Business context and reporting period
J.B. Hunt Transport Services, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2017, comparing results with the first quarter of 2016. Its four segments are Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truckload (JBT). Management notes that freight volumes are typically somewhat higher from August through early November in its full-load business.
Financial results and key metrics
Amounts are in millions, except per-share data and ratios.
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total operating revenue | $1,629.2 | $1,528.7 | +6.6% |
| Revenue excluding fuel surcharges | $1,461.8 | $1,426.7 | +2.5% |
| Operating income | $149.4 | $167.9 | -11.0% |
| Operating margin | 9.2% | 11.0% | -1.8 percentage points |
| Net interest expense | $6.8 | $6.4 | +5.8% |
| Net earnings | $102.7 | $100.1 | +2.6% |
| Net margin | 6.3% | 6.5% | -0.2 percentage points |
| Diluted EPS | $0.92 | $0.88 | +4.5% |
| Operating cash flow | $285.6 | $304.9 | -6.3% |
Higher fuel surcharge revenue contributed to total revenue growth; excluding fuel surcharges, revenue rose 2.5%. Operating expenses grew 8.7%, faster than revenue. Rents and purchased transportation were 49.5% of revenue versus 48.4%; fuel and fuel taxes were 5.0% versus 3.9%; and insurance and claims were 1.4% versus 1.1%. The effective tax rate fell to 28.0% from 38.0%, including a one-time $13.6 million after-tax benefit for tax credits and deductions related to 2012–2016. This benefit helped net earnings increase despite lower operating income.
Segment revenue and operating income: JBI revenue $937 million (+5%) and operating income $95.3 million (-8%); DCS $392 million (+10%) and $44.8 million (flat); ICS $209 million (+14%) and $4.4 million (-59%); JBT $94 million (-2%) and $4.9 million (-46%).
At March 31, 2017, cash was $12.3 million, current assets $893.3 million, and current liabilities $586.5 million; the working capital ratio was 1.52. Long-term debt carrying value was $950.6 million, down from $986.3 million at December 31, 2016. Debt-to-equity was 0.69 and debt as a share of total capital was 41%. The company had $110 million outstanding on a $500 million revolving credit facility and reported compliance with its debt covenants. Operating cash flow was $285.6 million; investing cash outflow was $94.5 million and financing cash outflow was $185.3 million. Cash increased by $5.9 million during the quarter.
Material changes versus the prior comparable period
- JBI load volume increased 2%, but operating income declined amid competitive pricing, higher rail costs, weaker Eastern network utilization, higher equipment costs, driver wages, and insurance claims.
- DCS revenue and productivity increased, supported by new contracts and rate increases; operating income was unchanged as wage, claims, health insurance, and contract start-up costs offset gains.
- ICS loads rose 36%, while revenue per load fell 16%; gross margin declined to 14.3% from 17.3%. Higher third-party transportation costs, lower spot rates, claims, and start-up branches weighed on earnings.
- JBT revenue declined 2% and operating income declined 46%, reflecting lower revenue per load and rates, shorter haul lengths, maintenance costs, and insurance claims.
- Repurchases totaled 1.328 million shares for $129.8 million, and the quarterly dividend increased from $0.22 to $0.23 per share. A further $500 million repurchase authorization was approved after quarter-end.
Outlook, risks, contingencies, and unusual items
- Management expects a 2017 annual tax rate of approximately 35%; the normalized rate excluding one-time items is expected to be 37%. No broader revenue or earnings guidance is provided.
- Expected net capital expenditures for the remainder of 2017 are $360–$385 million. The company reported approximately $910.6 million of commitments to acquire revenue equipment and facilities, principally over 2017–2019.
- Management believes cash, operating cash generation, and the revolving credit facility will be sufficient for foreseeable operating and capital needs. It cautions that quarterly results are not necessarily indicative of full-year results.
- Risks include economic conditions, competition and pricing, fuel cost and availability, driver and carrier availability, weather, insurance claims, reliance on railroads and major customers, and information technology disruption or security breaches.
- Arbitration with BNSF concerns revenue allocation under the parties’ joint service agreement and related issues. The outcome cannot currently be predicted; no gain or loss contingency was recorded. Normal commercial activity was expected to continue.
- California driver class actions alleging wage and meal/rest-period violations remain subject to appeal; the company cannot estimate any possible loss. Other claims are not expected by management to materially affect financial condition, results, or liquidity.
- Other notable items: insurance and claims expense increased 32%; a $1.7 million net loss on asset dispositions compared with less than $0.1 million in the prior-year quarter; and a one-percentage-point increase in applicable interest rates would reduce annual pretax earnings by an estimated $7.1 million.
Important facts for investors to verify
- Whether revenue growth excluding fuel surcharges and operating performance improve, particularly JBI pricing/utilization and ICS margins.
- Whether increased insurance and claims costs, driver costs, and competitive pricing continue to pressure operating margins.
- How the $13.6 million tax benefit affects comparability, and whether the projected 35% annual and 37% normalized tax rates hold.
- Capital spending execution, share repurchases, debt levels, and liquidity relative to the company’s substantial equipment commitments.
- Developments in the BNSF arbitration and California driver litigation, including any change in the company’s ability to estimate potential exposure.