J.B. Hunt Transport Services, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. J.B. Hunt provides intermodal, dedicated contract, truckload and logistics services. Financial amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total operating revenue | $942.8 | $769.8 | $1,787.4 | $1,492.6 |
| Revenue excluding fuel surcharges | $812.0 | $703.0 | $1,548.9 | $1,366.6 |
| Operating income | $91.3 | $47.1 | $158.8 | $104.1 |
| Net earnings | $52.1 | $24.0 | $89.6 | $54.8 |
| Diluted earnings per share | $0.40 | $0.19 | $0.69 | $0.42 |
| Operating margin | 9.7% | 6.1% | 8.9% | 7.0% |
| Net margin | 5.5% | 3.1% | 5.0% | 3.7% |
Q2 revenue rose 22% including fuel surcharges; excluding surcharges, it increased 16%. For the first half, revenue grew 20% including surcharges and 13% excluding them. Q2 operating income nearly doubled, while first-half operating income grew 53%. Results benefited from increased freight volumes, improved utilization and lower comparative impairment expense.
Segments and material changes
- Intermodal (JBI): Q2 revenue increased 24% to $526 million and operating income rose to $59.5 million from $38.8 million. Higher loads and improved container utilization contributed; load volume increased 19%.
- Dedicated Contract Services (DCS): Q2 revenue increased 31% to $229 million and operating income rose to $22.3 million from $8.1 million, reflecting demand, truck additions and new business.
- Truck (JBT): Q2 revenue grew 15% to $125 million; the segment returned to operating profit of $7.2 million from a $4.0 million loss. Network refinement, fleet reduction and improved tractor utilization supported the improvement.
- Integrated Capacity Solutions (ICS): Q2 revenue increased 3% to $70 million, but operating income declined to $2.2 million from $4.2 million. Purchased transportation costs compressed margins; gross profit fell 27% to $9.7 million and gross margin declined to 13.9% from 19.5%.
Q2 operating expenses increased 17.8%, slower than revenue growth of 22.5%. Fuel and fuel taxes rose 34.8%, and rents and purchased transportation rose 24.6%, reflecting fuel prices, rates and higher volumes. General and administrative expense fell 54.5%, largely because Q2 2009 included $10.3 million of impairment charges. Insurance and claims expense also decreased.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $208.8 million, versus $150.6 million in 2009. Investing cash outflow was $104.0 million, compared with $143.6 million; financing cash outflow was $105.0 million, primarily reflecting share repurchases and dividends.
- Cash was $7.7 million at June 30. Current assets were $423.6 million and current liabilities were $527.8 million; the working capital ratio was 0.80, down from 1.46 at year-end 2009, mainly because $200 million of senior notes due in March 2011 was classified as current.
- Total debt was $617.1 million, compared with $565.0 million at December 31, 2009 and $648.2 million at June 30, 2009. Debt-to-equity was 1.08. The company had $217.1 million drawn on its $350 million revolving facility at an average rate of 1.1%; the facility expires in March 2012. The company reported compliance with debt covenants.
- First-half net capital expenditures were approximately $104 million. The company expected about $124 million of net spending for the remainder of 2010 and approximately $280 million for the full year.
- Dividends declared were $0.12 per share for Q2. The board authorized up to $500 million in share repurchases; 4.4 million shares were purchased during the quarter for $150 million, with $350 million remaining under the authorization at June 30.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management said cash, operating cash generation and the revolving credit facility should provide sufficient funds for operating and capital requirements for the foreseeable future. Freight volumes are typically somewhat higher from August through early November in Truck and Intermodal. Management cautioned that interim results are not necessarily indicative of full-year results.
Risks identified include economic conditions, fuel cost and availability, reliance on third-party carriers, driver and carrier availability, customer concentration, competition, insurance and claims, regulation, environmental requirements, weather, and adverse legal or tax outcomes. A 1-percentage-point increase in applicable variable borrowing rates would reduce annual pretax earnings by approximately $2.2 million. The company had $18.9 million of gross unrecognized tax benefits, plus $3.6 million of accrued interest and penalties.
Routine claims and litigation were not expected to materially affect financial condition, results or liquidity. However, California driver class-action allegations concerning wages, meal and rest periods, and other matters were stayed pending an unrelated state Supreme Court decision; the company could not estimate a possible loss range.
Important facts for investors to verify
- Whether volume, utilization and pricing improvements continued after the quarter, particularly in JBI and DCS.
- Whether ICS margins recovered from the reported 13.9% gross margin amid tighter carrier capacity and higher purchased transportation costs.
- The company’s ability to fund the $200 million senior-note maturity in March 2011 and planned 2010 capital spending while executing the remaining repurchase authorization.
- Actual full-year capital expenditures versus the approximately $280 million expectation, and the effect of repurchases and dividends on debt and liquidity.
- Developments in the California driver litigation and resolution of uncertain tax positions.