J. B. Hunt - 10-Q quarterly report FY2012 Q2

J.B. HUNT TRANSPORT SERVICES, INC.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

(Unaudited)

Basis of Presentation

We compute basic earnings per share by dividing net earnings available to common stockholders by the actual weighted average number of common shares outstanding for the reporting period.  Diluted earnings per share reflects the potential dilution that could occur if holders of unvested restricted and performance share units or options exercised or converted their holdings into common stock.  The dilutive effect of restricted share units and performance share units and stock options was 2.8 million shares during the three and six months ended June 30, 2012, compared to 3.0 million shares for the three and six months ended June 30, 2011.

The following table summarizes the components of our share-based compensation program expense (in thousands):

 

Outstanding borrowings under our current financing arrangements consist of the following (in millions):

At June 30, 2012, we were authorized to borrow up to $500 million under a senior revolving line of credit, which is supported by a credit agreement with a group of banks and expires in August 2016.  This senior credit facility allows us to request an increase in the total commitment by up to $250 million and to request a one-year extension of the maturity date.  The applicable interest rate under this agreement is based on either the Prime Rate, the Federal Funds Rate or LIBOR, depending upon the specific type of borrowing, plus an applicable margin based on our credit rating and other fees.  At June 30, 2012, we had $30.0 million outstanding at an average interest rate of 1.50% under this agreement.

Senior Term Loan

Our senior term loan at June 30, 2012, consists of a three-year, unsecured $200 million variable-rate agreement, which matures in March 2014.  We are required to make an installment payment of $50 million in March 2013, with the remaining $150 million payable at maturity.  The applicable interest rate under this agreement is based on either the Prime Rate, the Federal Funds Rate or LIBOR, depending upon the specific type of borrowing, plus an applicable margin based on our credit rating and other fees.  At June 30, 2012, we had $200 million outstanding under this variable-rate senior term loan facility at an interest rate of 1.35%.

Senior Notes

On April 28, 2010, our Board of Directors authorized the purchase of $500 million of our common stock.  We have purchased 13.2 million shares for approximately $497 million, with $3 million remaining under this authorization at June 30, 2012.  On October 27, 2011, our Board of Directors authorized an additional purchase of up to $500 million of our common stock, resulting in a total of $503 million remaining under our share repurchase authorizations at June 30, 2012.  We did not purchase any shares under our repurchase authorizations during the three months ended June 30, 2012.  On April 26, 2012, our Board of Directors declared a regular quarterly dividend of $0.14 per common share, which was paid on May 25, 2012, to stockholders of record on May 11, 2012.  On July 25, 2012, our Board of Directors declared a regular quarterly dividend of $0.14 per common share, which will be paid on August 17, 2012, to stockholders of record on August 3, 2012.

 

Our assets and liabilities measured at fair value are based on the market approach valuation technique which considers prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities.

 

 

Our effective income tax rate was 38.25% for the three and six month periods ended June 30, 2012, and 38.45% for the three and six month periods ended June 30, 2011.  In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on our expected annual income, statutory tax rates, best estimate of nontaxable and nondeductible items of income and expense and the ultimate outcome of tax audits.

 

At June 30, 2012, we had a total of $18.8 million in gross unrecognized tax benefits, which are a component of other long-term liabilities on our balance sheet. Of this amount, $12.2 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate.  The total amount of accrued interest and penalties for such unrecognized tax benefits was $3.2 million at June 30, 2012.

 

 

We reported four distinct business segments during the three and six months ended June 30, 2012 and 2011.  These segments included Intermodal (JBI), Dedicated Contract Services® (DCS), Truck (JBT), and Integrated Capacity Solutions (ICS).  The operation of each of these businesses is described in Note 13, Segment Information, of our Annual Report (Form 10-K) for the year ended December 31, 2011.  A summary of certain segment information is presented below (in millions):

 

