J.B. Hunt Transport Services, Inc. — Q3 2018 Form 10-Q
Business context and period. J.B. Hunt provides intermodal, dedicated contract, asset-light logistics, and truckload transportation services. This unaudited quarterly report covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. The company notes that freight volumes are typically somewhat seasonal, with higher full-load volumes from August into early November.
Financial performance
| Metric | Q3 2018 | Q3 2017 | First 9 months 2018 | First 9 months 2017 |
|---|---|---|---|---|
| Total revenue | $2.210 billion | $1.843 billion | $6.297 billion | $5.199 billion |
| Revenue excluding fuel surcharges | $1.937 billion | $1.657 billion | $5.524 billion | $4.670 billion |
| Operating income | $174.7 million | $165.0 million | $558.3 million | $478.0 million |
| Net earnings | $131.1 million | $100.4 million | $400.9 million | $301.0 million |
| Diluted EPS | $1.19 | $0.91 | $3.63 | $2.71 |
| Operating margin | 7.9% | 8.9% | 8.9% | 9.2% |
| Net margin | 5.9% | 5.4% | 6.4% | 5.8% |
Revenue, earnings, and margins. Q3 total revenue rose 19.9%; revenue excluding fuel surcharges grew 17%. Operating income increased 5.9%, while net earnings rose 30.6%, helped by a lower effective tax rate. For the first nine months, revenue rose 21.1%, operating income 16.8%, and net earnings 33.2%. Operating margin declined year over year in both comparison periods as expenses grew slightly faster than revenue over nine months and materially faster in Q3; net margin improved as taxes fell.
Segment highlights. In Q3, JBI (Intermodal) revenue grew 16% and operating income 10%; rail congestion, network disruption, and the BNSF arbitration charge weighed on results. DCS revenue rose 24%, but operating income fell 18%, including driver-litigation charges, contract start-up costs, and higher wages and recruiting expenses. ICS revenue increased 28% and operating income 40%, supported by improved gross margin (15.5% versus 12.8%); results included a $2.2 million bad-debt charge related to a customer bankruptcy. JBT revenue grew 14% and operating income 61%, primarily on higher rates.
Cash flow and investment. Nine-month operating cash flow was $777.6 million, versus $628.5 million. Investing cash use was $586.3 million, including $676.1 million of property and equipment additions and $91.1 million of equipment-sale proceeds. Financing cash use was $198.4 million, including $100.0 million of share repurchases and $78.8 million of dividends. Net capital expenditures were approximately $585 million for the period.
Balance sheet and liquidity. At September 30, cash was $7.6 million; current assets were $1.342 billion and current liabilities $1.213 billion, for a 1.11 working-capital ratio (1.45 at year-end 2017). Total debt was $1.070 billion, including $248.7 million classified as current; total debt to equity was 0.51. The company replaced its $500 million revolver with a $750 million, five-year facility maturing in September 2023; $241 million was drawn at a 3.23% average rate. It was in compliance with debt covenants. Management said cash, operating cash flow, and the revolver should cover foreseeable operating and capital needs, and intends to refinance or repay debt maturing in 2019.
Changes, outlook, and risks
- Cost pressures and unusual charges: Q3 included an $18.3 million pre-tax charge related to the BNSF arbitration interim award and an $8.6 million insurance-and-claims charge, primarily for driver litigation settlements. Insurance and claims expense increased 72.3% year over year in Q3. Higher fuel prices, driver compensation, recruiting, and purchased transportation also pressured costs.
- Legal matters: The company agreed to a $15 million settlement of California driver claims, subject to court approval. BNSF arbitration remains unresolved; the interim award produced the $18.3 million charge, and further outcomes could result in a material liability. The company could not reasonably predict the final result.
- Capital plans: Management expected 2018 net capital expenditures of $750–$800 million and reported approximately $645 million of commitments for revenue equipment and facilities during the remainder of 2018 and 2019. These plans support fleet additions and replacement.
- Taxes: The effective tax rate was 20.4% in Q3 and 24.3% for the first nine months, compared with 35.9% and 33.9%, respectively, in 2017. Management expected a 24.0% full-year 2018 rate. The 2017 nine-month comparison included a one-time $13.6 million tax benefit.
- Interest-rate exposure: A one-percentage-point increase in applicable short-term rates was estimated to reduce annual pre-tax earnings by $8.4 million. Fuel prices, driver and carrier availability, rail service, customer concentration, claims, competition, weather, regulation, and information-system disruption are among the cited risks.
- Accounting and guidance: The company expected to adopt the lease accounting standard on January 1, 2019, recording offsetting lease assets and liabilities; it did not expect material earnings, covenant, or cash-flow effects. The filing provides no specific earnings or revenue guidance.
Important facts for investors to verify
- Progress and final financial impact of the BNSF arbitration, including whether additional liabilities are recorded.
- Court approval and final cost of the $15 million driver settlement, and whether related litigation reserves prove sufficient.
- Whether revenue growth can translate into sustained operating-margin improvement given driver, fuel, insurance, and purchased-transportation costs.
- Execution and funding of planned capital expenditures, and the company’s ability to address the $250 million of debt due in 2019 while maintaining liquidity.
- Actual 2018 tax rate versus management’s 24.0% estimate and the impact of remaining tax-accounting estimates.