ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
You should refer to the attached interim Condensed Consolidated Financial Statements and related notes and also to our Annual Report (Form 10-K) for the year ended December 31, 2017, as you read the following discussion. We may make statements in this report that reflect our current expectation regarding future results of operations, performance, and achievements. These are “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995, and are based on our belief or interpretation of information currently available. You should realize there are many risks and uncertainties that could cause actual results to differ materially from those described. Some of the factors and events that are not within our control and could have a significant impact on future operating results are general economic and business conditions, competition and competitive rate fluctuations, cost and availability of diesel fuel, ability to attract and retain qualified drivers and delivery personnel, a loss of one or more major customers, interference with or termination of our relationships with certain railroads, rail service delays, insurance costs and availability, claims expense, retention of key employees, terrorist attacks or actions, acts of war, adverse weather conditions, disruption or failure of information systems, new or different environmental or other laws and regulations, operational disruption or adverse effects of business acquisitions, increased costs for new revenue equipment or decreases in the value of used equipment, and the ability of revenue equipment manufacturers to perform in accordance with agreements for guaranteed equipment trade-in values. Additionally, our business is somewhat seasonal with slightly higher freight volumes typically experienced during August through early November in our full-load transportation business. You should also refer to Item 1A of our Annual Report (Form 10-K) for the year ended December 31, 2017, for additional information on risk factors and other events that are not within our control. Our future financial and operating results may fluctuate as a result of these and other risk factors as described from time to time in our filings with the SEC.
GENERAL
We are one of the largest surface transportation, delivery, and logistics companies in North America. We operate four distinct, but complementary, business segments and provide a wide range of transportation and delivery services to a diverse group of customers throughout the continental United States, Canada, and Mexico. Our service offerings include transportation of full-truckload containerized freight, which we directly transport utilizing our company-controlled revenue equipment and company drivers or independent contractors. We have arrangements with most of the major North American rail carriers to transport freight in containers or trailers, while we perform the majority of the pickup and delivery services. We also provide customized freight movement, revenue equipment, labor, systems, and delivery services that are tailored to meet individual customers’ requirements and typically involve long-term contracts. These arrangements are generally referred to as dedicated services and may include multiple pickups and drops, local and home deliveries, freight handling, specialized equipment, and freight network design. Our local and home delivery services typically are provided through a network of cross-dock service centers throughout the continental United States. Utilizing a network of thousands of reliable third-party carriers, we also provide comprehensive transportation and logistics services. In addition to dry-van, full-load operations, these unrelated outside carriers also provide flatbed, refrigerated, less-than-truckload (LTL), and other specialized equipment, drivers, and services. Also, we utilize a combination of company-owned and contracted power units to provide traditional over-the-road full truckload delivery services. We account for our business on a calendar year basis, with our full year ending on December 31 and our quarterly reporting periods ending on March 31, June 30, and September 30. The operation of each of our four business segments is described in Note 13, Segment Information, of our Annual Report (Form 10-K) for the year ended December 31, 2017.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that impact the amounts reported in our Condensed Consolidated Financial Statements and accompanying notes. Therefore, the reported amounts of assets, liabilities, revenues, expenses and associated disclosures of contingent liabilities are affected by these estimates. We evaluate these estimates on an ongoing basis, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates. Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recognized in the accounting period in which the facts that give rise to the revision become known.
