable to effectively compete with other LTL carriers, whether on the basis of price, service or otherwise, we may be unable to retain existing customers or attract new customers, either of which could have a material adverse effect on our business, financial condition and results of operations.

If our employees were to unionize, our operating costs would increase and our ability to compete would be impaired.

None of our employees are currently represented under a collective bargaining agreement. However, from time to time there have been efforts to organize our employees at various service centers. Further, Congress or one or more states could approve legislation and/or the National Labor Relations Board could render decisions or implement rule changes that could significantly affect our business and our relationship with our employees, including actions that could substantially liberalize the procedures for union organization. In addition, we can offer no assurance that the Department of Labor will not adopt new regulations or interpret existing regulations in a manner that would favor the agenda of unions, or that our employees will not unionize in the future, particularly if regulatory changes occur that facilitate unionization.

The unionization of our employees could have a material adverse effect on our business, financial condition and results of operations because:

some shippers have indicated that they intend to limit their use of unionized trucking companies because of the threat of strikes and other work stoppages;
restrictive work rules could hamper our efforts to improve and sustain operating efficiency;
restrictive work rules could impair our service reputation and limit our ability to provide next-day services;
a strike or work stoppage would negatively impact our profitability and could damage customer and employee relationships; and
an election and bargaining process could divert management’s time and attention from our overall objectives and impose significant expenses.


10



If we are unable to successfully execute our growth strategy, our business and future results of operations may suffer.

Our growth strategy includes increasing the volume of freight moving through our existing service center network, selectively expanding our geographic footprint and broadening the scope of our service offerings. In connection with our growth strategy, at various times, we have made selective acquisitions, purchased additional equipment, expanded and upgraded service centers and increased our sales and marketing efforts, and we expect to continue to do so. Our growth strategy exposes us to a number of risks, including the following:

geographic expansion requires start-up costs that could expose us to temporary losses;
shortages of suitable real estate may limit our growth and geographic expansion and might cause congestion in our service center network, which could result in increased operating expenses;
growth may strain our management, capital resources, information systems and customer service;
hiring new employees may increase training costs and may result in temporary inefficiencies until those employees become proficient in their jobs; and
expanding our service offerings may require us to enter into new markets and encounter new competitive challenges.

We cannot assure that we will overcome the risks associated with our growth strategy. If we fail to overcome those risks, we may not realize additional revenue or profits from our efforts, we may incur additional expenses and, therefore, our financial position and results of operations could be materially and adversely affected.

We may be unable to successfully consummate and integrate acquisitions as part of our growth strategy.

Growth through acquisitions has been a key component of our LTL growth strategy throughout our history. In the future, we may seek to acquire other LTL carriers as well as other complementary businesses. Exploration of potential acquisitions requires significant attention from our senior management team. In addition, we expect to compete for acquisition opportunities with other companies, some of which may have greater financial and other resources than we do. We cannot assure that we will
have sufficient cash with which to consummate an acquisition or otherwise be able to obtain financing for any acquisition. If we are unable to access sufficient funding for potential acquisitions, we may not be able to complete transactions that we otherwise find advantageous.

Any subsequent acquisition will entail numerous risks, including:
we may not achieve anticipated levels of revenue, efficiency, cash flows and profitability;
we may experience difficulties managing businesses that are outside our historical core competency and markets;
we may underestimate the resources required to support acquisitions, which could disrupt our ongoing business and distract our management;
we may incur unanticipated costs to our infrastructure to support new business lines or separate legal entities;
we may be required to temporarily match existing customer pricing in the acquiree’s markets, which may be lower than the rates that we would typically charge for our services;
liabilities we assume could be greater than our original estimates or may not be disclosed to us at the time of acquisition;
we may incur additional indebtedness or we may issue additional equity to finance future acquisitions, which could be dilutive to our shareholders;
potential loss of key employees and customers of the acquired company; and
an inability to recognize projected cost savings and economies of scale.

In addition, we may have difficulty integrating any acquired business and its operations, services and personnel into our existing operations, and such integration may require a significant amount of time and effort by our management team. To the extent we do not successfully avoid or overcome the risks or problems resulting from any acquisitions we undertake, there could be a material adverse effect on our business, financial condition and results of operations.


11



Our customers’ and suppliers’ business may be impacted by a downturn in the economy and/or a disruption of financial markets, which may decrease demand for our services.

Adverse economic conditions can negatively affect our customers’ business levels, the amount of transportation services they need, their ability to pay for our services and overall freight levels, all of which might impair our asset utilization. Customers encountering adverse economic conditions may be unable to obtain additional financing, or financing under acceptable terms, due to disruptions in the capital and credit markets. These customers represent a greater potential for bad debt losses, which may require us to increase our reserve for bad debt. Economic conditions resulting in bankruptcies of one or more of our large customers could have a significant impact on our financial position, results of operations or liquidity in a particular year or quarter. Further, when adverse economic times arise customers may bid out freight or select competitors that offer lower rates in an attempt to lower their costs and we might be forced to lower our rates or lose freight.

Our suppliers’ business levels also may be negatively affected by adverse economic conditions or financial constraints, which could lead to disruptions in the supply and availability of equipment, parts and services critical to our operations. A significant interruption in our normal supply chain could disrupt our operations, increase our costs and negatively impact our ability to serve our customers.

We also are subject to cost increases outside of our control that could materially reduce our profitability if we are unable to increase our rates sufficiently. Such cost increases include, but are not limited to, increases in fuel prices, driver wages, interest rates, taxes, tolls, license and registration fees, insurance, revenue equipment and healthcare for our employees.

Increases in driver compensation or other difficulties attracting and retaining qualified drivers could adversely affect our profitability and ability to maintain or grow our fleet.

From time to time we have experienced difficulty in attracting and retaining sufficient numbers of qualified drivers and such shortages may recur in the future. Because of the intense competition for drivers, we may face difficulty maintaining or increasing our number of drivers. The compensation we offer our drivers is subject to market conditions that may require increases in driver compensation, which becomes more likely as economic conditions improve. If we are unable to attract and retain a sufficient number of drivers, we could be required to adjust our compensation packages, or operate with fewer trucks and face difficulty meeting shipper demands, all of which could adversely affect our profitability and ability to maintain our size or grow.

Insurance and claims expenses could significantly reduce our profitability.

We are exposed to claims related to cargo loss and damage, property damage, personal injury, workers’ compensation, group health and group dental. We have insurance coverage with third-party insurance carriers, but we assume a significant portion of the risk associated with these claims due to our SIRs and deductibles. Our operating results would be adversely affected if any of the following were to occur: (i) the number or severity of claims increases; (ii) we are required to accrue or pay additional amounts because the claims prove to be more severe than our original assessment; or (iii) claims exceed our excess coverage amounts. If claims exceed our retention or deductible levels or insurance market conditions change, insurers could raise premiums for excess coverage to cover their expenses and anticipated future losses. In addition, insurance companies require us to obtain letters of credit to collateralize our retention or deductible levels. If these requirements increase, our borrowing capacity could be adversely affected.

Healthcare legislation may increase our costs and reduce our future profitability.

To attract and retain employees, we maintain a competitive health insurance plan for our employees and their dependents. The Patient Protection and Affordable Care Act, which was signed into law in 2010 and has several provisions not yet in effect, is expected to increase our annual employee healthcare costs going forward. We cannot predict the impact that this legislation, or any future state or federal healthcare legislation or regulation, will have on our operations. However, rising healthcare costs and universal healthcare coverage in the United States could result in significant long-term costs to us, which could have a material adverse effect on our operating results. In addition, rising healthcare costs could force us to make further changes to our benefits program, which could negatively impact our ability to attract and retain employees.


12



We have significant ongoing cash requirements that could limit our growth and affect our profitability if we are unable to obtain sufficient capital.

Our business is highly capital intensive. We generally finance our capital expenditures and planned growth with existing cash, cash flow from operations, issuance of debt and through available borrowings under our existing senior unsecured credit agreement. We may require additional capital to finance long-term real estate purchase opportunities and acquisitions, which we may fund through additional debt or through equity offerings. If we are unable in the future to generate sufficient cash from our operations or raise capital by accessing the debt and equity markets, we may be forced to limit our growth and operate our equipment for longer periods of time, which could have a material adverse effect on our operating results.

Our business also has significant ongoing operating cash requirements. If our cash requirements are high or our cash flow from operations is low during particular periods, we may need to seek additional financing, which could be costly or difficult to obtain.

Limited supply and increased prices for new equipment may adversely affect our earnings and cash flow.

We may face difficulty in purchasing new equipment due to decreased supply and increased costs. Investment in new equipment is a significant part of our annual capital expenditures and we require an available supply of tractors and trailers from equipment manufacturers to operate and grow our business. We are also subject to shortages in raw materials that are required for the production of critical operating equipment and supplies, such as shortages in rubber or steel.

The price of our equipment may also be adversely affected in the future by regulations on newly manufactured tractors and diesel engines. We have incurred significant increases in the cost of tractors due to regulations issued by the U.S. Environmental Protection Agency (the “EPA”) and various state agencies that require progressive reductions in exhaust emissions from diesel engines. Beginning in October 2002, new diesel engines were required to meet these new emission limits. Some of the regulations required reductions in the sulfur content of diesel fuel beginning in June 2006 and the introduction of emissions after-treatment devices on newly-manufactured engines and vehicles beginning with model-year 2007. The final phase of these regulations required reduced nitrogen and non-methane hydrocarbon emissions beginning with model-year 2010. Beginning in 2013, these regulations also required that all heavy-duty diesel engines built for highway applications over 14,000 pounds include certified onboard diagnostics systems to monitor emissions. These regulations have resulted in higher prices for tractors and diesel engines and increased operating and maintenance costs, and there can be no assurance that continued increases in pricing or costs will not have an adverse effect on our business and results of operations.

We may be adversely impacted by fluctuations in the availability and price of diesel fuel.

Diesel fuel is a critical component of our operations and a significant operating expense for our business. Diesel fuel prices and fuel availability can be impacted by factors beyond our control, such as natural or man-made disasters, adverse weather conditions, political events, price and supply decisions by oil producing countries and cartels, terrorist activities, armed conflict and world supply and demand imbalances. We maintain fuel storage and pumping facilities at many of our service center locations; however, we may be susceptible to fuel shortages at certain locations that could cause us to incur additional expense to ensure adequate supply on a timely basis to prevent a disruption to our service schedules. An interruption in the supply of diesel fuel could have a material adverse effect on our operating results.

