J.B. Hunt Transport Services, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. The company operates Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truckload (JBT). Amounts below are in millions except per-share data and ratios.
Financial performance
| Metric | Q1 2016 | Comparable / change |
|---|---|---|
| Total operating revenue | $1,528.7 | +$88.5; +6.1%. Revenue excluding fuel surcharge was $1,426.7, up about 13% as described by management. |
| Operating income / margin | $167.9 / 11.0% | $155.2 / 10.8%; operating income +8.2%. |
| Net earnings | $100.1 | $91.9; +8.9%. |
| Diluted EPS | $0.88 | $0.78. |
| Operating cash flow | $304.9 | $255.5. |
| Cash and cash equivalents | $6.0 | $5.6 at December 31, 2015. |
| Long-term debt | $961.3 | $998.0 at December 31, 2015; debt-to-equity 0.75. |
| Working capital ratio | 1.40 | 1.61 at December 31, 2015. |
Net cash used in investing activities was $114.5, including $156.8 of property and equipment additions and $42.3 of equipment-sale proceeds. Financing used $190.0, including $100.0 for treasury stock purchases and $24.8 of dividends. The quarterly dividend rose to $0.22 per share from $0.21.
Material changes and segment results
- JBI: Revenue rose 6% to $895 million, with loads up 12%; operating income declined 1% to $103.1 million. Lower revenue per load, higher rail costs, equipment costs, and driver costs weighed on results.
- DCS: Revenue increased 4% to $358 million and operating income rose 25% to $44.8 million, aided by improved utilization and reduced third-party carrier reliance. Revenue per truck per week declined about 2%, mainly due to lower fuel surcharges.
- ICS: Revenue increased 12% to $183 million; operating income rose 63% to $10.8 million. Load volumes grew 45%, while revenue per load fell 23%, primarily due to lower fuel prices and freight mix. Gross profit margin improved to 17.3% from 13.7%.
- JBT: Revenue rose 5% to $96 million and operating income rose 8% to $9.2 million. Fleet count increased 12%; revenue per loaded mile decreased about 2%.
Consolidated operating margin improved to 11.0% from 10.8%. Fuel and fuel-tax expense fell 27.4%, but salaries, wages and benefits increased 9.7%; depreciation and amortization rose 8.6%. General and administrative expense increased 56.7%, reflecting higher charitable contributions and professional fees and the absence of prior-year net gains from asset dispositions.
Liquidity, outlook, and risks
- Management said operating cash flow, liquid assets, and its revolving credit facility should provide sufficient funds for operating and capital needs for the foreseeable future. The $500 million revolving facility expires in September 2020; approximately $102 million was borrowed at March 31, 2016. The company reported compliance with debt covenants.
- Management expected net capital expenditures of $410–$430 million for the remainder of 2016 and reported approximately $433 million of equipment and facility commitments spanning the remainder of 2016 and 2017. No earnings or revenue guidance was provided.
- Debt includes fixed-rate notes, with swaps converting $600 million of notes to variable rates. Management estimated a one-percentage-point increase in applicable short-term rates would reduce annual pretax earnings by $7.0 million.
- Risks highlighted include economic and freight conditions, fuel cost and availability, driver and carrier availability, dependence on third parties and major customers, rail relationships, competition, accidents and insurance claims, weather, regulation, and IT disruption or security events. The business is seasonal, with typically higher full-load freight volumes from August through early November.
- California driver class actions alleging wage and meal/rest-period violations remain on appeal. The company said it could not reasonably estimate a possible loss or range of loss. Other ordinary-course claims were not expected to have a material adverse effect, according to management.
- Gross unrecognized tax benefits were $32.8 million, with $3.9 million of accrued interest and penalties. The filing also identifies $36.7 million of potential uncertain-tax-position liabilities, including interest and penalties; settlement timing could not be estimated.
- The company adopted new debt-issuance-cost presentation guidance retrospectively, reducing reported December 2015 current assets by $1.4 million, other assets by $5.6 million, and long-term debt by $7.0 million. Management was evaluating the effects of other forthcoming accounting standards, including revenue recognition and leases.
Key facts for investors to verify
- Whether JBI’s load growth and rail-service improvements can offset lower revenue per load and higher transportation and equipment costs.
- Whether DCS and ICS margin improvements persist amid wage, recruiting, and personnel-cost pressures.
- Funding and execution of planned capital spending and commitments, and the effect on debt and liquidity.
- Developments in the California driver litigation and uncertain tax positions, for which exposure or timing is not fully estimable.
- Exposure to variable interest rates, fuel-price changes, driver availability, and reliance on railroads, carriers, and major customers.