J.B. Hunt Transport Services, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparative periods are 2013. The company provides intermodal, dedicated contract, logistics brokerage, and truck transportation services. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total operating revenue | $1,547.9 | $1,382.9 | $2,954.8 | $2,674.4 |
| Revenue excluding fuel surcharge | $1,268.6 | $1,120.2 | $2,421.0 | $2,159.1 |
| Operating income | $159.2 | $147.4 | $276.5 | $272.4 |
| Operating margin | 10.3% | 10.7% | 9.4% | 10.2% |
| Net earnings | $93.4 | $87.7 | $162.1 | $161.0 |
| Diluted EPS | $0.79 | $0.73 | $1.36 | $1.35 |
| Net interest expense | $8.3 | $6.2 | $14.7 | $12.5 |
Q2 revenue rose 11.9% (13% excluding fuel surcharge), operating income rose 8.0%, and net earnings rose 6.5%. For the first half, revenue increased 10.5% (12% excluding fuel surcharge), operating income increased 1.5%, and net earnings increased 0.6%. Net margin was 6.0% in Q2 versus 6.3% a year earlier, and 5.5% for the first half versus 6.0%.
For the first six months, operating cash flow was $301.0 versus $293.6; investing cash outflow was $352.8 versus $211.7, principally reflecting higher equipment purchases. Financing provided $51.9 versus an $81.5 outflow. Cash at June 30 was $5.9.
At June 30, total debt was $874.0, compared with $708.4 at December 31, 2013; debt-to-equity was 0.81 versus 0.70, and debt was 45% of total capital versus 41%. Current debt was zero after repayment/refinancing activity; the working capital ratio was 1.44 versus 0.95 at year-end. The $500 million revolving facility, expiring August 2016, had $123.5 outstanding at a 1.10% average rate. The company reported covenant compliance.
Material changes and segment results
- Intermodal (JBI): Q2 revenue rose 9% to $931 million, mainly on 8% higher load volume; operating income increased 2% to $113.4 million. Rail service disruptions, lower equipment turns, driver recruiting challenges, and higher insurance, equipment, and outsourced drayage costs constrained results. First-half operating income declined to $206.6 million from $207.5 million.
- Dedicated Contract Services (DCS): Q2 revenue rose 15% to $348 million, while operating income increased slightly to $30.3 million. First-half revenue rose 15%, but operating income fell to $45.9 million from $51.7 million; weather, driver shortages, recruiting, safety, and equipment costs affected productivity and margins.
- Integrated Capacity Solutions (ICS): Q2 revenue increased 31% to $173 million and operating income to $6.2 million from $4.2 million. First-half revenue grew 32% to $336 million and operating income rose to $12.3 million. Higher load volumes and revenue per load supported growth.
- Truck (JBT): Q2 revenue was flat at $101 million despite an 8% smaller fleet; operating income rose to $9.4 million from $2.9 million, helped in part by equipment-sale gains. First-half revenue declined 5%, while operating income increased to $11.8 million from $4.0 million.
Consolidated cost pressures included salaries and benefits, depreciation, maintenance and supplies, and insurance and claims. Q2 insurance and claims expense increased 64.2%, attributed to higher incident volume and accident severity. Net equipment-sale gains were $2.4 million in Q2 and $5.1 million for the first half, versus $0.1 million and $1.4 million, respectively, in 2013.
Outlook, liquidity, risks, and unusual items
- Management expected 2014 net capital expenditures of $680–$690 million and reported approximately $324 million of expected spending for the remainder of 2014. First-half net capital expenditures were approximately $353 million. The company stated that cash, operating cash flow, and its revolver should fund foreseeable operating and capital needs.
- Management cited seasonal freight volume strength typically from August through early November in full-load freight. No earnings or revenue guidance was provided.
- Driver availability, recruiting and wage inflation, rail velocity and service interruptions, accident severity and insurance costs, fuel price and surcharge recovery, weather, competition, economic conditions, reliance on third parties and major customers, and regulation are identified risks. Management noted driver costs may continue to rise faster than customer rate adjustments.
- In March 2014, the company issued $250 million of 2.40% notes due 2019 and $250 million of 3.85% notes due 2024. It repaid a $150 million term loan at maturity and prepaid $100 million of 6.08% notes in April. A swap converts the 2019 notes to variable-rate exposure; management estimated that a 1 percentage-point increase in applicable short-term rates would reduce annual pretax earnings by $3.7 million.
- Q2 included $75 million of share repurchases; $263 million remained under the authorization at June 30. The quarterly dividend increased to $0.20 per share from $0.15 in Q2 2013.
- In a California driver class action, the court entered judgment for the company on all claims during Q2; plaintiffs appealed. Related cases were stayed, and the company said it could not reasonably estimate any possible loss. Other ordinary-course claims were not expected by management to have a material adverse effect.
- The company was evaluating the impact and transition method for the new revenue recognition standard, effective for periods beginning after December 15, 2016.
Most important facts for investors to verify
- Whether JBI service disruptions and driver constraints improve, and whether rising driver, safety, and insurance costs continue to pressure margins.
- Whether planned equipment investment and capital commitments are supported by operating cash flow without further material increases in debt.
- Progress and outcome of the appealed California driver litigation and any change in the ability to estimate potential exposure.
- How effectively the company passes through fuel costs and sustains pricing amid market and capacity changes.
- Any material effect from adopting the new revenue recognition standard.