Information regarding our Critical Accounting Policies and Estimates can be found in our Annual Report (Form 10-K). The critical accounting policies that we believe require us to make more significant judgments and estimates when we prepare our financial statements include those relating to self-insurance accruals, revenue equipment, revenue recognition and income taxes. We have discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors. In addition, Note 2,
Summary of Significant Accounting Policies
, to the financial statements in our Annual Report (Form 10-K) for the year ended December 31, 2017, contains a summary of our critical accounting policies. There have been no material changes to the methodology we apply for critical accounting estimates as previously disclosed in our Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Comparison of Three Months Ended
March 31, 201
8
to T
hree Months Ended March 31,
20
1
7
|
|
Summary of Operating Segment Results
For the Three Months Ended March 31,
(in millions)
|
|
|
|
Operating Revenues
|
|
|
Operating Income
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
JBI
|
|
$
|
1,070
|
|
|
$
|
937
|
|
|
$
|
114.2
|
|
|
$
|
95.3
|
|
DCS
|
|
|
494
|
|
|
|
392
|
|
|
|
40.6
|
|
|
|
44.8
|
|
ICS
|
|
|
296
|
|
|
|
209
|
|
|
|
8.9
|
|
|
|
4.4
|
|
JBT
|
|
|
93
|
|
|
|
94
|
|
|
|
5.1
|
|
|
|
4.9
|
|
Subtotal
|
|
|
1,953
|
|
|
|
1,632
|
|
|
|
168.8
|
|
|
|
149.4
|
|
Inter-segment eliminations
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,948
|
|
|
$
|
1,629
|
|
|
$
|
168.8
|
|
|
$
|
149.4
|
|
Total consolidated operating revenues increased to $1.95 billion for the first quarter 2018, a 20% increase from $1.63 billion in the first quarter 2017, and a 17% increase excluding fuel surcharge revenues. This increase in operating revenues was primarily due to a 6% increase in load volumes and an 8% increase in revenue per load in JBI, a 26% increase in revenues in DCS related to new customer contracts and rate increases from more mature customer contracts, and a 6% increase in load volume and a 34% increase in revenue per load in ICS over the same period in 2017. JBT revenue decreased 1% primarily from fewer seated trucks compared to a year ago.
JBI segment revenue increased 14% to $1.07 billion during the first quarter 2018, compared with $937 million in 2017. Load volumes during the first quarter 2018 grew 6% over the same period 2017. Transcontinental loads grew 2% during the first quarter 2018, while the Eastern network load volume grew 12% compared to the first quarter 2017. The 14% increase in revenue was primarily due to the 6% volume growth, combined with an 8% increase in revenue per load, which is determined by the combination of customer rates, fuel surcharges and freight mix. Revenue per load excluding fuel surcharge revenue increased 4% year over year. JBI segment operating income increased 20%, to $114.2 million in the first quarter 2018, from $95.3 million in 2017. Benefits from volume growth, customer rate increases, and freight mix were partially offset by an increase in rail purchased transportation costs; reduced network utilization and lower dray efficiency created from rail congestion, customer equipment pool utilization and a tight third party dray market; higher equipment ownership costs; increased driver wages and recruiting costs; increased costs for onboarding and integration of container tracking technologies and insurance and claims costs compared to the first quarter 2017. The current period ended with approximately 89,500 units of trailing capacity and 5,450 power units assigned to the dray fleet.
DCS segment revenue increased 26% to $494 million in the first quarter 2018 from $392 million in 2017. Productivity, defined as revenue per truck per week, increased 5% when compared to 2017. Productivity excluding fuel surcharges increased 2%, primarily due to customer rate increases partially offset by a more impactful winter weather season during the first quarter of 2018 compared to 2017. In addition, the growth in DCS revenue includes an increase of $35 million in Final Mile Services (FMS) revenue, approximately $25 million of which was derived from the 2017 acquisition of Special Logistics Dedicated, resulting in a 75% increase in total FMS revenue when compared to first quarter 2017. A net additional 1,329 revenue producing trucks were in the fleet by the end of the first quarter 2018 compared to a year ago, primarily from private fleet conversions and growth in FMS in the current and prior periods. DCS segment operating income decreased 9% to $40.6 million in the first quarter 2018, from $44.8 million in 2017. Increased revenue was more than offset by winter weather inefficiencies, higher insurance and claims costs, increased driver wages and recruiting costs, higher non-driver salaries wages and benefits, higher facilities rent and costs from the expanded FMS network, increased maintenance costs on equipment scheduled to be traded in 2018 and approximately $1.9 million in additional non-cash amortization expense compared to the first quarter 2017.
