J.B. Hunt Transport Services, Inc. — Q1 2019 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2019, compared with the same period in 2018. J.B. Hunt provides intermodal, dedicated contract, logistics, and truckload transportation services. Amounts below are U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total operating revenue | $2,089.6 | $1,948.2; up 7.3% |
| Revenue excluding fuel surcharge | $1,855.3 | $1,712.9; up 8.3% |
| Operating income / margin | $167.8 / 8.0% | $168.8 / 8.7% |
| Net earnings / net margin | $119.6 / 5.7% | $118.1 / 6.1% |
| Diluted EPS | $1.09 | $1.07 |
| Operating cash flow | $250.7 | $261.6 |
| Net cash used in investing | $310.7 | $179.3 |
| Cash and cash equivalents | $52.4 at March 31 | $7.6 at December 31, 2018 |
| Total debt | $1,284.6 at March 31 | $1,149.1 at December 31, 2018 |
| Working capital ratio | 1.44 | 1.11 at December 31, 2018 |
- Operating expenses rose 8.0%, faster than revenue growth. Salaries, wages and benefits increased 14.7%, depreciation and amortization 13.6%, and general and administrative expenses 39.3%. Net interest expense increased 42.4% to $13.0 million.
- Operating cash flow declined mainly because of working-capital timing. Net capital expenditures were approximately $212 million. Investing outflows included $98.5 million for the Cory acquisition and higher equipment spending.
- The company issued $700 million of 3.875% senior notes due 2026, repaid $250 million of notes at maturity, and paid down its revolving borrowings to zero. It reported $1.285 billion of debt, no revolver borrowings, and a $750 million revolving facility expiring in 2023. Debt-to-equity was 0.58; debt was 37% of total capital. All debt covenants were met.
- The effective tax rate was 22.7%, versus 26.0%, including a favorable state tax audit settlement. Management expected a 24.0% annual tax rate for 2019.
Material changes and segment results
- Intermodal (JBI): Revenue increased 2% to $1.088 billion, but operating income fell 10% to $103.3 million. Load volume declined 7%; revenue per load excluding fuel surcharge rose 11%. Rail costs, winter-weather disruption, lower network utilization, equipment costs, and driver pay weighed on results.
- Dedicated Contract Services (DCS): Revenue rose 22% to $602 million and operating income rose 24% to $50.3 million, reflecting customer contracts, rate increases and Final Mile growth. The Cory acquisition closed in February and operates within DCS.
- Integrated Capacity Solutions (ICS): Revenue increased 2% to $301 million, while operating income declined 22% to $7.0 million. Volume rose 15%, but revenue per load fell 12% amid customer mix changes and softer spot pricing. Marketplace revenue was approximately $186 million, versus $96 million.
- Truckload (JBT): Revenue rose 10% to $102 million and operating income rose 41% to $7.2 million, primarily on higher rates and a larger fleet.
Outlook, management commentary and risks
- Management said cash, operating cash generation and the revolving facility should fund operating and capital needs for the foreseeable future. It expected $410–$430 million of net capital expenditures during the remainder of 2019 and reported approximately $278 million of commitments for revenue equipment and facilities.
- Freight volume is seasonal, typically stronger from August through early November in full-load transportation. Severe Midwest winter weather and anticipated rail lane closures affected Q1 operations.
- The BNSF revenue-division arbitration remains unresolved. The panel’s January 2019 award ordered $89.4 million due for 2016–2017 adjustments; the company had recorded total BNSF-related pretax contingent-liability charges of $134 million in 2018, including $44.6 million for 2018. Further outcomes could create a material additional liability, and management said it could not reasonably predict the final result.
- A $15 million settlement of California driver wage and meal/rest-period claims received final court approval on April 23, 2019, after quarter-end. The company expected overlapping stayed claims to be dismissed.
- Other stated risks include economic and competitive conditions, fuel prices and surcharge recovery, driver and carrier availability, major-customer concentration, rail service and relationships, claims and insurance costs, regulation, technology disruption or security breaches, weather, and acquisition integration.
- Adoption of the new lease accounting standard in January added $102.4 million to other assets and corresponding lease liabilities; management said it did not materially affect earnings, cash flows or covenant compliance. Cory was acquired for $100 million; preliminary purchase accounting included $65.5 million of intangibles and $28.4 million of goodwill.
Most important facts for investors to verify
- Progress, additional awards and potential exposure in the BNSF arbitration; the recorded $134 million is not stated to be the final liability.
- Whether JBI volume and operating profitability recover from weather, rail-cost and utilization pressures.
- Whether DCS growth, including Cory and Final Mile, converts to sustained margins and cash generation.
- Execution of the capital spending plan and the effect of higher debt and interest costs on liquidity and earnings.
- Actual 2019 tax rate versus management’s 24.0% estimate, and any further effects from tax positions or settlements.