Business context and reporting period
J.B. Hunt Transport Services, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. Its four segments are Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truckload (JBT). The company notes that freight volumes are typically seasonally higher from August through early November.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $1.843 billion | $1.691 billion | $5.199 billion | $4.834 billion |
| Revenue excluding fuel surcharges | $1.657 billion | $1.539 billion | $4.670 billion | $4.449 billion |
| Operating income | $165.0 million | $183.0 million | $478.0 million | $526.7 million |
| Net earnings | $100.4 million | $109.4 million | $301.0 million | $314.5 million |
| Diluted EPS | $0.91 | $0.97 | $2.71 | $2.77 |
| Operating margin | 8.9% | 10.8% | 9.2% | 10.9% |
- Revenue rose 9% in Q3 and 8% for the nine-month period; excluding fuel surcharges, growth was 8% and 5%, respectively. Fuel surcharge revenue increased to $186.0 million in Q3 from $152.0 million, and to $529.2 million for nine months from $385.7 million.
- Operating expenses grew faster than revenue: 11.3% in Q3 and 9.6% for nine months. Insurance and claims expense rose 21% in Q3 and 32% for nine months; rents and purchased transportation increased 12% and 10%, respectively.
- Net cash from operations was $628.5 million for nine months, down from $684.0 million. Investing used $456.1 million, including the SLD acquisition; financing used $171.1 million. Capital additions to property and equipment were $328.2 million.
- At September 30, cash was $7.7 million, current assets $1.007 billion, and current liabilities $681.8 million; the working capital ratio was 1.48. Long-term debt was $1.085 billion, up from $986.3 million at December 2016. Debt-to-equity was 0.74, and debt was 42% of total capital.
Changes, segments, and significant transactions
- Q3 operating income fell 10% and net earnings fell 8%; nine-month operating income fell 9% and net earnings fell 4%. Higher driver wages, purchased transportation, fuel, insurance and claims, and other operating costs pressured results.
- Q3 JBI revenue increased 8%, but operating income fell 7%, reflecting rail costs and inefficiencies, wage and claims costs, equipment costs, and hurricane disruption. DCS revenue rose 11%, while operating income fell 18%; results included about $4.5 million of SLD acquisition costs and intangible amortization.
- ICS Q3 revenue grew 16% as revenue per load increased 17%, but operating income declined 14%. Nine-month ICS operating income fell 62%, with gross margin declining to 12.9% from 14.9%. JBT Q3 revenue fell 5%, although operating income rose 12%; nine-month revenue and operating income both declined.
- The company acquired Special Logistics Dedicated, LLC and affiliates on July 31, 2017, for $137.6 million cash consideration, with no debt assumed. The preliminary allocation included $55.7 million of goodwill and $60.2 million of definite-lived intangibles; the allocation remained subject to revision.
Outlook, liquidity, risks, and contingencies
- Management expected 2017 net capital expenditures of $475–$500 million and reported approximately $109.4 million of committed spending for the remainder of 2017. It said available liquid assets, operating cash flow, and the revolving credit facility should fund foreseeable operating and capital needs. The $500 million facility had $242 million outstanding, leaving approximately $258 million undrawn; the facility expires in September 2020. The company was in compliance with its debt covenants.
- Management estimated a 35% 2017 effective tax rate, or 37% excluding one-time items. Nine-month tax expense included a $13.6 million after-tax benefit from prior-year research and development credits and domestic production deductions; Q3 included a $4.5 million after-tax stock-compensation tax benefit and a $1.5 million after-tax cost from state tax-rate changes.
- Risk factors include economic conditions, fuel prices and availability, driver and carrier supply, rail relationships, competition, customer concentration, accidents and claims, severe weather, regulation, and IT disruption. Hurricanes Harvey, Irma, and Maria disrupted operations during the quarter.
- California driver class-action judgments previously in the company’s favor were vacated and remanded by the Ninth Circuit; a rehearing petition was pending, and the company could not estimate a possible loss. Arbitration with BNSF concerning revenue allocation and other agreement issues was underway; the outcome was not predictable. No contingency amount was recorded for either matter.
- Interest-rate sensitivity: a one-percentage-point increase in applicable short-term rates would reduce annual pretax earnings by $8.4 million at the then-current borrowing level. The company reported no material foreign-currency exposure and no fuel-hedging derivatives.
Important facts for investors to verify
- Whether operating-cost inflation, claims severity, rail congestion, and driver costs continue to outpace revenue growth.
- Whether the SLD purchase-price allocation, integration, and expected synergies develop as anticipated.
- Progress and potential financial exposure in the California driver litigation and BNSF arbitration.
- Actual 2017 capital spending versus the $475–$500 million outlook, and changes in debt and revolving-credit usage.
- Future ICS margins and segment profitability, and the impact of fuel prices, seasonal volumes, and weather disruptions.