ICS segment revenue increased 41% to $296 million in the first quarter 2018, from $209 million in 2017. Overall volumes increased 6% while revenue per load increased 34% primarily due to a more vibrant spot pricing market when compared to first quarter 2017. Spot volumes increased 43% and contractual business load counts decreased 7% compared to the same period in 2017. Contractual business represented approximately 67% of total load volume and 44% of total revenue in the first quarter 2018, compared to 76% and 63%, respectively, in 2017. ICS segment operating income increased 99% to $8.9 million in the first quarter 2018, from $4.4 million in 2017, primarily from a higher revenue per load, a higher gross profit margin, and an increased number of branches more than two years old, partially offset by continued personnel growth costs and increased technology spending as marketplace for JBHunt360 continues its rollout. Approximately $96 million of first quarter 2018 ICS revenue was executed through the marketplace for JBHunt360. Gross profit margin increased to 14.4% in the first quarter 2018, compared to 14.3% in 2017, primarily due to increased spot market activity. Total branch count grew to 44 locations compared to 42 at the end of the comparable quarter last year. ICS’s carrier base increased 15% and employee count increased 14% compared to first the quarter 2017.
JBT segment revenue totaled $93 million for the first quarter 2018, a decrease of 1% from $94 million in first quarter 2017. Revenue excluding fuel surcharge decreased 3% primarily from a 15% decrease in load count, partially offset by an increase in revenue per load. Revenue per load excluding fuel surcharge increased 14%, primarily from a 10% increase in rates per loaded mile and a 3% increase in length of haul when compared to first quarter 2017. At the end of the first quarter 2018, JBT operated 1,926 tractors compared to 2,144 in 2017. JBT segment operating income increased 4% to $5.1 million in 2018, compared with $4.9 million during first quarter 2017. Benefits from the higher revenue per load were partially offset by a 10% decrease in tractor count, an average of 162 unseated trucks during first quarter 2018, higher driver and independent contractor costs per mile and higher recruiting costs per driver and independent contractor compared to first quarter 2017.
Consolidated Operating Expenses
The following table sets forth items in our Condensed Consolidated Statements of Earnings as a percentage of operating revenues and the percentage increase or decrease of those items as compared with the prior period.
|
|
Three Months Ended March 31,
|
|
|
|
Dollar Amounts as a
Percentage of Total
Operating Revenues
|
|
|
Percentage Change
of Dollar Amounts Between Quarters
|
|
|
|
2018
|
|
|
2017
|
|
|
2018 vs. 2017
|
|
Total operating revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
19.6
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Rents and purchased transportation
|
|
|
49.5
|
|
|
|
49.5
|
|
|
|
19.6
|
|
Salaries, wages and employee benefits
|
|
|
23.1
|
|
|
|
23.3
|
|
|
|
18.4
|
|
Fuel and fuel taxes
|
|
|
5.5
|
|
|
|
5.0
|
|
|
|
33.8
|
|
Depreciation and amortization
|
|
|
5.4
|
|
|
|
5.7
|
|
|
|
14.5
|
|
Operating supplies and expenses
|
|
|
3.6
|
|
|
|
3.6
|
|
|
|
21.8
|
|
General and administrative expenses, net of asset dispositions
|
|
|
1.7
|
|
|
|
1.3
|
|
|
|
37.7
|
|
Insurance and claims
|
|
|
1.5
|
|
|
|
1.4
|
|
|
|
23.9
|
|
Operating taxes and licenses
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
8.5
|
|
Communication and utilities
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
55.1
|
|
Total operating expenses
|
|
|
91.3
|
|
|
|
90.8
|
|
|
|
20.3
|
|
Operating income
|
|
|
8.7
|
|
|
|
9.2
|
|
|
|
13.0
|
|
Net interest expense
|
|
|
0.5
|
|
|
|
0.4
|
|
|
|
34.3
|
|
Earnings before income taxes
|
|
|
8.2
|
|
|
|
8.8
|
|
|
|
12.0
|
|
Income taxes
|
|
|
2.1
|
|
|
|
2.5
|
|
|
|
4.1
|
|
Net earnings
|
|
|
6.1
|
%
|
|
|
6.3
|
%
|
|
|
15.0
|
%
|
Total operating expenses increased 20.3%, while operating revenues increased 19.6%, during the first quarter 2018, from the comparable period 2017. Operating income increased to $168.8 million during the first quarter 2018, from $149.4 million in 2017.
