J.B. Hunt Transport Services, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. J.B. Hunt provides intermodal, dedicated contract, freight brokerage and truckload services across North America.
Financial results and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Operating revenue | $8.615 billion | $7.190 billion |
| Operating income | $681 million | $624 million |
| Operating margin | 7.9% | 8.7% |
| Net earnings | $490 million | $686 million |
| Diluted earnings per share | $4.43 | $6.18 |
| Operating cash flow | $1.088 billion | $855 million |
| Cash used in investing activities | $887 million | $651 million |
Revenue rose 19.8%, driven by higher volume and revenue per load across all four segments; fuel surcharge revenue increased 40.2% to $1.057 billion. Operating expenses grew faster than revenue, and the operating ratio (operating expenses as a share of revenue) increased to 92.1% from 91.3%. Net earnings fell 28.7%, principally reflecting the unusually large tax benefit recorded in 2017 following federal tax reform, as well as higher operating costs and 2018 charges connected with the BNSF arbitration.
Fourth quarter: Revenue was $2.318 billion, operating income $123 million, net earnings $89 million and diluted EPS $0.81. In Q4 2017, those figures were $1.990 billion, $146 million, $385 million and $3.48, respectively. The unusually high prior-year earnings reflected the $309.2 million tax benefit from remeasuring deferred tax balances after enactment of the Tax Cuts and Jobs Act.
Segment performance
| Segment | 2018 revenue | 2018 operating income | Change versus 2017 |
|---|---|---|---|
| Intermodal (JBI) | $4.717 billion | $401 million | Revenue +15%; operating income down from $407 million |
| Dedicated Contract Services (DCS) | $2.163 billion | $193 million | Revenue +26%; operating income up from $171 million |
| Integrated Capacity Solutions (ICS) | $1.335 billion | $50 million | Revenue +30%; operating income up from $23 million |
| Truckload (JBT) | $417 million | $37 million | Revenue +10%; operating income up from $23 million |
JBI’s results were pressured by rail costs, service disruption and arbitration-related expense. DCS growth included expanded Final Mile Services activity and the effects of the 2017 Special Logistics Dedicated acquisition. ICS benefited from higher volume and improved gross profit margin, which rose to 15.4% from 13.3%. JBT’s higher rates offset lower load counts.
Financial position, liquidity and capital
- At year-end, total debt was approximately $1.149 billion, cash and cash equivalents were $7.6 million, and stockholders’ equity was $2.101 billion. Debt-to-equity was 0.55; the working capital ratio was 1.11, down from 1.45.
- The company had $309 million outstanding under its $750 million revolving credit facility, which matures in September 2023. It reported compliance with debt covenants.
- $250.7 million of debt was classified as current, with the corresponding senior notes due in March 2019. Management intended to repay or refinance them using the revolving facility or other long-term financing.
- Capital expenditures and equipment investment drove cash used in investing activities to $887 million. The company had approximately $381.6 million of net equipment and facility commitments for 2019–2020.
- The quarterly dividend was raised from $0.24 to $0.26 per share in January 2019. The company repurchased approximately $150 million of shares during 2018.
Material changes, outlook and risks
- BNSF arbitration: The company recorded $134 million of pretax charges in Q4 2018 for amounts claimed under its rail joint service agreement: $89.4 million for 2016–2017 and $44.6 million for 2018. A January 2019 interim award ordered $89.4 million payable for the 2016–2017 periods. Further issues, including 2018 and future revenue divisions, remained unresolved; management said the final outcome could not be reasonably predicted and additional liability could be material.
- Other unusual items: A $15 million reserve was recorded in 2018 for a proposed settlement of California driver wage-and-hour claims, subject to final court approval. The 2017 comparison includes a $309.2 million tax benefit from federal tax reform.
- Outlook: Management said cash, operating cash generation and financing arrangements should support operating and capital needs for the foreseeable future. The filing does not provide quantified earnings or revenue guidance.
- Post-year-end acquisition: The company completed its $100 million acquisition of Cory 1st Choice Home Delivery on February 15, 2019, financing it with the revolving facility. It is expected to operate within DCS.
- Principal risks: Dependence on major railroads, especially BNSF and Norfolk Southern; driver and carrier availability and costs; fuel volatility and timing of fuel surcharges; customer concentration (top ten customers represented about 30% of 2018 revenue); insurance and claims; competition and freight-rate pressure; severe weather; regulatory and environmental compliance; and information-system disruption or security breaches.
Most important facts for investors to verify
- Subsequent BNSF arbitration awards, total exposure and effects on JBI costs and margins.
- Whether the $250.7 million 2019 debt maturity was repaid or refinanced, and remaining revolver availability.
- Whether the California settlement received final approval and whether further material claims or contingencies arose.
- Cash conversion and returns on the substantial equipment investment and 2019–2020 commitments.
- Whether revenue growth translates into improved operating margins despite labor, purchased transportation and fuel costs.
The company and its auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.