J.B. Hunt Transport Services, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. The company operates Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truckload (JBT). Results are unaudited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | First 9 months 2016 | First 9 months 2015 |
|---|---|---|---|---|
| Total operating revenue | $1,690.7 million | $1,586.5 million | $4,834.4 million | $4,566.6 million |
| Revenue excluding fuel surcharges | $1,538.7 million | $1,419.5 million | $4,448.7 million | $4,044.0 million |
| Operating income | $183.0 million | $193.8 million | $526.7 million | $522.8 million |
| Net earnings | $109.4 million | $115.1 million | $314.5 million | $310.5 million |
| Diluted EPS | $0.97 | $0.99 | $2.77 | $2.65 |
| Operating margin | 10.8% | 12.2% | 10.9% | 11.4% |
| Net margin | 6.5% | 7.3% | 6.5% | 6.8% |
Q3 total revenue increased 6.6%, while revenue excluding fuel surcharges rose 8%. Operating income fell 5.6% and net earnings fell 5.0%; diluted EPS declined 2.0%. For the first nine months, total revenue increased 5.9% and revenue excluding fuel surcharges rose about 10%; operating income increased 0.7%, net earnings 1.3%, and diluted EPS 4.5%. Fuel surcharge revenue declined to $151.96 million in Q3 from $167.04 million and to $385.69 million year to date from $522.64 million.
Cash flow and investment: Nine-month operating cash flow was $684.0 million versus $697.0 million. Investing cash outflow was $358.8 million versus $450.8 million, including $498.9 million of property and equipment additions and $140.2 million of equipment-sale proceeds. Financing cash outflow was $325.3 million versus $246.6 million. Cash at September 30 was $5.5 million.
Balance sheet and liquidity: Total assets were $3.73 billion. Long-term debt was $943.7 million, down from $998.0 million at December 31, 2015. The current ratio was 1.40, compared with 1.61 at year-end; debt-to-equity was 0.68 and debt as a share of total capital was 41%. The $500 million revolving credit facility expires September 2020; $84.0 million was drawn at an average rate of 1.55%, leaving approximately $416 million of stated facility capacity before other availability considerations. The company reported compliance with debt covenants.
Material changes and segment results
- JBI: Q3 revenue rose 2% to $970 million, with loads up 7%, but operating income declined 7% to $116.9 million. Lower revenue per load, rail transportation costs, equipment costs, claims, and driver expenses pressured results. Nine-month operating income fell to $325.6 million from $349.0 million.
- DCS: Q3 revenue increased 6% to $394 million and operating income rose 16% to $52.5 million, supported by productivity and asset utilization. Nine-month operating income increased to $147.7 million from $121.5 million.
- ICS: Q3 revenue grew 35% to $233 million as volume increased 88%, but operating income declined 26% to $8.5 million. Gross profit margin contracted to 12.8% from 15.9%, reflecting contractual-rate and spot-rate pressure. Nine-month operating income rose to $30.2 million from $23.0 million.
- JBT: Q3 revenue was broadly flat at $97 million, while operating income fell 55% to $5.1 million amid lower rates, recruiting, safety and insurance, and maintenance costs. Nine-month operating income declined to $23.1 million from $29.4 million.
Consolidated Q3 operating expenses grew 8.3%, faster than revenue growth of 6.6%. Purchased transportation and rents increased 9.9%, while fuel expense fell 3.4%. For the first nine months, operating expenses grew 6.5%, also faster than revenue at 5.9%; lower fuel expense partly offset higher purchased transportation, labor, and depreciation costs. The effective tax rate was 38.0% in 2016 versus 38.1% in 2015.
Outlook, risks, and notable items
- Management said cash, operating cash generation, and revolving credit availability should fund operating and capital needs for the foreseeable future. It expected 2016 net capital expenditures of $500–$525 million and reported approximately $366 million of committed equipment and facility spending for the remainder of 2016 and 2017.
- No specific revenue or earnings guidance was provided. Management noted seasonally higher freight volumes typically occur from August through early November in full-load transportation.
- Key risks cited include economic and customer-demand conditions, pricing and competition, driver and carrier availability, fuel costs and surcharge recovery, rail relationships and service, accidents and claims, weather, regulation, major-customer concentration, and IT disruption or security events.
- California driver class actions alleging wage and meal/rest-period violations remain on appeal to the Ninth Circuit after judgment for the company in the lead case. The company said it could not reasonably estimate any possible loss or range of loss. It considered other ordinary-course litigation not expected to materially affect its financial position, results, or liquidity.
- The company repurchased approximately 2.23 million shares for $174.8 million in the first nine months under its $500 million authorization; $276 million remained at September 30. It declared a quarterly dividend of $0.22 per share, payable in November 2016.
- Unrecognized tax benefits were $34.7 million, with $4.9 million of accrued interest and penalties. Potential tax-position liabilities, including interest and penalties, were excluded from the commitments table; settlement timing was not estimable.
- A one-percentage-point increase in applicable short-term interest rates would reduce annual pretax earnings by an estimated $6.8 million. Interest-rate swaps convert $600 million of fixed-rate notes to variable rates. The company had no fuel-price hedges.
Important facts for investors to verify
- Whether volume growth in JBI and ICS can translate into improved margins despite rate pressure and higher purchased-transportation costs.
- Whether DCS productivity and profitability gains continue, and whether JBT’s lower operating income and higher cost trends improve.
- Execution and funding of the stated capital-spending plan, equipment commitments, and share repurchases.
- Updates on the California driver litigation, tax uncertainties, and claims accruals.
- Exposure to variable interest rates, fuel-price changes, driver availability, rail service, and customer concentration.