J.B. Hunt Transport Services, Inc. — Q3 2020 Form 10-Q
Business context and reporting period: The filing covers the quarter and nine months ended September 30, 2020, compared with the same 2019 periods. J.B. Hunt operates five transportation and logistics segments: Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), Final Mile Services (FMS), and Truckload (JBT). The company changed its segment structure in March 2020, separating Final Mile Services from Dedicated Contract Services.
Financial performance
Amounts below are in millions except per-share data. Percentages are year-over-year.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total operating revenue | $2,472.5 (+4.6%) | $2,363.7 | $6,898.9 (+2.7%) | $6,714.9 |
| Revenue excluding fuel surcharge | $2,296.1 (+9.2%) | $2,102.5 | $6,327.9 (+6.3%) | $5,954.1 |
| Operating income | $175.5 (+4.6%) | $167.9 | $505.4 (-4.4%) | $528.8 |
| Operating margin | 7.1% | 7.1% | 7.3% | 7.9% |
| Net earnings | $125.5 (+6.0%) | $118.4 | $352.0 (-5.3%) | $371.6 |
| Diluted EPS | $1.18 | $1.10 | $3.30 | $3.42 |
| Net cash from operations | Not presented separately | Not presented separately | $911.0 | $937.6 |
- Q3 net margin was 5.1%, versus 5.0% in Q3 2019; nine-month net margin was 5.1%, versus 5.5%.
- Q3 fuel surcharge revenue fell 32% to $176.5 million; nine-month fuel surcharge revenue decreased to $571.0 million from $760.8 million.
- Q3 net interest expense was $11.9 million, down from $12.4 million. Nine-month net interest expense was $36.7 million, down from $40.2 million.
- Cash and cash equivalents were $318.5 million at September 30, 2020, versus $35.0 million at year-end 2019. Current assets were $1,728.6 million and current liabilities $1,095.4 million; working capital ratio was 1.58.
- Long-term debt was $1,303.4 million, compared with $1,295.7 million at year-end. Debt-to-equity was 0.52 and debt was 34% of total capital. The $750 million revolving facility had no borrowings outstanding; all debt covenants were met.
- Nine-month investing cash outflow was $448.7 million, primarily reflecting $559.8 million of property and equipment additions and $111.0 million in equipment sale proceeds. Financing cash outflow was $178.8 million. Net capital expenditures were approximately $449 million.
Material changes and segment results
- JBI: Q3 revenue declined 2% to $1.21 billion, while operating income rose to $108.4 million. The comparison benefited from $44.2 million of BNSF arbitration-related charges in Q3 2019; excluding those charges, Q3 2020 operating income declined 18%. Nine-month revenue fell 1%, while operating income was nearly flat at $317.7 million.
- DCS: Q3 revenue increased 1% to $553 million and operating income rose 5% to $80.4 million. Nine-month revenue rose 3% and operating income increased to $236.4 million.
- ICS: Q3 revenue increased 28% to $431 million, but operating loss widened to $18.3 million from $5.6 million. Gross profit margin fell to 7.6% from 12.7%. Nine-month operating results shifted to a $50.3 million loss from $0.8 million of income; gross profit margin declined to 9.4% from 14.1%.
- FMS: Q3 revenue increased 22% to $182 million and operating income was $2.1 million. Nine-month revenue rose 18% to $475 million; operating loss narrowed to $6.5 million from $13.7 million, which included a $20 million claim settlement charge in 2019.
- JBT: Q3 revenue increased 16% to $109 million, but operating income declined 55% to $2.9 million. Nine-month revenue rose 9%, while operating income fell to $8.2 million from $22.7 million.
Outlook, risks, and unusual items
- Management said COVID-19 continued to create uncertainty for freight demand, customer operations, staffing, carrier capacity, equipment procurement, and customer credit losses. The duration and effects of the pandemic were uncertain.
- Management expected 2020 annual effective tax rate of 24.0%–24.5%. It expected net capital expenditures of $150–$175 million for the remainder of 2020; approximately $604 million of equipment and facility purchase commitments were outstanding for 2020–2022. Capital spending was being deferred or reassessed due to economic uncertainty.
- Management believed cash, operating cash generation, and available credit would fund foreseeable operating and capital needs, and expected to maintain its investment-grade rating. No specific revenue or earnings guidance was provided.
- Costs and margins faced pressure from higher purchased transportation rates, limited rail and truck capacity, driver compensation and medical costs, and ICS pricing competition. ICS, FMS, and JBT results could remain volatile as pandemic effects continued. Freight seasonality typically brings somewhat higher full-load volumes from August through early November.
- The BNSF arbitration matter remained under appeal after a July 2020 court decision confirmed the awards in part but denied additional enforcement relief. The company recorded an $8.2 million pretax charge in Q1 2020 for an adjusted calculation under the award. The filing also reports $55.2 million of gross unrecognized tax benefits and $5.5 million of accrued interest and penalties.
- Nine-month results included a $12.3 million one-time COVID-related bonus and $3.4 million of additional stock compensation related to accelerated executive retirement awards. In Q3 2019, JBI recorded $44.2 million of BNSF-related charges; FMS also had a $20 million casualty-claim charge in June 2019.
Important facts for investors to verify
- Whether ICS can restore gross profit margins and reduce operating losses, and how much of its revenue growth converts to profit.
- Whether nine-month operating margin and earnings pressure continues, particularly in JBI and JBT, after adjusting comparisons for prior-year legal and claim charges.
- COVID-19 effects on freight volumes, customer credit quality, rail and carrier capacity, driver availability, and planned capital spending.
- Developments in the BNSF appeal and any resulting financial or contractual impact.
- Execution of the $604 million purchase commitments, liquidity and covenant headroom, and the effect of variable-rate exposure; management estimated a one-percentage-point rate increase would reduce annual pretax earnings by $3.5 million.