We do not hedge against the risk of diesel fuel price increases. An increase in diesel fuel prices or diesel fuel taxes, or any change in federal or state regulations that results in such an increase, could have a material adverse effect on our operating results. We have fuel surcharge programs in place with a majority of our customers, which help offset the negative impact of the increased cost of diesel fuel and other petroleum-based products. However, we also incur fuel costs that cannot be recovered even with respect to customers with which we maintain fuel surcharge programs, such as those costs associated with empty miles or the time when our engines are idling. Because our fuel surcharge recovery lags behind changes in fuel prices, our fuel surcharge recovery may not capture the increased costs we pay for fuel, especially when prices are rising, leading to fluctuations in our levels of reimbursement. We regularly monitor the components of our pricing, including fuel surcharges, and address individual account profitability issues with our customers when necessary; however, there can be no assurance that fuel surcharges can be maintained indefinitely or will be sufficiently effective in offsetting increases in diesel fuel prices.


13



We are subject to various environmental laws and regulations, and costs of compliance with, liabilities under, or violations of, existing or future environmental laws or regulations could adversely affect our business.

We are subject to various federal, state and local environmental laws and regulations that govern, among other things, the emission and discharge of hazardous materials into the environment, the presence of hazardous materials at our properties or in our vehicles, fuel storage tanks, the transportation of certain materials and the discharge or retention of storm water. Under certain environmental laws, we could also be held responsible for any costs relating to contamination at our past or present facilities and at third-party waste disposal sites, as well as costs associated with the clean-up of accidents involving our vehicles. Environmental laws have become and are expected to continue to be increasingly more stringent over time, and there can be no assurance that our costs of complying with current or future environmental laws or liabilities arising under such laws will not have a material adverse effect on our business, operations or financial condition.

In addition to the EPA regulations on exhaust emissions with which we must comply, there is an increased regulatory focus on climate change and greenhouse gas emissions in the United States. As a result, we may become subject to additional legislation or rulemaking that could adversely impact our business. Any future limitations on the emission of greenhouse gases or other environmental legislation could increase our future capital expenditures and have an adverse impact on our financial condition, results of operations and liquidity.

We are subject to the risks of litigation and governmental proceedings, which could adversely affect our business.

We are, and in the future may be, subject to legal and governmental proceedings and claims. The parties in such legal actions may seek amounts from us that may not be covered in whole or in part by insurance. Defending ourselves against such legal actions could result in significant costs and could require a substantial amount of time and effort by our management team. We cannot predict the outcome of litigation or governmental proceedings to which we are a party or whether we will be subject to future legal actions. As a result, the potential costs associated with legal actions against us could adversely affect our business, financial condition or results of operations.

We are subject to various risks arising from our international business operations and relationships, which could adversely affect our business.

We arrange for transportation and logistics services to and from various international locations and are subject to both the risks of conducting international business and the requirements of the Foreign Corrupt Practices Act of 1977 (the "FCPA"). Failure to comply with the FCPA may result in legal claims against us.  In addition, we face other risks associated with international operations and relationships, which may include restrictive trade policies, imposition of duties, taxes or government royalties imposed by foreign governments.

We operate in a highly regulated industry, and increased costs of compliance with, or liability for violation of, existing or future regulations could have a material adverse effect on our business.

We are regulated by the DOT and by various state agencies. These regulatory authorities have broad powers, generally governing matters such as authority to engage in motor carrier operations, as well as motor carrier registration, driver hours of service, safety and fitness of transportation equipment and drivers, transportation of hazardous materials, certain mergers and acquisitions and periodic financial reporting. In addition, the trucking industry is subject to regulatory and legislative changes from a variety of other governmental authorities, which address matters such as: (i) increasingly stringent environmental, occupational safety and health regulations; (ii) limits on vehicle weight and size; (iii) ergonomics; (iv) port security; and (v) hours of service. In addition, we are subject to compliance with cargo-security and transportation regulations issued by the TSA within the U.S. Department of Homeland Security. Regulatory requirements, and changes in regulatory requirements, may affect our business or the economics of the industry by requiring changes in operating practices or by influencing the demand for and increasing the costs of providing transportation services.

In October 2009, the U.S. Court of Appeals for the District of Columbia Circuit ordered the FMCSA to review and re-issue rules governing hours of service for commercial truck drivers by July 26, 2011. This deadline was extended and on December 22, 2011, the FMCSA issued its final rule, which mandated compliance by July 1, 2013. The final rule reduces the maximum number of hours a truck driver can work each week to 70 hours from the former 82-hour limit. The rule maintains a maximum 11-hour daily driving limit, but requires drivers to take a 30-minute break prior to working beyond eight hours. The rule also includes changes to the “34-hour restart” provision. Implementation of the new rule has required certain changes in

14



our operating procedures and increased our operating costs by limiting the productivity of our drivers. As a result, we have hired additional drivers to supplement our labor requirements, which have increased our costs. While we are unable to fully quantify all of the effects of implementing the new rule, we do not believe these additional costs had a material impact on our operating costs. We are, however, subject to future rulemaking by the FMCSA and other regulatory agencies, which could be more stringent, require additional changes to our operations, increase our operating costs or otherwise adversely impact our results of operations.

The FMCSA’s Compliance, Safety, Accountability initiative (“CSA”) could adversely impact our ability to hire qualified drivers, meet our growth projections and maintain our customer relationships, each of which could adversely impact our results of operations.

The CSA includes compliance and enforcement initiatives designed to monitor and improve commercial motor vehicle safety by measuring the safety record of both the motor carrier and the driver. These measurements are scored and used by the FMCSA to identify potential safety risks and to direct enforcement action. CSA scores for transportation companies are currently available on the FMCSA’s website.

Our CSA scores are dependent upon our safety and compliance experience, which could change at any time. In addition, the safety standards prescribed in CSA could change and our ability to maintain an acceptable score could be adversely impacted. If we receive an unacceptable CSA score, our relationships with our customers could be damaged, which could result in a loss of business.

The requirements of CSA could shrink the industry’s pool of drivers as those with unfavorable scores could leave the industry. As a result, the costs to attract, train and retain qualified drivers could increase. In addition, a shortage of qualified drivers could increase driver turnover, decrease asset utilization, limit growth and adversely impact our results of operations.

Our results of operations may be affected by seasonal factors and harsh weather conditions.

Our operations are subject to seasonal trends common in the trucking industry. Our operating margins in the first quarter are normally lower due to reduced demand during the winter months. Harsh weather can also adversely affect our performance by reducing demand and reducing our ability to transport freight, which could result in decreased revenue and increased operating expenses.

If we are unable to retain our key employees, our financial condition, results of operations and liquidity could be adversely affected.

Our success will continue to depend upon the experience and leadership of our key employees and executive officers. In that regard, the loss of the services of any of our key personnel could have a material adverse effect on our financial condition, results of operations and liquidity.

Our principal shareholders control a large portion of our outstanding common stock.

Earl E. Congdon, David S. Congdon, John R. Congdon, Jr. and members of their respective families beneficially own an aggregate of approximately 27% of the outstanding shares of our common stock. As long as the Congdon family controls a large portion of our voting stock, they may be able to significantly influence the election of the entire Board of Directors and the outcome of all matters involving a shareholder vote. The Congdon family’s interests may differ from the interests of other shareholders and the status of their ownership could change at their discretion.

Our financial results may be adversely impacted by potential future changes in accounting practices.

Future changes in accounting standards or practices, and related legal and regulatory interpretations of those changes, may adversely impact public companies in general, the transportation industry or our operations specifically. New accounting standards or requirements, such as a conversion from U.S. generally accepted accounting principles to International Financial Reporting Standards, could change the way we record revenues, expenses, assets and/or liabilities or could be costly to implement. These types of regulations could have a negative impact on our financial position, liquidity, results of operations and/or access to capital.


15



Our information technology systems are subject to certain risks that we cannot control.

We are reliant on our information systems for our operations as well as providing a value-added service to our customers. Our information systems, including our accounting systems, are dependent upon third-party software, global communications providers, data network systems and other aspects of technology and Internet infrastructure that are susceptible to failure or an adverse cyber incident. Although we have implemented redundant systems and network security measures, our information technology remains susceptible to interruptions caused by natural disasters, outages, computer viruses, break-ins and similar disruptions. Such an event could inhibit our ability to provide services to our customers and the ability of our customers to access our systems. In addition, there could be a loss of confidential information, corruption of data and damage to our brand image. This may result in a reduction in demand for our services or the loss of customers that could have a negative impact on our financial condition, results of operations and liquidity.

Misuse of social media outlets could damage our reputation and adversely affect our financial condition.

Customers, competitors, employees and other individuals continue to increase the use of social media outlets, and we maintain and manage our own corporate presence through various social media outlets. We support new ways of sharing data and communicating through these social media outlets. However, information distributed via social networking could result in unfavorable publicity about us being disseminated quickly and broadly. This unfavorable publicity could damage our reputation and may result in a reduction in demand for our services or the loss of customers that could have a negative impact on our financial condition, results of operations and liquidity.

A decrease in the demand and value of used equipment may impact our results of operations.

As we purchase new tractors as part of our normal replacement cycle each year, we rely on the used equipment market to dispose of our older equipment. Oversupply in the transportation industry as well as adverse domestic and foreign economic conditions can negatively impact the demand for used tractors and, therefore, reduce the value we can obtain on our used equipment. If we are unable to sell our older equipment at or above salvage value, the resulting losses could have a significant impact on our results of operations.

If we raise additional capital in the future, your ownership in us could be diluted.

Any issuance of equity we may undertake in the future to raise additional capital could cause the price of our common stock to decline, or require us to issue shares at a price that is lower than that paid by holders of our common stock in the past, which would result in those newly issued shares being dilutive. If we obtain funds through a credit facility or through the issuance of debt or preferred securities, these obligations and securities would likely have rights senior to your rights as a common shareholder, which could impair the value of our common stock.