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should refer to the attached interim Condensed Consolidated Financial Statements and related notes and also to our Annual Report (Form 10-K) for the year ended December 31, 2011, as you read the following discussion.  We may make statements in this report that reflect our current expectation regarding future results of operations, performance and achievements.  These are “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995, and are based on our belief or interpretation of information currently available.  You should realize there are many risks and uncertainties that could cause actual results to differ materially from those described.  Some of the factors and events that are not within our control and could have a significant impact on future operating results are general economic conditions, cost and availability of fuel, accidents, adverse weather conditions, competitive rate fluctuations, availability of drivers, adverse legal decisions and audits or tax assessments of various federal, state or local taxing authorities.  Additionally, our business is somewhat seasonal with slightly higher freight volumes typically experienced during August through early November in our full-load transportation business.  You should also refer to Item 1A of our Annual Report (Form 10-K) for the year ended December 31, 2011, for additional information on risk factors and other events that are not within our control.  Our future financial and operating results may fluctuate as a result of these and other risk factors as described from time to time in our filings with the SEC.

 We are one of the largest surface transportation, delivery and logistics companies in North America.  We operate four distinct, but complementary, business segments and provide a wide range of transportation and delivery services to a diverse group of customers throughout the continental United States, Canada and Mexico.  We generate revenues primarily from the actual movement of freight from shippers to consignees and from serving as a logistics provider by offering or arranging for others to provide the transportation service.  In addition, we offer services that generally are not provided by common truckload or intermodal carriers, including specialized equipment, on-site management, final-mile and home delivery services.  Our local and home delivery services typically are provided through the use of a network of cross dock service centers throughout the continental United States.  We also utilize a network of thousands of reliable third-party carriers to provide comprehensive transportation and logistics services.  We account for our business on a calendar year basis with our full year ending on December 31 and our quarterly reporting periods ending on March 31, June 30 and September 30.  The operation of each of our four business segments is described in Note 13, Segment Information, of our Annual Report (Form 10-K) for the year ended December 31, 2011.

The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that impact the amounts reported in our Condensed Consolidated Financial Statements and accompanying notes.  Therefore, the reported amounts of assets, liabilities, revenues, expenses and associated disclosures of contingent liabilities are affected by these estimates.  We evaluate these estimates on an ongoing basis, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances.  Nevertheless, actual results may differ significantly from our estimates.  Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recognized in the accounting period in which the facts that give rise to the revision become known.

Information regarding our Critical Accounting Policies and Estimates can be found in our Annual Report (Form 10-K).  The critical accounting policies that we believe require us to make more significant judgments and estimates when we prepare our financial statements include those relating to self-insurance accruals, revenue equipment, revenue recognition and income taxes.  We have discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.  In addition, Note 2, Summary of Significant Accounting Policies, to the financial statements in our Annual Report (Form 10-K) for the year ended December 31, 2011, contains a summary of our critical accounting policies.  There have been no material changes to the methodology we apply for critical accounting estimates as previously disclosed in our Annual Report on Form 10-K.

 

 

Our total consolidated operating revenues increased to $1.26 billion for the second quarter 2012, a 9% increase from the $1.15 billion in the second quarter 2011. Fuel surcharge revenues increased to $249.6 million during the current quarter, compared with $225.2 million in 2011. If fuel surcharge revenues were excluded from both periods, the increase was also 9%.

JBI segment revenue increased 13%, to $762 million during the second quarter 2012, compared with $676 million in 2011.  This increase in segment revenue was primarily a result of a 13% increase in load volume with the effect of traffic mix, customer rate increases and fuel surcharges keeping revenue per load virtually flat compared to a year ago.  Load volume in our eastern network increased 21% and transcontinental loads grew by 8% over the second quarter 2011.  Operating income of the JBI segment increased to $93.4 million in the second quarter 2012, from $76.5 million in 2011, primarily due to steady demand, overall load growth and lower office personnel compensation costs, partially offset by increases in outsourced drayage costs, rail purchase transportation costs, fleet maintenance costs and driver wages.

DCS segment revenue increased 1%, to $267 million in 2012, from $264 million in 2011.  Excluding fuel surcharges, revenue also increased 1% compared to the second quarter 2011, primarily due to increased truck count from new accounts.  Productivity, which is defined as revenue per truck per week, decreased slightly compared to second quarter 2011.  Operating income of our DCS segment increased to $33.2 million in 2012, from $27.4 million in 2011.  The increase in operating income was primarily due to the transfer of assets to more profitable accounts and the decline in fuel costs throughout the quarter.  Higher safety costs, toll road charges and maintenance costs compared to 2011, partially offset the increase in operating income.