Rents and purchased transportation costs increased 19.6% in 2018. This increase was primarily the result of increased load volumes, which increased services provided by third-party rail and truck carriers within JBI and ICS segments and increased truck and rail purchased transportation rates.
Salaries, wages and employee benefit costs increased 18.4% in 2018 compared with 2017. This increase was primarily related to increases in driver pay and office personnel compensation due to a tighter supply of qualified drivers and an increase in the number of employees.
Fuel costs increased 33.8% in 2018, compared with 2017, due to increases in the price of fuel and increased road miles. Depreciation and amortization expense increased 14.5% in 2018, primarily due to additions to our JBI segment tractor, container and chassis fleets to support additional business demand and equipment purchased related to new DCS long-term customer contracts.
Operating supplies and expenses increased 21.8% in 2018, compared with 2017, primarily due to higher equipment maintenance costs, increased tire expense, higher travel costs, increased toll costs, and higher building maintenance expenses. General and administrative expenses increased 37.7% for the current quarter from the comparable period in 2017, primarily due to increased net losses from asset sales and disposals, increased building and computer rentals, and higher professional fees, partially offset by a reduction in charitable contributions. Net loss from sale or disposal of assets was $2.8 million in 2018, compared to a net loss of $1.7 million in 2017, primarily due to higher volume. Insurance and claims expense increased 23.9% in 2018, compared with 2017, due to higher incident volume.
Net interest expense increased 34.3% in 2018, due primarily to higher effective interest rates on our debt.
Income tax expense increased 4.1% in first quarter 2018, compared with 2017, primarily due to increased taxable earnings, partially offset by a lower effective income tax rate in first quarter 2018 due to the impact of the Tax Cuts and Jobs Act of 2017. Our effective income tax rate was 26.0% for the first quarter 2018, compared to 28.0% in 2017. First quarter 2017 included a one-time after-tax benefit of $13.6 million for the claiming of federal research and development tax credits and domestic production tax deductions for the 2012 through 2016 tax years. Our annual tax rate for 2018 is expected to be 26.0%. In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate, adjusted for discrete items. This rate is based on our expected annual income, statutory tax rates, best estimate of nontaxable and nondeductible items of income and expense, and the ultimate outcome of tax audits.
Liquidity and Capital Resources
Cash Flow
Net cash provided by operating activities totaled $262 million during the first three months of 2018, compared with $286 million for the same period 2017. Operating cash flows decreased due to the timing of general working capital activities, partially offset by increased earnings. Net cash used in investing activities totaled $179 million in 2018, compared with $94 million in 2017. The increase resulted from an increase in equipment purchases in 2018 partially offset by an increase in proceeds from the sale of equipment during the same period. Net cash used in financing activities was $90 million in 2018, compared with $185 million in 2017. This change resulted primarily from a decrease in treasury stock purchased in 2018.
Debt and Liquidity Data
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
March 31, 2017
|
|
Working capital ratio
|
|
|
1.13
|
|
|
|
1.45
|
|
|
|
1.43
|
|
Current portion of long-term debt (millions)
|
|
$
|
247.6
|
|
|
|
-
|
|
|
|
-
|
|
Total debt (millions)
|
|
$
|
1,000.0
|
|
|
$
|
1,085.6
|
|
|
$
|
950.6
|
|
Total debt to equity
|
|
|
0.51
|
|
|
|
0.59
|
|
|
|
0.69
|
|
Total debt as a percentage of total capital
|
|
|
34
|
%
|
|
|
37
|
%
|
|
|
41
|
%
|
Liquidity
Our need for capital has typically resulted from the acquisition of containers and chassis, trucks, tractors and trailers required to support our growth and the replacement of older equipment. We are frequently able to accelerate or postpone a portion of equipment replacements depending on market conditions. We have, during the past few years, obtained capital through cash generated from operations, revolving lines of credit and long-term debt issuances. We have also periodically utilized operating leases to acquire revenue equipment. For all debt facilities maturing in 2019, it is our intent to pay the entire outstanding balances in full, on or before the maturity dates, using our existing senior revolving line of credit or other sources of long-term financing.
