UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 20189

OR

Commission File Number: 0-11757

J.B. HUNT TRANSPORT SERVICES, INC.

(Exact name of registrant as specified in its charter)

615 J.B. Hunt Corporate Drive, Lowell, Arkansas  72745

(Address of principal executive offices)

479-820-0000

(Registrant's telephone number, including area code)

www.jbhunt.com

(Registrant's web site)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.

Yes   X            No        

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   X            No         

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   X    Accelerated filer         Non-accelerated filer        

Smaller reporting company       Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

            Yes                 No X             

The number of shares of the registrant’s $0.01 par value common stock outstanding on June 30, 20189 was 109,344,030106,768,145.

Basis of Presentation

The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. We believe such statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of our financial position, results of operations and cash flows at the dates and for the periods indicated. Pursuant to the requirements of the Securities and Exchange Commission (SEC) applicable to quarterly reports on Form 10-Q,10-Q, the accompanying financial statements do not include all disclosures required by GAAP for annual financial statements. While we believe the disclosures presented are adequate to make the information not misleading, these unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K10-K for the year ended December 31, 2017. 2018. Operating results for the periods presented in this report are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2018, 2019, or any other interim period. Our business is somewhat seasonal with slightly higher freight volumes typically experienced during August through early November in our full-load freight transportation business.

Recent Accounting PronouncementsPronouncement Adopted in 2019

In February 2016, the FASBFinancial Accounting Standards Board (FASB) issued ASU 2016-02,Accounting Standards Update (ASU) 2016-02, Leases, which requires lessees to recognize a right-of-use asset and a lease liability for most leases on the balance sheet as well as other qualitative and quantitative disclosures. ASU 2016-022016-02 is to be applied using a modified retrospective method and iswas effective for interim and annualus on January 1, 2019. In July 2018, the FASB issued ASU 2018-11, Leases, which provides an optional transition method allowing entities to recognize a cumulative-effect adjustment to the opening balance of stockholders’ equity in the period of adoption, with no restatement of comparative prior periods beginning after December 15, 2018, but earlyrequired. We adopted the standard using this optional transition method.

The FASB has provided certain practical expedients in applying the standard. Of the allowed practical expedients within the standard applicable to our operations, we elected the package of practical expedients, which among other things, allowed us to carry forward the historical lease classification upon adoption is permitted. We are currently evaluating the potential effects of the standard. We did not elect the hindsight practical expedient when determining the lease term for existing leases. In addition, we did not separate nonlease components from lease components by class of underlying assets where appropriate and we did not apply the recognition requirements of the standard to short-term leases, as allowed by the standard.

Upon adoption of this update on our financial statements. See Note 10, Commitmentsthe standard, we recorded offsetting lease assets and Contingencies,lease liabilities resulting in a $102.4 million increase in other assets, a $32.3 million increase in other accrued expenses and a $70.1 million increase in other long-term liabilities in our Condensed Consolidated Financial Statements included in our Annual Report on Form 10-K forBalance Sheet, as of January 1, 2019. The adoption of the year ended December 31, 2017 for discussion of our remaining obligations under operating lease arrangements.

Accounting Pronouncement Adopted in 2018

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which supersedes virtually all existing revenue recognition guidance. The new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. We adopted ASU 2014-09 in the first quarter 2018, using the modified retrospective transition approach, which did not have a material impact on how we recognize revenueour Condensed Consolidated Statements of Earnings, Condensed Consolidated Statements of Cash Flows or to our financial statements or disclosures. See below for additional information related to our recognition of revenue generated from customer contracts.debt covenant compliance. 