JBT segment revenue totaled $126 million for the second quarter 2012, a decrease of 3% from the $130 million in the second quarter 2011.  Excluding fuel surcharges, segment revenue also decreased 3%, primarily due to a 4% reduction in tractors year-over-year.  Rates per mile, excluding fuel surcharges, increased 3%, while length of haul declined 10%.  Our JBT segment operating income was $8.8 million, compared to $6.9 million in the second quarter 2011.  This 27% increase in operating income was the result of favorable changes in freight mix, strong seasonal spot pricing, steadily declining fuel costs and improvements in fuel efficiency.  This increase in operating income was partially offset by increases in driver wages, independent contractor costs, lower utilization and higher empty miles compared to second quarter 2011.

 

ICS segment revenue grew 23%, to $109 million in the second quarter 2012, from $89 million in the second quarter 2011, due to a 16% increase in load volume in contractual business, while transactional volumes remained relatively flat.  Operating income of our ICS segment decreased to $2.0 million, from $2.6 million in 2011, primarily due to a decline in gross profit margin.  Our gross profit margin decreased to 10.6% in the current quarter vs. 12.3% in the second quarter 2011, due to increased purchase transportation costs.

 

 

Total operating expenses increased 7.9%, while operating revenues increased 9.2%, during the second quarter 2012, from the comparable period 2011. Operating income increased to $137.2 million during the second quarter 2012, from $113.4 million in 2011.

Rents and purchased transportation costs increased 14.9% in 2012.  This increase was primarily the result of the increase in load volume, which increased services provided by third-party rail and truck carriers within our JBI and ICS segments.

Salaries, wages and employee benefit costs remained flat during the second quarter 2012, compared with 2011, due to increases in driver pay offset by decreases in office personnel compensation costs.

 

Fuel costs decreased 6% in 2012, compared with 2011, due to decreases in the cost of fuel, offset by increases in freight volume.  It is not meaningful to compare the amount of fuel surcharge revenue or the change in fuel surcharge revenue between reporting periods to fuel and fuel taxes expense, or the change of fuel expense between periods, as a significant portion of fuel cost is included in our payments to railroads, dray carriers and other third parties.  These payments are classified as purchased transportation expense.

Depreciation and amortization expense increased 7% in 2012 primarily due to additions to our JBI segment container and chassis fleet to support additional business demand, as well as truck and tractor growth and trades within our JBI and DCS segments.  Operating supplies and expenses increased 11.1%, driven primarily by toll rate increases and increased tire cost and usage.  Insurance and claims expense increased 8.2% in 2012 compared with 2011, primarily due to increased accident severity.

General and administrative expenses decreased 15.4% for the current quarter from the comparable period in 2011, primarily due to an increase in net gains from asset sales.  Net gains from sale of revenue equipment were $4.1 million in 2012, compared with $1.8 million in 2011.

 

Net interest expense slightly increased in 2012, primarily due to increased debt levels.  Total debt increased to $679.5 million at June 30, 2012, from $664.3 million at June 30, 2011.

 

Our total consolidated operating revenues increased to $2.42 billion for the first six months 2012, a 13% increase from the $2.15 billion for the comparable period 2011. Higher fuel prices during the first half of the period and overall increased load volume resulted in fuel surcharge revenues of $476.9 million during the first six months 2012, compared with $394.3 million in 2011. If fuel surcharge revenues were excluded from both periods, the increase of 2012 revenue from 2011 was 11%.

JBI segment revenue increased 16%, to $1.46 billion during the first six months 2012, compared with $1.25 billion in 2011.  This increase in revenue was primarily a result of increased load volume in both our eastern and transcontinental networks.  Excluding fuel surcharge, revenues increased 15% over the comparable prior year period.  Operating income of the JBI segment increased to $172.8 million in the first six months 2012, from $139.2 million in 2011, primarily due to increased load volume and lower office personnel compensation costs over the prior year, partially offset by increased purchased transportation cost and driver wages.