The market value of our common stock may fluctuate and could be substantially affected by various factors.

The price of our common stock on the NASDAQ Global Select Market constantly changes. We expect that the market price of our common stock will continue to fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include, among others:

Actual or anticipated variations in earnings, financial or operating performance or liquidity;
Changes in analysts’ recommendations or projections;
Failure to meet analysts’ projections;
General economic and capital market conditions;
Announcements of developments related to our business;
Operating and stock performance of other companies deemed to be peers;
Actions by government regulators; and
News reports of trends, concerns and other issues related to us or our industry, including changes in regulations.


16



Our common stock price may fluctuate significantly in the future, and these fluctuations may be unrelated to our performance. General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price of our common stock may not be indicative of future market prices.

Our articles of incorporation, our bylaws and Virginia law contain provisions that could discourage, delay or prevent a change in our control or our management.

Provisions of our articles of incorporation, bylaws and the laws of Virginia, the state in which we are incorporated, may discourage, delay or prevent a change in control of us or a change in management that shareholders may consider favorable. These provisions:

limit who may call a special meeting of shareholders;
require shareholder action by written consent to be unanimous;
establish advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon at shareholder meetings;
may make it difficult to merge with or otherwise absorb a Virginia corporation acquired in a tender offer for the three years after the acquisition; and
may make an unsolicited attempt to gain control of us more difficult by restricting the right of specified shareholders to vote newly acquired large blocks of stock.

These provisions could discourage proxy contests and make it more difficult for you and other shareholders to take certain corporate actions. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We own our principal executive office located in Thomasville, North Carolina, consisting of a two-story office building of approximately 160,000 square feet on 30.1 acres of land. At December 31, 2013, we operated 221 service centers, of which 158 were owned and 63 were leased. Our service centers that are owned include most of our larger facilities and account for 83.5% of the total door capacity in our network. With the exception of our Chicago, Illinois facility, which has a lease that expires in 2021, we own our major breakbulk facilities. Each of our major breakbulk facilities is listed below with the number of doors as of December 31, 2013.
Service Center
  
Doors
Morristown, Tennessee
  
347
Indianapolis, Indiana
  
318
Harrisburg, Pennsylvania
  
300
Rialto, California
  
265
Dallas, Texas
  
234
Atlanta, Georgia
  
227
Greensboro, North Carolina
  
219
Memphis, Tennessee
  
169
Chicago, Illinois
  
134
Salt Lake City, Utah
  
129

Our 221 facilities are strategically dispersed over the states in which we operate. At December 31, 2013, the terms of our leased properties ranged from month-to-month to a lease that expires in 2023. We believe that as current leases expire, we will be able to renew them or find comparable facilities without incurring any material negative impact on service to our customers or our operating results.

17




We also own 18 non-operating service center properties. Eleven of these properties are leased to third parties with lease terms that range from month-to-month to a lease that expires in 2017.

We believe that all of our properties are in good repair and are capable of providing the level of service required by current business levels and customer demands. In addition, we believe we have sufficient capacity in our service center network to accommodate a substantial increase in demand for our services.

ITEM 3. LEGAL PROCEEDINGS

We are involved in various legal proceedings and claims that have arisen in the ordinary course of our business that have not been fully adjudicated, some of which are covered in part by insurance. Our management does not believe that these actions, when finally concluded and determined, will have a material adverse effect upon our financial position, liquidity or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock and Dividend Information

Our common stock is traded on the NASDAQ Global Select Market ("Nasdaq") under the symbol ODFL. At February 19, 2014, there were 32,642 holders of our common stock, including 159 shareholders of record. We did not pay any dividends on our common stock during fiscal year 2013 or 2012, and we have no current plans to declare or pay any dividends on our common stock during fiscal year 2014. For information concerning restrictions on our ability to make dividend payments, see Liquidity and Capital Resources in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 2 in Item 8, “Financial Statements and Supplementary Data” of this report.

On August 13, 2012, we announced a three-for-two common stock split for shareholders of record as of the close of business on the record date, August 24, 2012. On September 7, 2012 those shareholders received one additional share of common stock for every two shares owned. In lieu of fractional shares, shareholders received a cash payment based on the average of the high and low sales prices of our common stock on the record date.

The following table sets forth the high and low sales price of our common stock for the periods indicated, as reported by Nasdaq and as adjusted to give effect to the three-for-two stock split effected in September 2012:
 
 
2013
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
 
High
 
$
38.76

 
$
44.00

 
$
47.66

 
$
53.34

Low
 
$
34.58

 
$
35.17

 
$
41.93

 
$
45.15

 
 
 
2012
 
 
First
Quarter
 
Second
Quarter
 
Third
Quarter
 
Fourth
Quarter
 
 
High
 
$
32.87

 
$
32.77

 
$
32.06

 
$
35.13

Low
 
$
25.54

 
$
27.04

 
$
26.12

 
$
28.75



18



Performance Graph

The following graph compares the total shareholder cumulative returns, assuming the reinvestment of all dividends, of $100 invested on December 31, 2008, in (i) our common stock, (ii) the NASDAQ Trucking & Transportation Stocks and (iii) The NASDAQ Stock Market (US) for the five-year period ended December 31, 2013:
 

Cumulative Total Return
 
 
12/31/08
 
12/31/09
 
12/31/10
 
12/31/11
 
12/31/12
 
12/31/13
Old Dominion Freight Line, Inc..............................
 
$
100

 
$
108

 
$
169

 
$
214

 
$
271

 
$
419

NASDAQ Trucking & Transportation Stocks.........
 
$
100

 
$
117

 
$
161

 
$
136

 
$
143

 
$
190

The NASDAQ Stock Market (US)..........................
 
$
100

 
$
144

 
$
170

 
$
171

 
$
202

 
$
282



19




ITEM 6. SELECTED FINANCIAL DATA
 
 
 
Year Ended December 31,
(In thousands, except per share amounts
 
 
 
 
 
 
 
 
 
 
and operating statistics)
 
2013
 
2012
 
2011
 
2010
 
2009
Operating Data:
 
 
 
 
 
 
 
 
 
 
Revenue from operations (1)
 
$
2,337,648

 
$
2,134,579

 
$
1,903,800

 
$
1,501,848

 
$
1,260,088

Depreciation and amortization expense (2)
 
127,072

 
110,743

 
90,820

 
80,362

 
94,784

Total operating expenses (1)
 
1,999,210

 
1,849,325

 
1,669,728

 
1,364,109

 
1,189,697

Operating income
 
338,438

 
285,254

 
234,072

 
137,739

 
70,391

Interest expense, net (3)
 
9,473

 
11,428

 
13,887

 
12,465

 
12,998

Provision for income taxes
 
122,573

 
103,646

 
80,614

 
48,775

 
22,294

Net income
 
206,113

 
169,452

 
139,470

 
75,651

 
34,871

Per Share Data:
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share (4)
 
2.39

 
1.97

 
1.63

 
0.90

 
0.42

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Cash, cash equivalents
 
30,174

 
12,857

 
75,850

 
5,450

 
4,171

Current assets
 
332,979

 
275,028

 
331,852

 
222,582

 
174,175

Total assets
 
1,932,089

 
1,712,514

 
1,513,074

 
1,239,881

 
1,159,278

Current liabilities
 
232,122

 
225,139

 
204,810

 
170,046

 
148,125

Long-term debt (including current maturities)
 
191,429

 
240,407

 
269,185

 
271,217

 
305,532

Shareholders’ equity
 
1,232,082

 
1,025,969

 
856,519

 
668,649

 
593,000

Operating Statistics:
 
 
 
 
 
 
 
 
 
 
Operating ratio (1)
 
85.5
%
 
86.6
%
 
87.7
%
 
90.8
%
 
94.4
%
Revenue per hundredweight (1)
 
$
15.85

 
$
15.53

 
$
14.88

 
$
13.28

 
$
12.85

Revenue per intercity mile (1)
 
$
5.24

 
$
5.08

 
$
4.89

 
$
4.44

 
$
4.21

Intercity miles (in thousands)
 
446,532

 
420,214

 
389,588

 
338,504

 
299,330

Total tons (in thousands)
 
7,385

 
6,875

 
6,397

 
5,656

 
4,902

Total shipments (in thousands)
 
8,279

 
7,765

 
7,256

 
6,327

 
5,750

Average length of haul (miles)
 
936

 
941

 
952

 
948

 
928

 
(1)
Our prior-period results have been adjusted for an immaterial correction related to how we present the costs of purchased transportation for certain truckload brokerage and international freight forwarding services. For more information on these adjustments, see Note 1 to the Financial Statements included in Item 8, "Financial Statements and Supplementary Data" below.
(2)
Our 2010 results reflect a reduction in depreciation and amortization expense of $12.7 million, which was due to a change in estimate resulting from an evaluation of estimated useful lives and salvage values for our equipment. We determined that useful lives should be extended and salvage values should be reduced for certain equipment effective January 1, 2010.
(3)
For the purpose of this table, interest expense is presented net of interest income.
(4)
Per share data has been restated retroactively for the three-for-two stock splits effected in September 2012 and August 2010.


20



ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

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

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

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

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

Weight Per Shipment – Fluctuations in weight per shipment can indicate changes in the 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. Increases in weight per shipment may also reflect growth of our container delivery services, as the weight for a container shipment is significantly higher than a traditional LTL shipment. Changes in weight per shipment generally have an inverse effect on our revenue per hundredweight, as an increase in weight per shipment will typically cause a decrease in revenue per hundredweight.

Average Length of Haul – We consider lengths of haul less than 500 miles to be regional traffic, lengths of haul between 500 miles and 1,000 miles to be inter-regional traffic, and lengths of haul in excess of 1,000 miles to be national traffic. This metric is used to analyze our tonnage and pricing trends for shipments with similar characteristics, and also allows 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 that is measured by our revenue per service center. 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 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; fuel and equipment repair expenses; and depreciation of our equipment fleet and service center facilities. We gauge our overall success in managing these costs by monitoring our operating ratio, a measure of profitability calculated by dividing total operating expenses by revenue, which also allows industry-wide comparisons with our competition.


