J.B. Hunt Transport Services, Inc. — 2019 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2019. J.B. Hunt provides surface transportation, delivery and logistics services through Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS) and Truckload (JBT). The filing also reports fourth-quarter results; it is not a standalone quarterly filing.
Key financial results
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $9.165 billion | $8.615 billion | +6.4% |
| Operating income | $734 million | $681 million | +7.8% |
| Net earnings | $516 million | $490 million | +5.5% |
| Diluted EPS | $4.77 | $4.43 | +7.7% |
| Operating margin | 8.0% | 7.9% | +0.1 percentage point |
| Net margin | 5.6% | 5.7% | -0.1 percentage point |
| Operating cash flow | $1.098 billion | $1.088 billion | +1.0% |
Fuel surcharge revenue was $1.043 billion, down 1.4%; excluding fuel surcharges, revenue increased 7.5%. The effective income tax rate was 24.2%, compared with 23.6%.
Segments
| Segment | 2019 revenue | 2019 operating income | Change versus 2018 |
|---|---|---|---|
| JBI | $4.745 billion | $447 million | Revenue +1%; operating income increased from $401 million |
| DCS | $2.695 billion | $269 million | Revenue +25%; operating income increased from $193 million |
| ICS | $1.348 billion | Loss of $11 million | Revenue +1%; operating income declined from $50 million |
| JBT | $389 million | $29 million | Revenue -7%; operating income declined from $37 million |
DCS growth reflected higher productivity, additional contracted trucks and the Cory acquisition. ICS gross profit margin fell to 13.1% from 15.4%, reflecting weaker spot activity and lower contractual rates. JBI load volume declined 3%, partly offset by higher revenue per load. JBT faced lower volumes, rates and length of haul, and more empty miles.
Cash, debt and liquidity
- Operating cash flow was $1.098 billion. Investing activities used $804 million, including $854 million of property and equipment additions and $116 million for business acquisitions. Financing activities used $267 million.
- Cash and cash equivalents were $35 million at year-end, versus $8 million a year earlier. The working capital ratio was 1.43, up from 1.11.
- Total debt was approximately $1.296 billion, up from $1.149 billion; debt-to-equity was 0.57. The company had no borrowings under its $750 million revolving credit facility, which expires in September 2023, and reported compliance with debt covenants.
- Debt included $250 million of 3.85% notes due 2024, $350 million of 3.30% notes due 2022 (swapped to variable rate), and $700 million of 3.875% notes due 2026. A one-percentage-point increase in applicable variable interest rates was estimated to reduce annual pretax earnings by $3.5 million.
- Management said available liquid assets, operating cash generation and financing arrangements should fund foreseeable operating and capital needs. Equipment and facility purchase commitments were approximately $938 million through 2021, net of expected sale or trade-in proceeds.
Material changes, outlook and risks
- Acquisitions: The company acquired Cory 1st Choice Home Delivery for approximately $100 million and RDI Last Mile for approximately $17.5 million in 2019, both within DCS. Cory contributed to DCS growth; acquisition accounting included $48.2 million of goodwill and $45.8 million of finite-lived intangibles.
- BNSF arbitration: 2019 included $26.8 million of rail transportation expense and $17.4 million of legal fees, costs and interest related to the arbitration, totaling $44.2 million in charges. The filing cites $152.3 million of related charges in 2018. The parties pursued court confirmation/enforcement of the final award, with motions pending in different federal courts.
- Other unusual charges: DCS recorded a $20 million casualty-claim charge in 2019. Insurance and claims expense also rose 21.5% year over year.
- Capital returns: The company repurchased approximately 2.8 million shares for $275.7 million in 2019 and paid $1.04 per share in dividends. In January 2020 it raised the quarterly dividend from $0.26 to $0.27 and authorized an additional $500 million share repurchase.
- Guidance: The filing provides no specific quantified earnings or revenue forecast. It describes continued investment in equipment, technology and customer solutions, but future results remain subject to freight demand, pricing and operating costs.
- Principal risks: Economic and freight-market weakness, rate competition and excess capacity; reliance on major customers, railroads (especially BNSF and Norfolk Southern), independent contractors and third-party carriers; driver availability and labor costs; fuel volatility and surcharge timing; claims and litigation; regulation, environmental requirements and contractor classification; weather; and IT disruption or cybersecurity incidents. The top 10 customers represented about 32% of 2019 revenue.
- Controls and audit: Management and Ernst & Young reported effective internal control over financial reporting, and the auditor issued an unqualified opinion on the financial statements. Claims accruals and Cory acquisition valuations were identified as critical audit matters.
Most important facts for investors to verify
- Whether DCS growth and productivity can be sustained, and how the Cory and RDI acquisitions perform against expectations.
- Whether ICS can restore margins after its 2019 operating loss, and whether JBI can stabilize load volumes and rail service costs.
- The final financial and operational effects of the BNSF arbitration and related court proceedings.
- Whether the $938 million equipment commitment, debt servicing and share repurchases remain consistent with cash generation and liquidity.
- Developments in insurance claims, driver availability, customer concentration, fuel recovery and cybersecurity exposure.