J.B. Hunt Transport Services, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; compared with the corresponding 2012 periods. Unaudited interim results. The company operates Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truck (JBT).
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total operating revenue | $1,435.9 million | $1,295.8 million | $4,110.3 million | $3,716.8 million |
| Operating income | $150.7 million | $133.1 million | $423.2 million | $386.9 million |
| Net earnings | $89.5 million | $78.2 million | $250.5 million | $226.4 million |
| Diluted EPS | $0.75 | $0.65 | $2.10 | $1.89 |
| Operating margin | 10.5% | 10.3% | 10.3% | 10.4% |
Q3 revenue, operating income, and net earnings increased 10.8%, 13.3%, and 14.4%, respectively. Nine-month revenue and net earnings increased 10.6% and 10.7%. Fuel surcharge revenue was $269.9 million in Q3 and $785.2 million year to date; revenue growth excluding fuel surcharges was also 11% for both comparison periods. Effective tax rate was 38.25% for Q3 and 38.12% year to date.
Segment trends
- JBI: Q3 revenue rose 12% and operating income rose 21%, supported by 12% load growth, improved box turns, and steady demand. Nine-month operating income increased 20%.
- DCS: Q3 revenue rose 17%, with 972 net additional revenue-producing trucks year over year; Q3 operating income increased to $29.3 million. Nine-month operating income declined to $80.9 million from $86.9 million. New-account implementation costs were about $2.5 million in Q3 and $6.7 million year to date; some costs may continue during the ramp-up.
- ICS: Q3 revenue rose 13%, but operating income fell to $2.8 million from $5.5 million as gross margin narrowed to 10.4% from 12.8%, principally due to higher third-party carrier rates. Nine-month revenue rose 19% and operating income rose modestly; gross margin fell to 11.7% from 12.5%.
- JBT: Q3 revenue fell 17% and operating income fell to $0.6 million from $4.0 million. Nine-month revenue fell 19% and operating income fell to $4.7 million from $17.7 million, reflecting a smaller fleet, lower utilization, and shorter hauls.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $411.2 million, versus $417.3 million. Net cash used in investing was $333.7 million, versus $279.4 million; financing used $77.2 million, versus $137.7 million.
- Cash was $6.0 million at September 30, 2013. Current assets were $648.0 million and current liabilities were $690.3 million; the working capital ratio was 0.94, down from 1.10 at December 31, 2012.
- Total debt was $687.5 million, approximately flat from $685.3 million at year-end 2012. The current portion rose to $250.0 million; total debt/equity was 0.70 and debt as a share of total capital was 41%. The company reported covenant compliance.
- Debt includes a $150 million term loan maturing March 2014 and $100 million of 6.08% senior notes due July 2014; the remaining $250 million of senior notes mature September 2015. The $500 million revolving facility expires August 2016, with $187.8 million drawn at 1.22%.
- Nine-month net capital expenditures were approximately $334 million. Management expected full-year 2013 net capital expenditures of $425 million to $450 million and had about $107 million of equipment and facility commitments for the remainder of 2013 and early 2014. Management stated available liquidity, operating cash flow, and the revolver should fund foreseeable operating and capital needs.
Material changes, outlook, and risks
Revenue growth was driven chiefly by JBI load growth and new DCS customer conversions, with ICS also contributing. Cost pressures included higher purchased transportation and carrier rates, driver hiring and retention costs, equipment and maintenance costs, and DCS implementation expenses. JBI and DCS fleet investment increased depreciation. JBT continued to contract, while ICS profitability weakened despite revenue growth. The company noted typical seasonal freight strength from August through early November; it provided no specific earnings guidance.
Key risks identified include economic and freight-market conditions, fuel prices and surcharge recovery, driver and carrier availability, customer concentration, competition, regulation, accidents and insurance claims, and severe weather. A one-percentage-point increase in applicable short-term interest rates would reduce annual pretax earnings by $3.4 million at the reported borrowing level.
California driver class-action lawsuits allege wage and meal/rest-period violations. The company obtained judgment in its favor on meal and rest-period claims, but other claims remained pending; a trial in one case was scheduled for Q2 2014. The company could not reasonably estimate a possible loss or range. Gross unrecognized tax benefits were $26.6 million, with $4.8 million of accrued interest and penalties; timing of any settlements was not estimable.
Other reported items: the company repurchased $64.7 million of stock during the first nine months but made no repurchases in Q3; $388 million remained under the authorization at September 30. The quarterly dividend was $0.15 per share. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How the company will refinance or repay the $250 million of debt due in 2014, and the effect on liquidity and borrowing costs.
- Whether DCS new-account fleets reach planned productivity and whether implementation costs persist.
- Whether ICS can recover brokerage margins as third-party carrier rates remain elevated.
- Whether JBT utilization and profitability stabilize as the fleet is reduced.
- The eventual outcome and potential financial exposure of the California driver litigation, which was not quantifiable in the filing.
- Whether planned capital spending and the identified equipment commitments remain consistent with operating cash flow and management’s liquidity assessment.