21



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

Results of Operations

The following table sets forth, for the years indicated, expenses and other items as a percentage of revenue from operations:
 
 
 
2013
 
2012
 
2011
Revenue from operations (1)
 
100.0
%
 
100.0
%
 
100.0
%
Operating expenses:
 
 
 
 
 
 
Salaries, wages and benefits
 
50.1

 
50.0

 
50.2

Operating supplies and expenses
 
16.5

 
17.7

 
18.7

General supplies and expenses
 
3.0

 
2.8

 
2.6

Operating taxes and licenses
 
3.1

 
3.2

 
3.3

Insurance and claims
 
1.3

 
1.4

 
1.5

Communication and utilities
 
1.0

 
0.9

 
1.0

Depreciation and amortization
 
5.4

 
5.2

 
4.8

Purchased transportation (1)
 
4.5

 
4.4

 
4.4

Building and office equipment rents
 
0.5

 
0.6

 
0.7

Miscellaneous expenses, net
 
0.1

 
0.4

 
0.5

Total operating expenses
 
85.5

 
86.6

 
87.7

Operating income
 
14.5

 
13.4

 
12.3

Interest expense, net (2)
 
0.4

 
0.6

 
0.7

Other expense, net
 

 

 

Income before income taxes
 
14.1

 
12.8

 
11.6

Provision for income taxes
 
5.3

 
4.9

 
4.3

Net income
 
8.8
%
 
7.9
%
 
7.3
%
 
(1)
Our prior-period results have been adjusted for an immaterial correction related to how we present the costs of purchased transportation for certain truckload brokerage and international freight forwarding services. For more information on these adjustments, see Note 1 to the Financial Statements included in Item 8, "Financial Statements and Supplementary Data" below.

(2)
For the purpose of this table, interest expense is presented net of interest income.
 



22



2013 Compared to 2012

Key financial and operating metrics for 2013 and 2012 are presented below:
 
 
2013
 
2012
 
Change
 
% Change
Work days
 
254

 
254

 

 

Revenue (in thousands)
 
$
2,337,648

 
$
2,134,579

 
$
203,069

 
9.5

Operating ratio
 
85.5
%
 
86.6
%
 


 


Net income (in thousands)
 
$
206,113

 
$
169,452

 
$
36,661

 
21.6

Diluted earnings per share
 
$
2.39

 
$
1.97

 
$
0.42

 
21.3

Total tons (in thousands)
 
7,385

 
6,875

 
510

 
7.4

Total shipments (in thousands)
 
8,279

 
7,765

 
514

 
6.6

Weight per shipment (lbs.)
 
1,784

 
1,771

 
13

 
0.7

Revenue per hundredweight
 
$
15.85

 
$
15.53

 
$
0.32

 
2.1

Revenue per shipment
 
$
282.78

 
$
274.92

 
$
7.86

 
2.9

Average length of haul (miles)
 
936

 
941

 
(5
)
 
(0.5
)

Our financial results for 2013 reflect the continued execution and success of our long-term strategies. We increased our revenue 9.5% in 2013 primarily through increased market share, as we continued to win share by providing a value proposition consisting of superior service at a fair and equitable price. With a focus on yield management and operating efficiencies, we were able to improve our margins, which increased earnings per diluted share 21.3%. As a result, our operating ratio improved by over 100 basis points for the fourth straight year to 85.5%, which is the best annual operating ratio our Company has ever produced.

Revenue

Our revenue increased $203.1 million, or 9.5% during 2013, which was a result of increases in both tonnage and price. As compared to 2012, tonnage increased 7.4% primarily due to a 6.6% increase in shipments and a 0.7% increase in weight per shipment. Our tonnage growth in 2013 was primarily due to increased market share, as our growth exceeded both the growth rate of the U.S. economy as well as the growth rate for the LTL industry.

Revenue per hundredweight increased 2.1% to $15.85 in 2013, which reflects our disciplined yield management process and a stable pricing environment. We believe that revenue per hundredweight is a good indicator of pricing trends; however, we manage our yield by focusing on individual customer profitability due to the influence of various factors on revenue per hundredweight, such as changes in fuel surcharges, weight per shipment, length of haul and mix of freight. The impact of these factors can result in changes to revenue per hundredweight that do not necessarily indicate actual changes in underlying rates.

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 16.1% of revenue in 2013 from 16.5% in 2012, primarily due to a slight decrease in the average price per gallon for diesel fuel. Most of our tariffs and contracts provide for a fuel surcharge, which is recorded as additional revenue, as diesel fuel prices increase above stated levels. These levels are generally indexed to the DOE’s published fuel prices that reset each week. We regularly monitor the components of our pricing, including base freight rates and fuel surcharges. We also address any individual account profitability issues with our customers as part of our effort to minimize the negative impact on our profitability that would likely result from a rapid and significant change in any of our operating expenses.

23




Operating Costs and Other Expenses

Salaries, wages and benefits increased $104.2 million, or 9.8% in 2013 due to a $72.2 million increase in the costs for salaries and wages and a $32.0 million increase in benefit costs. Of the total increase in salaries and wages, our direct labor costs for drivers, platform employees and fleet technicians increased $56.8 million, or 10.0% in 2013 as compared to 2012. The increase in the costs for our salaries and wages, excluding benefits, was due primarily to a 7.5% increase in average full-time employees over 2012 and the impact of wage increases provided to employees in September 2012 and 2013. We primarily increased our headcount in 2013 due to our increased volume of shipments as well as to ensure sufficient labor capacity for future revenue growth. We also hired additional drivers in the second half of 2013 to address inefficiencies that resulted from changes to the FMCSA’s hours-of-service regulations. Although our salaries and wages, excluding benefits, increased during 2013, these costs decreased as a percent of revenue to 37.2% from 37.4% in 2012 as a result of increased efficiencies within our operations. Our platform pounds handled per hour, P&D stops per hour and P&D shipments per hour improved 1.0%, 0.7% and 0.5%, respectively, over the prior-year period.

Employee benefit costs increased $32.0 million as a result of the increase in the number of full-time employees eligible for benefits; however, we also experienced a significant increase in the costs per employee for our group health and dental plans during 2013. Our group health and dental costs increased $14.5 million, or 14.7% in 2013 as compared to 2012, with the majority of the increase occurring in the second half of the year. We experienced significant increases in both the number of claims and the average severity per claim during 2013. We believe there will be additional costs associated with the ongoing implementation of the 2010 Patient Protection and Affordable Care Act, and consequently, we believe our group health and dental costs may continue to increase in future periods. Our employee benefit costs also increased for certain retirement benefit plans directly linked to the improvement in our net income and the share price of our common stock. Employee benefit costs as a percent of salaries and wages increased to 34.6% for 2013 from 33.7% for 2012.

Operating supplies and expenses increased $6.7 million in 2013 as compared to 2012. These costs as a percent of revenue improved to 16.5% of revenue in 2013 from 17.7% in 2012. This improvement is primarily due to a 100 basis point decrease as a percent of revenue for our cost of diesel fuel, excluding fuel taxes, which is the largest component of operating supplies and expenses, and can vary based on both consumption and average price per gallon. Much of this improvement is due to our diesel fuel consumption increasing only 3.5% as compared to the 6.3% increase in our intercity miles in 2013. Our consumption trends have improved due to a focus on improving our average miles per gallon, which has benefited from certain operational initiatives and the increased use of new fuel-efficient equipment. The average price per gallon of diesel fuel also decreased 2.3% as compared to 2012. We do not use diesel fuel hedging instruments and are therefore subject to market price fluctuations.

General supplies and expenses increased $10.9 million in 2013 primarily due to an overall increase in our marketing activities, which include costs to support our brand and services. Our other general supplies and expenses remained relatively consistent as a percent of revenue.

Depreciation and amortization expense increased to 5.4% of revenue in 2013 as compared to 5.2% in 2012. This increase was primarily due to additional depreciation recorded on the tractors and trailers purchased as part of our 2012 and 2013 capital expenditure plans. Our capital expenditure plan for 2014 is projected to be higher than 2013, and we expect depreciation costs to increase in future periods as a result. While our investments can increase costs in the short term, we believe these investments are necessary to support our long-term growth initiatives.

Purchased transportation expense increased $11.9 million in 2013 as compared to 2012. Our purchased transportation expense is primarily related to our use of third-party transportation providers to support our container drayage, truckload brokerage and international freight forwarding operations. Growth in these services has resulted in the increase in our purchased transportation costs for 2013. To a lesser extent, we utilized purchased transportation in our LTL operations, consisting primarily of rail and truckload providers, to maximize the efficient movement of freight between our service centers.

Miscellaneous expenses, net, was impacted primarily by an increase of $5.7 million in gains recognized on the sale of operating assets. Our other miscellaneous expenses remained relatively consistent as a percent of revenue.

Our effective tax rate for 2013 was 37.3% as compared to 38.0% in 2012. Our effective tax rate in 2013 was favorably impacted by various tax credits, including credits for the use of alternative fuel in operations provided by the American Taxpayer Relief Act of 2012. These alternative fuel tax credits expired on December 31, 2013. 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.

24



2012 Compared to 2011

Key financial and operating metrics for 2012 and 2011 are presented below: 
 
 
2012
 
2011
 
Change
 
% Change
Work days
 
254

 
254

 

 

Revenue (in thousands)
 
$
2,134,579

 
$
1,903,800

 
$
230,779

 
12.1

Operating ratio
 
86.6
%
 
87.7
%
 


 


Net income (in thousands)
 
$
169,452

 
$
139,470

 
$
29,982

 
21.5

Diluted earnings per share
 
$
1.97

 
$
1.63

 
$
0.34

 
20.9

Total tons (in thousands)
 
6,875

 
6,397

 
478

 
7.5

Total shipments (in thousands)
 
7,765

 
7,256

 
509

 
7.0

Weight per shipment (lbs.)
 
1,771

 
1,763

 
8

 
0.5

Revenue per hundredweight
 
$
15.53

 
$
14.88

 
$
0.65

 
4.4

Revenue per shipment
 
$
274.92

 
$
262.43

 
$
12.49

 
4.8

Average length of haul (miles)
 
941

 
952

 
(11
)
 
(1.2
)

Our 2012 financial results were driven by strong growth in our revenue, which exceeded $2.0 billion for the first time in our Company's history. We experienced strong growth in both tonnage and revenue per hundredweight, while also improving the efficiency of our operations, all of which led to margin improvement over the previous year. As a result, our operating ratio improved to 86.6% and net income increased 21.5% to $169.5 million for 2012.

