J.B. Hunt Transport Services, Inc. — Q2 2016 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2016, compared with the same 2015 periods. J.B. Hunt operates four transportation segments: Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truckload (JBT). Amounts below are in millions except per-share data.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total operating revenue | $1,615.0 | $1,540.0 | $3,143.7 | $2,980.1 |
| Revenue excluding fuel surcharges | $1,483.4 | $1,360.6 | $2,910.0 | $2,624.5 |
| Operating income | $175.8 | $173.7 | $343.7 | $329.0 |
| Net earnings | $105.0 | $103.4 | $205.1 | $195.4 |
| Diluted earnings per share | $0.92 | $0.88 | $1.80 | $1.66 |
| Operating margin | 10.9% | 11.3% | 10.9% | 11.0% |
- Q2 revenue rose 4.9%; revenue excluding fuel surcharges increased 9%. Six-month revenue rose 5.5%, or 11% excluding fuel surcharges. Lower fuel surcharge revenue reflected lower fuel prices.
- Q2 operating income increased 1.2% and net earnings 1.5%; diluted EPS rose about 5%, aided in part by fewer weighted-average shares. For the first half, operating income increased 4.5%, net earnings 5.0%, and diluted EPS about 8%.
- Q2 segment revenue and operating income: JBI $933 million and $105.6 million; DCS $383 million and $50.5 million; ICS $204 million and $10.9 million; JBT $98 million and $8.8 million. JBI operating income fell 11%, while DCS rose 24% and ICS more than doubled; JBT operating income declined 9%.
- Q2 consolidated operating expenses grew 5.3%, faster than revenue. Higher purchased transportation, wages and benefits, and depreciation were partly offset by lower fuel and general and administrative expense. The 2015 comparison included corporate streamlining and technology costs.
Cash flow, debt and liquidity
- First-half operating cash flow was $474.1 million, versus $453.5 million. Investing cash outflow was $258.0 million, including $351.5 million of equipment additions and $93.5 million of equipment-sale proceeds. Financing cash outflow was $210.5 million, including $100 million of share repurchases and $49.6 million of dividends.
- Cash was $11.3 million at June 30, 2016. Total debt was $957.6 million, down from $998.0 million at December 31, 2015. The working capital ratio was 1.50; debt-to-equity was 0.69.
- The company had an authorized $500 million revolving credit facility, with $87 million drawn, expiring in September 2020. It reported compliance with all debt covenants. Management said cash, operating cash generation, and the revolver should meet operating and capital needs for the foreseeable future.
- Net capital expenditures were approximately $258 million in the first half. Management expected full-year 2016 net capital expenditures of $525–$550 million and reported approximately $271 million of commitments for the remainder of 2016 and 2017.
Outlook, risks and unusual items
- No earnings or revenue guidance was provided. Management noted typical seasonality, with somewhat higher full-load freight volumes from August through early November.
- Key operating pressures included rail purchased-transportation costs, driver recruitment, wages and retention, equipment ownership costs, and insurance and claims. The company cited tighter availability of qualified drivers and higher accident severity; JBI also faced increased insurance and cargo claims.
- Risks identified include economic conditions, dependence on railroads and other third parties, fuel-price changes and recovery through surcharges, customer concentration, driver and carrier availability, competition, regulation, severe weather, and information-technology disruption or security breaches.
- California driver class-action litigation remained on appeal after a favorable judgment for the company in the lead case. The possible loss, if any, could not be reasonably estimated. The company said other ordinary-course claims were not expected to materially affect its financial condition, results, or liquidity.
- Unrecognized tax benefits totaled $33.7 million, with $4.4 million of accrued interest and penalties; timing of any settlements was not reasonably estimable. A one-percentage-point increase in applicable short-term interest rates would reduce annual pretax earnings by an estimated $6.9 million.
- The board authorized $500 million in share repurchases; $100 million was repurchased in the first half and $351 million remained authorized at June 30. A quarterly dividend of $0.22 per share was declared in July for payment in August.
Important facts for investors to verify
- Whether volume growth, particularly in JBI and ICS, can sustain earnings as segment pricing and operating costs evolve.
- Capital spending, equipment commitments, and the company’s ability to fund them while maintaining liquidity and managing debt.
- Driver availability, wage and recruiting costs, rail service and pricing, and insurance and claims trends.
- Developments in the California driver litigation and the timing or amount of potential tax settlements.
- Actual results relative to seasonal patterns; the filing cautions that interim results are not necessarily indicative of full-year results.