J.B. Hunt Transport Services, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company provides transportation, delivery and logistics services through Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS) and Truckload (JBT). Results are unaudited; the company notes that freight volumes are typically higher from August through early November.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenue | $1,726.9 million | $1,615.0 million | $3,356.1 million | $3,143.7 million |
| Revenue excluding fuel surcharges | $1,551.1 million | $1,483.4 million | $3,012.8 million | $2,910.0 million |
| Operating income | $163.6 million | $175.8 million | $313.0 million | $343.7 million |
| Operating margin | 9.5% | 10.9% | 9.3% | 10.9% |
| Net earnings | $97.9 million | $105.0 million | $200.6 million | $205.1 million |
| Diluted EPS | $0.88 | $0.92 | $1.80 | $1.80 |
For Q2, total revenue rose 6.9%, while revenue excluding fuel surcharges increased 5%. Net earnings fell 6.8% and operating income fell 6.9% year over year. For the first half, total revenue grew 6.8%, but operating income decreased 8.9%; diluted EPS was unchanged. Fuel surcharge revenue was $175.9 million in Q2 and $343.3 million in the first half.
Operating costs grew faster than revenue. Q2 rents and purchased transportation rose 9.6%, and insurance and claims expense rose 43.8%, principally reflecting higher incident volume and accident severity. For the first half, fuel and fuel-tax expense increased 22.0% and insurance and claims increased 38.2%. The company also cited higher rail and truck transportation costs, driver pay and recruiting costs, maintenance, and technology spending.
Segments and material changes
- JBI: Q2 revenue increased 7% to $1.00 billion and operating income increased 4% to $109.7 million. Load volume rose 5%; benefits from growth and dray fleet productivity were partly offset by higher rail, labor, equipment and technology costs. First-half operating income declined to $205.0 million from $208.8 million.
- DCS: Q2 revenue increased 8% to $412 million, but operating income decreased 4% to $48.6 million, mainly because of higher claims costs and start-up expenses. Customer retention remained above 98%. First-half operating income was $93.3 million versus $95.2 million.
- ICS: Q2 revenue increased 9% to $222 million, while the segment reported a $0.2 million operating loss versus $10.9 million of income a year earlier. Gross margin fell to 11.6% from 15.0%, with higher purchased transportation costs, claims, technology expense and start-up branches cited. First-half operating income fell to $4.2 million from $21.7 million.
- JBT: Q2 revenue decreased 4% to $95 million and operating income decreased 37% to $5.5 million, reflecting higher driver, contractor and maintenance costs. First-half revenue fell 3% and operating income fell 42% to $10.5 million.
Cash flow, balance sheet and capital
- First-half operating cash flow was $443.4 million, down from $474.1 million; management attributed the decrease to timing of working-capital activity. Investing cash use was $168.6 million, compared with $258.0 million, reflecting lower equipment purchases partly offset by lower equipment-sale proceeds.
- Cash was $7.3 million at June 30, 2017. Total debt was $943.2 million, down from $986.3 million at year-end 2016. The working capital ratio was 1.49; debt-to-equity was 0.67. The company reported compliance with all debt covenants.
- The $500 million revolving credit facility expires in September 2020; $95 million was outstanding at an average rate of 2.33%, leaving nominal unused capacity of approximately $405 million. The company stated that cash, operating cash flow and the facility should cover foreseeable operating and capital needs.
- First-half net capital expenditures were approximately $165 million. The company expected 2017 net capital expenditures of $450–$475 million and reported approximately $882 million of equipment and facility commitments for the remainder of 2017 and 2018.
- The company repurchased approximately 1.892 million shares for $179.8 million in the first half. At June 30, $521 million remained under its combined buyback authorizations. It declared a quarterly dividend of $0.23 per share, including a July declaration payable in August.
Outlook, contingencies and other notable items
- Management expected a 35.0% effective tax rate for 2017 and a normalized rate of 37.0%. First-half tax expense included a one-time after-tax benefit of $13.6 million from research and development credits and domestic production deductions for tax years 2012–2016; the reported first-half effective rate was 32.9%.
- On July 20, 2017, the company agreed to acquire Special Logistics Dedicated, LLC and affiliates for $136 million, with no debt assumption, subject to customary closing conditions. It expected to fund the purchase through its revolving facility.
- Arbitration with BNSF concerns division of revenue under their joint service agreement and other issues. BNSF is a significant rail provider to JBI; the outcome could not be predicted and no contingency was recorded. The company expected normal commercial activity with BNSF to continue.
- California driver class-action claims alleging wage and meal/rest-period violations remain on appeal; the company could not estimate a possible loss. Other ordinary-course claims were not expected to materially affect financial condition, results or liquidity.
- Key disclosed risks include economic conditions, rail-provider relationships, fuel costs and surcharge recovery, driver and carrier availability, claims and accident severity, customer concentration, competition, weather, regulation, and information-technology disruptions. A one-percentage-point increase in applicable short-term interest rates was estimated to reduce annual pretax earnings by $7.0 million.
- The company planned to adopt the new revenue recognition standard in Q1 2018 using the modified retrospective method and did not expect a material impact based on work to date. It was evaluating the impact of the new lease standard, effective for it after December 15, 2018.
Investor verification checklist
- Track whether ICS margins and operating results recover, and whether purchased transportation costs and start-up branches continue to pressure profitability.
- Monitor insurance and claims trends, driver retention and compensation costs, and the ability to pass through rail, fuel and other cost increases.
- Review the outcome and financial implications of the BNSF arbitration and the California driver litigation.
- Verify the closing, financing, integration and performance of the $136 million Special Logistics Dedicated acquisition.
- Assess planned capital spending, equipment commitments, buybacks and dividends against operating cash generation and debt capacity.
- Separate recurring earnings from the $13.6 million one-time tax benefit and compare future tax expense with management’s normalized-rate expectation.