Leases

We record revenuesrecognize a right-of-use asset and a lease liability on the gross basis at amounts chargedeffective date of a lease agreement. Right-of-use assets represent our right to use an underlying asset over the lease term and lease liabilities represent the obligation to make lease payments resulting from the lease agreement. We initially record these assets and liabilities based on the present value of lease payments over the lease term calculated using our customers because we controlincremental borrowing rate applicable to the leased asset or the implicit rate within the agreement if it is readily determinable. Lease agreements with lease and nonlease components are primarily responsible for the fulfillment of promised services. Accordingly, we servecombined as a principalsingle lease component. Right-of-use assets additionally include net prepaid lease expenses. Options to extend or terminate an agreement are included in the transaction. We invoice our customers,lease term when it becomes reasonably certain the option will be exercised. Leases with an initial term of 12 months or less, short-term leases, are not recorded on the balance sheet. Lease expense for short-term and we maintain discretionlong-term operating leases is recognized on a straight-line basis over pricing. Additionally, wethe lease term, while variable lease payments are responsible for selection of third-party transportation providers to the extent used to satisfy customer freight requirements.expensed as incurred.

Revenue

Our revenue is earned through the service offerings of our four reportable business segments. See Note 10, Business Segments, for revenue reported by segment. All revenue transactions between reporting segments are eliminated in consolidation.

Intermodal (JBI) - JBI segment includes freight that is transported by rail over at least some portion of the movement and also includes certain repositioning truck freight moved by JBI equipment or third-party carriers, when such highway movement is intended to direct JBI equipment back toward intermodal operations. JBI performs these services primarily through contractual rate quotes with customers that are held static for a period of time, usually one year.

Dedicated Contract Services® (DCS) - DCS segment business includes company-owned and customer-owned, DCS-operated revenue equipment and employee drivers assigned to a specific customer, traffic lane, or service. DCS operations usually include formal, written longer-term customer contracts that govern services performed and applicable rates.

Integrated Capacity Solutions (ICS) - ICS provides non-asset and asset-light transportation solutions to customers through relationships with third-party carriers and integration with company-owned equipment. ICS services include flatbed, refrigerated, and less-than-truckload (LTL), as well as a variety of dry-van and intermodal solutions. ICS performs these services through customer contractual rate quotes as well as spot quotes that are one-time rate quotes issued for a single transaction or group of transactions.

Truckload (JBT) - JBT business includes full-load, dry-van freight that is typically transported utilizing company-owned or company-controlled revenue equipment. This freight is typically transported over roads and highways and does not move by rail. JBT utilizes both contractual rate quotes and spot rate quotes with customers.

We recognize revenue from customer contracts based on relative transit time in each reporting period and as other performance obligations are provided, with related expenses recognized as incurred. Accordingly, a portion of the total revenue that will be billed to the customer is recognized in each reporting period based on the percentage of the freight pickup and delivery performance obligation that has been completed at the end of the reporting period.

We compute basic earnings per share by dividing net earnings available to common stockholders by the actual weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if holders of unvested restricted and performance share units converted their holdings into common stock. The dilutive effect of restricted and performance share units was 1.0 million shares during the three and six months ended June 30, 2019, compared to 1.2 million shares during the second quarter 2018three and 2017. During the six months ended June 30, 2018 and 2017, the dilutive effect of restricted and performance share units and stock options was also 1.2 million shares for both periods.2018.

The following table summarizes the components of our share-based compensation program expense (in thousands):

As of June 30, 2018, 2019, we had $68.5$76.5 million and $20.7$19.9 million of total unrecognized compensation expense related to restricted share units and performance share units, respectively, that is to be recognized over the remaining weighted-average period of approximately 3.63.3 years for restricted share units and 2.52.2 years for performance share units. During the six months ended June 30, 2018, 2019, we issued 4,141 shares for vested restricted share units. Of this total, 709170 shares for vested restricted share units and 51,441 shares for vested performance share units. Norestricted share units or performance share units were issued during the second quarter 2018.2019.

Outstanding borrowings, net of unamortized discount, unamortized debt issuance cost, and fair value swap, under our current financing arrangements consist of the following (in millions):

Senior Revolving Line of Credit

At June 30, 2018, 2019, we were authorized to borrow up to $500$750 million under a senior revolving line of credit, which is supported by a credit agreement with a group of banks and expires in September 2020. 2023. This senior credit facility allows us to request an increase in the total commitment by up to $250 million and to request a one-yearone-year extension of the maturity date. The applicable interest rate under this agreement is based on either the Prime Rate, the Federal Funds Rate or LIBOR, depending upon the specific type of borrowing, plus an applicable margin based on our credit rating and other fees. At June 30, 2018, 2019, we had $170.2$78.1 million outstanding at an average interest rate of 3.61%3.42% under this agreement.

