J.B. Hunt Transport Services, Inc. — Q2 2019 Form 10-Q
Business context and period: The filing covers the three and six months ended June 30, 2019, compared with the same 2018 periods. J.B. Hunt operates Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truckload (JBT). Amounts below are U.S. dollars; financial statement figures are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total operating revenue | $2,261.6 | $2,139.0 | $4,351.3 | $4,087.3 |
| Operating income | $193.1 | $214.8 | $360.9 | $383.6 |
| Operating margin | 8.5% | 10.0% | 8.3% | 9.4% |
| Net earnings | $133.6 | $151.7 | $253.2 | $269.8 |
| Diluted EPS | $1.23 | $1.37 | $2.32 | $2.44 |
| Net interest expense | $14.8 | $9.9 | $27.8 | $19.0 |
- Q2 revenue increased 5.7%, while operating income fell 10.1% and net earnings fell 11.9% year over year. For the first half, revenue rose 6.5%, while operating income declined 5.9% and net earnings declined 6.1%.
- Six-month operating cash flow was $606.7, versus $529.0 a year earlier. Investing cash outflow was $573.9, including $555.1 of property and equipment additions and $98.5 paid for the Cory acquisition. Financing cash outflow was $33.5.
- At June 30, cash was $6.9; current assets were $1,384.4 and current liabilities $1,061.5, with a working capital ratio of 1.30. Total debt was $1,372.1, versus $1,149.1 at December 31, 2018; debt-to-equity was 0.64. A $750 million revolving facility had $78.1 million outstanding. The company reported covenant compliance.
- Declared dividends were $0.26 per share in Q2. The company repurchased about 1.98 million shares for $189.7 million during the first half; $181 million remained under its authorization at June 30.
Material changes and segment performance
- JBI: Q2 revenue declined 1% and operating income declined 7%. Loads fell 8%, partly offset by a 7% increase in revenue per load. Management cited softer freight conditions, rail network rationalization, higher purchased transportation, driver, recruiting, technology, and equipment costs.
- DCS: Q2 revenue increased 28% and operating income increased 3%. Productivity rose about 8%; revenue growth included Cory-related and other Final Mile Services (FMS) growth. Higher insurance and claims costs, including a $20 million FMS casualty claim charge, offset part of the improvement.
- ICS: Q2 revenue fell 4%; the segment recorded a $0.6 million operating loss, compared with $14.9 million operating income a year earlier. Volume declined 7%, and gross profit margin fell to 13.4% from 14.8%, reflecting weaker spot activity and lower contractual rates. Marketplace revenue through J.B. Hunt 360° was approximately $222 million.
- JBT: Q2 revenue declined 2%, while operating income rose 19% to $8.9 million, primarily on lower equipment ownership and non-driver personnel costs.
- Across the company, higher wages and benefits, depreciation, technology and administrative spending, and insurance and claims contributed to expense growth outpacing revenue. Q2 operating expenses rose 7.5% against revenue growth of 5.7%. Net interest expense increased as debt levels rose.
Outlook, risks and unusual items
- Management expected a 24.0% effective tax rate for 2019. It expected net capital expenditures of $100–$125 million for the remainder of 2019 and reported approximately $130 million of remaining committed equipment and facility purchases. It stated that cash generation and the revolving facility should provide sufficient funds for foreseeable operating and capital needs.
- The company noted seasonal freight volumes are typically higher from August through early November in full-load transportation. It cautioned that interim results are not necessarily indicative of full-year results; no earnings or revenue guidance was provided.
- The ongoing BNSF arbitration is a significant contingency. The company had recorded $134 million of pretax charges in 2018 for claims through 2018, including a $89.4 million interim award for 2016–2017. Further issues, including 2018 and later revenue divisions, remained unresolved; the company said it could not predict the final outcome and an adverse outcome could be material.
- A California driver class settlement for $15 million received final court approval in April 2019; the reserve had been recorded in 2018. A separate $20 million pretax casualty-claim charge was recorded in Q2 2019 in DCS/FMS.
- The February 2019 Cory acquisition cost $98.5 million in cash consideration. The company preliminarily recorded $48.2 million of goodwill and $45.8 million of finite-lived intangible assets. The acquisition contributed to higher DCS revenue and assets.
- Adoption of the new lease accounting standard on January 1, 2019 added $102.4 million to other assets and offsetting lease liabilities; the company reported no material impact on earnings, cash flows, or debt covenant compliance. At June 30, operating lease liabilities had a present value of $123.4 million.
- Key risks cited include economic and freight-market weakness, competition and rate changes, driver and carrier availability, fuel prices, insurance and claims, dependence on major customers and third-party railroads, regulation, litigation, technology disruption, weather, and acquisition execution. A 1 percentage-point increase in applicable variable interest rates would reduce annual pretax earnings by an estimated $4.3 million.
Important facts for investors to verify
- Updates and potential additional financial exposure from the BNSF arbitration, beyond the $134 million already accrued.
- Whether JBI volumes and ICS margins stabilize, and whether DCS growth converts into sustained operating-income improvement.
- The frequency and severity of insurance claims, including the impact of the $20 million FMS charge and other claim costs.
- Cory integration, purchase-accounting estimates, and the returns generated on the acquisition and elevated capital spending.
- Debt, interest expense, liquidity, and capital allocation, including repurchases, dividends, and remaining equipment commitments.