J.B. Hunt Transport Services, Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. J.B. Hunt operates four transportation and logistics segments: Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truck (JBT).
Financial results and key metrics
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Operating revenue | $5.585 billion | $5.055 billion | +10.5% |
| Operating income | $576.7 million | $530.2 million | +8.8% |
| Net earnings | $342.4 million | $310.4 million | +10.3% |
| Diluted EPS | $2.87 | $2.59 | +10.8% |
| Operating margin | 10.3% | 10.5% | Down 0.2 percentage points |
| Net margin | 6.1% | 6.1% | Unchanged |
| Operating cash flow | $574.4 million | $548.0 million | +4.8% |
| Cash used in investing | $442.5 million | $369.6 million | Higher equipment investment |
Fuel surcharge revenue was $1.057 billion, versus $996.8 million in 2012. Excluding fuel surcharges, revenue grew 11.6%. Total operating expenses grew 10.7%, slightly faster than revenue; rents and purchased transportation rose to 50.2% of revenue from 49.2%.
At year-end, cash was $5.8 million, total assets $2.819 billion, stockholders’ equity $1.012 billion, and total debt $708.4 million. The working-capital ratio was 0.95, down from 1.10. Debt-to-equity was 0.70, compared with 0.87. Approximately $358.7 million of debt was variable-rate; management estimated that a one-percentage-point rate increase would reduce annual pretax earnings by $3.6 million.
Segment performance
| Segment | Revenue | Operating income | Notable change |
|---|---|---|---|
| JBI | $3.456 billion | $447 million | Revenue +12.5%; operating income increased on volume growth and improved container utilization. |
| DCS | $1.231 billion | $110 million | Revenue +14.1%; operating income fell from $116 million amid startup, labor, equipment, and claims costs. |
| ICS | $537 million | $16 million | Revenue +17.6%; operating income flat; gross profit margin declined to 11.8% from 13.0%. |
| JBT | $391 million | $4 million | Revenue -19.2%; operating income fell from $23 million as fleet and utilization contracted. |
Material changes versus 2012
- Growth was led by JBI load volume (+12.6%) and DCS new long-term customer contracts; ICS also expanded load volume.
- Higher third-party rail, drayage, and carrier costs, along with driver pay and equipment maintenance, pressured operating margins. The company cited driver shortages and a tighter third-party carrier market.
- DCS revenue-producing trucks increased by a net 1,154, but implementation costs for new accounts and other cost increases reduced segment operating income.
- JBT continued to shrink its fleet and activity: revenue declined 19.2%, with lower equipment utilization and shorter average haul.
- Net cash provided by operations increased, but equipment additions rose to $493.4 million and cash used in investing increased. Treasury stock purchases were $114.7 million in 2013 versus $50 million in 2012.
Outlook, risks, contingencies, and unusual items
- Management expected a 2014 effective tax rate of 38.0%–38.5%. It committed to approximately $606.6 million of 2014 revenue-equipment and facility purchases, net of expected sales or trade-ins.
- Debt obligations of $250 million mature in 2014: a $150 million term loan in March and $100 million of senior notes in July. Management intended to repay 2014 maturities using the revolving facility or other long-term financing. The $500 million revolver had $208.7 million drawn at year-end and matures in August 2016; covenants were met.
- Management said available liquidity, operating cash flow, and financing arrangements should fund foreseeable operating and capital needs. However, substantial equipment spending and near-term maturities make funding and refinancing important to monitor.
- The company reported that the July 2013 hours-of-service rules had negatively affected productivity. It did not anticipate material productivity effects from proposed electronic logging or speed-limiter requirements.
- Fuel-price volatility, driver and carrier availability, railroad relationships, severe weather, competition, customer concentration, insurance claims, equipment resale values, and regulatory or environmental requirements were identified as risks. Fuel surcharges historically recover most, but not necessarily all, fuel cost increases; there were no fuel hedges at year-end.
- The top 10 customers represented approximately 29% of 2013 revenue; no individual customer exceeded 10%. Two customer bankruptcies contributed to increased bad-debt expense.
- California driver class actions allege wage and meal/rest-period violations. The company prevailed on meal and rest break claims in the fourth quarter, but other claims remained pending; a possible loss could not be estimated. Other ordinary-course claims were not expected by management to materially affect results or liquidity.
- Estimated self-insured claims accruals were approximately $59 million, up from $38 million in 2012. The company also disclosed $33.9 million of uncertain-tax-position liabilities whose settlement timing could not be reasonably estimated.
- The quarterly dividend was increased from $0.15 to $0.20 per share in January 2014. The filing reported $0.45 per share of 2013 dividends; the first-quarter 2013 payment had been pulled forward into December 2012.
Key facts for investors to verify
- Whether JBI and DCS growth can continue without further erosion in consolidated margins, and whether new DCS accounts reach planned operating performance.
- Whether ICS can restore gross margin as third-party carrier capacity and rates change, and whether JBT’s fleet reduction stabilizes profitability.
- Execution and financing of the approximately $606.6 million 2014 equipment program and repayment or refinancing of the $250 million 2014 maturities.
- Current liquidity and cash conversion, including receivables growth, the 0.95 working-capital ratio, and reliance on revolving credit.
- Developments in California driver litigation, claims accruals, customer credit quality, and the uncertain-tax-position balance.