| OLD DOMINION FREIGHT LINE INC/VA ITEM 1A RISK FACTORS In addition to the factors discussed elsewhere in this report, the following are some of the important factors that could cause our actual results to differ materially from those projected in any forward-looking statements: 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 many other transportation service providers of varying sizes, some of which have more equipment, a broader coverage network, a wider range of services and greater capital resources than we do or have other competitive advantages; • 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 significant growth in our business; 7 ______________________________________________________________________ [33]Table of Contents • many customers reduce the number of carriers they use by selecting “core carriers” as approved transportation service providers, and in some instances 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; • 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 prices |
| 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 by a collective bargaining agreement |
| However, from time to time there have been efforts to organize our employees at various service centers |
| We can make no assurance that our employees will not unionize in the future, which could in turn have a material adverse effect on our operating results 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, and such action by our customers would impair our revenue base; • restrictive work rules could hamper our efforts to improve and sustain operating efficiency; • a strike or work stoppage would hurt our profitability and could damage customer and other relationships; and • an election and bargaining process would distract management’s time and attention and impose significant expenses |
| These results, and unionization of our workforce generally, could have a material adverse effect on our business, financial condition and results of operations |
| 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 the geographic reach of our service center network and broadening the scope of our service offerings |
| In connection with our growth strategy, we have purchased additional equipment, expanded and upgraded service centers, hired additional personnel and increased our sales and marketing efforts, and expect to continue to do so |
| Our growth strategy exposes us to a number of risks, including the following: • geographic expansion and acquisitions require start-up costs and could expose us to temporary losses; • growth through acquisition could require us to temporarily match existing freight rates of the acquiree’s markets, which may be lower than the rates that we would typically charge for our services; • growth and geographic expansion is dependent on the availability of real estate |
| Shortages of suitable real estate may limit our geographic expansion and could constrain our service center network that could result in increased operating expenses; • growth may strain our management, capital resources, information systems and customer service; 8 ______________________________________________________________________ [34]Table of Contents • hiring new employees may increase training costs and may result in temporary inefficiencies as the employees become proficient in their jobs; and • expanding our service offerings may require us to enter into new markets and compete with additional competitors |
| We cannot assure that we will overcome the risks associated with our growth |
| If we fail to overcome such 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 |
| Difficulty in attracting drivers could affect our profitability |
| Competition for drivers is intense within the trucking industry, and we periodically experience difficulties in attracting and retaining qualified drivers |
| Our operations may be affected by a shortage of qualified drivers in the future, which could cause us to temporarily under-utilize our truck fleet, face difficulty in meeting shipper demands and increase our compensation levels for drivers |
| If we encounter difficulty in attracting or retaining qualified drivers, our ability to service our customers and increase our revenue could be adversely affected |
| 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, long-term disability and group health |
| We carry significant insurance with third-party insurance carriers, the cost of which has risen significantly |
| To offset, in part, the significant increases we have experienced, we have elected to increase our self-insured retention levels for most of our risk exposures |
| If the number or severity of claims for which we are self-insured increases, or we are required to accrue or pay additional amounts because the claims prove to be more severe than our original assessment, our operating results would be adversely affected |
| In addition, insurance companies require us to obtain letters of credit to collateralize our self-insured retention |
| If these requirements increase, our borrowing capacity could be adversely affected |
| Our business is subject to general economic factors that are largely out of our control |
| Economic conditions may adversely affect our customers’ business levels, the amount of transportation services they need and their ability to pay for our services |
| Customers encountering adverse economic conditions represent a greater potential for bad debt losses, which may require us to increase our reserve for bad debt |
| In addition, because we self-insure a substantial portion of our group health expense, increases in healthcare costs and pharmaceutical expenses can adversely affect our financial results |
| Our results also may be negatively affected by increases in interest rates, which increase our borrowing costs and can negatively affect the level of economic activity by our customers and thus our freight volumes |
| We have significant ongoing cash requirements that could limit our growth and affect our profitability if we are unable to obtain sufficient financing |