We believe our success in 2012 was primarily the result of our ability to win market share by providing shippers with a value proposition that consists of providing "best-in-class" on-time and claims-free service at a fair and equitable price. Our commitment to this value proposition should allow us to continue to increase our tonnage and market share.

Revenue

Our revenue growth during 2012 of 12.1% was driven by increased tonnage and pricing. Tonnage increased 7.5% primarily due to a 7.0% increase in shipments and a 0.5% increase in weight per shipment for the periods compared. We believe the increase in shipments during the year was primarily due to increased market share, as our growth exceeded reported industry levels.

Revenue per hundredweight increased 4.4% to $15.53 in 2012. This increase reflects our disciplined yield management process as well as an improved pricing environment in 2012. Revenue per hundredweight is a good indicator of pricing trends, but this metric is influenced by many other factors, such as changes in fuel surcharges, weight per shipment, length of haul and mix of freight; therefore, changes in revenue per hundredweight do not necessarily indicate actual changes in underlying rates. Our revenue per hundredweight, excluding fuel surcharges, increased 4.0% in 2012 despite the negative influence of the increase in weight per shipment and decrease in length of haul.

Fuel surcharge revenue increased to 16.5% of revenue in 2012 from 16.2% in 2011, primarily due to a slight increase in the average price per gallon for diesel fuel. Most of our tariffs and contracts provide for a fuel surcharge, which is recorded as additional revenue, as diesel fuel prices increase above stated levels. These levels are generally indexed to the DOE’s published fuel prices that reset each week. The fuel surcharge is one of many components included in the overall negotiated price for our transportation services with our customers, although it is generally considered to be a measure of the increase in cost of all petroleum products we use. We regularly monitor the components of our pricing, including base freight rates and fuel surcharges. We also address any individual account profitability issues with our customers as part of our effort to minimize the negative impact on our profitability that would likely result from a rapid and significant change in any of our operating expenses.


25



Operating Costs and Other Expenses

Salaries, wages and benefits increased $110.5 million, or 11.6% in 2012 due to a $72.8 million increase in the costs for salaries and wages and a $37.7 million increase in benefit costs. The increase in the costs for our salaries and wages, excluding benefits, was due primarily to a 6.9% increase in average full-time employees over 2011 and the impact of wage increases provided to employees in September 2011 and 2012. The increase in our headcount was necessary to ensure adequate labor capacity for the increase in shipments during 2012 as well as for projected growth. As a result, our direct labor costs for drivers, platform employees and fleet technicians increased $55.2 million, or 10.8% in 2012 as compared to 2011. Although these costs increased during 2012, our salaries and wages as a percent of revenue improved to 37.4% from 38.1% in 2011 as a result of the increased density and efficiency in our operations. Our platform pounds handled per hour, P&D stops per hour and P&D shipments per hour improved 4.0%, 0.7% and 0.5%, respectively, over the prior-year period.

Employee benefit costs increased $37.7 million primarily due to an increase in the number of full-time employees eligible for benefits, an increase in paid time off for employees and an increase in the cost per employee for our group health and dental plans. As a percentage of salaries and wages, employee benefit costs increased to 33.7% in 2012 from 31.9% in 2011.

Operating supplies and expenses increased $23.3 million in 2012 primarily due to the increases in the costs of diesel fuel, excluding fuel taxes, which represents the largest component of operating supplies and expenses. Diesel fuel costs can vary based on both consumption and average price per gallon, both of which increased over 2011. Gallons consumed and average price per gallon increased 5.1% and 2.4%, respectively, in 2012 as compared to 2011. Although we saw increases in these costs, operating supplies and expenses decreased as a percent of revenue to 17.7% in 2012 from 18.7% in 2011. We attribute this improvement primarily to certain operational initiatives and the increased use of newer, more fuel-efficient equipment during 2012. We do not use diesel fuel hedging instruments and are therefore subject to market price fluctuations.

Depreciation and amortization expense increased to 5.2% of revenue in 2012 as compared to 4.8% in 2011. This increase was primarily due to the increase in our capital expenditure program for 2012, which included a significant increase in the number of tractors and trailers purchased. In addition, our unit costs for tractors have increased significantly, due primarily to the impact of increasingly stringent emission standard requirements. Since 2002, the average cost of a new tractor in our fleet has increased approximately $45,000, or 85%. Although our capital expenditure plan for 2013 was lower than 2012, we expect our continued growth and investments to increase depreciation costs in future periods.

Our effective tax rate for 2012 was 38.0% as compared to 36.6% in 2011. Our effective tax rate in 2011 was favorably impacted by tax credits related to our investment in alternative energy-producing assets and alternative fuel tax credits for the use of propane in our operations. These alternative fuel tax credits expired on December 31, 2011; however, Congress retroactively reinstated these credits for 2012 and extended the credits through December 31, 2013 by passing the American Taxpayer Relief Act of 2012 on January 1, 2013. The impact of the retroactive application was recorded as a favorable discrete tax benefit during the first quarter of 2013.

Liquidity and Capital Resources

A summary of our cash flows is presented below:
(In thousands)
 
2013
 
2012
 
2011
Cash and cash equivalents at beginning of year
 
$
12,857

 
$
75,850

 
$
5,450

Cash flows provided by (used in):
 
 
 
 
 
 
Operating activities
 
350,666

 
328,056

 
277,934

Investing activities
 
(284,371
)
 
(361,175
)
 
(245,332
)
Financing activities
 
(48,978
)
 
(29,874
)
 
37,798

Increase (decrease) in cash and cash equivalents
 
17,317

 
(62,993
)
 
70,400

Cash and cash equivalents at end of year
 
$
30,174

 
$
12,857

 
$
75,850


The changes in our cash flows provided by operating activities for the periods presented above are due primarily to the significant improvement in our net income, which increased $36.7 million in 2013 and $30.0 million in 2012 over the comparable prior-year periods. These increases are more fully described above in “Results of Operations.” Depreciation and amortization expenses also increased $16.3 million in 2013 and $19.9 million in 2012 over the comparable prior year periods, which was primarily due to the ongoing execution of our capital expenditure programs that is more fully described below.

26



Other changes in our cash flows provided by operating activities are related to various fluctuations within our working capital accounts, which primarily include changes in customer receivables and certain accrued liabilities.

The changes in our cash flows used in investing activities are primarily due to fluctuations in our capital expenditure programs each year. The changes in our capital expenditure program are more fully described below in Capital Expenditures.”

The changes in our cash flows from financing activities consists primarily of fluctuations in our senior unsecured revolving line of credit and scheduled principal payments under our long-term debt agreements. Additionally in 2011, we completed a $95.0 million private placement of senior notes, and we received aggregate net proceeds of $48.4 million resulting from the issuance of our common stock, both of which are discussed in more detail below.

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.

On January 3, 2011, we entered into a Note Purchase Agreement pursuant to which we issued $95.0 million of privately-placed senior notes. We entered into this Note Purchase Agreement to fund planned capital expenditures and for general corporate purposes. We used a portion of the proceeds to refinance existing indebtedness, including paying down the outstanding balance on our senior unsecured revolving credit agreement.

Pursuant to an automatic shelf registration statement previously filed with the Securities and Exchange Commission (the “SEC”), we filed a prospectus supplement and entered into an At-The-Market Equity Offering Sales Agreement on February 2, 2011 with Stifel, Nicolaus & Company, Incorporated (“Stifel Nicolaus Weisel”), under which we had the ability to issue and sell, from time to time over a 12-month period through or to Stifel Nicolaus Weisel, shares of our common stock having an aggregate offering price of up to $100.0 million (the “ATM program”). From February 2, 2011 through December 31, 2011, we issued 2,274,568 shares of common stock pursuant to the ATM program at an average price of $21.79 per share, after adjusting for a three-for-two stock split effected on September 7, 2012. We received aggregate gross proceeds of $49.6 million and aggregate net proceeds of $48.4 million, after deducting commissions and other transaction costs of $1.2 million. There were no subsequent issuances pursuant to the ATM program through February 2, 2012, which was the date on which the ATM program expired. Our automatic shelf registration statement that provided us with the opportunity to offer and sell shares of common stock on a delayed or continuous basis at indeterminate prices expired in the fourth quarter of 2012.

Capital Expenditures

The table below sets forth our net capital expenditures for property and equipment, including those obtained through capital leases and nonmonetary exchanges, for the years ended December 31, 2013, 2012 and 2011:
 
 
Year Ended December 31,
(In thousands)
 
2013
 
2012
 
2011
Land and structures
 
$
126,424

 
$
143,701

 
$
73,463

Tractors
 
59,317

 
113,257

 
69,837

Trailers
 
70,042

 
83,405

 
62,326

Technology
 
15,032

 
13,950

 
24,767

Other
 
31,391

 
19,974

 
28,945

Less: Proceeds from sales
 
(11,235
)
 
(12,018
)
 
(5,436
)
Total
 
$
290,971

 
$
362,269

 
$
253,902


Our capital expenditure requirements are generally 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 growth. Expenditures for land and structures in 2013 and 2012 were significant due to the ongoing expansion of our service center network, the purchase of service centers in locations that were previously under lease and improvements to our existing service centers. Our capital expenditures for tractors and trailers decreased slightly in 2013, as we spent a higher amount in 2012 to reduce the average age of our fleet. We generally spend 6% to 8% of total revenue on tractors and trailers each year to support our projected tonnage growth as well as to replace equipment being retired through our normal replacement cycle. We expect to continue to maintain a high level of capital expenditures in order to support our long-term plan for market share growth.


27



We currently estimate capital expenditures will be approximately $342.0 million for the year ending December 31, 2014. Approximately $132.0 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 $163.0 million is allocated for the purchase of tractors, trailers and other equipment; and approximately $47.0 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, if needed. We believe our current sources of liquidity will be sufficient to satisfy our expected capital expenditures.

We anticipate that there will be additional environmental regulations and legislation resulting from the increased regulatory focus on climate change and greenhouse gas emissions in the United States. At this time, we cannot predict the requirements of any future regulations. However, any limitations on the emission of greenhouse gases or other environmental legislation could increase our future capital expenditures and have an adverse impact on our financial condition, results of operations and liquidity.

