J.B. Hunt Transport Services, Inc. — Q1 2013 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2013, compared with Q1 2012. J.B. Hunt provides intermodal, dedicated contract, logistics/brokerage, and truck transportation services. Results are unaudited; the company notes that freight volumes are typically seasonally higher from August through early November.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total operating revenue | $1,291.6 million | $1,165.9 million | +10.8% |
| Revenue excluding fuel surcharges | $1,038.9 million | $938.7 million | About +11% |
| Operating income | $125.0 million | $116.6 million | +7.2% |
| Operating margin | 9.7% | 10.0% | Down 0.3 percentage points |
| Net earnings | $73.3 million | $67.7 million | +8.4% |
| Diluted EPS | $0.61 | $0.57 | +7.0% |
| Operating cash flow | $206.8 million | $146.3 million | +41.4% |
| Capital expenditures, net | $115.1 million | $83.8 million | Higher |
Fuel surcharge revenue was $252.6 million, up from $227.2 million. Net income margin was 5.7%, versus 5.8%. Net interest expense declined to $6.3 million from $7.0 million; the effective tax rate was 38.25% in both periods. The company declared no Q1 dividend because its increased $0.15 quarterly dividend had been paid in December 2012; a $0.15 dividend was declared in April for payment in May.
Segment results
- Intermodal (JBI): Revenue rose 15% to $796 million, with load volume up 13%; operating income grew 22% to $96.8 million, supported by volume and revenue per load.
- Dedicated Contract Services (DCS): Revenue rose 9% to $279 million, but operating income fell 22% to $21.9 million. New customer implementations, equipment and maintenance costs, lower equipment-sale gains, and bad debt weighed on results.
- Integrated Capacity Solutions (ICS): Revenue increased 26% to $123 million and operating income increased 27% to $5.2 million. Gross profit margin declined to 13.0% from 14.3%, as carrier costs rose amid tighter capacity and competition.
- Truck (JBT): Revenue declined 21% to $102 million and operating income fell 78% to $1.1 million, principally reflecting a 21% smaller fleet, lower utilization, and higher per-unit costs.
Financial position and liquidity
At March 31, 2013, cash was $5.7 million and total debt was $593.3 million, down from $685.3 million at December 31, 2012 and $702.1 million a year earlier. Debt-to-equity was 0.68 and debt was 40% of total capital, compared with 0.87 and 46% at year-end 2012. The working capital ratio was 0.85, down from 1.10 at year-end, and the current portion of debt increased to $200 million from $100 million.
Operating cash flow improved, but management attributed much of the increase to payment and working-capital timing, including higher payables and accrued expenses; receivable collection timing partly offset the benefit. Investing activities used $115.1 million and financing activities used $91.5 million. The $500 million revolving facility had $43.7 million outstanding; the term loan balance was $150 million and matures in March 2014. Debt includes a $50 million senior-note installment due July 2013 and $150 million of notes maturing July 2014. The company reported compliance with all debt covenants and stated it expects available liquidity and operating cash generation to fund foreseeable requirements.
Changes, outlook, and risks
- Revenue growth was led by JBI, DCS, and ICS, while JBT contracted. Operating expenses grew 11.2%, faster than revenue growth of 10.8%, compressing operating margin.
- Management expects approximately $2.5 million of additional DCS implementation expense in coming periods; full implementation of the large new customer fleets is expected to take six to eight months.
- Management expects 2013 net capital expenditures of $425 million to $450 million and reported approximately $277 million of remaining committed equipment and facility spending as of March 31.
- Notable cost pressures included equipment and maintenance costs, tighter driver and carrier supply, higher insurance and claims expense (including costs from two prior-period claims), and reduced gains on equipment sales. The company recorded $1.3 million of equipment-sale gains versus $5.7 million a year earlier.
- California driver class-action lawsuits allege wage and meal/rest-period violations. The company cannot reasonably estimate any possible loss or range of loss and is awaiting a ruling on a motion to stay proceedings. Other ordinary-course claims are not expected by management to have a material adverse effect.
- Key stated risks include economic conditions, fuel prices and recovery through surcharges, accidents and claims, weather, competition, reliance on third parties and major customers, driver/carrier availability, regulation, and tax audits or assessments. A 1 percentage-point increase in applicable variable borrowing rates would reduce annual pretax earnings by approximately $1.9 million.
Important facts for investors to verify
- Whether strong intermodal and logistics volume and pricing persist, and whether operating margins recover from the year-over-year decline.
- Whether DCS customer conversions proceed on schedule and within the disclosed remaining implementation-cost estimate.
- Whether the $425 million to $450 million net-capex outlook and remaining commitments are funded while near-term debt maturities are addressed.
- How much of the Q1 operating-cash-flow improvement reflects timing rather than sustained cash generation.
- Developments in the California driver litigation and the uncertain tax positions, including $26.4 million of gross unrecognized tax benefits and $4.4 million of accrued interest and penalties.