J.B. Hunt Transport Services, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. The company operates Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truck (JBT). Results are unaudited. Amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total operating revenue | $1,382.9 | $1,255.1 | $2,674.4 | $2,421.1 |
| Operating income | $147.4 | $137.2 | $272.4 | $253.8 |
| Net earnings | $87.7 | $80.5 | $161.0 | $148.1 |
| Diluted EPS | $0.73 | $0.67 | $1.35 | $1.24 |
| Operating margin | 10.7% | 10.9% | 10.2% | 10.5% |
| Net margin | 6.3% | 6.4% | 6.0% | 6.1% |
- Q2 revenue increased 10.2%; revenue excluding fuel surcharges increased 11%. Fuel surcharge revenue was $262.7 million versus $249.6 million. First-half revenue grew 10.5%, or 11% excluding fuel surcharges.
- Q2 operating income rose 7.4% and net earnings rose 9.0%; first-half operating income rose 7.3% and net earnings rose 8.7%. Margins declined modestly as operating expenses grew faster than revenue.
- Q2 net interest expense was $6.2 million, down 10.1%; the first-half amount was $12.5 million, down 10.3%, reflecting lower average debt and rates. The effective tax rate was 37.88% for Q2 and 38.05% for the first half, versus 38.25% in 2012.
- First-half operating cash flow was $293.6 million, versus $260.6 million. Investing cash outflow was $211.7 million, chiefly reflecting $238.5 million of property and equipment additions, partly offset by equipment-sale proceeds. Financing cash outflow was $81.5 million. Cash ended at $5.9 million.
- At June 30, total debt was $674.1 million, down from $685.3 million at year-end; stockholders’ equity was $902.2 million. The working capital ratio was 0.93, versus 1.10 at December 31, 2012. Current debt was $200 million. Total debt to equity was 0.75 and debt was 43% of total capital.
- The company had $124.5 million drawn on its $500 million revolving facility, which expires in August 2016, and $150 million under a term loan maturing in March 2014. A $50 million installment on the $150 million, 6.08% senior notes was due in July 2013; the remaining notes mature in July 2014. The company reported compliance with all debt covenants.
Material changes and segment performance
- JBI: Q2 revenue rose 12% to $855 million and operating income rose 19% to $110.7 million, supported by 12% higher load volume. First-half revenue grew 13% and operating income rose to $207.5 million. Growth was partly offset by higher rail and drayage costs and other items.
- DCS: Q2 revenue increased 13% to $303 million, but operating income fell to $29.7 million from $33.2 million. New customer contracts added 863 revenue-producing trucks year over year; productivity per truck declined about 4%. First-half operating income fell to $51.7 million from $61.4 million. Implementation expenses were $2.5 million in Q2 and $4.2 million in the first half; the company expected about $1.0 million more related to these contracts.
- ICS: Q2 revenue rose 20% to $132 million and operating income increased to $4.2 million from $2.0 million. Load volume grew 29%; gross margin improved to 11.8% from 10.6%. First-half revenue grew 23% and operating income reached $9.3 million.
- JBT: Q2 revenue fell 20% to $101 million and operating income declined to $2.9 million from $8.8 million. The company cited a 16% smaller fleet, lower utilization and shorter length of haul. First-half revenue fell 20% and operating income declined to $4.0 million from $13.7 million.
- Q2 rents and purchased transportation costs increased 12.5%, faster than revenue, while salaries and benefits rose 10.3%. Fuel expense declined 2.5%. First-half general and administrative expense increased 126.2%, reflecting lower asset-disposal gains and unusual costs.
Outlook, commentary, risks and unusual items
- The company expected 2013 net capital expenditures of $425 million to $450 million and was committed to spend approximately $172 million during the remainder of 2013. Management said cash generated from operations, liquid assets and the revolver should provide sufficient funds for foreseeable operating and capital requirements. No specific earnings or revenue guidance was provided.
- Management noted seasonal freight volumes are typically higher from August through early November in full-load transportation. It also cited a tighter supply of qualified drivers and the associated pressure on labor costs.
- Q2 included $2.4 million of abandoned shared technology costs and a $1.5 million loss on equipment destroyed in two train derailments. DCS also incurred contract implementation costs. Asset-disposal gains were $0.1 million in Q2 2013 versus $4.1 million a year earlier; first-half gains were $1.4 million versus $9.8 million.
- California-based current and former drivers have brought class-action suits alleging unpaid wages and meal/rest-period violations. A motion for judgment on the pleadings on certain claims was pending; the first trial was scheduled for Q2 2014. The company said it could not reasonably estimate any possible loss or range of loss. Other ordinary-course claims were not expected to materially affect results, financial condition or liquidity.
- Other disclosed risks include economic conditions, fuel prices and availability, driver and carrier availability, competition, customer concentration, accidents and insurance claims, regulation, adverse weather, and legal or tax outcomes. A 1 percentage-point increase in variable borrowing rates would reduce annual pretax earnings by an estimated $2.7 million. The company had no fuel-price hedges.
- Gross unrecognized tax benefits were $25.9 million, including $4.4 million of accrued interest and penalties; the timing of any settlements was not reasonably estimable. The company also reported $12.0 million of trading investments measured at fair value.
Important facts for investors to verify
- Whether Q2 2013’s lower operating and net margins persist as costs rise, particularly purchased transportation, labor and equipment expenses.
- Progress and profitability of new DCS contracts, including the remaining implementation costs and the effect on productivity.
- JBT fleet utilization and operating performance, and whether JBI and ICS volume growth continues.
- Funding and timing for the $425–$450 million annual capital expenditure plan, and repayment or refinancing of near-term debt maturities.
- Developments in the California driver litigation, whose potential loss was not estimable, and any material changes in tax contingencies.