HUNT J B TRANSPORT SERVICES INC quarterly report, Q2 FY2020

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J.B. Hunt Transport Services, Inc. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods. The company operates five transportation and logistics segments: Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), Final Mile Services (FMS), and Truckload (JBT). In 2020, it separated FMS from DCS for segment reporting.

Financial performance

  • Q2 revenue: $2.146 billion, down 5.1% year over year, largely reflecting lower fuel-surcharge revenue. Revenue excluding fuel surcharges was $1.986 billion, down less than 1%.
  • Q2 earnings: Operating income was $175.2 million, down 9.3%; operating margin was 8.2%, versus 8.5%. Net earnings were $121.7 million, down 8.9%; diluted EPS was $1.14, versus $1.23. Net margin was 5.7%, versus 5.9%.
  • First-half results: Revenue was $4.426 billion, up 1.7%; excluding fuel surcharges, revenue rose about 5%. Operating income fell 8.6% to $329.9 million, and net earnings fell 10.5% to $226.5 million. Diluted EPS was $2.12, versus $2.32.
  • Cash flow and investment: First-half operating cash flow was $640.0 million, compared with $606.7 million. Net capital expenditures were approximately $265 million, versus $475 million; cash and cash equivalents increased to $274.7 million from $35.0 million at year-end.
  • Liquidity and debt: June 30 total debt was $1.307 billion. The company had no borrowings on its $750 million revolving credit facility, which expires in September 2023. Working-capital ratio was 1.59; debt-to-equity was 0.55. The company reported compliance with debt covenants.
  • Shareholder returns: The quarterly dividend was $0.27 per share. The company repurchased about $75 million of shares in the first half, with no repurchases in Q2.

Segment developments

  • JBI: Q2 revenue declined 7% to $1.065 billion and operating income declined 14% to $107.0 million, amid lower volume, higher rail costs, and network-balancing costs.
  • DCS: Q2 revenue declined 1% to $533 million, while operating income rose 9% to $83.1 million, helped by lower driver-turnover and safety-related costs.
  • ICS: Q2 revenue fell 9% to $304 million; operating loss widened to $13.1 million from $0.6 million. Gross profit margin declined to 11.8% from 13.4%, reflecting competitive pricing and weaker spot-market conditions.
  • FMS: Q2 revenue fell 2% to $140 million. Operating loss was $5.2 million, compared with $15.8 million in 2019; the prior-year quarter included a $20 million casualty-claim settlement charge.
  • JBT: Q2 revenue increased 9% to $108 million, but operating income declined 61% to $3.5 million, with higher purchased-transportation, insurance, and technology costs.

Outlook, risks, and unusual items

  • Management identified COVID-19 as a major source of uncertainty, affecting freight demand, customer operations, receivable collectability, network balance, staffing, and equipment procurement. Q2 volumes rebounded during the latter half of the quarter, but management cautioned that disruptions could return.
  • The company expected 2020 net capital expenditures of $335 million to $385 million for the remainder of the year and reported approximately $828 million of equipment and facility purchase commitments for 2020–2022. It said it could defer or cancel some spending as conditions warranted.
  • Management stated that cash, operating cash flow, and available credit were expected to cover foreseeable operating and capital needs, and that it expected to maintain its investment-grade rating. The estimated annual effective tax rate for 2020 was 24.4%.
  • First-half expenses included a $12.3 million one-time COVID-related bonus and $3.4 million of additional share-based compensation associated with accelerated vesting for executive retirements. The company recorded an $8.2 million charge in Q1 related to an adjusted revenue-sharing calculation under its BNSF agreement.
  • On July 21, 2020, a court confirmed the BNSF arbitration awards in part but denied additional enforcement relief sought by J.B. Hunt; the court did not foreclose further enforcement proceedings. The filing says other ordinary-course claims are not expected to materially affect financial condition, results, or liquidity.
  • Key risks include the pandemic and broader economic conditions, freight volumes and pricing, dependence on third-party carriers and railroads, major-customer concentration, driver availability, fuel prices, insurance and claims, regulation, litigation, and information-system disruptions.

Important facts for investors to verify

  • Whether COVID-related demand, network imbalance, customer-site suspensions, and bad-debt exposure materially changed after quarter-end.
  • Whether the planned capital-expenditure range and $828 million of commitments remain appropriate as equipment availability and business conditions evolve.
  • Developments in the BNSF enforcement dispute and any resulting financial or operating effects.
  • Whether ICS margins and profitability recover, and whether operating trends in JBI, FMS, and JBT improve or deteriorate.
  • The company’s capacity to sustain cash generation, meet debt and purchase commitments, and maintain its stated liquidity and credit objectives.