J.B. Hunt Transport Services, Inc. — Q2 2012 Form 10-Q
Business context and period: The filing covers the quarter and six months ended June 30, 2012, compared with the same 2011 periods. J.B. Hunt operates Intermodal (JBI), Dedicated Contract Services (DCS), Truck (JBT), and Integrated Capacity Solutions (ICS). Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total operating revenue | $1,255.1 | $1,149.9 | $2,421.1 | $2,150.6 |
| Revenue excluding fuel surcharge | $1,005.5 | $924.7 | $1,944.2 | $1,756.3 |
| Operating income | $137.2 | $113.4 | $253.8 | $203.3 |
| Net earnings | $80.5 | $65.7 | $148.1 | $115.8 |
| Diluted EPS | $0.67 | $0.53 | $1.24 | $0.94 |
| Operating margin | 10.9% | 9.9% | 10.5% | 9.5% |
- Q2 revenue increased 9.2%; revenue excluding fuel surcharges also grew 9%. Net earnings rose 22.5%. For the first half, revenue grew 12.6% and net earnings 27.9%; excluding fuel surcharges, revenue increased 11%.
- Q2 fuel surcharge revenue was $249.6 million, versus $225.2 million; first-half fuel surcharge revenue was $476.9 million, versus $394.3 million.
- Operating cash flow was $260.6 million for the first half, down from $307.7 million. Net cash used in investing was $170.9 million, versus $210.9 million; net cash used in financing was $89.3 million, versus $93.3 million. Cash ended at $5.9 million.
- At June 30, total debt was $679.5 million, down from $749.2 million at December 31, 2011, but up from $664.3 million a year earlier. Debt to equity was 0.95; debt was 49% of total capital. Working capital ratio was 1.03, compared with 1.17 at year-end. Current debt was $100 million.
- Cash and cash equivalents were $5.9 million; current assets were $540.4 million and current liabilities $524.4 million. The company reported $30 million drawn on its $500 million revolving facility, which expires in August 2016, and said it was in compliance with debt covenants.
Material changes and segment trends
- JBI: Q2 revenue increased 13% to $762 million and operating income rose to $93.4 million from $76.5 million, supported by 13% load growth. First-half revenue rose 16% and operating income increased to $172.8 million.
- DCS: Q2 revenue increased 1% to $267 million; operating income grew to $33.2 million from $27.4 million. First-half operating income increased to $61.4 million, with the prior-year period affected by a $1.6 million customer bankruptcy charge.
- JBT: Q2 revenue declined 3% to $126 million, but operating income rose to $8.8 million from $6.9 million. First-half revenue increased 2% while operating income reached $13.7 million.
- ICS: Q2 revenue increased 23% to $109 million, while operating income fell to $2.0 million from $2.6 million as gross margin declined to 10.6% from 12.3%. First-half revenue rose 26%; operating income increased to $6.0 million, though gross margin declined to 12.4% from 13.4%.
- For Q2, operating expenses grew 7.9%, slower than revenue growth of 9.2%; rents and purchased transportation increased 14.9%. For the first half, operating expenses grew 11.3% versus revenue growth of 12.6%. Management cited higher purchased transportation, driver pay, maintenance, tolls, tire costs, and insurance claims, partly offset by lower fuel costs and higher gains on equipment sales.
Outlook, risks, and unusual items
- Management expected 2012 net capital expenditures of $375 million to $400 million and was committed to approximately $164 million of additional spending for the remainder of the year. Spending was primarily for tractors, intermodal containers and chassis, and other equipment.
- Management stated that cash, operating cash generation, and the revolving credit facility should provide sufficient funds for operating and capital needs for the foreseeable future. No earnings or revenue guidance was provided in the filing.
- The company notes freight seasonality, typically with higher full-load volumes from August through early November. Key risks include economic conditions, fuel prices and recovery through surcharges, driver and carrier availability, competition, weather, accidents and claims, regulation, and customer concentration.
- California driver class-action matters allege wage and meal/rest-period violations. The company intends to seek summary judgment but said it could not reasonably estimate any possible loss or range. It stated other ordinary-course claims were not expected to have a material adverse effect.
- Gross unrecognized tax benefits were $18.8 million, including $3.2 million of accrued interest and penalties; the filing also lists $22 million of potential uncertain-tax-position liabilities excluded from its commitments table, with settlement timing not reasonably estimable.
- Variable-rate debt creates interest-rate exposure: management estimated a one-percentage-point increase in applicable rates would reduce annual pretax earnings by $2.3 million. No fuel-price or foreign-currency hedging derivatives were in place.
- The board declared a regular $0.14-per-share dividend in July, payable August 17, 2012. No shares were repurchased during Q2; $503 million remained under share-repurchase authorizations.
Important facts for investors to verify
- Whether JBI’s load growth and improved operating results continue, and whether higher purchased-transportation costs pressure margins.
- Whether ICS can stabilize gross profit margins amid tighter carrier capacity and higher purchase rates.
- Cash conversion and capital requirements, including execution of the $375 million to $400 million annual net capital expenditure plan.
- Debt maturities and repayment requirements, including $50 million of senior-note principal due in July 2012 and a $50 million term-loan installment due in March 2013.
- Developments and potential exposure in the California driver litigation and uncertain tax positions, neither of which has a clear estimated loss in the filing.