J.B. Hunt Transport Services, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2015, compared with the same periods in 2014. The company operates four transportation and logistics segments: Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truck (JBT). Freight volumes are somewhat seasonal, typically higher from August through early November.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $1,586.5 million | $1,601.2 million | $4,566.6 million | $4,555.9 million |
| Revenue excluding fuel surcharge (FSC) | $1,419.5 million | $1,317.0 million | $4,044.0 million | $3,737.9 million |
| Operating income | $193.8 million | $172.1 million | $522.8 million | $448.6 million |
| Net earnings | $115.1 million | $102.4 million | $310.5 million | $264.5 million |
| Diluted EPS | $0.99 | $0.87 | $2.65 | $2.23 |
| Operating margin | 12.2% | 10.7% | 11.4% | 9.8% |
| Net margin | 7.3% | 6.4% | 6.8% | 5.8% |
Q3 total revenue declined 0.9%, while revenue excluding FSC increased 8%. For the first nine months, total revenue rose 0.2% and revenue excluding FSC increased 8%. Management cited lower FSC revenue and weaker-than-expected customer demand as drags on reported revenue, despite rate increases and load growth. Q3 operating income rose 12.6% and net earnings rose 12.4%; nine-month operating income and net earnings each increased 16.5% and 17.4%, respectively.
- Segment performance, Q3: JBI revenue was $949 million, down 2%, while operating income increased 1% to $126.1 million. DCS revenue rose 3% to $370 million and operating income increased 32% to $45.1 million. ICS revenue declined 7% to $173 million, but operating income rose 36% to $11.5 million as gross margin improved to 15.9% from 13.3%. JBT revenue increased 2% to $98 million and operating income increased to $11.2 million from $4.3 million.
- Cost and margin drivers: Lower fuel prices reduced fuel expense 33.5% in Q3 and 30.9% for the nine-month period. Salaries and benefits increased 7.5% and 8.3%, respectively, amid higher driver pay, hiring costs, and a tighter driver supply. Depreciation increased 14.3% and 16.3%, reflecting fleet investment. Nine-month general and administrative expense increased 54.6%, primarily due to corporate streamlining and technology redevelopment costs.
Cash flow, balance sheet, and capital
- For the first nine months, operating cash flow was $697.0 million, versus $486.4 million; investing cash outflow was $450.8 million, versus $479.2 million; and financing cash outflow was $246.6 million, versus $7.1 million.
- Cash was $5.5 million at September 30, 2015. Current assets were $768.2 million and current liabilities were $544.0 million; the reported working-capital ratio was 1.41, compared with 1.14 at December 31, 2014.
- Total debt was $993.4 million, compared with $934.0 million at December 31, 2014; debt-to-equity was 0.80 versus 0.78. No current portion of long-term debt remained after the $250 million notes matured and were repaid in September. The company entered a new $500 million, five-year revolving credit facility, expiring September 2020, and reported compliance with all debt covenants.
- Net capital expenditures were approximately $431 million through nine months. Management expected full-year 2015 net capital expenditures of $570–$590 million and reported approximately $116 million of equipment and facility commitments for the remainder of 2015 and 2016. Management stated that liquid assets, operating cash flow, and the revolving credit line should be sufficient for foreseeable operating and capital needs.
- The company repurchased approximately 2.655 million shares for $212.2 million during the first nine months. On October 22, 2015, the board authorized a further $500 million repurchase program. The quarterly dividend was $0.21 per share.
Outlook, risks, and unusual items
- The filing provides no earnings or revenue forecast. Management’s stated capital-spending expectation is $570–$590 million of 2015 net capital expenditures.
- Management identified economic conditions, freight demand, fuel prices and surcharge recovery, driver and carrier availability, customer concentration, competition, accidents and insurance claims, regulation, adverse weather, and information-technology disruption or security breaches as risks.
- A 1-percentage-point increase in applicable short-term variable interest rates would reduce annual pretax earnings by an estimated $7.4 million at the reported borrowing level. Interest-rate swaps convert $600 million of fixed-rate notes to variable-rate exposure.
- California driver class actions alleging wage and meal/rest-period violations remain on appeal after judgment for the company in the lead case. The company cannot reasonably estimate any possible loss or range of loss. It believes other ordinary-course claims are not expected to materially affect financial condition, results, or liquidity.
- Gross unrecognized tax benefits were $31.8 million, including $4.9 million of accrued interest and penalties; timing of any settlements for uncertain tax positions is not reasonably estimable. Nine-month results also included corporate streamlining and technology redevelopment costs across segments.
Key facts investors should verify
- Whether growth in revenue excluding FSC and improved operating margins can persist if freight demand remains weaker than expected.
- How driver scarcity, compensation and recruiting costs, and fleet utilization affect segment profitability and planned capacity growth.
- Whether capital spending, equipment depreciation, and debt levels remain consistent with operating cash generation and liquidity needs.
- The amount and timing, if any, of loss from the pending California driver litigation and uncertain tax positions.
- The company’s exposure to variable interest rates, fuel-price movements, and its ability to recover fuel costs through surcharges.