J.B. Hunt Transport Services, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Unless noted, financial amounts below are in millions of dollars. The company operates four segments: Intermodal (JBI), Dedicated Contract Services (DCS), Truck (JBT), and Integrated Capacity Solutions (ICS).
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total operating revenue | $986.0 | $833.7 | $2,773.5 | $2,326.4 |
| Revenue excluding fuel surcharges | $854.8 | $740.7 | $2,403.7 | $2,107.3 |
| Operating income | $91.5 | $71.0 | $250.3 | $175.0 |
| Net earnings | $52.2 | $40.0 | $141.8 | $94.8 |
| Diluted EPS | $0.41 | $0.31 | $1.10 | $0.73 |
Q3 revenue rose 18% (15% excluding fuel surcharge revenue); nine-month revenue rose 19% (14% excluding fuel surcharges). Q3 operating margin was 9.3%, versus 8.5%; net margin was 5.3%, versus 4.8%. For the nine months, operating margin was 9.0%, versus 7.5%, and net margin was 5.1%, versus 4.1%. The effective tax rate was 38.5%, compared with 38.4%.
For Q3, JBI revenue increased 23% and operating income reached $60.3 million; DCS revenue increased 18% and operating income was $22.1 million. JBT returned to operating profit of $6.5 million from a $0.4 million loss. ICS revenue grew 14%, but operating income declined to $2.7 million from $3.0 million as purchased-transportation costs compressed margins. Nine-month ICS operating income fell to $6.0 million from $11.4 million; JBT improved to $14.3 million from a $10.3 million loss.
Cash flow, balance sheet, and capital
- Nine-month operating cash flow was $330.2 million, versus $248.2 million. Investing activities used $145.4 million, versus $208.9 million; financing activities used $124.1 million, versus $36.9 million. Cash ended the period at $68.6 million, up from $7.8 million at year-end 2009.
- At September 30, total debt was $649.2 million, including $200 million current and $449.2 million long-term, versus $565.0 million at December 31, 2009. Debt was 52% of total capital; debt-to-equity was 1.09. The working-capital ratio was 0.93, down from 1.46 at year-end, largely because the $200 million note due March 2011 was classified as current.
- The company had no revolver borrowings against its $350 million facility, which expires March 2012, and reported compliance with debt covenants. Cash and current assets were $486.3 million; current liabilities were $525.2 million.
- In September, the company issued $250 million of 3.375% senior notes due 2015. A portion of the proceeds repaid revolver borrowings; remaining proceeds were held in cash and cash equivalents. Existing notes include $200 million at 5.31% due March 2011 and $200 million at 6.08% due 2014.
- Nine-month capital expenditures, net of equipment-sale proceeds, were approximately $145 million. Management expected approximately $248 million of net capital expenditures for full-year 2010 and was committed to about $103 million of net spending for the remainder of the year.
- The company repurchased 5.2 million shares for approximately $175 million through September 30 under a $500 million authorization, leaving $325 million. It declared a quarterly dividend of $0.12 per share, payable in December.
Changes, outlook, and risks
Management attributed growth mainly to higher freight volumes, new DCS contracts, improved rates and utilization, and recovery in JBT. Higher fuel prices and volume increased fuel and purchased-transportation costs. ICS faced tighter carrier capacity and lower margins. Management said cash, operating cash generation, and financing arrangements should fund operating and capital needs for the foreseeable future; no specific earnings or revenue guidance was provided.
Management cited seasonality, with typically higher full-load freight volumes from August through early November. Key risks include economic conditions, fuel costs and surcharge recovery, driver and carrier availability, competition, customer concentration, weather, claims and insurance costs, regulation, and environmental compliance. California driver class-action proceedings alleging wage and meal/rest-period violations were stayed pending an unrelated state Supreme Court decision; the company could not estimate any possible loss. Gross unrecognized tax benefits were $18.7 million, including $3.2 million of accrued interest and penalties; timing of settlement for uncertain tax positions was not estimable. Management stated that ordinary claims and litigation were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether growth in freight volumes, rates, and DCS contracts continues, and whether ICS margin pressure persists.
- The company’s ability to refinance or repay the $200 million note maturing in March 2011, and its ongoing debt and liquidity position.
- Actual full-year capital spending versus the approximately $248 million expectation, and the returns from fleet and intermodal equipment investment.
- Progress and potential financial exposure from California driver litigation and uncertain tax positions.
- Fuel-price movements and the extent to which surcharges recover related costs, including costs embedded in purchased transportation.