J.B. Hunt Transport Services, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Amounts are in U.S. dollars. The company operates Intermodal (JBI), Dedicated Contract Services (DCS), Truck (JBT), and Integrated Capacity Solutions (ICS).
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total operating revenue | $1,149.9 million | $942.8 million | $2,150.6 million | $1,787.4 million |
| Revenue excluding fuel surcharges | $924.7 million | $812.0 million | $1,756.3 million | $1,548.9 million |
| Operating income | $113.4 million | $91.3 million | $203.3 million | $158.8 million |
| Net earnings | $65.7 million | $52.1 million | $115.8 million | $89.6 million |
| Diluted EPS | $0.53 | $0.40 | $0.94 | $0.69 |
| Operating margin | 9.9% | 9.7% | 9.5% | 8.9% |
| Net margin | 5.7% | 5.5% | 5.4% | 5.0% |
Q2 revenue rose 22% (14% excluding fuel surcharges); six-month revenue rose 20% (13% excluding surcharges). Fuel surcharge revenue was $225.2 million in Q2 and $394.3 million for the six months, versus $130.7 million and $238.6 million, respectively, in 2010. The effective tax rate was 38.5% in both periods.
- Segments: Q2 revenue increased 29% at JBI, 16% at DCS, 4% at JBT, and 27% at ICS. Operating income rose at JBI, DCS, and ICS but edged down at JBT to $6.9 million from $7.2 million. For the six months, all four segments increased operating income; JBI revenue growth reflected higher loads and pricing, while DCS benefited from new and existing business and productivity.
- Cost and margin factors: Q2 rents and purchased transportation rose 27.9%, fuel and fuel taxes 42.3%, and salaries and benefits 11.9%. Management attributed cost increases to fuel, volume, carrier costs, labor demand, and compensation programs. The ICS gross margin declined to 12.3% from 13.9% in Q2 as fuel and transportation costs rose; six-month ICS gross margin was 13.4%, down from 14.3%.
Cash flow, balance sheet, and capital
- Six-month operating cash flow was $307.7 million, compared with $208.8 million; investing cash outflow was $210.9 million, compared with $104.0 million; financing cash outflow was $93.3 million, compared with $105.0 million.
- Cash was $11.1 million at June 30, 2011. Current assets were $508.2 million and current liabilities $446.1 million; the reported working-capital ratio was 1.14, up from 0.91 at December 31, 2010.
- Total debt was $664.3 million, versus $654.2 million at year-end 2010 and $617.1 million at June 30, 2010. Debt/equity was 1.11 and debt was 53% of total capital. The company reported compliance with all debt covenants.
- Debt included $15 million outstanding on a $350 million revolving facility expiring March 2012, a $200 million variable-rate term loan due March 2014, and $449.3 million of senior notes. The company was renewing its revolving credit agreement. A 1 percentage-point increase in applicable short-term rates would reduce annual pretax earnings by an estimated $2.2 million.
- Net capital expenditures were approximately $211 million in the first half. Management expected $450–$480 million of net capital expenditures for 2011, including approximately $260 million for the remainder of the year, net of expected equipment-sale proceeds. Equipment and facility commitments totaled $279.7 million as of June 30.
- The company repurchased 675,323 shares for approximately $30 million in Q2; $164 million remained under its $500 million authorization. The quarterly dividend was $0.13 per share.
Outlook, risks, and contingencies
The filing does not provide earnings or revenue guidance. Management said it believed liquid assets, operating cash generation, and the revolving credit line would fund operating and capital needs for the foreseeable future. It noted typically higher freight volumes from August through early November and cautioned that interim results are not necessarily indicative of full-year results.
Risks identified include economic conditions, fuel cost and availability, driver and carrier availability, competition and pricing, customer concentration, accidents and insurance claims, weather, 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-price hedges. California driver class actions alleging wage and meal/rest-period violations were stayed pending an unrelated state Supreme Court decision; potential loss could not be reasonably estimated. Management did not expect other ordinary-course claims and litigation to have a material adverse effect. The company also reported $17.8 million of gross unrecognized tax benefits and $3.5 million of related accrued interest and penalties.
Important facts for investors to verify
- Whether the revolving credit facility was renewed before its March 2012 expiration and on what terms.
- Whether planned 2011 capital expenditures and fleet investments generated expected volume, utilization, and returns.
- How fuel prices, surcharge recovery, driver availability and compensation, and third-party carrier rates affected margins after June 30.
- Developments and potential exposure in the California driver litigation and uncertain tax positions.
- Whether seasonality and segment trends—particularly JBT profitability and ICS margin pressure—continued in subsequent quarters.