Financing Agreements

We have a five-year, $200.0 million senior unsecured revolving credit facility pursuant to the terms of a second amended and restated credit agreement dated August 10, 2011 (the “Credit Agreement”), with Wells Fargo Bank, National Association (“Wells Fargo”) serving as administrative agent for the lenders. Of the $200.0 million line of credit commitments, $150.0 million may be used for letters of credit and $20.0 million may be used for borrowings under the Wells Fargo Sweep Plus Loan Program. We utilize the sweep program to manage our daily cash needs, as the sweep program automatically initiates borrowings to cover overnight cash requirements up to an aggregate of $20.0 million. In addition, we have the right to request an increase in the line of credit commitments up to a total of $300.0 million in minimum increments of $25.0 million.

At our option, revolving loans under the facility bear interest at either: (a) the Applicable Margin Percentage for Base Rate Loans plus the higher of Wells Fargo’s prime rate, the federal funds rate plus 0.5% per annum, or the one month LIBOR Rate plus 1.0% per annum; (b) the LIBOR Rate plus the Applicable Margin Percentage for LIBOR Loans; or (c) the LIBOR Market Index Rate (“LIBOR Index Rate”) plus the Applicable Margin Percentage for LIBOR Market Index Loans. The Applicable Margin Percentage is determined by a pricing grid in the Credit Agreement and ranges from 1.0% to 1.875% based upon the ratio of debt to total capitalization. The Applicable Margin Percentage was 1.0% and 1.125% at December 31, 2013 and 2012, respectively, and ranged from 1.0% to 1.125% during 2013. Revolving loans under the sweep program bear interest at the LIBOR Index Rate.

The Credit Agreement contains customary covenants, including financial covenants that require us to observe a maximum ratio of debt to total capital and a minimum fixed charge coverage ratio. Any future wholly-owned subsidiaries of Old Dominion would be required to guarantee payment of all of our obligations under the facility. The amounts outstanding and remaining borrowing capacity under our revolving credit facilities are presented below: 
 
 
December 31,
(In thousands)
 
2013
 
2012
Facility limit
 
$
200,000

 
$
200,000

Line of credit borrowings
 

 
(10,000
)
Outstanding letters of credit
 
(57,686
)
 
(52,423
)
Total borrowing capacity
 
$
142,314

 
$
137,577


Commitment fees ranging from 0.175% to 0.30% are charged quarterly in arrears on the aggregate unutilized portion of the Credit Agreement based upon the ratio of debt to total capitalization. Letter of credit fees equal to the applicable margin for Adjusted LIBOR Rate loans are charged quarterly in arrears on the daily average aggregate stated amount of all letters of credit outstanding during the quarter. The commitment fees ranged from 0.175% to 0.20% and letter of credit fees ranged from 1.0% to 1.125% during 2013. In addition, the Company will pay to Wells Fargo as issuer of letters of credit (i) a facing fee with respect to each letter of credit in an amount equal to 0.125% of the daily average aggregate Stated Amount thereof, payable quarterly in arrears and calculated on an actual/360-day basis and (ii) such fees and charges customarily charged in connection with the issuance and administration of such letters of credit. Wells Fargo, as administrative agent, also receives an annual administrative fee for providing such services.

We have three outstanding unsecured senior note agreements with an aggregate amount outstanding of $191.4 million at December 31, 2013. These notes call for periodic principal payments with maturities that range from 2015 to 2021, of which

28



$35.7 million is due in the next twelve months. Interest rates on these notes are fixed and range from 4.00% to 5.85%. The effective average interest rate on our outstanding senior note agreements was 4.99% and 5.07% at December 31, 2013 and 2012, respectively.

With the exception of borrowings pursuant to the Credit Agreement, interest rates are fixed on all of our debt instruments. Therefore, short-term exposure to fluctuations in interest rates is limited to our line of credit facility. We do not currently use interest rate derivative instruments to manage exposure to interest rate changes.

Our Credit Agreement limits the amount of dividends that could be paid to shareholders to the greater of (i) $20.0 million, (ii) the amount of dividends paid in the immediately preceding fiscal year, or (iii) an amount equal to 25% of net income from the immediately preceding fiscal year. We did not declare or pay a dividend on our common stock in 2013 or 2012, and we have no plans to declare or pay a dividend in 2014.

A significant decrease in demand for our services could limit our ability to generate cash flow and affect profitability. Most of our debt agreements have covenants that require stated levels of financial performance, which if not achieved could cause acceleration of the payment schedules. As of December 31, 2013, 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.

Common Stock Split

On August 13, 2012, we announced a three-for-two common stock split for shareholders of record as of the close of business on the record date, August 24, 2012. On September 7, 2012 those shareholders received one additional share of common stock for every two shares owned. In lieu of fractional shares, shareholders received a cash payment based on the average of the high and low sales prices of our common stock on the record date.

All references in this report to shares outstanding, weighted average shares outstanding and earnings per share amounts have been restated retroactively to reflect this stock split.

Contractual Obligations

The following table summarizes our significant contractual obligations as of December 31, 2013:
 
 
Payments due by period
Contractual Obligations (1)
 
 
 
Less than
 
 
 
 
 
More than
(In thousands)
 
Total
 
1 year
 
1-3 years
 
3-5 years
 
5 years
Long-term debt obligations, exclusive of interest
 
$
191,429

 
$
35,715

 
$
60,714

 
$
50,000

 
$
45,000

Operating lease obligations
 
58,789

 
15,931

 
18,341

 
10,307

 
14,210

Purchase obligations
 
122,270

 
122,270

 

 

 

Total
 
$
372,488

 
$
173,916

 
$
79,055

 
$
60,307

 
$
59,210

 
(1)
Contractual obligations include long-term debt consisting of senior notes totaling $191.4 million; operating leases consisting primarily of real estate leases; and purchase obligations relating to non-cancellable purchase orders for equipment scheduled for delivery in 2014. Please refer to the information regarding interest rates and the balance on our revolving credit facility in this section above and also in Note 2 to the Financial Statements included in Item 8 of this report.

Critical Accounting Policies

In preparing our financial statements, we apply the following critical accounting policies that we believe affect our judgments and estimates of amounts recorded in certain assets, liabilities, revenue and expenses. These critical accounting policies are further described in Note 1 of the Notes to the Financial Statements included in Item 8 of this report.


29



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, long-term disability, group health and dental. The related costs are charged to insurance and claims expense except for workers’ compensation, long-term disability, group health and dental, which are charged to employee benefits expense.

Insurers providing excess coverage above retention levels adjust their premiums to cover insured losses and for other market factors. As a result, we periodically evaluate our self-insured retention levels to determine the most cost-efficient balance between our retention 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. Periodically, we review property and equipment for impairment due to changes in operational and market conditions, and we adjust the carrying value and economic life of any impaired asset as appropriate.

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.


30



Inflation

Most of our expenses are affected by inflation, which typically results in increased operating costs. In response to fluctuations in the cost of petroleum products, particularly diesel fuel, we generally include a fuel surcharge in our tariffs and contractual agreements. The fuel surcharge is designed to offset the cost of diesel fuel above a base price and increases as diesel fuel prices escalate over the base, which is generally indexed to the DOE’s published fuel prices that reset each week. Volatility in the price of diesel fuel, independent of inflation, has impacted our business, as described in this report. However, we do not believe inflation has had a material effect on our results of operations for each of the past three years.

Related Person Transactions

Family Relationships

Each of Earl E. Congdon, 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 2013. We have employment agreements with Earl E. Congdon and David S. Congdon, which are incorporated by reference as exhibits to our Annual Report on Form 10-K. We regularly disclose the amount of compensation that we pay to these individuals, 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.

During 2012, John R. Congdon, who was the brother of Earl E. Congdon, resigned from his position as Senior Vice President. At that time, the Board of Directors and John R. Congdon mutually agreed to terminate his amended and restated employment agreement. He continued to be employed by the Company in a management position and as a member of our Board of Directors until his death in October 2013.

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 served as Chairman of the Board of Leasing until October 2013 and was succeeded in that position by John R. Congdon, Jr. Earl E. Congdon and David S. Congdon currently serve as members of Leasing’s Board of Directors. Since 1986, we have combined our requirements with Leasing for the purchase of tractors, trailers, equipment, parts, tires and fuel. We believe that the termination of this arrangement would not have a material adverse impact on our financial results.

We purchased $299,000, $239,000 and $278,000 of maintenance and other services from Leasing in 2013, 2012 and 2011, 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 charged Leasing $18,000, $18,000 and $18,000 for the rental of property in 2013, 2012 and 2011, respectively. No other services were provided to Leasing for the years ended December 31, 2013, 2012 and 2011.

Split-Dollar Life Insurance Policies

We owned two split-dollar life insurance contracts insuring the life of John R. Congdon that were terminated upon Mr. Congdon's death in October 2013. The death benefits under these policies totaled an aggregate of $9.3 million, of which we received $7.3 million in December 2013 and Mr. Congdon’s beneficiaries received $2.0 million. At December 31, 2012, the net cash surrender value for these policies totaled $6.8 million and was included on our Balance Sheet under the caption of “Other Assets.”

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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact our financial position, results of operations and cash flows due to adverse changes in financial market prices and rates.

31




We are exposed to interest rate risk directly related to loans, if any, under our Credit Agreement, which have variable interest rates. A 100 basis point increase in the average interest rate on this agreement would have no material effect on our operating results. We have established policies and procedures to manage exposure to market risks and use major institutions that we believe are creditworthy to minimize credit risk.

We are exposed to market risk for equity investments relating to Company-owned life insurance contracts on certain employees. At December 31, 2013, the cash value for variable life insurance contracts was $29.4 million of the $31.6 million of aggregate cash values for all life insurance contracts included on our Balance Sheets. Variable life insurance contracts expose us to fluctuations in equity markets; however, we utilize a third-party to manage these assets and minimize that exposure. A 10% change in market value in those investments would have a $2.9 million impact on our pre-tax income.

