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, 2014, comparing results with the same 2013 periods. Its four segments are Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truck (JBT). The company notes that freight volumes are typically higher from August through early November.
Financial performance
Amounts below are in millions, except per-share data. Revenue includes fuel surcharges unless otherwise noted.
| Metric | Q3 2014 | Q3 2013 | Change | Nine months 2014 | Nine months 2013 | Change |
|---|---|---|---|---|---|---|
| Total operating revenue | $1,601.2 | $1,435.9 | +11.5% | $4,555.9 | $4,110.3 | +10.8% |
| Operating income | $172.1 | $150.7 | +14.2% | $448.6 | $423.2 | +6.0% |
| Net earnings | $102.4 | $89.5 | +14.5% | $264.5 | $250.5 | +5.6% |
| Diluted EPS | $0.87 | $0.75 | +16.0% | $2.23 | $2.10 | +6.2% |
- Operating margin was 10.7% in Q3 versus 10.5% a year earlier; net margin was 6.4% versus 6.2%. For the first nine months, operating margin was 9.8% versus 10.3%, and net margin was 5.8% versus 6.1%.
- Revenue excluding fuel surcharges increased 13% in Q3 and 12% for the nine-month period. Fuel surcharge revenue was $284.2 million in Q3 and $818.0 million year to date.
- Q3 segment operating income increased at JBI ($125.0 million, +6%), DCS ($34.3 million, +17%), ICS ($8.4 million versus $2.8 million), and JBT ($4.3 million versus $0.6 million). For nine months, JBI earned $331.6 million (+2%), DCS $80.2 million (down from $80.9 million), ICS $20.8 million (up from $12.2 million), and JBT $16.1 million (up from $4.7 million).
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $486.4 million, up from $411.2 million. Investing cash outflow was $479.2 million, versus $333.7 million, reflecting higher equipment purchases partly offset by greater equipment-sale proceeds. Financing cash outflow was $7.1 million, compared with $77.2 million.
- Cash was $5.9 million at September 30, 2014. Total debt was $837.1 million, up from $708.4 million at December 31, 2013; debt-to-equity was 0.72 versus 0.70. The current portion of long-term debt was $250 million, and the working-capital ratio was 0.93.
- The company had $90.3 million drawn on its $500 million revolving facility, expiring August 2016. It reported compliance with all debt covenants. Management said cash generation and the revolving facility should provide sufficient funds for operating and capital requirements for the foreseeable future.
- Net capital expenditures were approximately $479 million for the first nine months. Management expected 2014 net capital expenditures of $660–$670 million and reported approximately $462.6 million of commitments for revenue equipment and facilities. Dividends declared were $0.20 per share for Q3, versus $0.15 a year earlier.
Material changes, outlook and risks
- Q3 growth reflected higher JBI load volumes, DCS productivity and rate increases, and ICS growth in both volume and revenue per load. JBI revenue rose 8%, but slow rail speeds and limited dray capacity reduced equipment utilization. ICS revenue rose 35%, with load volume up 24% and revenue per load up 9%.
- For the nine-month period, operating expenses grew faster than revenue, and operating margin declined. Insurance and claims expense rose 48.7%, attributed to higher incident volume and accident severity; salaries and benefits rose 13.9%, partly reflecting driver shortages and compensation costs. Depreciation increased 15.4% amid fleet investment.
- Debt increased following 2014 senior-note issuances; the company also repaid its $150 million term loan at maturity and a $100 million note issuance in April. A $250 million interest-rate swap converts 2.40% fixed-rate notes to a variable rate; management estimated a one-percentage-point rate increase would reduce annual pretax earnings by $3.4 million.
- No specific earnings or revenue guidance was provided. Key disclosed risks include economic conditions, fuel prices and surcharge recovery, driver and carrier availability, rail service and third-party dependence, competition, weather, customer concentration, and insurance claims. California driver class-action plaintiffs appealed a judgment in the company’s favor; the possible loss, if any, could not be reasonably estimated. Other pending claims were not expected by management to have a material adverse effect.
- The company was evaluating the effect and transition method for the new revenue-recognition standard, effective for periods beginning after December 15, 2016. Disclosure controls were assessed as effective at September 30, 2014.
Investor verification priorities
- Assess whether JBI rail-service and dray-capacity constraints, and elevated insurance and claims costs, persist or improve.
- Verify the pace and returns of the planned capital spending, including the $462.6 million of commitments and expected $660–$670 million in 2014 net capex.
- Review debt maturities, variable-rate exposure, and liquidity against the $250 million current debt portion and the sub-1.0 working-capital ratio.
- Track segment margins and growth, particularly DCS’s nine-month operating-income decline and ICS’s rapid expansion.
- Monitor the California driver litigation appeal and the $37.9 million of uncertain-tax-position liabilities, including interest and penalties.