UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20120920
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
Commission File Number: 0-11757
J.B. HUNT TRANSPORT SERVICES, INC.
(Exact name of registrant as specified in its charter)
Arkansas | 71-0335111 |
(State or other jurisdiction | (I.R.S. Employer |
of incorporation or | Identification No.) |
organization) |
|
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:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value | JBHT | NASDAQ |
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 every Interactive Data File required to be submitted 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 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 March 31, 20120920 was 108,738,893105,460,633.
J.B. HUNT TRANSPORT SERVICES, INC.
Form 10-Q
For The Quarterly Period Ended March 31, 20120920
Table of Contents
Page | |||
Part I. Financial Information | |||
Item 1. | Financial Statements | ||
Condensed Consolidated Statements of Earnings for the Three Months Ended March 31, 2020 and 2019 | 3 | ||
Condensed Consolidated Balance Sheets as of March 31, | 4 | ||
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, | 5 | ||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, | 6 | ||
Notes to Condensed Consolidated Financial Statements as of March 31, | 7 | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 19 | |
Item 4. | Controls and Procedures | ||
Part II. Other Information | |||
Item 1. | Legal Proceedings | 20 | |
Item 1A. | Risk Factors | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 21 | |
Item 3. | Defaults Upon Senior Securities | 21 | |
Item 4. | Mine Safety Disclosures | 21 | |
Item 5. | Other Information | 21 | |
Item 6. | Exhibits | 21 | |
Signatures | 23 |
Part I. Financial Information
ITEM 1. FINANCIAL STATEMENTS
J.B. HUNT TRANSPORT SERVICES, INC.
Condensed Consolidated Statements of Earnings
(in thousands, except per share amounts)
(unaudited)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Operating revenues, excluding fuel surcharge revenues | $ | 1,855,341 | $ | 1,712,934 | ||||
Fuel surcharge revenues | 234,286 | 235,311 | ||||||
Total operating revenues | 2,089,627 | 1,948,245 | ||||||
Operating expenses: | ||||||||
Rents and purchased transportation | 999,889 | 964,892 | ||||||
Salaries, wages and employee benefits | 516,326 | 450,265 | ||||||
Depreciation and amortization | 119,930 | 105,583 | ||||||
Fuel and fuel taxes | 112,125 | 107,881 | ||||||
Operating supplies and expenses | 78,172 | 70,681 | ||||||
General and administrative expenses, net of asset dispositions | 45,038 | 32,326 | ||||||
Insurance and claims | 28,994 | 28,499 | ||||||
Operating taxes and licenses | 13,160 | 11,588 | ||||||
Communication and utilities | 8,198 | 7,749 | ||||||
Total operating expenses | 1,921,832 | 1,779,464 | ||||||
Operating income | 167,795 | 168,781 | ||||||
Net interest expense | 13,033 | 9,152 | ||||||
Earnings before income taxes | 154,762 | 159,629 | ||||||
Income taxes | 35,161 | 41,487 | ||||||
Net earnings | $ | 119,601 | $ | 118,142 | ||||
Weighted average basic shares outstanding | 108,730 | 109,754 | ||||||
Basic earnings per share | $ | 1.10 | $ | 1.08 | ||||
Weighted average diluted shares outstanding | 109,664 | 110,863 | ||||||
Diluted earnings per share | $ | 1.09 | $ | 1.07 | ||||
Dividends declared per common share | $ | 0.26 | $ | 0.24 |
See Notes to Condensed Consolidated Financial Statements.
J.B. HUNT TRANSPORT SERVICES, INC.
Condensed Consolidated Statements of Earnings
(in thousands, except per share amounts)
(unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Operating revenues, excluding fuel surcharge revenues | $ | 2,045,694 | $ | 1,855,341 | ||||
Fuel surcharge revenues | 235,132 | 234,286 | ||||||
Total operating revenues | 2,280,826 | 2,089,627 | ||||||
Operating expenses: | ||||||||
Rents and purchased transportation | 1,136,151 | 999,889 | ||||||
Salaries, wages and employee benefits | 574,249 | 516,326 | ||||||
Depreciation and amortization | 130,095 | 119,930 | ||||||
Fuel and fuel taxes | 101,123 | 112,125 | ||||||
Operating supplies and expenses | 85,598 | 78,172 | ||||||
General and administrative expenses, net of asset dispositions | 45,165 | 45,038 | ||||||
Insurance and claims | 32,361 | 28,994 | ||||||
Operating taxes and licenses | 13,312 | 13,160 | ||||||
Communication and utilities | 8,031 | 8,198 | ||||||
Total operating expenses | 2,126,085 | 1,921,832 | ||||||
Operating income | 154,741 | 167,795 | ||||||
Net interest expense | 12,036 | 13,033 | ||||||
Earnings before income taxes | 142,705 | 154,762 | ||||||
Income taxes | 37,871 | 35,161 | ||||||
Net earnings | $ | 104,834 | $ | 119,601 | ||||
Weighted average basic shares outstanding | 105,985 | 108,730 | ||||||
Basic earnings per share | $ | 0.99 | $ | 1.10 | ||||
Weighted average diluted shares outstanding | 106,950 | 109,664 | ||||||
Diluted earnings per share | $ | 0.98 | $ | 1.09 | ||||
Dividends declared per common share | $ | 0.27 | $ | 0.26 |
See Notes to Condensed Consolidated Financial Statements.
