J.B. Hunt Transport Services, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The company operates Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truck (JBT). Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total operating revenue | $1,540m | $1,548m | $2,980m | $2,955m |
| Revenue excluding fuel surcharges | $1,361m | $1,269m | $2,625m | $2,421m |
| Operating income | $173.7m | $159.2m | $329.0m | $276.5m |
| Net earnings | $103.4m | $93.4m | $195.4m | $162.1m |
| Diluted EPS | $0.88 | $0.79 | $1.66 | $1.36 |
| Operating margin | 11.3% | 10.3% | 11.0% | 9.4% |
- Q2 total revenue declined 0.5%, while revenue excluding fuel surcharges rose 7%. For the first half, total revenue increased about 1%, and revenue excluding fuel surcharges rose 8%. Lower fuel surcharge revenue weighed on reported growth.
- Q2 net margin was 6.7%, versus 6.0% a year earlier; first-half net margin was 6.6%, versus 5.5%. The effective tax rate was 38.1% in both comparable periods.
- First-half cash from operations was $453.5m, versus $301.0m. Investing activities used $319.3m, chiefly reflecting property and equipment additions net of equipment sale proceeds. Financing activities used $134.6m, compared with $51.9m provided in the prior-year period.
- At June 30, cash was $5.6m; total debt was $893.2m, including $250m current debt. The working capital ratio was 1.01, total debt-to-equity 0.67, and debt as a share of total capital 40%. The company reported compliance with debt covenants.
- Capital expenditures were about $319m net for the first half. Management expected full-year 2015 net capital expenditures of $600m–$625m, with approximately $222m of equipment and facility commitments remaining for 2015. Management stated available liquidity, operating cash flow, and the revolving facility should cover foreseeable needs.
Material changes and segment results
- JBI: Q2 revenue declined 3% to $905m, while operating income rose 5% to $118.6m. Load volume increased 2%, offset by a 4.5% decline in revenue per load. First-half operating income increased to $222.9m from $206.6m.
- DCS: Q2 revenue rose 5% to $367m and operating income increased 34% to $40.6m. First-half revenue rose 6% to $712m and operating income increased to $76.4m from $45.9m. Growth reflected new accounts, utilization, and lower maintenance costs.
- ICS: Q2 revenue was roughly flat at $174m; operating income fell 21% to $4.9m. Load volume grew 12%, but revenue per load fell 10%. Gross profit margin improved to 15.2% from 12.7%. First-half operating income declined 6.7% despite improved gross margin.
- JBT: Q2 revenue declined 3.5% to $97m, while operating income rose 3% to $9.7m. First-half revenue fell 2.5% to $188m, but operating income rose 54.1% to $18.2m.
- Operating expenses were 88.7% of Q2 revenue, versus 89.7% a year earlier. Lower fuel and purchased transportation costs helped, while salaries, depreciation, and general and administrative expenses increased. G&A rose 139.6% in Q2, primarily due to company-wide streamlining and technology redevelopment efforts. The filing cites related costs of approximately $6.4m for JBI, $2.6m for DCS, $4.4m for ICS, and $0.7m for JBT in the quarter.
Outlook, risks, and contingencies
- Management highlighted typical seasonal freight-volume strength from August through early November in full-load transportation. No earnings or revenue guidance was provided.
- Driver availability and higher wages and recruiting costs were pressures. Other risks identified include economic conditions, fuel-price changes and recovery through surcharges, reliance on third-party carriers, customer concentration, competition, claims and insurance costs, regulation, IT disruption, and adverse weather.
- A $250m senior note matures in September 2015. The $500m revolving credit facility expires in August 2016; $141m was drawn at June 30. The company also had $222.4m in equipment and facility commitments expected within one year.
- California driver class actions alleging wage and meal/rest-period violations remain on appeal after judgment for the company in the lead case; the possible loss cannot currently be reasonably estimated. The company said other pending claims were not expected to materially affect its financial condition, results, or liquidity.
- Gross unrecognized tax benefits were $30.6m, with $4.2m of accrued interest and penalties. The filing also identifies $34.8m of potential uncertain-tax-position liabilities, including interest and penalties, for which settlement timing cannot be estimated.
- The company uses an interest-rate swap to convert $250m of fixed-rate notes to variable-rate exposure. It estimated that a one-percentage-point increase in applicable short-term rates would reduce annual pretax earnings by $3.9m.
Investor verification priorities
- Track whether revenue growth excluding fuel surcharges and freight volumes translate into sustainable operating margins as fuel prices, rates, and freight mix change.
- Assess whether higher driver wages, hiring costs, depreciation, and streamlining and technology expenses affect future profitability and capacity growth.
- Verify funding and refinancing of the $250m September 2015 maturity, as well as execution of the full-year capital expenditure plan.
- Monitor cash generation and working capital, given the low reported cash balance and 1.01 working capital ratio.
- Follow the California litigation appeal and developments in uncertain tax positions; potential outcomes and timing remain uncertain.