We are exposed to market risk for awards granted under our employee and director phantom stock plans. The liability for the unsettled outstanding awards is remeasured at the end of each reporting period based on the closing price of our common stock at that date. At December 31, 2013, the total liability for awards granted under our employee and director phantom stock plans totaled $23.6 million. A 10% change in the price of our common stock at December 31, 2013 would have had a $2.4 million impact on our operating income in 2013 with respect to these plans.

We are also exposed to commodity price risk related to diesel fuel prices and manage our exposure to that risk primarily through the application of fuel surcharges to our customers.

For further discussion related to these risks, see Notes 2 and 8 to the Financial Statements included in Item 8, “Financial Statements and Supplementary Data” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


32


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

OLD DOMINION FREIGHT LINE, INC.
BALANCE SHEETS
 
 
December 31,
(In thousands, except share and per share data)
 
2013
 
2012
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
30,174

 
$
12,857

Customer receivables, less allowances of $8,067 and $8,561, respectively
 
248,069

 
219,039

Other receivables
 
10,225

 
1,324

Prepaid expenses and other current assets
 
21,262

 
21,754

Deferred income taxes
 
23,249

 
20,054

Total current assets
 
332,979

 
275,028

Property and equipment:
 
 
 
 
Revenue equipment
 
1,009,936

 
922,030

Land and structures
 
990,256

 
874,768

Other fixed assets
 
266,563

 
225,298

Leasehold improvements
 
6,378

 
6,128

Total property and equipment
 
2,273,133

 
2,028,224

Less: Accumulated depreciation
 
(730,074
)
 
(648,919
)
Net property and equipment
 
1,543,059

 
1,379,305

Goodwill
 
19,463

 
19,463

Other assets
 
36,588

 
38,718

Total assets
 
$
1,932,089

 
$
1,712,514

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
36,788

 
$
44,891

Compensation and benefits
 
97,187

 
80,047

Claims and insurance accruals
 
38,784

 
33,990

Other accrued liabilities
 
21,480

 
20,906

Income taxes payable
 
2,168

 
6,327

Current maturities of long-term debt
 
35,715

 
38,978

Total current liabilities
 
232,122

 
225,139

Long-term debt
 
155,714

 
201,429

Other non-current liabilities
 
123,054

 
106,791

Deferred income taxes
 
189,117

 
153,186

Total long-term liabilities
 
467,885

 
461,406

Total liabilities
 
700,007

 
686,545

 
 
 
 
 
Commitments and contingent liabilities
 


 


 
 
 
 
 
Shareholders’ equity
 
 
 
 
Common stock - $0.10 par value, 140,000,000 shares authorized, 86,164,917 shares outstanding at December 31, 2013 and 2012
 
8,616

 
8,616

Capital in excess of par value
 
134,401

 
134,401

Retained earnings
 
1,089,065

 
882,952

Total shareholders’ equity
 
1,232,082

 
1,025,969

 
 
 
 
 
Total liabilities and shareholders’ equity
 
$
1,932,089

 
$
1,712,514


The accompanying notes are an integral part of these financial statements.

33


OLD DOMINION FREIGHT LINE, INC.
STATEMENTS OF OPERATIONS

 
 
Year Ended December 31,
(In thousands, except share and per share data)
 
2013
 
2012
 
2011
Revenue from operations
 
$
2,337,648

 
$
2,134,579

 
$
1,903,800

 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
Salaries, wages and benefits
 
1,170,773

 
1,066,551

 
956,079

Operating supplies and expenses
 
385,201

 
378,534

 
355,186

General supplies and expenses
 
69,765

 
58,908

 
49,900

Operating taxes and licenses
 
71,599

 
67,526

 
63,284

Insurance and claims
 
30,910

 
29,681

 
27,693

Communications and utilities
 
23,142

 
19,980

 
18,104

Depreciation and amortization
 
127,072

 
110,743

 
90,820

Purchased transportation
 
106,435

 
94,522

 
84,516

Building and office equipment rents
 
11,920

 
13,514

 
13,689

Miscellaneous expenses, net
 
2,393

 
9,366

 
10,457

Total operating expenses
 
1,999,210

 
1,849,325

 
1,669,728

 
 
 
 
 
 
 
Operating income
 
338,438

 
285,254

 
234,072

 
 
 
 
 
 
 
Non-operating expense (income):
 
 
 
 
 
 
Interest expense
 
9,620

 
11,541

 
14,067

Interest income
 
(147
)
 
(113
)
 
(180
)
Other expense, net
 
279

 
728

 
101

Total non-operating expense
 
9,752

 
12,156

 
13,988

 
 
 
 
 
 
 
Income before income taxes
 
328,686

 
273,098

 
220,084

Provision for income taxes
 
122,573

 
103,646

 
80,614

Net income
 
$
206,113

 
$
169,452

 
$
139,470

 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
Basic
 
$2.39
 
$1.97
 
$1.63
Diluted
 
$2.39
 
$1.97
 
$1.63
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
Basic
 
86,164,917

 
86,164,964

 
85,719,728

Diluted
 
86,164,917

 
86,164,964

 
85,719,728















The accompanying notes are an integral part of these financial statements.

34


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, 2010
 
83,891

 
$
8,389

 
$
86,230

 
$
574,030

 
$
668,649

Issuance and sale of common stock
 
2,274

 
227

 
48,173

 

 
48,400

Net income
 

 

 

 
139,470

 
139,470

Balance as of December 31, 2011
 
86,165

 
$
8,616

 
$
134,403

 
$
713,500

 
$
856,519

Net income
 

 

 

 
169,452

 
169,452

Other
 

 

 
(2
)
 

 
(2
)
Balance as of December 31, 2012
 
86,165

 
$
8,616

 
$
134,401

 
$
882,952

 
$
1,025,969

Net income
 

 

 

 
206,113

 
206,113

Balance as of December 31, 2013
 
86,165

 
$
8,616

 
$
134,401

 
$
1,089,065

 
$
1,232,082









































The accompanying notes are an integral part of these financial statements.

35


OLD DOMINION FREIGHT LINE, INC.
STATEMENTS OF CASH FLOWS


 
 
Year Ended December 31,
(In thousands)
 
2013
 
2012
 
2011
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
206,113

 
$
169,452

 
$
139,470

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
127,072

 
110,743

 
90,820

(Gain) loss on sale of property and equipment
 
(5,743
)
 
78

 
1,263

Deferred income taxes
 
32,736

 
17,682

 
43,348

Changes in assets and liabilities:
 
 
 
 
 
 
Customer and other receivables, net
 
(30,063
)
 
(5,410
)
 
(40,414
)
Prepaid expenses and other assets
 
1,910

 
(7,956
)
 
(2,952
)
Accounts payable
 
(8,103
)
 
2,795

 
12,875

Compensation, benefits and other accrued liabilities
 
17,714

 
13,559

 
17,626

Claims and insurance accruals
 
6,952

 
7,458

 
6,696

Income taxes, net
 
(12,027
)
 
9,264

 
3,224

Other liabilities
 
14,105

 
10,391

 
5,978

Net cash provided by operating activities
 
350,666

 
328,056

 
277,934

 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
Purchase of property and equipment
 
(295,606
)
 
(373,193
)
 
(250,768
)
Proceeds from sale of property and equipment
 
11,235

 
12,018

 
5,436

Net cash used in investing activities
 
(284,371
)
 
(361,175
)
 
(245,332
)
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
Proceeds from issuance of long-term debt
 

 
412

 
96,010

Principal payments under long-term debt agreements
 
(38,978
)
 
(40,284
)
 
(40,382
)
Net (payments) proceeds on revolving line of credit
 
(10,000
)
 
10,000

 
(66,230
)
Proceeds from stock issuance, net of issuance costs
 

 

 
48,400

Other financing activities, net
 

 
(2
)
 

Net cash (used in) provided by financing activities
 
(48,978
)
 
(29,874
)
 
37,798

 
 
 
 
 
 
 
Increase (decrease) in cash and cash equivalents
 
17,317

 
(62,993
)
 
70,400

Cash and cash equivalents at beginning of year
 
12,857

 
75,850

 
5,450

Cash and cash equivalents at end of year
 
$
30,174

 
$
12,857

 
$
75,850

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income taxes paid
 
$
102,448

 
$
74,932

 
$
34,579

Interest paid
 
$
11,585

 
$
13,728

 
$
14,011

Capitalized interest
 
$
1,731

 
$
1,963

 
$
895

 
 
 
 
 
 
 









The accompanying notes are an integral part of these financial statements.

36


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 service and other logistics services from a single integrated organization. In addition to our core LTL services, we offer a broad range of value-added services including international freight forwarding, ground and air expedited transportation, container delivery, truckload brokerage, supply chain consulting, warehousing and consumer household pickup and delivery.

We have one operating segment and no single customer exceeds 10% of our revenue.

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.

Prior Period Adjustments

During the second quarter of 2013, we determined that the costs of purchased transportation for certain truckload brokerage and international freight forwarding services, which were previously netted against revenue, met the criteria to be presented separately in operating expenses in accordance with Accounting Standards Codification ("ASC") Topic 605, Revenue Recognition. As a result, the accompanying Statements of Operations include correcting adjustments to increase both revenue and purchased transportation expense in the amounts of $24.1 million and $21.3 million for the years ended December 31, 2012 and 2011, respectively. There was no effect on retained earnings, operating income, net income, earnings per share or cash flows for any period presented.

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.

37


OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)


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.

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.

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 $126.4 million, $109.8 million and $89.9 million for 2013, 2012 and 2011, respectively.

Goodwill and Other Intangible Assets

Intangible assets have been acquired in connection with business combinations and are comprised of goodwill and other intangible assets. Goodwill is calculated as the excess cost over the fair value of assets acquired and is not subject to amortization. We review our goodwill balance annually for impairment as a single reporting unit, unless circumstances dictate more frequent assessments, and 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 two-step goodwill impairment test required by ASC Topic 350.

In the fourth quarter of 2013, we performed the qualitative assessment of goodwill and determined 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 two-step goodwill impairment test. Furthermore, there has been no historical impairment of our goodwill.


