Text-S&P raises J.B. Hunt Transport Services to 'BBB+'
Overview -- U.S.-based trucking company J.B. Hunt Transport Services Inc.'s credit measures, already strong, improved year-over-year in the 12 months ended June 30, 2012. -- We are raising our long-term ratings, including the corporate credit rating, on J.B. Hunt to 'BBB+' from 'BBB'. -- The outlook is stable, reflecting our expectation that truck-to-rail conversion will continue to bolster demand for intermodal transportation services. Following the upgrade, J.B. Hunt's credit measures remain strong for the rating. Rating Action On July 20, 2012, Standard & Poor's Ratings Services raised its long-term ratings on Lowell, Ark.-based trucking company J.B. Hunt Transport Services Inc., including the corporate credit rating to 'BBB+' from 'BBB'. The outlook is stable. Rationale The upgrade reflects strengthening earnings and strong free cash flow generation, as well as improved capital structure and cash flow adequacy measures. Currently, J.B. Hunt generates funds from operations (FFO) to total debt in the 85% area, EBITDA interest coverage at 25x, total debt to EBITDA at 1x, and debt to capital in the mid-50% area. Although the company has a history of debt-financed share repurchases, based on our expectations, we believe that its financial profile can accommodate fairly substantial capital spending and shareholder rewards while still maintaining FFO to total debt in the 80% area and debt to EBITDA below 1.5x. The ratings on J.B. Hunt reflect a solid financial profile with stable cash flow generation. The company's principal risk factor is its participation in the trucking industry, which is highly competitive, cyclical, and capital-intensive. J.B. Hunt operates in four distinct segments: intermodal, which accounted for 60% of total operating revenues and 68% of operating income for the six months ended June 30, 2012; dedicated contract services, 22% of revenues and 24% of operating income; truckload (TL) trucking, 10% of revenues and 6% of operating income; and integrated capacity solutions, a logistics business, which contributes about 9% of revenue and 2% of operating income. In 2012, we expect J.B. Hunt to continue generating stable earnings and cash flow as well as generate funds from operations (FFO) of about $650 million-$700 million. The company likely will continue to benefit from rising demand for intermodal and dedicated contract services, strong operating efficiency, and improving pricing trends. We categorize the business profile as "satisfactory," financial profile as "intermediate," and liquidity as "adequate" (based on our criteria). J.B. Hunt is one of the largest railroad intermodal service providers (based on fleet size) and sustained improvements in rail service and the relative fuel efficiency of intermodal transport have benefited this segment. As of June 30, 2012, the intermodal segment operates 56,012 company-controlled equipment, which consists of 53-feet high-cube containers and chassis. Containers can be double-stacked onto railcars. Over next several quarters, we expect the domestic intermodal business to continue to grow, given certain advantages of rail relative to trucking, specifically its cost advantage, lower fuel consumption, and thus smaller environmental impact. The intermodal segment uses agreements with all major North American rail carriers to provide intermodal freight solutions throughout the continent (particularly through key contracts with the Burlington Northern Santa Fe LLC and Norfolk Southern Corp. railroads). The line-haul freight movement in this segment uses rail carriers' "container on flatcar" services with over-the-road trucking companies picking up and delivering at the origin and destination rail terminal locations. Customers receive one invoice for the transportation and have one point of contact. The dedicated and logistics segments, while somewhat competitive and capital-intensive, tend to be somewhat more stable, due to longer-term contracts and higher barriers to entry. The TL segment of the trucking industry is intensely competitive, commodity-based, cyclical, and fragmented (the top 10 TL companies account for less than 10% of industry revenues). The company continues to focus on expanding its more profitable intermodal and dedicated businesses. Longer term, we expect the company to focus more on these segments, rather than on its traditional long-haul truckload business. We expect financial results for J.B. Hunt's intermodal segment to remain healthy. Demand for dedicated contract services continues to increase because of customers shifting away from maintaining private fleets and because of improved service offerings with key customers. We expect the truck segment to continue to shrink as a result of the company's longer-term strategy to reduce its tractor fleet and scale down this business. Overall, the company continues to focus on cost controls, productivity improvements, and yield management. We expect J.B. Hunt to maintain satisfactory operating profitability and to sustain its greater free cash flow generation, given rising demand for intermodal and dedicated contract services. As a result of the solid profitability in the intermodal segment, cash generation remains stable and the company has reduced debt. As of June 30, 2012, the company's total reported debt was $679 million, which is down slightly versus $749 million at fiscal year-end Dec. 31, 2011. During the fourth quarter of 2011, the board of directors authorized the new share repurchase authorization of up to $500 million of its common stock over an unspecified period. As of June 30, 2012, J.B. Hunt did not complete any share repurchases and the company has $503 million remaining under existing authorizations. Liquidity J.B. Hunt has adequate liquidity, with support from stable cash generation and substantial sources of liquidity. In accordance with our liquidity criteria, the expectations and assumptions that support our assessment include the following: -- We expect the company's liquidity sources to exceed its uses by more than 1.2x over the next 12 to 18 months, the minimum level for an adequate designation. -- We assumed $850 million-$900 million of liquidity sources over the next 12 months, consisting of cash, FFO, asset disposals, and unused credit facility capacity. -- We estimate $750 million-$800 million of uses including capital spending, debt maturities, working capital needs, dividends, and share repurchases. -- Net sources would be positive, even if EBITDA declined 20% or more, and the company would remain in compliance with key bank covenants. -- The company maintains good relationships with its banks and its financial risk management is generally prudent, in our assessment. In August, the company secured a $250 million revolving credit facility, which matures August 2016; $197 million was available as of March 31, 2012 (latest information available). The terms of the credit facility allow J.B. Hunt to request an increase in the total commitment by up to $250 million and to request a one-year extension of the maturity date for a total amount of $500 million. J.B. Hunt is currently in compliance with the terms of its various financing agreements, which require it to maintain financial covenants, including leverage tests and fixed-charge coverage. We expect the company to remain in compliance with its financial covenants with ample cushion. J.B. Hunt offsets a notable portion of gross capital expenditures through asset disposals. As of June 30, 2012, net capital expenditures were $171 million versus $211 million the previous year. We expect full-year 2012 net capital expenditures to be about $350 million-$375 million area, which is comparable with 2011 levels due to additional fleet investment in tractors, containers, and chassis. J.B. Hunt pays about $60 million in dividends annually and we expect dividends to increase gradually as earnings improve. The company can support its spending initiatives as a result of solid cash generation, good access to liquidity, and continued strong operating performance. Outlook The outlook is stable. Over the next several quarters, we expect continued truck to rail conversion to support ongoing demand for intermodal transportation services. Following the upgrade, J.B. Hunt's credit measures remain strong for the ratings. However, the company has used debt to finance share repurchases in the past and may do so again. Still, we feel the company has sufficient room in its credit ratios to continue to reward shareholders and maintain current ratings. We could lower the ratings if debt-financed share repurchases cause FFO to debt to fall below 45% on a sustained basis. Given the company's financial policy, an upgrade is unlikely. Related Criteria And Research -- Infrastructure Spending Keeps Rails And Trucks Moving In The U.S., March 26, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Long-Term Ratings Raised; Short-Term Ratings Affirmed To From J.B. Hunt Transport Services Inc. Corporate credit rating BBB+/Stable/A-2 BBB/Stable/A-2 Senior unsecured BBB+ BBB Rating Affirmed J.B. Hunt Transport Services Inc. Commercial paper A-2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.