DCS segment revenue increased 4%, to $523 million in 2012, from $503 million in 2011.  This revenue increase was primarily attributable to new contracts.  Operating income of our DCS segment increased to $61.4 million in 2012, from $46.0 million in 2011.  This increase in operating income was primarily due to the increased revenue, transfer of assets to more profitable accounts and increased gains on equipment dispositions, partially offset by increased driver wages and maintenance costs.  Additionally, our DCS segment operating income for the 2011 period was reduced by a $1.6 million charge related to a customer bankruptcy.

JBT segment revenue totaled $254 million for the first six months 2012, an increase of 2% from $249 million in the same period in 2011.  Excluding fuel surcharges, revenue for the first six months 2012 was flat compared to the same period 2011, on a 4% reduction in tractors year-over-year.  Increases in customer rates and load volume were offset by less paid empty miles and a reduction in average length of haul.  Our JBT segment operating income increased to $13.7 million during the first six months 2012, from $12.8 million in 2011.  This increase in operating income was due to overall cost decreases related to the reduction in the segment’s tractor fleet, offset by increased independent contractor costs and fewer gains on equipment sales.

ICS segment revenue grew 26%, to $207 million in 2012, from $164 million in 2011, primarily due to a 15% increase in loads and higher pricing in our contractual and transactional business.  Operating income of our ICS segment increased to $6.0 million, from $5.2 million in 2011, primarily due to increased revenues.  ICS gross profit margin declined slightly to 12.4% for the first six months 2012 from 13.4% for the comparable period 2011 due to increased rates paid to carriers due to a tighter supply of qualified purchased transportation providers.  Our ICS employee count increased 7% during the first six months 2012, compared with 2011, and our third-party carrier base increased 13% over 2011.

 

 

Total operating expenses increased 11.3%, while operating revenues increased 12.6%, during the first six months 2012, from the comparable period of 2011. Operating income increased to $253.8 million during the first six months 2012, from $203.3 million in 2011.

Rents and purchased transportation costs increased 18.4% in 2012.  This increase was primarily the result of the increase in load volume which increased services provided by third-party rail and truck carriers within our JBI and ICS segments.

Salaries, wages and employee benefit costs increased 3.8% in 2012 from 2011.  This increase was primarily related to increases in driver and other labor pay due to increased business demand and a tighter supply of qualified drivers, offset by decreases in office personnel compensation costs.

 

Fuel costs increased 1.9% in 2012, compared with 2011, due to a net increase in the cost of fuel, as well as an increase in freight volume.  It is not meaningful to compare the amount of fuel surcharge revenue or the change in fuel surcharge revenue between reporting periods to fuel and fuel taxes expense, or the change of fuel expense between periods, as a significant portion of fuel cost is included in our payments to railroads, dray carriers and other third parties.  These payments are classified as purchased transportation expense.

Depreciation and amortization expense increased 8.1% in 2012 primarily due to additions to our JBI segment container and chassis fleet to support additional business demand, as well as truck and tractor growth and trades in our JBI, DCS and JBT segments.  Operating supplies and expenses increased 10.0% driven primarily by toll rate increases and increased tire cost and usage.  Insurance and claims expense increased 10.0% in 2012 compared with 2011, primarily due to increased accident severity and increased cargo claims.

 

General and administrative expenses decreased 28.1% from the comparable period in 2011, primarily as a result of a decrease in bad debt expense due to a 2011 customer bankruptcy and an increase in net gains from asset sales.  Net gains from sale of revenue equipment were $9.8 million in 2012, compared with $6.1 million in 2011.

Net interest expense decreased 8.1% in 2012, due to lower interest rates, offset by increased debt levels.  Total debt increased to $679.5 million at June 30, 2012, from $664.3 million at June 30, 2011.

Net cash provided by operating activities totaled $261 million during the first six months of 2012, compared with $308 million for the same period 2011.  Operating cash flows decreased primarily due to timing of payments of trade accounts payable and other accrued expenses, offset by increased earnings and the timing of trade receivables collections.  Net cash used in investing activities totaled $171 million in 2012, compared with $211 million in 2011.  The decrease related to the timing of equipment purchases and sales.  Net cash used in financing activities decreased to $89 million in 2012, compared to $93 million in 2011.  Financing expenditures consisted primarily of payments on outstanding debt and dividends in 2012, while net financing expenditures in 2011 were primarily for stock repurchases and dividends.  Cash paid for income taxes during the current period increased $66.4 million when compared to the first six months of 2011 due to the effect of timing differences caused by the use of 100% bonus depreciation within the Company’s 2011 corporate tax filings.