38


OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

Other intangible assets include the value of acquired customer lists and related non-compete agreements and are amortized on a straight-line basis over their estimated useful lives, none of which exceeds ten years. The gross carrying amount of our other intangible assets totaled $8.1 million as of December 31, 2013 and 2012. Accumulated amortization for these assets was $6.4 million and $5.7 million as of December 31, 2013 and 2012, respectively. The net carrying amounts of our other intangible assets are included in “Other assets” on our Balance Sheets. Amortization expense was $0.7 million for 2013 and $0.9 million for 2012 and 2011, respectively. Annual amortization expense for the next five years for these intangible assets is estimated to be: 
(In thousands)
 
2014
$
695

2015
$
495

2016
$
315

2017
$
210

2018
$
8


Long-Lived Assets

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.

Claims and Insurance Accruals

At December 31, 2013, we maintained a self-insured retention ("SIR") of $2.75 million per occurrence for bodily injury and property damage ("BIPD") claims; a deductible of $100,000 per claim for cargo loss and damage; and a deductible of $1.0 million per occurrence for workers' compensation claims. We also had an SIR of $400,000 per occurrence (with a $400,000 aggregate over our retention level) for group health claims.

Claims and insurance accruals reflect the estimated cost of claims for cargo loss and damage, BIPD, workers' compensation, long-term disability, 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 expense, while the related costs for workers' compensation, long-term disability, group health and dental are charged to employee benefits expense.

Our liability for claims and insurance totaled $100.4 million and $93.5 million at December 31, 2013 and 2012, respectively. The long-term portions of those reserves were $61.6 million and $59.5 million for 2013 and 2012, respectively, which were included in “Other non-current liabilities” on our Balance Sheets.
 
Share-Based Compensation

Awards of phantom stock to employees and directors are accounted for as a liability under ASC topic 718, Compensation - Stock Compensation. ASC topic 718 requires changes in the fair value of our liability to be 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 based on the closing price of our common stock at that date, and the compensation cost is based on the change in fair value for each reporting period.

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 $16.7 million, $11.0 million and $8.3 million for 2013, 2012 and 2011, respectively.


39


OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

Common Stock Split

On August 13, 2012, we announced a three-for-two common stock split for shareholders of record as of the close of business on the record date, August 24, 2012. On September 7, 2012 those shareholders received one additional share of common stock for every two shares owned. In lieu of fractional shares, shareholders received a cash payment based on the average of the high and low sales prices of our common stock on the record date.

All references in this report to shares outstanding, weighted average shares outstanding and earnings per share amounts have been restated retroactively to reflect this stock split.

Fair Values of Financial Instruments

The carrying values of financial instruments, such as cash and cash equivalents, customer and other receivables and trade payables, approximate their fair value due to the short maturities of these instruments. The carrying value of our long-term debt was $191.4 million and $240.4 million at December 31, 2013 and 2012, respectively. The estimated fair value of our long-term debt was $196.5 million and $247.9 million at December 31, 2013 and 2012, respectively. The fair value measurement of our senior notes was determined using market interest rates for similar issuances of private debt. Since this methodology is based upon indicative market interest rates, the measurement is categorized as Level 2 under the three-level fair value hierarchy as established by the Financial Accounting Standards Board (the “FASB”). The fair value of our other long-term debt approximates carrying value.

Comprehensive Income

The Company has no components of other comprehensive income. Accordingly, net income equals comprehensive income for all periods presented in this report.

Earnings Per Share

Earnings per common share is computed using the weighted-average number of common shares outstanding during the period. There were no potentially dilutive shares outstanding at the end of each period 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)
 
2013
 
2012
 
2011
Acquisition of property and equipment by capital lease
 
$

 
$
1,094

 
$
8,570


In addition, during the fourth quarter of 2013, we completed a nonmonetary exchange of property. We acquired a service center with a fair value of $6.6 million, which resulted in a gain of $3.4 million. The resulting gain was recorded in "Miscellaneous expenses, net" on our Statements of Operations.

Recent Accounting Pronouncements

The FASB has issued various new accounting standards and updates during 2013 that are effective for future periods. We have evaluated these new standards and believe the adoption will not materially impact our financial condition or results of operations.


40


OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

Note 2. Long-term Debt

Long-term debt consisted of the following:
 
 
December 31,
(In thousands)
 
2013
 
2012
Senior notes
 
$
191,429

 
$
227,143

Revolving credit facility
 

 
10,000

Capitalized lease and other obligations
 

 
3,264

Total long-term debt
 
191,429

 
240,407

Less: Current maturities
 
(35,715
)
 
(38,978
)
Total maturities due after one year
 
$
155,714

 
$
201,429


We have three outstanding unsecured senior note agreements with an aggregate amount outstanding of $191.4 million at December 31, 2013. These notes call for periodic principal payments with maturities that range from 2015 to 2021, of which $35.7 million is due in the next twelve months. Interest rates on these notes are fixed and range from 4.00% to 5.85%. The weighted average interest rate on our outstanding senior note agreements was 4.99% and 5.07% at December 31, 2013 and 2012, respectively.

We have a five-year, $200.0 million senior unsecured revolving credit facility pursuant to the terms of a second amended and restated credit agreement dated August 10, 2011 (the “Credit Agreement”), with Wells Fargo Bank, National Association (“Wells Fargo”) serving as administrative agent for the lenders. Of the $200.0 million line of credit commitments, $150.0 million may be used for letters of credit and $20.0 million may be used for borrowings under the Wells Fargo Sweep Plus Loan Program. We utilize the sweep program to manage our daily cash needs, as the sweep program automatically initiates borrowings to cover overnight cash requirements up to an aggregate of $20.0 million. In addition, we have the right to request an increase in the line of credit commitments up to a total of $300.0 million in minimum increments of $25.0 million. At our option, revolving loans under the facility bear interest at either: (a) the Applicable Margin Percentage for Base Rate Loans plus the higher of Wells Fargo’s prime rate, the federal funds rate plus 0.5% per annum, or the one month LIBOR Rate plus 1.0% per annum; (b) the LIBOR Rate plus the Applicable Margin Percentage for LIBOR Loans; or (c) the LIBOR Market Index Rate (“LIBOR Index Rate”) plus the Applicable Margin Percentage for LIBOR Market Index Loans. The Applicable Margin Percentage is determined by a pricing grid in the Credit Agreement and ranges from 1.0% to 1.875% based upon the ratio of debt to total capitalization. The Applicable Margin Percentage was 1.0% and 1.125% at December 31, 2013 and 2012, respectively, and ranged from 1.0% to 1.125% during 2013. Revolving loans under the sweep program bear interest at the LIBOR Index Rate.

There was no outstanding balance of borrowings on the line of credit facility at December 31, 2013 and there was $10.0 million outstanding at December 31, 2012. There were $57.7 million and $52.4 million of outstanding letters of credit at December 31, 2013 and 2012, respectively.
 
Commitment fees ranging from 0.175% to 0.30% are charged quarterly in arrears on the aggregate unutilized portion of the Credit Agreement based upon the ratio of debt to total capitalization. Letter of credit fees equal to the applicable margin for Adjusted LIBOR Rate loans are charged quarterly in arrears on the daily average aggregate stated amount of all letters of credit outstanding during the quarter. The commitment fees ranged from 0.175% to 0.20% and letter of credit fees ranged from 1.0% to 1.125% during 2013. In addition, the Company will pay to Wells Fargo as issuer of letters of credit (i) a facing fee with respect to each letter of credit in an amount equal to 0.125% of the daily average aggregate Stated Amount thereof, payable quarterly in arrears and calculated on an actual/360-day basis and (ii) such fees and charges customarily charged in connection with the issuance and administration of such letters of credit. Wells Fargo, as administrative agent, shall also receive an annual administrative fee for providing such services.

Our Credit Agreement limits the amount of dividends that could be paid to shareholders to the greater of (i) $20.0 million, (ii) the amount of dividends paid in the immediately preceding fiscal year, or (iii) an amount equal to 25% of net income from the immediately preceding fiscal year. We did not declare or pay a dividend on our common stock in 2013 or 2012, and we have no plans to declare or pay a dividend in 2014.


41


OLD DOMINION FREIGHT LINE, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)

Our three outstanding senior note agreements and the 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 subsidiaries of the Company would be required to guarantee payment of all of our obligations under these agreements.

As of December 31, 2013, aggregate maturities of long-term debt are as follows:
(In thousands)
 
2014
$
35,715

2015
35,714

2016
25,000

2017

2018
50,000

Thereafter
45,000

 
 
 
$
191,429

 
 

Note 3. Shareholders’ Equity

On February 2, 2011, we entered into an At-The-Market Equity Offering Sales Agreement with Stifel, Nicolaus & Company, Incorporated (“Stifel Nicolaus Weisel”) pursuant to which we had the ability to issue and sell, from time to time over a 12-month period through or to Stifel Nicolaus Weisel, shares of our common stock having an aggregate offering price of up to $100.0 million (the “ATM program”). The ATM program was conducted pursuant to the Company’s automatic shelf registration statement on Form S-3 (File No. 333-162709), filed by the Company on October 28, 2009 with the SEC, and a prospectus supplement, filed by the Company on February 2, 2011 with the SEC. Sales of the Company’s common stock in the offering were made by means of ordinary brokers’ transactions on the Nasdaq, in privately negotiated transactions, or otherwise at prevailing market prices at the time of sale. Set forth below is information regarding our ATM program. Shares and per share amounts have been adjusted for the three-for-two common stock split effected on September 7, 2012. 
Period
 
Aggregate
Number of
Shares Sold
 
Aggregate
Gross
Proceeds
 
Aggregate
Net Proceeds
 
Average Sales
Price Per Share
First quarter 2011
 
2,274,568

 
$
49,575,000

 
$
48,400,000

 
$
21.79


There were no subsequent issuances pursuant to the ATM program through February 2, 2012, which was the date on which the ATM program expired. The Company's automatic shelf registration statement expired in October 2012.

Note 4. Leases

We lease certain assets under operating leases, which primarily consist of real estate leases for 63 of our 221 service center locations at December 31, 2013. 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.

Future minimum annual lease payments for assets under operating leases as of December 31, 2013 are as follows:
 
(In thousands)
 
Total
 
2014
 
$
15,931

 
2015
 
10,833

 
2016
 
7,508

 
2017
 
5,684

 
2018
 
4,623

 
Thereafter
 
14,210

 
Total minimum lease payments
 
$
58,789