J.B. Hunt Transport Services, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in millions except per-share data. The filing is unaudited. J.B. Hunt operates Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truckload (JBT).
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Total revenue | $2,363.7 | $2,209.8 | $6,714.9 | $6,297.0 |
| Revenue excluding fuel surcharges | $2,102.5 | $1,936.7 | $5,954.1 | $5,524.0 |
| Operating income | $167.9 | $174.7 | $528.8 | $558.3 |
| Net earnings | $118.4 | $131.1 | $371.6 | $400.9 |
| Diluted EPS | $1.10 | $1.19 | $3.42 | $3.63 |
Q3 revenue rose 7.0% (9% excluding fuel surcharge revenue), but operating income fell 3.9% and net earnings fell 9.7%. Operating margin declined to 7.1% from 7.9%; net margin was 5.0% versus 5.9%. For the first nine months, revenue increased 6.6% (8% excluding fuel surcharges), while operating income decreased 5.3% and net earnings decreased 7.3%.
Cash flow and investment: Nine-month operating cash flow was $937.6, compared with $777.6 in 2018. Investing activities used $684.9, including $98.2 for the Cory acquisition; financing activities used $185.1. Property-and-equipment additions were $722.4, partly offset by $135.8 in equipment-sale proceeds. Net capital expenditures were approximately $587.
Liquidity and debt: September 30 cash was $75.1; the working-capital ratio was 1.29. Total debt was $1,293.3, up from $1,149.1 at December 31, 2018; there were no revolver borrowings and the revolving facility provides up to $750. Debt-to-equity was 0.59. The company reported compliance with all debt covenants. The filing states liquid assets, operating cash flow, and the revolver are expected to fund foreseeable operating and capital requirements.
Segment results and material changes
- JBI: Q3 revenue increased 2% to $1.24 billion, but operating income fell 26% to $88.7. Flat load volumes and higher rail transportation, repositioning, recruiting, and other costs weighed on results. For the first nine months, revenue was up 1% and operating income declined to $316.4 from $368.6.
- DCS: Q3 revenue rose 28% to $696 million and operating income more than doubled to $78.3. Growth reflected improved productivity, more trucks under contract, and FMS expansion, including the Cory acquisition. Nine-month revenue increased 26% and operating income rose to $189.0 from $134.0.
- ICS: Q3 revenue declined 3% to $337 million; the segment recorded a $5.6 operating loss versus $10.2 operating income a year earlier. Gross profit margin declined to 12.7% from 15.5%. Nine-month operating income fell to $0.8 from $34.0, amid weaker spot-market activity, competitive pricing, and higher personnel and technology costs.
- JBT: Q3 revenue fell 11% to $94 million and operating income fell 28% to $6.6, reflecting lower spot activity, rates, and volumes. Nine-month revenue decreased 1%, while operating income increased 4% to $22.7.
Operating expenses grew faster than revenue in Q3 and year to date. The company cited higher driver and employee compensation, depreciation, equipment maintenance, technology investment, and insurance and claims costs. Interest expense also increased, reflecting higher average debt and borrowing rates.
Outlook, unusual items, and risks
- Management expected 2019 net capital expenditures of $650–$675 million. The 2019 annual effective tax rate was expected to be 24.5%. No broader earnings or revenue guidance was provided in the filing.
- The Cory home-delivery acquisition closed February 15, 2019, for $98.2 million cash consideration. It added approximately $48.2 million of goodwill and $45.8 million of finite-lived intangible assets and operates in DCS.
- A BNSF arbitration final award was issued October 24, 2019. J.B. Hunt recorded $26.8 million of Q3 pretax charges for BNSF claims and $17.4 million for related legal fees, costs, and interest, totaling $44.2 million. The award’s details are confidential. The company had previously recorded $134 million of contingent-liability charges in Q4 2018 for earlier periods; the filing also reports no material adjustment for January–September 2019.
- Other notable charges included a $20 million DCS casualty-claim charge in June 2019. A California driver class settlement received final court approval in April 2019; the company had recorded a $15 million reserve in 2018.
- Key risks include economic and freight-market conditions, competition and rate pressure, driver and carrier availability, fuel prices, insurance and claims, dependence on major customers and rail partners, litigation, regulation, severe weather, technology disruption, and acquisition integration. Freight volumes are seasonally somewhat higher from August through early November in full-load operations.
- Leases adopted under the new accounting standard added $102.4 million to other assets and corresponding lease liabilities at adoption; management said adoption did not materially affect earnings, cash flows, or covenant compliance. A one-percentage-point increase in applicable short-term rates was estimated to reduce annual pretax earnings by $3.5 million.
Most important facts for investors to verify
- How the BNSF final award and previously accrued amounts reconcile, and whether further payments or adjustments are expected.
- Whether JBI cost pressures and ICS margin weakness persist, and whether DCS productivity and Cory-related growth continue.
- Execution of the $650–$675 million capital-spending plan and the impact of substantial equipment purchase commitments ($935.9 million).
- Debt, interest-rate exposure, and cash generation relative to dividends, share repurchases, and investment needs.
- Developments in claims, insurance costs, driver availability, and customer or rail-partner concentration.