J.B. Hunt Transport Services, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results. Amounts below are U.S. dollars; financial figures are generally in millions unless stated otherwise.
Business context
J.B. Hunt provides surface transportation, delivery and logistics services across the continental United States, Canada and Mexico. Its four segments are Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS) and Truck (JBT). Intermodal generated 58% of 2016 consolidated revenue. The company emphasized integrated, multimodal services, customer partnerships, safety and investment in capacity.
Financial results and liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $6,555m | $6,188m | +5.9% |
| Operating income | $721m | $716m | +0.7% |
| Net earnings | $432m | $427m | +1.1% |
| Diluted EPS | $3.81 | $3.66 | +4.1% |
| Operating margin | 11.0% | 11.6% | Down 0.6 percentage points |
| Net margin | 6.6% | 6.9% | Down 0.3 percentage points |
| Operating cash flow | $854m | $873m | Down $19m |
| Capital expenditures, additions to property and equipment | $638m | $725m | Down $87m |
Fuel surcharge revenue fell 18.4% to $548m; excluding fuel surcharge revenue, operating revenue rose 8.9%. Operating expenses increased 6.6%, faster than revenue. Purchased transportation and rents rose 8.7%, while fuel and fuel taxes declined 9.5%. Salaries and benefits included a one-time $15.2m benefit from a paid-time-off policy change. The effective tax rate was 37.90%, versus 38.10%.
Fourth-quarter 2016 revenue was $1,721m, operating income $194m, net earnings $118m and diluted EPS $1.05, compared with $1,621m, $193m, $117m and $1.01, respectively, in fourth-quarter 2015.
At year-end, total debt was approximately $986m, stockholders’ equity $1,414m and the working-capital ratio 1.65. Cash and cash equivalents were $6m. The company had $140m outstanding on a $500m revolving credit facility, with maturity in September 2020, and reported compliance with its debt covenants. It stated that liquidity, operating cash generation and financing arrangements should cover foreseeable operating and capital needs.
Net cash used in investing activities was $485m and net cash used in financing activities was $368m. The company repurchased approximately $250m of stock in 2016 and paid $0.88 per share in dividends. It announced a quarterly dividend increase to $0.23 per share in January 2017.
Material changes and segment performance
- JBI: Revenue rose 3.6% to $3,796m, with loads up 8.1% but revenue per load down 4.2%. Operating income fell to $450m from $477m, reflecting higher rail costs, equipment ownership expense, claims and driver costs.
- DCS: Revenue increased 5.6% to $1,533m; operating income rose to $205m from $163m. Management cited better asset utilization and operating efficiency, partly offset by higher driver, recruiting and equipment costs.
- ICS: Revenue increased 21.7% to $852m and loads rose 57.0%, but revenue per load declined 22.5%. Operating income was unchanged at $36m; gross profit margin declined to 14.3% from 15.3%.
- JBT: Revenue edged up 0.6% to $388m, while operating income declined to $30m from $40m, amid driver, contractor, insurance, safety and maintenance cost increases.
Overall, earnings grew more slowly than revenue and the operating margin contracted. The company attributed revenue growth mainly to higher volumes, while lower revenue per load affected JBI, ICS and JBT. The $15.2m paid-time-off policy benefit supported 2016 results across segments.
Outlook, risks and contingencies
No specific earnings or revenue guidance was provided in the supplied filing text. The company planned approximately $967m of revenue-equipment and facility commitments during 2017–2018, net of expected sale or trade-in proceeds, primarily for containers, chassis and tractors. It described demand for transportation solutions and ongoing investment in customer capacity, but did not quantify a forecast.
- BNSF arbitration: In January 2017, J.B. Hunt and BNSF initiated arbitration concerning the division of revenue collected beginning May 1, 2016, and other Joint Service Agreement issues. BNSF is a significant rail provider to JBI. The outcome and any potential gain or loss could not be reasonably estimated; normal commercial operations were expected to continue.
- Litigation: California driver class-action claims concerning wages and meal and rest periods remained on appeal after the company prevailed in the lead case. Potential loss could not be reasonably estimated. The company said other routine claims were not expected to materially affect its financial condition, results or liquidity.
- Operating risks: Dependence on railroads and third-party carriers; driver recruitment and retention; competition and freight-rate pressure; customer concentration (top 10 customers were about 29% of revenue); fuel-price volatility; insurance and claims costs; severe weather; regulation; and information-system or cybersecurity disruptions.
- Capital and rate exposure: Long-term debt obligations were approximately $990m in the contractual-obligations table. A one-percentage-point increase in applicable variable interest rates was estimated to reduce annual pretax earnings by $7.4m. Operating-lease obligations were $36.7m.
- Other items: Estimated claims accrual was approximately $98m; uncertain tax-position liabilities, including interest and penalties, were $39.8m and excluded from the contractual-obligations table because settlement timing could not be estimated. The company had no fuel-price hedges.
Management and Ernst & Young reported effective internal controls over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Progress and financial implications of the BNSF arbitration, including any change to rail service or revenue-sharing terms.
- Whether volume growth can offset pressure on revenue per load, purchased transportation costs and operating margins—particularly in JBI and ICS.
- Execution and returns on the approximately $967m of committed 2017–2018 equipment and facility spending.
- Trends in driver availability, compensation, insurance claims and self-insured losses.
- Liquidity and debt capacity after capital spending, dividends and share repurchases; confirm debt maturities and variable-rate exposure.
- Outcome of the California driver litigation and developments in uncertain tax positions.