J.B. Hunt Transport Services, Inc. — Q1 2018 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2018, compared with Q1 2017. J.B. Hunt provides transportation and logistics services through Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truckload (JBT). Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where applicable.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $1,948.2 million | $1,629.2 million | +19.6%; +17% excluding fuel surcharges |
| Operating income | $168.8 million | $149.4 million | +13.0% |
| Operating margin | 8.7% | 9.2% | Down 0.5 percentage points |
| Net earnings | $118.1 million | $102.7 million | +15.0% |
| Net margin | 6.1% | 6.3% | Down 0.2 percentage points |
| Diluted earnings per share | $1.07 | $0.92 | +16.3% |
| Operating cash flow | $261.6 million | $285.6 million | Down $24.0 million |
| Capital expenditures, net | Approximately $179 million | Approximately $91 million | Increased investment |
Fuel surcharge revenue was $235.3 million, versus $167.4 million. Total operating expenses rose 20.3%, slightly faster than revenue. Fuel, insurance and claims, and general and administrative expenses increased notably. The effective tax rate was 26.0%, compared with 28.0%; Q1 2017 included a $13.6 million one-time after-tax tax-credit and deduction benefit, which affects comparability.
Segments and material changes
- JBI: Revenue rose 14% to $1.07 billion and operating income rose 20% to $114.2 million. Loads increased 6%, revenue per load increased 8%, and revenue per load excluding fuel surcharge increased 4%. Rail congestion, lower dray efficiency, higher equipment costs, driver costs, and claims partly offset growth.
- DCS: Revenue rose 26% to $494 million, but operating income fell 9% to $40.6 million. Revenue growth reflected new contracts, rate increases, and expansion of Final Mile Services, including the 2017 Special Logistics Dedicated acquisition. Winter weather, claims, labor, facilities, maintenance, and amortization costs pressured results.
- ICS: Revenue rose 41% to $296 million and operating income increased to $8.9 million from $4.4 million. Load volume grew 6% and revenue per load rose 34%, mainly reflecting stronger spot pricing. Spot volumes increased 43%, while contractual load counts declined 7%. About $96 million of revenue was executed through the JBHunt360 marketplace.
- JBT: Revenue decreased 1% to $93 million, while operating income increased 4% to $5.1 million. Lower load count and fewer tractors were partly offset by higher revenue per load and rates.
Cash, debt, and liquidity
- Cash was $7.1 million at March 31, 2018, down from $14.6 million at year-end 2017. Current assets were $1.24 billion and current liabilities $1.09 billion; the working-capital ratio was 1.13, down from 1.45 at year-end.
- Total debt was $1.00 billion, versus $1.09 billion at December 31, 2017 and $950.6 million at March 31, 2017. Debt-to-equity was 0.51; debt was 34% of total capital. The company reported compliance with all debt covenants.
- The $500 million revolving credit facility had $167.9 million outstanding and expires in September 2020. A $250 million senior note issuance matures in March 2019; management intends to repay 2019 maturities using the revolver or other long-term financing.
- Management said cash, operating cash generation, and the revolving facility should meet operating and capital needs for the foreseeable future. Equipment and facility commitments totaled $743.4 million, with $362.8 million due within one year. The company expected $440–$460 million of net capital expenditures for the remainder of 2018 and was committed to spend approximately $743 million during 2018 and 2019.
Outlook, risks, and unusual items
- No full-year earnings or revenue guidance was provided. Management expected a 26.0% annual effective tax rate for 2018. Freight volumes are seasonal, typically higher from August through early November in full-load transportation.
- Management cited driver and carrier availability, rising wages and recruiting costs, rail congestion and service, fuel prices, weather, claims and insurance costs, competition, major-customer concentration, regulation, and reliance on technology systems as risks. A 1-percentage-point rise in applicable short-term interest rates would reduce annual pretax earnings by an estimated $7.7 million.
- California driver class actions allege wage and meal/rest-period violations. The company recorded a $10 million reserve in 2017 but said the possible loss range cannot currently be estimated; it petitioned the U.S. Supreme Court for review in February 2018. A separate arbitration with BNSF concerns revenue allocation and other Joint Service Agreement issues; the outcome cannot be predicted, and no contingency was recorded.
- The company adopted the new revenue-recognition standard in Q1 2018 using the modified retrospective approach and reported no material impact. It was still evaluating the effect of the new lease accounting standard, effective for periods beginning after December 15, 2018.
- The company raised its quarterly dividend from $0.23 to $0.24 per share. No shares were repurchased under its authorization during the quarter.
Important facts for investors to verify
- Whether stronger JBI and ICS pricing and volume can sustain growth while restoring consolidated operating and net margins.
- Execution and funding of the substantial equipment investment program, and refinancing or repayment of 2019 debt maturities.
- Developments and potential financial exposure in the California driver litigation and BNSF arbitration.
- Whether hiring, fuel, claims, weather, and rail-service costs continue to pressure segment profitability and cash generation.
- Final tax-accounting effects of the Tax Cuts and Jobs Act and the timing or resolution of $46.1 million in gross unrecognized tax benefits.