JBHT

Business Context and Reporting Period

Company: J.B. Hunt Transport Services, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Industry: Surface Transportation (Intermodal, Dedicated Contract Services, Full-Load Dry-Van)

J.B. Hunt is one of the largest surface transportation companies in North America, operating three primary segments: Intermodal (JBI), Dedicated Contract Services (DCS), and Full-Load Dry-Van (JBT). The company also holds a 37% ownership interest in Transplace, Inc. (TPI). The reporting period covers the calendar year 2006, during which the company focused on capacity management, shifting assets to higher-margin segments, and managing rising fuel costs through surcharge programs.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased 6.4% to $3.33 billion. Excluding fuel surcharge revenues, organic revenue growth was 3.8%, driven by volume increases in JBI (5.1%) and DCS (2.2%) segments.
• Segment Performance:
  • JBI: Revenue rose 11.4% to $1.43 billion; Operating income increased to $182 million (vs. $124 million in 2005, which included a $25.8 million arbitration charge).
  • DCS: Revenue grew 8.4% to $915 million; Operating income rose to $104 million.
  • JBT: Revenue declined 1.2% to $1.01 billion due to lower load volumes and utilization; Operating income dropped 27% to $87 million.
• Cost Structure: Fuel and fuel taxes expense increased 15.0% due to a 12.6% rise in fuel cost per gallon. Salaries and wages increased 4.3% due to higher driver compensation. General and administrative expenses decreased 27.7% due to the absence of 2005 arbitration legal fees and charitable contributions.
• Debt and Liquidity: Total debt increased significantly from $124 million to $396 million, primarily due to a new $100 million term loan for trailer purchases and increased utilization of revolving credit facilities. Working capital ratio declined from 1.72 to 0.98.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects the effective income tax rate to approximate 38.5% in 2007. The company is committed to spending approximately $129.4 million in 2007 on revenue equipment.
• Unusual Items:
  • 2005 Arbitration: 2005 results included a $25.8 million pretax charge related to a settlement with BNSF Railway. This charge is not present in 2006, favorably impacting year-over-year comparisons.
  • Insurance Reserves: 2006 operating income included a $12.4 million pretax charge to increase insurance reserves.
  • Accounting Change: Adoption of SFAS 123R (Share-Based Payment) in 2006 reduced net earnings by $3.4 million and diluted EPS by $0.03.
• Risks and Contingencies:
  • IRS Dispute: The IRS has proposed disallowing tax benefits from 1999 sale-and-leaseback transactions. A contingent liability of approximately $42.9 million (including interest) is recorded. The ultimate impact on liquidity could be approximately $44 million excluding interest.
  • Fuel Prices: Rapid fluctuations in diesel fuel prices remain a significant risk, though fuel surcharge programs mitigate most exposure.
  • Customer Concentration: The top 10 customers accounted for 40% of revenue; Wal-Mart Stores, Inc. alone accounted for 14%.
  • Driver Shortage: Industry-wide difficulty in attracting and retaining qualified drivers continues to drive up compensation costs.

Investor Verification Checklist

• Debt Covenants: Verify compliance with financial ratios required by the new $100 million term loan and revolving credit facilities, given the significant increase in leverage.
• IRS Contingency: Monitor the status of the IRS audit regarding the 1999 sale-and-leaseback transactions and the potential for additional tax liabilities beyond the current $42.9 million accrual.
• Insurance Reserves: Assess the adequacy of the $20 million claims accrual and the impact of the $9.2 million reserve increase in Q4 2006 on future profitability.
• Segment Mix: Confirm the sustainability of the shift from lower-margin JBT (Truck) to higher-margin JBI (Intermodal) and DCS segments.
• Capital Expenditures: Track the execution of the $129.4 million equipment commitment for 2007 and its impact on cash flow.