J.B. Hunt Transport Services, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. J.B. Hunt operates Intermodal (JBI), Dedicated Contract Services (DCS), Truck (JBT), and Integrated Capacity Solutions (ICS). Results are unaudited, and the company notes that freight volumes are seasonal, typically higher from August through early November in Truck and Intermodal.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total operating revenue | $1,000.8 million | $844.7 million | +18.5%; +13% excluding fuel surcharges |
| Operating income | $89.8 million | $67.4 million | +33.2% |
| Operating margin | 9.0% | 8.0% | +1.0 percentage point |
| Net earnings | $50.1 million | $37.5 million | +33.7% |
| Basic / diluted EPS | $0.41 / $0.40 | $0.29 / $0.29 | Higher year over year |
| Net interest expense | $8.4 million | $6.5 million | +29.9% |
| Operating cash flow | $136.6 million | $86.7 million | +$49.9 million |
| Net capital expenditures | Approximately $112 million | Approximately $48 million | Higher investment in equipment |
Fuel surcharge revenue was $169.2 million, up from $107.8 million, reflecting higher fuel prices. Total operating expenses rose 17.2%, slower than revenue growth; fuel and fuel taxes increased 35.6%, and rents and purchased transportation increased 21.1%. Salaries, wages, and benefits rose 11.4%, while insurance and claims expense fell 14.8%. Net gains on equipment sales were $4.4 million versus $2.2 million.
Segment results
- JBI: Revenue $577 million (+23%); operating income $62.6 million versus $47.5 million. Load volume increased 15%, eastern network volume 28%, and base pricing 4%.
- DCS: Revenue $238 million (+15%; +10% excluding fuel surcharges); operating income $18.6 million versus $18.4 million. New contracts and account growth were partly offset by a customer bankruptcy.
- JBT: Revenue $119 million (+6%; +1.2% excluding fuel surcharges); operating income $5.8 million versus $0.6 million.
- ICS: Revenue $75 million (+22%); operating income $2.6 million versus $1.1 million. Gross profit margin edged down to 14.7% from 14.8%, with tighter carrier capacity and higher fuel costs cited.
Cash, debt, and liquidity
- Cash and equivalents were $5.4 million at March 31, 2011, compared with $7.7 million at December 31, 2010. Current assets were $475.6 million and current liabilities $425.0 million; the working capital ratio was 1.12, versus 0.91 at year-end 2010.
- Total debt was $698.2 million, compared with $654.2 million at December 31, 2010 and $541.0 million at March 31, 2010. Debt-to-equity was 1.25 and debt represented 56% of total capital.
- At quarter-end, borrowings included $49 million under a $350 million revolving facility, $200 million under a new three-year variable-rate term loan at 1.41%, and $449.2 million of senior notes. The revolving facility expires in March 2012. The company reported compliance with all debt covenants.
- Operating cash flow was $136.6 million; investing activities used $112.4 million and financing activities used $26.5 million. Capital spending included intermodal containers and chassis, trucks, tractors, and other equipment.
- Management said liquid assets, operating cash flow, and the revolving credit line should provide sufficient funds for operating and capital needs for the foreseeable future. The company expected $410–$440 million of net capital expenditures for calendar 2011 and was committed to approximately $300 million of spending for the remainder of 2011, net of expected equipment-sale proceeds.
Outlook, risks, and other notable items
- The filing provides no specific earnings or revenue guidance. The capital expenditure range is the principal quantified outlook item.
- Risks identified include economic conditions, fuel cost and availability, driver and carrier availability, competition and pricing, customer concentration, weather, accidents and claims, regulation, and adverse legal or tax outcomes. Fuel surcharges have historically recovered a majority of fuel price increases, but recovery is not assured; the company had no fuel-hedging derivatives.
- A 1 percentage point increase in applicable short-term variable interest rates would reduce annual pretax earnings by an estimated $2.5 million at current borrowing levels. Foreign-currency exposure was described as immaterial.
- The company repurchased 1.34 million shares for approximately $55 million during the quarter; $194 million remained under its $500 million repurchase authorization. It declared a $0.13 quarterly dividend, up from $0.12 in Q1 2010.
- California-based drivers have brought class-action allegations concerning unpaid wages and meal and rest periods. Proceedings were stayed pending an unrelated California Supreme Court case; the company could not estimate a possible loss range. It said other ordinary-course claims were not expected to materially affect its financial condition, results, or liquidity.
- Gross unrecognized tax benefits were $17.5 million, including $3.2 million of accrued interest and penalties. The filing also identifies $20.7 million of potential uncertain-tax-position liabilities, with settlement timing not reasonably estimable.
Most important facts for investors to verify
- Whether volume, pricing, and operating-margin gains persist, particularly in JBI, and whether fuel surcharge collections keep pace with fuel and third-party transportation costs.
- Execution and funding of the planned $410–$440 million 2011 net capital expenditure program, and the resulting effect on debt and liquidity.
- Debt refinancing and maturity exposure, including the March 2012 revolving-facility expiration, variable-rate borrowings, and scheduled term-loan and note principal payments.
- Potential financial impact of the California driver litigation, customer bankruptcy, and uncertain tax positions, none of which has a clear estimated loss or settlement amount in the filing.
- Whether the stated liquidity outlook remains adequate as equipment commitments, share repurchases, and dividend payments continue.