Business context and reporting period
J.B. Hunt Transport Services, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2014, comparing results with the same 2013 quarter. Its four segments are Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truck (JBT). The company notes that results are seasonal and that first-quarter performance is not necessarily indicative of full-year results.
Financial performance and position
Amounts below are in millions, except per-share data, percentages, and ratios.
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Operating revenue | $1,406.9 | $1,291.6; up 8.9% |
| Revenue excluding fuel surcharge | $1,152.3 | $1,038.9; up approximately 11% |
| Operating income / margin | $117.3 / 8.3% | $125.0 / 9.7% |
| Net earnings | $68.7 | $73.3; down 6.4% |
| Diluted earnings per share | $0.58 | $0.61 |
| Net interest expense | $6.4 | $6.3 |
| Cash from operations | $159.0 | $206.8 |
| Net cash used in investing | $158.2 | $115.1 |
| Cash and cash equivalents, March 31 | $124.2 | $5.7 at March 31, 2013 |
Operating margin fell as operating expenses rose 10.5%, faster than revenue. Net margin was 4.9%, versus 5.7%. The effective tax rate was 38.10%, compared with 38.25%.
Segments
- JBI: Revenue rose 5% to $836 million; operating income fell 4% to $93.2 million. Severe winter weather and rail disruptions increased costs and reduced productivity.
- DCS: Revenue rose 15% to $322 million, while operating income declined 29% to $15.6 million. Productivity per truck per week fell about 5.7% amid weather impacts and driver shortages.
- ICS: Revenue increased 33% to $163 million and operating income rose 18% to $6.1 million. Gross profit margin declined to 12.1% from 13.0% as carrier rates increased faster than contractual rate adjustments.
- JBT: Revenue decreased 9% to $92 million; operating income increased to $2.4 million from $1.1 million, supported partly by pricing and equipment-sale gains.
Liquidity, debt, and capital spending
At March 31, 2014, reported total debt was $852.2 million, up from $708.4 million at December 31, 2013; debt-to-equity was 0.80 and debt as a percentage of total capital was 44%. Working capital ratio was 1.27, versus 0.95 at year-end. The company had no borrowings on its $500 million revolving credit facility and reported compliance with debt covenants.
Quarterly operating cash flow declined primarily because of lower earnings and the timing of trade payables. Capital additions were $198.3 million, partly offset by $40.1 million of equipment-sale proceeds. Cash dividends paid were $23.5 million; the quarterly dividend had been raised from $0.15 to $0.20 per share. The company issued $500 million of senior notes in March, including $250 million due 2019 and $250 million due 2024. It subsequently paid off $100 million of 6.08% notes on April 1, 2014. The filing states expected 2014 net capital expenditures of $675–$700 million, with approximately $440.8 million of remaining commitments as of March 31.
Outlook, risks, contingencies, and unusual items
- Management expected driver recruiting challenges, higher driver costs, and lower productivity from unseated trucks to persist in future periods; it also noted that JBI service issues and related costs could continue, though rail issues were improving.
- Severe winter weather and rail service disruptions affected volumes, productivity, maintenance, safety, and purchased transportation costs. Freight volumes are typically higher from August through early November in the full-load business.
- Key risks identified include economic conditions, fuel price and availability, driver and carrier availability, competition, customer concentration, insurance and claims, regulation, weather, and litigation. The company said it historically recovered a majority of fuel price increases through surcharges, but cannot predict future recovery.
- A $250 million interest-rate swap converts the 2.40% 2019 notes to a variable rate; management estimated a one-percentage-point rate increase would reduce annual pretax earnings by $2.5 million.
- California driver class actions allege wage and meal/rest-period violations. The company was awaiting a summary-judgment decision, with one trial scheduled for Q1 2015, and could not reasonably estimate any potential loss. It stated other ordinary-course claims were not expected to have a material adverse effect.
- Gross unrecognized tax benefits were $30.4 million, with $4.6 million of accrued interest and penalties; settlement timing could not be reasonably estimated. The filing also identifies approximately $35 million of uncertain-tax-position liabilities, including interest and penalties, outside its obligations table.
- Disclosure controls were assessed as effective at March 31, 2014. A new human resource management system was implemented during the quarter; no other material change to internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether margin pressure and segment profit declines, particularly in JBI and DCS, persisted after the weather and rail disruptions.
- Progress in driver recruiting, retention, and truck utilization, and the resulting effect on labor and purchased-transportation costs.
- Execution and funding of the $675–$700 million 2014 capital-spending plan and the impact on free cash flow and debt.
- Debt and interest-rate exposure after the April repayment of the $100 million notes, including the variable-rate swap exposure.
- Developments in the California driver litigation and uncertain tax positions, for which potential loss or settlement timing was not clearly estimable.