Senior Notes

Our senior notes consist of three separate issuances. The first and second issuances are $250 million of 2.40% senior notes due March 2019 and is $250 million of 3.85% senior notes due March 2024, respectively, both of which werewas issued in March 2014. Interest payments under both notes are due semiannually in March and September of each year, beginning September 2014. The third is $350 million of 3.30% senior notes due August 2022, issued in August 2015. Interest payments under this note are due semiannually in February March and August September of each year, beginning September 2014. The second is $350 million of 3.30% senior notes due August 2022, issued in August 2015. Interest payments under this note are due semiannually in February and August of each year, beginning February 2016. The third is $700 million of 3.875% senior notes due March 2026, issued in March 2019. Interest payments under this note are due semiannually in March and September of each year, beginning September 2019. All three senior notes were issued by J.B. Hunt Transport Services, Inc., a parent-level holding company with no significant assets or operations. The notes are guaranteed on a full and unconditional basis by a wholly-owned subsidiary. All other subsidiaries of the parent are minor. We registered these offerings and the sale of the notes under the Securities Act of 1933, pursuant to a shelf registration statementstatements filed in February 2014. 2014 and January 2019. All notes are unsecured obligations and rank equally with our existing and future senior unsecured debt. We may redeem for cash some or all of the notes based on a redemption price set forth in the note indenture. See Note 5, Derivative Financial Instruments, for terms of an interest rate swapsswap entered into on the$350 million of 3.30% senior notes due August 2022. Our $250 million of 2.40% senior notes due matured in March 2019 and the $350 million of 3.30% senior notes due August 2022.  2019. The entire outstanding balance was paid in full at maturity.

Our financing arrangements require us to maintain certain covenants and financial ratios.  We were in compliance with all covenants and financial ratios at June 30, 2018. For our senior notes 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.2019.

We periodically utilize derivative instruments for hedging and non-trading purposes to manage exposure to changes in interest rates and to maintain an appropriate mix of fixed and variable-rate debt. At inception of a derivative contract, we document relationships between derivative instruments and hedged items, as well as our risk-management objective and strategy for undertaking various derivative transactions, and assess hedge effectiveness. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, we discontinue hedge accounting prospectively.

We entered into a receive fixed-rate and pay variable-rate interest rate swap agreementsagreement simultaneously with the issuance of our $250 million of 2.40% senior notes due March 2019 and $350 million of 3.30% senior notes due August 2022, to effectively convert this fixed-rate debt to variable-rate. The notional amountsamount of thesethis interest rate swap agreements equal thoseagreement equals that of the corresponding fixed-rate debt. The applicable interest ratesrate under these agreementsthis agreement is based on LIBOR plus an established margin, resulting in an interest rate of 3.19%3.88% for our $250$350 million of 2.40% senior notes and 3.70% for our $350 million of 3.30% senior notes at June 30, 2018. 2019. The swaps expireswap expires when the corresponding senior notes are due. The fair valuesvalue of these swaps arethis swap is recorded in other accrued expenses and other long-term liabilitiesassets in our Condensed Consolidated Balance Sheet at June 30, 2018. 2019. See Note 7, Fair Value Measurements, for disclosure of fair value. These derivatives meetThis derivative meets the required criteria to be designated as a fair value hedges,hedge, and as the specific terms and notional amountsamount of thesethis derivative instrumentsinstrument match those of the fixed-rate debt being hedged, thesethis derivative instruments areinstrument is assumed to perfectly hedge the related debt against changes in fair value due to changes in the benchmark interest rate. Accordingly, any change in the fair value of thesethis interest rate swapsswap recorded in earnings is offset by a corresponding change in the fair value of the related debt.

