J.B. Hunt Transport Services, Inc. — Q1 2015 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2015, compared with the same period in 2014. The company operates Intermodal (JBI), Dedicated Contract Services (DCS), Integrated Capacity Solutions (ICS), and Truck (JBT). Management notes that freight volumes are typically seasonally stronger in August through early November.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total operating revenue | $1.440 billion | $1.407 billion | +2.4% |
| Revenue excluding fuel surcharges | $1.264 billion | $1.152 billion | +10% |
| Operating income | $155.2 million | $117.3 million | +32.3% |
| Operating margin | 10.8% | 8.3% | +2.5 percentage points |
| Net earnings | $91.9 million | $68.7 million | +33.9% |
| Diluted EPS | $0.78 | $0.58 | +$0.20 |
| Operating cash flow | $255.5 million | $159.0 million | +$96.5 million |
Net margin was 6.4%, versus 4.9%. The effective tax rate was 38.1% in both periods. Dividends declared per share increased to $0.21 from $0.20.
Segment performance and material changes
- JBI: Revenue rose 1% to $844 million and operating income increased 12% to $104.3 million. Loads grew 6%; revenue per load fell 5%, while revenue per load excluding fuel surcharge increased 3%. Improved efficiency and lower claims and maintenance costs helped results.
- DCS: Revenue grew 7% to $345 million; operating income more than doubled to $35.8 million. Management cited increased activity, improved asset utilization, lower maintenance costs, and lower fuel prices, partly offset by higher driver and depreciation costs.
- ICS: Revenue was flat at $163 million despite 17% load growth, as revenue per load declined 14.5%. Operating income increased to $6.6 million from $6.1 million; gross margin improved to 13.7% from 12.1%.
- JBT: Revenue declined 1% to $91 million, but revenue excluding fuel surcharge rose 6%. Operating income increased to $8.5 million from $2.4 million.
Fuel surcharge revenue fell to $176.3 million from $254.6 million as fuel prices declined. Fuel and fuel-tax expense decreased 31.8%, while salaries, wages, and benefits increased 8.6% and depreciation and amortization increased 18.0%. Insurance and claims expense rose 10.1%, including higher incident volume and accident severity. Total operating expenses declined 0.4% despite revenue growth.
Cash, debt, and liquidity
- Cash was $5.6 million at March 31, 2015. Current assets were $803.5 million and current liabilities $762.3 million; the working-capital ratio was 1.05, down from 1.14 at year-end 2014 and 1.27 a year earlier.
- Total debt was approximately $878.2 million, down from $934.0 million at December 31, 2014. Debt-to-equity was 0.69; debt was 41% of total capital. The company had $126.5 million drawn on its $500 million revolving facility, expiring August 2016, and reported compliance with all debt covenants.
- $250 million of senior notes mature in September 2015. Management says cash generation and the revolving facility should provide sufficient funds for foreseeable operating and capital needs.
- Investing cash outflow was $161.3 million; financing cash outflow was $94.5 million, compared with financing inflow of $117.5 million in Q1 2014. Financing activity included $24.5 million of dividends and $6.4 million of share repurchases.
Outlook, risks, and unusual items
- Management expects 2015 net capital expenditures of $625–$650 million and reported approximately $404.5 million of remaining commitments for revenue equipment and facilities as of March 31.
- Key risks include economic conditions, fuel-price volatility and surcharge recovery, driver and carrier availability, customer concentration, competition, accidents and claims, regulation, weather, and information-technology disruption. A 1-percentage-point increase in applicable variable interest rates would reduce annual pretax earnings by approximately $3.8 million.
- California driver class-action claims remain on appeal after a favorable judgment for the company in the lead case; the possible loss or range of loss cannot currently be estimated. Other pending claims are not expected by management to have a material adverse effect.
- Gross unrecognized tax benefits were $32.4 million, with $3.9 million of accrued interest and penalties. The company could not reasonably estimate settlement timing for uncertain tax positions.
- The company is evaluating the forthcoming revenue-recognition standard. Adoption of the debt-issuance-cost presentation standard was not expected to have a material impact.
Investor verification checklist
- How the September 2015 $250 million note maturity will be funded or refinanced, and the availability and cost of revolving credit.
- Whether the planned $625–$650 million of 2015 net capital expenditures and related equipment commitments are maintained, and their effect on cash flow and leverage.
- Whether Q1 margin improvements persist as fuel prices, surcharges, driver costs, and equipment depreciation change.
- Developments in the California litigation and uncertain tax positions, for which potential outcomes or timing remain unclear.
- Whether the improvement in operating cash flow continues, given management’s reference to working-capital timing.