 

 

Our need for capital has typically resulted from the acquisition of containers and chassis, trucks, tractors and trailers required to support our growth and the replacement of older equipment.  We are frequently able to accelerate or postpone a portion of equipment replacements depending on market conditions.  We have, during the past few years, obtained capital through cash generated from operations, revolving lines of credit and long-term debt issuances.  We have also periodically utilized operating leases to acquire revenue equipment.

We believe our liquid assets, cash generated from operations and revolving line of credit will provide sufficient funds for our operating and capital requirements for the foreseeable future.  The following table summarizes our expected obligations and commitments as of June 30, 2012 (in millions):

 

 

 

Our net capital expenditures were approximately $171 million during the first six months of 2012, compared with $211 million for the same period 2011.  Our net capital expenditures include net additions to revenue equipment and non-revenue producing assets that are necessary to contribute to and support the future growth of our various business segments.  Capital expenditures in 2012 were primarily for tractors, additional intermodal containers and chassis, and other trailing equipment.  We are currently committed to spend approximately $164 million during the remainder of 2012.  We expect to spend in the range of $375 million to $400 million for net capital expenditures during calendar year 2012.  The table above excludes $22 million of potential liabilities for uncertain tax positions which are recorded on our Condensed Consolidated Balance Sheets.  However, we are unable to reasonably estimate the ultimate timing of any settlements.

 

Our only off-balance sheet arrangements as of June 30, 2012 were operating leases related to facility lease obligations.

You should refer to Item 1A of our Annual Report (Form 10-K) for the year ended December 31, 2011, under the caption “Risk Factors” for specific details on the following factors and events that are not within our control and could affect our financial results.

We had $679.5 million of debt outstanding at June 30, 2012, including our senior revolving line of credit, senior term loan and senior notes issuances.  Our senior notes have fixed interest rates of 3.375% and 6.08%.  These fixed-rate facilities reduce the impact of changes to market interest rates on future interest expense.  Our senior revolving line of credit and senior term loan have variable interest rates, which are based on the Prime Rate, the Federal Funds Rate, or LIBOR, depending upon the specific type of borrowing, plus any applicable margins.  Risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates.  Our earnings would be affected by changes in these short-term variable interest rates.  At our current level of borrowing, a one percentage point increase in our applicable rate would reduce annual pretax earnings by $2.3 million.

 

Although we conduct business in foreign countries, international operations are not material to our consolidated financial position, results of operations or cash flows.  Additionally, foreign currency transaction gains and losses were not material to our results of operations for the three or six months ended June 30, 2012.  Accordingly, we are not currently subject to material foreign currency exchange rate risks from the effects that exchange rate movements of foreign currencies would have on our future costs or on future cash flows we would receive from our foreign investment.  As of June 30, 2012, we had no foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.

The price and availability of diesel fuel are subject to fluctuations due to changes in the level of global oil production, seasonality, weather and other market factors.  Historically, we have been able to recover a majority of fuel price increases from our customers in the form of fuel surcharges.  We cannot predict the extent to which high fuel price levels may occur in the future, or the extent to which fuel surcharges could be collected to offset such increases.  As of June 30, 2012, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our internal controls and disclosure controls.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were effective as of June 30, 2012, in alerting them on a timely basis to material information required to be disclosed by us in our periodic reports to the SEC.

In addition, there were no changes in our internal control over financial reporting during our first six months of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II.    Other Information

 

Information regarding risk factors appears in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011.

On April 28, 2010, our Board of Directors authorized the purchase of $500 million of our common stock.  We have purchased 13.2 million shares for approximately $497 million, with $3 million remaining under this authorization at June 30, 2012.  On October 27, 2011, our Board of Directors authorized an additional purchase of up to $500 million of our common stock, resulting in a total of $503 million remaining under our share repurchase authorizations at June 30, 2012.  We did not purchase any shares under our repurchase authorizations during the three months ended June 30, 2012.

Not applicable.

ITEM 4.        MINE SAFETY DISCLOSURES
 

Not applicable.

Not applicable.

Index to Exhibits

 

 

 

 

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