J.B. Hunt Transport Services, Inc. — Q3 2012 Form 10-Q
Period: Three and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. The company operates Intermodal (JBI), Dedicated Contract Services (DCS), Truck (JBT), and Integrated Capacity Solutions (ICS). Amounts below are in USD millions unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total operating revenue | 1,295.8 | 1,171.3 | 3,716.8 | 3,321.9 |
| Operating income | 133.1 | 118.7 | 386.9 | 321.9 |
| Net earnings | 78.2 | 68.7 | 226.4 | 184.4 |
| Diluted EPS | $0.65 | $0.57 | $1.89 | $1.50 |
| Operating margin | 10.3% | 10.1% | 10.4% | 9.7% |
| Net margin | 6.0% | 5.9% | 6.1% | 5.6% |
Fuel surcharge revenue was $249.0 million for Q3 and $725.9 million for the first nine months, versus $223.9 million and $618.2 million, respectively, in 2011. Excluding fuel surcharges, revenue grew 10% in Q3 and 11% year to date. The effective tax rate was 38.25% in 2012, compared with 38.45% in 2011.
Cash flow and capital: Nine-month operating cash flow was $417.3 million, down from $488.2 million; investing cash outflow was $279.4 million, versus $323.9 million; financing cash outflow was $137.7 million, versus $164.2 million. Cash at September 30 was $5.7 million. Net capital expenditures were approximately $279 million.
Debt and liquidity: Total debt was $644.9 million at September 30, 2012, compared with $749.2 million at December 31, 2011 and $768.0 million at September 30, 2011. The working capital ratio was 1.03; total debt to equity was 0.83. The company had $45.4 million drawn on a $500 million revolving facility, with $200 million outstanding on a term loan and $399.5 million in senior notes, net of discount. A $50 million term-loan installment is due March 2013; $50 million of senior notes is due July 2013. The company reported covenant compliance.
Material changes and segment results
- JBI: Q3 revenue rose 15% to $794 million and operating income rose 25% to $97.9 million, supported by 15% load growth, better container utilization, and drayage efficiencies. Nine-month revenue increased 16% and operating income increased to $270.8 million.
- DCS: Q3 revenue increased 1% to $273 million, but operating income fell to $25.6 million from $29.7 million. New-account implementation costs, safety and workers’ compensation, and health care costs weighed on results. Nine-month operating income rose to $86.9 million, partly reflecting asset transfers and equipment-sale gains; the prior-year period included a $1.6 million customer-bankruptcy charge.
- JBT: Q3 revenue fell 8% to $117 million and operating income fell 41% to $4.0 million, amid a 9% smaller tractor fleet, lower utilization, more empty miles, and higher driver-related and health care costs. Nine-month operating income was $17.7 million, down from $19.6 million.
- ICS: Q3 revenue grew 30% to $121 million and operating income grew 43% to $5.5 million. Nine-month revenue rose 28% to $328 million and operating income reached $11.5 million. Gross margin declined to 12.8% in Q3 and 12.5% year to date, from 13.5% and 13.4%, respectively, as purchased transportation costs rose.
For Q3, operating expenses increased 10.5%, slightly less than revenue growth of 10.6%; rents and purchased transportation increased 16.9%. Insurance and claims expense rose 24.5%, which management attributed primarily to greater accident severity. Nine-month operating expenses increased 11.0% against revenue growth of 11.9%. Net interest expense declined as debt and interest rates fell.
Outlook, risks, and contingencies
- Management expected 2012 net capital expenditures of $350 million to $375 million and reported approximately $77.6 million of remaining-year equipment and facility commitments. It stated that cash, operating cash flow, and the revolving line should meet operating and capital needs for the foreseeable future. No earnings or revenue guidance was provided.
- Freight volumes are somewhat seasonal, typically higher from August through early November in full-load transportation. Results may be affected by economic conditions, fuel prices and availability, competitive rates, driver and carrier availability, weather, accidents, and regulation.
- Management highlighted tighter driver and qualified-carrier supply, rising driver pay and health care costs, and higher accident severity. The company said it has historically recovered a majority of fuel price increases through surcharges, but cannot predict future recovery.
- California driver class actions allege unpaid wages and missed meal and rest periods. The company intends to seek summary judgment and class decertification; it could not reasonably estimate a possible loss or range. Other ordinary-course claims were not expected by management to materially affect financial condition, results, or liquidity.
- Gross unrecognized tax benefits were $19.1 million, including $3.7 million of accrued interest and penalties. The company could not reasonably estimate the timing of settlement for $22.8 million of potential uncertain-tax-position liabilities disclosed in its commitments discussion.
- At current borrowing levels, a one-percentage-point increase in applicable short-term variable rates would reduce annual pretax earnings by $2.5 million. The filing reported no material foreign-currency exposure or fuel-price hedging instruments.
Key facts for investors to verify
- Whether JBI’s volume and operating-efficiency gains can continue while rail, purchased-transportation, and driver costs remain elevated.
- Whether DCS implementation costs and JBT utilization and fleet pressures improve, and whether ICS can protect margins amid tight carrier capacity.
- Actual 2012 capital spending versus the $350 million to $375 million expectation, alongside operating cash flow and debt maturities.
- Developments in the California driver litigation and uncertain tax positions, for which the filing provides no clear estimate of ultimate exposure or settlement timing.
- Cash and committed liquidity: cash was $5.7 million, while $45.4 million of the $500 million revolving facility was drawn; confirm availability and covenant capacity as needs change.