We believe our liquid assets, cash generated from operations, and revolving line of credit will provide sufficient funds for our operating and capital requirements for the foreseeable future. The following table summarizes our expected obligations and commitments as of March 31, 2018 (in millions):
|
|
Total
|
|
|
One
Year Or
Less
|
|
|
One to
Three
Years
|
|
|
Three to
Five Years
|
|
|
After
Five
Years
|
|
Operating leases
|
|
$
|
107.8
|
|
|
$
|
29.4
|
|
|
$
|
46.9
|
|
|
$
|
24.3
|
|
|
$
|
7.2
|
|
Debt obligations
|
|
|
1,017.9
|
|
|
|
250.0
|
|
|
|
167.9
|
|
|
|
350.0
|
|
|
|
250.0
|
|
Interest payments on debt
(1
)
|
|
|
126.5
|
|
|
|
33.0
|
|
|
|
48.8
|
|
|
|
35.1
|
|
|
|
9.6
|
|
Commitments to acquire revenue equipment and facilities
|
|
|
743.4
|
|
|
|
362.8
|
|
|
|
380.6
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,995.6
|
|
|
$
|
675.2
|
|
|
$
|
644.2
|
|
|
$
|
409.4
|
|
|
$
|
266.8
|
|
(1)
|
Interest payments on debt are based on the debt balance and applicable rate at March 31, 2018.
|
Our net capital expenditures were approximately $179 million during the first three months of 2018, compared with $91 million for the same period 2017. Our net capital expenditures include net additions to revenue equipment and non-revenue producing assets that are necessary to contribute to and support the future growth of our various business segments. Capital expenditures in 2018 were primarily for tractors, additional intermodal containers and chassis, and other trailing equipment. We are currently committed to spend approximately $743 million during 2018 and 2019. We expect to spend in the range of $440 million to $460 million for net capital expenditures during the remainder of 2018. The table above excludes $50.2 million of potential liabilities for uncertain tax positions, including interest and penalties, which are recorded on our Condensed Consolidated Balance Sheets. However, we are unable to reasonably estimate the ultimate timing of any settlements.
Off-Balance Sheet Arrangements
Our only off-balance sheet arrangements as of March 31, 2018, were operating leases related to facility lease obligations.
Risk Factors
You should refer to Item 1A of our Annual Report (Form 10-K) for the year ended December 31, 2017, under the caption “Risk Factors” for specific details on the following factors and events that are not within our control and could affect our financial results.
|
●
|
Our business is subject to general economic and business factors, any of which could have a material adverse effect on our results of operations. Economic trends and tightening of credit in financial markets could adversely affect our ability, and the ability of our suppliers, to obtain financing for operations and capital expenditures.
|
|
●
|
We depend on third parties in the operation of our business.
|
|
●
|
Rapid changes in fuel costs could impact our periodic financial results.
|
|
●
|
Insurance and claims expenses could significantly reduce our earnings.
|
|
●
|
We derive a significant portion of our revenue from a few major customers, the loss of one or more of which could have a material adverse effect on our business.
|
|
●
|
We operate in a regulated industry, and increased direct and indirect costs of compliance with, or liability for violation of, existing or future regulations could have a material adverse effect on our business.
|
|
●
|
Difficulty in attracting and retaining drivers, delivery personnel and third-party carriers could affect our profitability and ability to grow.
|
|
●
|
We may be subject to litigation claims that could result in significant expenditures.
|
|
●
|
We rely significantly on our information technology systems, a disruption, failure or security breach of which could have a material adverse effect on our business.
|
|
●
|
We operate in a competitive and highly fragmented industry. Numerous factors could impair our ability to maintain our current profitability and to compete with other carriers and private fleets.
|
|
●
|
Extreme or unusual weather conditions can disrupt our operations, impact freight volumes and increase our costs, all of which could have a material adverse effect on our business results.
|
|
●
|
Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.
|
|
●
|
Acquisitions or business combinations may disrupt or have a material adverse effect on our operations or earnings.
|