J.B. Hunt Transport Services, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The unaudited filing covers four transportation segments: Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truckload (JBT). Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total operating revenue | $2,139 | $1,727 | $4,087 | $3,356 |
| Revenue excluding fuel surcharges | $1,874 | $1,551 | $3,587 | $3,013 |
| Operating income | $214.8 | $163.6 | $383.6 | $313.0 |
| Net earnings | $151.7 | $97.9 | $269.8 | $200.6 |
| Diluted EPS | $1.37 | $0.88 | $2.44 | $1.80 |
| Operating margin | 10.0% | 9.5% | 9.4% | 9.3% |
| Net margin | 7.1% | 5.7% | 6.6% | 6.0% |
For Q2, total revenue rose 23.9% year over year (21% excluding fuel surcharges); operating income increased 31.3% and net earnings 55.0%. For the first half, total revenue grew 21.8% (19% excluding fuel surcharges), operating income 22.6%, and net earnings 34.5%. The lower effective tax rate materially contributed to earnings growth.
- Segments, Q2: JBI revenue was $1.165 billion and operating income $134.0 million; DCS revenue was $530 million and operating income $58.5 million; ICS revenue was $347 million and operating income $14.9 million, compared with a $0.2 million loss a year earlier; JBT revenue was $101 million and operating income $7.5 million.
- Cash flow, first half: Operating cash flow was $529.0 million versus $443.4 million. Investing cash outflow was $355.4 million versus $168.6 million, including $411.7 million in property and equipment additions. Financing cash outflow was $173.0 million versus $274.0 million. Ending cash was $15.2 million.
- Liquidity and debt: Current assets were $1.307 billion and current liabilities $1.159 billion; working-capital ratio was 1.13, down from 1.45 at December 2017. Balance-sheet debt was approximately $1.005 billion, including $249.4 million classified as current, versus $1.086 billion of long-term debt at year-end. Debt-to-equity was 0.49; debt was 33% of total capital. The company had a $500 million revolving facility, with about $170 million drawn, and reported compliance with debt covenants.
- Capital returns: The company repurchased approximately 420,000 shares for $50 million in the first half and declared quarterly dividends of $0.24 per share. $471 million remained under repurchase authorizations at June 30.
Material changes and management commentary
- JBI benefited from load growth and higher revenue per load, but faced increased rail costs, driver wages and retention costs, outsourced dray costs, and equipment costs. Q2 load volume increased 4% and revenue per load rose 12% (8% excluding fuel surcharges).
- DCS revenue grew 29% in Q2, supported by a 17% increase in revenue-producing trucks and 10% higher productivity. Growth included Final Mile Services and the prior-year Special Logistics Dedicated acquisition. Customer retention remained above 98%.
- ICS revenue grew 56% in Q2; volume rose 38% and revenue per load 13%. Gross profit margin improved to 14.8% from 11.6%. About $137 million of Q2 ICS revenue was executed through the JBHunt360 marketplace.
- JBT revenue increased 7% in Q2, with revenue per load excluding fuel surcharges up 14%; operating income increased 35%. The company reported an average of 180 unseated trucks during the quarter.
- Across the business, operating costs rose with fuel prices, higher transportation rates and volumes, driver compensation and recruiting, maintenance, and equipment investment. Q2 fuel and fuel-tax expense increased 46.1% year over year; general and administrative expense increased 71.7%, partly due to higher asset-disposal losses and professional fees.
Outlook, risks, contingencies and unusual items
- Management expected a 26.0% effective tax rate for 2018. It attributed the lower 2018 rate to the Tax Cuts and Jobs Act; the 2017 first-half comparison included a $13.6 million after-tax benefit from prior-year research credits and domestic production deductions. The company had not completed accounting for all effects of the new tax law.
- Management forecast $750 million to $775 million of net capital expenditures for calendar 2018 and reported approximately $854 million of commitments for revenue equipment and facilities during the remainder of 2018 and 2019. It said cash, operating cash generation, and the revolving line should fund foreseeable needs. Senior notes due in 2019 were intended to be repaid at maturity using the revolver or other long-term financing.
- Seasonality typically brings higher full-load freight volumes from August through early November. No broader earnings or revenue forecast was provided in the filing.
- California driver class actions involve wage and break-period allegations. A July 23, 2018 court order, after quarter-end, found the activity-based compensation system violated California law to the extent it did not separately compensate rest breaks and other nonproductive time, but did not determine liability on the claims. Trial was scheduled for Q3 2018; the company said it could not reasonably estimate potential loss. A $10 million reserve had been recorded in 2017.
- Arbitration with BNSF over revenue allocation under a joint service agreement remained pending; the company could not predict the outcome or estimate a contingency. Normal commercial activity continued.
- Other disclosed risks include fuel-price volatility and uncertain surcharge recovery, driver and carrier availability, rail service and third-party dependence, customer concentration, insurance and claims, competition, weather, regulation, litigation, and information-system disruption. A one-percentage-point increase in applicable short-term rates was estimated to reduce annual pretax earnings by $7.7 million.
- The company adopted the revenue recognition standard in Q1 2018 with no material financial-statement impact. It was evaluating the effect of the new lease standard, effective for periods beginning after December 15, 2018.
Important facts for investors to verify
- Whether volume, pricing, and segment margins—particularly ICS’s improved profitability—were sustained in subsequent periods.
- Capital expenditure execution and funding needs, including repayment or refinancing of the 2019 notes and the timing of equipment commitments.
- Developments and potential financial exposure in the California driver litigation and BNSF arbitration.
- Effects of fuel, driver costs, equipment costs, and interest-rate changes on margins and cash generation.
- Final tax accounting under the Tax Cuts and Jobs Act and the company’s reported $46.9 million of gross unrecognized tax benefits.