On October 22, 2015, April 20, 2017, our Board of Directors authorized the purchase of $500 million of our common stock. On April 20, 2017, our Board of Directors authorized an additional purchase of up to $500 million of our common stock. At June 30, 2018, $4712019, $181 million of this authorization was remaining. We purchased approximately 420,0001.98 million shares, or $50$190 million, of our common stock under our repurchase authorizations during the six months ended June 30, 2018. 2019. On April 19, 2018, 18, 2019, our Board of Directors declared a regular quarterly dividend of $0.24$0.26 per common share, which was paid on May 18, 2018, 17, 2019, to stockholders of record on May 4, 2018. 3, 2019. On July 19, 2018, 18, 2019, our Board of Directors declared a regular quarterly dividend of $0.24$0.26 per common share, which will be paid on August 17, 2018, 16, 2019, to stockholders of record on August 3, 2018.2, 2019.

We arewere a defendant in a certain alleged class-action lawsuitslawsuit in which the plaintiffs arewere current and former California-based employee drivers who allegealleged claims for unpaid wages, failure to provide meal and rest periods, and other items. During the first half of 2014, the District CourtWe reached an agreement and recorded a reserve in the lead class-action granted judgment in our favor with regard September 2018 to resolve all claims.  The plaintiffs appealed the case to the United States Court of Appeals for the Ninth Circuit.  In July 2017, the Ninth Circuit issued a Memorandum decision vacating the judgment in our favor and remanding the case to the District Court for further proceedings. The Ninth Circuit denied our Petition for Rehearing En Banc in November 2017. We filed a Petitionpending claims for a Writclass settlement payment of Certiorari in the Supreme$15 million, subject to Court of the United States seeking review of the Ninth Circuit’s decision, but the Supreme Court denied the Petition in June 2018.approval. The case is pending before the United States District Court for the Central District of California. Plaintiffs filed a motion for partial summary judgment on their claims on June 11, 2018. On July 23, 2018 the CourtCalifornia entered an Orderorder granting in part and denying in part Plaintiffs’ motion for partial summary judgment. The Court granted partial summary judgment on the issuefinal approval of whether our activity-based compensation system violates California law concluding that it does to the extent our system fails to separately compensate drivers for rest breaks and other nonproductive time. However, the Court declined to enter summary judgment as to our liability on any of Plaintiffs’ claims. We also filed motions for partial summary judgment and to decertify the class settlement on July 2, 2018. The Court has not yet entered an Order deciding our motions. The case is currently scheduled to begin trial in the third quarter of 2018. The overlapping claims in the other lawsuits remain stayed pending final resolution of the appellate process or a final decision in the lead class-action case.  We cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from these lawsuits, however, in 2017, we recorded a $10 million reserve representing an amount we deem acceptable for the settlement of these claims.April 23, 2019.

In January 2017 we exercised our right to utilize the arbitration process to review the division of revenue collected beginning May 1, 2016, as well as to clarify other issues, under our Joint Service Agreement with BNSF Railway Company (BNSF). BNSF has requested the same, and the arbitration process has progressedis on-going. In October 2018 we received the arbitrators’ Interim Award. The details of the Interim Award are confidential and remains pending.require the parties to submit additional information requested by the arbitrators to decide certain unresolved matters. For the determined components of the Interim Award, we recorded an $18.3 million pre-tax charge in the third quarter 2018 related to certain charges claimed by BNSF for specific services requested for customers from April 2014 through May 2018. In December 2018 the arbitrators’ issued their Clarified Interim Award of October 2018 resulting from some of the parties’ additional submissions to the Panel regarding certain issues related to determining the revenue division between the parties. In January 2019 the Panel issued its Second Interim Award ordering that $89.4 million is due from the Company to BNSF resulting from the adjusted revenue divisions relating to the 2016 period at issue ($52.1 million) and for calendar year 2017 ($37.3 million). The parties have made further submissions on the revenue divisions for calendar year 2018 and going forward, as well as other confidential issues raised during the arbitration process so that the panel can issue an appropriate interim and/or final award regarding all issues raised during the proceeding. We recorded pretax charges for contingent liabilities in the fourth quarter 2018 of $89.4 million claimed by the BNSF for the period May 1, 2016 through December 31, 2017 and $44.6 million for the period January 1, 2018 through December 31, 2018, for a total of $134 million.