| Our business is highly capital intensive |
| Our net capital expenditures, including the acquisition of business assets, in 2005 and 2004 were dlra160cmam488cmam000 and dlra92cmam106cmam000, respectively |
| We expect our capital expenditures for 2006 to be approximately dlra245cmam000cmam000 to dlra255cmam000cmam000 |
| The increase in our capital expenditures for 2006 is primarily due to real estate acquisitions and improvements to increase capacity at our existing service centers, which we believe is necessary in order for us to achieve our growth strategy |
| We depend on operating leases, lines of credit, senior debt, secured equipment financing and cash flow from operations to finance our tractors, trailers and service centers |
| If we are unable in the future to raise sufficient capital or borrow sufficient funds to make these purchases, we will be forced to limit our growth and operate our trucks for longer periods of time, which could have a material adverse effect on our operating results |
| 9 ______________________________________________________________________ [35]Table of Contents In addition, our business has significant 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 may be costly or difficult to obtain |
| We currently maintain a dlra110cmam000cmam000 unsecured line of credit with lenders consisting of Wachovia Bank, National Association; Bank of America, NA; and Branch Banking and Trust Company that will expire in September 2010 |
| We may be adversely impacted by fluctuations in the price and availability of diesel fuel |
| Diesel fuel is a significant operating expense |
| We do not hedge against the risk of diesel fuel price increases |
| Any increase in diesel fuel prices or diesel fuel taxes or any change in federal or state regulations that results in such an increase, to the extent not offset by freight rate increases or fuel surcharges to customers, or any interruption in the supply of diesel fuel, could have a material adverse effect on our operating results |
| Historically, we have been able to offset significant increases in diesel fuel prices through fuel surcharges to our customers, but we cannot be certain that we will be able to do so in the future |
| From time to time, we experience shortages in the availability of diesel fuel at certain locations and have been forced to incur additional expense to ensure adequate supply on a timely basis |
| However, we did not experience any disruption to our normal service schedules as a result of any supply shortages in 2005 |
| Limited supply and increased prices for new equipment may adversely affect our earnings and cash flow |
| Investment in new equipment is a significant part of our annual capital expenditures |
| We may face difficulty in purchasing new equipment due to decreased supply |
| The price of our equipment may also be adversely affected in the future by regulations on newly manufactured tractors and diesel engines |
| See the risk factor below entitled: “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 that could adversely affect our business |
| ” 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, safety and fitness of transportation equipment and drivers, driver hours of service, 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 increasingly stringent environmental and occupational safety and health regulations or limits on vehicle weight and size, and ergonomics |
| 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 the costs of providing transportation services |
| 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 regulating, among other things, the emission and discharge of hazardous materials into the environment or presence on or in our properties and vehicles, fuel storage tanks, our 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 |
| 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 |
| The Environmental Protection Agency has issued regulations that require progressive reductions in exhaust emissions from diesel engines through 2007 |
| Beginning in October 2002, new diesel engines were required to meet these new emission limits |
| Some of the regulations require subsequent reductions in the sulfur content of diesel fuel beginning in June 2006 and the introduction of emissions after-treatment devices on newly- 10 ______________________________________________________________________ [36]Table of Contents manufactured engines and vehicles beginning with model year 2007 |
| These regulations could result in higher prices for tractors and diesel engines and increased fuel and maintenance costs |
| These adverse effects, combined with the uncertainty as to the reliability of the vehicles equipped with the newly designed diesel engines and the residual values that will be realized from the disposition of these vehicles, could increase our costs or otherwise adversely affect our business or 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 results 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 increased operating expenses |
| If we are unable to retain our key employees, our business, financial condition and results of operations could be harmed |
| The success of our business will continue to depend upon our executive officers |
| One of the critical factors in staying competitive in our industry is the maintenance and development of personal relationships |
| In that regard, the loss of the services of any of our key personnel could have a material adverse effect on our business, financial condition and results of operation |
| Our principal shareholders control a large portion of our outstanding common stock |
| On March 13, 2006, Earl E Congdon and John R Congdon and members of their families and their affiliates beneficially owned 30dtta4prca of the outstanding shares of our common stock |
| As long as the Congdon family controls a large portion of our voting stock, they will 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 other shareholders |