The other financial implications from the Interim Award and the Clarified Interim Award will not be fully determined until the arbitrators issue additional award(s) following their review of each party’s requested additional submissions. At this time, we are unable to reasonably predict the final outcome of the arbitration, and, as such, no further gain or loss contingency can be determined or recorded. If decided adversely, this matter could result in a liability material to our financial condition or results of operations. BNSF provides a significant amount of rail transportation services to our JBI business segment.  At this time, we are unable to reasonably predict the outcome of the arbitration, and, as such, no gain or loss contingency can be determined or recorded. Normal commercial business activity between the parties, including load tendering, load tracing, billing and payments, has continued and is expected to continue on a timely basis.

In June 2019, we recorded pretax charges of $20 million for the settlement of a casualty claim within our DCS segment.

We are involved in certain other claims and pending litigation arising from the normal conduct of business. Based on present knowledge of the facts and, in certain cases, opinions of outside counsel, we believe the resolution of these claims and pending litigation will not have a material adverse effect on our financial condition, results of operations or liquidity.

As of June 30, 2019, we had various obligations remaining under operating lease arrangements related primarily to the rental of maintenance and support facilities, cross-dock and delivery system facilities, office space, parking yards and equipment. Many of these leases include one or more options, at our discretion, to renew and extend the agreement beyond the current lease expiration date or to terminate the agreement prior to the lease expiration date. These options are included in the calculation of our operating lease liability when it becomes reasonably certain the option will be exercised. Our lease obligations typically do not include options to purchase the leased property, nor do they contain residual value guarantees or material restrictive covenants. Operating leases with an initial term of more than 12 months are included in our Condensed Consolidated Balance Sheets as discounted liabilities and corresponding right-of-use assets consisting of the following (in millions):

Right-of-use assets are classified in other assets in our Condensed Consolidated Balance Sheets. Operating lease liability, current is classified in other accrued expenses, while operating lease liability, long-term is classified in other long-term liabilities in our Condensed Consolidated Balance Sheets.

As of June 30, 2019, the weighted-average remaining lease term for our outstanding operating lease obligations was 4.3 years and the weighted-average discount rate was 3.5%. Future minimum lease payments under these operating leases as of June 30, 2019, are as follows (in millions):

During the three and six months ended June 30, 2019, cash paid for amounts included in the measurement of operating lease liabilities were $10.9 million and $20.5 million, respectively, while $10.7 million and $20.0 million, respectively, of operating lease expense was recognized on a straight-line basis for the same periods. During the second quarter 2019, a total of $16.5 million of right-of-use assets were obtained in exchange for new operating lease liabilities. New right-of-use assets obtained during the six months ended June 30, 2019 was $40.2 million, of which, $16.0 million were obtained through the business combination discussed at Note 11, Acquisitions.

On January 7, 2019, we entered into an asset purchase agreement to acquire substantially all of the assets and assume certain specified liabilities of the affiliated entities of Cory 1st Choice Home Delivery (Cory), subject to customary closing conditions.  The closing of the transaction was effective on February 15, 2019, with a purchase price of $100 million. Total consideration paid in cash under the Cory agreement was $98.5 million and consisted of the agreed upon purchase price adjusted for estimated working capital adjustments. In addition, we incurred approximately $2.9 million in transaction costs which are recorded in general and administrative expenses, net of asset dispositions in our Condensed Consolidated Statements of Earnings. The Cory acquisition was accounted for as a business combination and operates within our Dedicated Contract Services® business segment. Assets acquired and liabilities assumed were recorded in our Condensed Consolidated Balance Sheet at their estimated fair values, as of the closing date, using cost, market data and valuation techniques that reflect management’s judgment and estimates. As a result of the acquisition, we preliminarily recorded approximately $45.8 million of finite-lived intangible assets and approximately $48.2 million of goodwill. Goodwill consists of acquiring and retaining the Cory existing network and expected synergies from the combination of operations. The following table outlines the consideration transferred and preliminary purchase price allocation at their respective estimated fair values as of February 15, 2019 (in millions):