J.B. HUNT TRANSPORT SERVICES, INC.
Condensed Consolidated Balance Sheets
(in(in thousands)
March 31, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | ||||||||||||||
(unaudited) | (unaudited) | ||||||||||||||||
ASSETS | ASSETS | ||||||||||||||||
Current assets: | Current assets: | ||||||||||||||||
Cash and cash equivalents | Cash and cash equivalents | $ | 52,363 | $ | 7,600 | $ | 48,454 | $ | 35,000 | ||||||||
Trade accounts receivable, net | Trade accounts receivable, net | 1,002,483 | 1,051,698 | 978,280 | 1,011,829 | ||||||||||||
Prepaid expenses and other, net | 383,313 | 443,683 | |||||||||||||||
Prepaid expenses and other | 371,235 | 434,470 | |||||||||||||||
Total current assets | Total current assets | 1,438,159 | 1,502,981 | 1,397,969 | 1,481,299 | ||||||||||||
Property and equipment, at cost | Property and equipment, at cost | 5,453,569 | 5,329,243 | 5,682,573 | 5,640,806 | ||||||||||||
Less accumulated depreciation | Less accumulated depreciation | 1,913,831 | 1,884,132 | 2,064,273 | 2,019,940 | ||||||||||||
Net property and equipment | Net property and equipment | 3,539,738 | 3,445,111 | 3,618,300 | 3,620,866 | ||||||||||||
Goodwill and intangible assets, net | Goodwill and intangible assets, net | 196,940 | 105,157 | 199,437 | 202,832 | ||||||||||||
Other assets | Other assets | 152,445 | 38,398 | 164,336 | 165,857 | ||||||||||||
Total assets | Total assets | $ | 5,327,282 | $ | 5,091,647 | $ | 5,380,042 | $ | 5,470,854 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | Current liabilities: | ||||||||||||||||
Current portion of long-term debt | $ | - | $ | 250,706 | |||||||||||||
Trade accounts payable | Trade accounts payable | 594,704 | 709,736 | $ | 497,649 | $ | 602,601 | ||||||||||
Claims accruals | Claims accruals | 267,481 | 275,139 | 265,540 | 279,590 | ||||||||||||
Accrued payroll | Accrued payroll | 63,991 | 80,922 | 75,736 | 68,220 | ||||||||||||
Other accrued expenses | Other accrued expenses | 72,063 | 35,845 | 70,451 | 85,355 | ||||||||||||
Total current liabilities | Total current liabilities | 998,239 | 1,352,348 | 909,376 | 1,035,766 | ||||||||||||
Long-term debt | Long-term debt | 1,284,550 | 898,398 | 1,302,756 | 1,295,740 | ||||||||||||
Other long-term liabilities | Other long-term liabilities | 172,239 | 96,056 | 170,944 | 173,241 | ||||||||||||
Deferred income taxes | Deferred income taxes | 668,490 | 643,461 | 714,548 | 699,078 | ||||||||||||
Stockholders' equity | Stockholders' equity | 2,203,764 | 2,101,384 | 2,282,418 | 2,267,029 | ||||||||||||
Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 5,327,282 | $ | 5,091,647 | $ | 5,380,042 | $ | 5,470,854 |
See Notes to Condensed Consolidated Financial Statements.
J.B. HUNT TRANSPORT SERVICES, INC.
Condensed Consolidated Statements of Stockholders' Equity
(in(in thousands, except per share amounts)
(unaudited)
Additional | Additional | |||||||||||||||||||||||||||||||||||||||
Common | Paid-in | Retained | Treasury | Stockholders’ | Common | Paid-in | Retained | Treasury | Stockholders’ | |||||||||||||||||||||||||||||||
Stock | Capital | Earnings | Stock | Equity | ||||||||||||||||||||||||||||||||||||
Balances at December 31, 2017 | $ | 1,671 | $ | 310,811 | $ | 3,803,844 | $ | (2,277,001 | ) | $ | 1,839,325 | |||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Net earnings | - | - | 118,142 | - | 118,142 | |||||||||||||||||||||||||||||||||||
Cash dividend declared and paid ($0.24 per share) | - | - | (26,341 | ) | - | (26,341 | ) | |||||||||||||||||||||||||||||||||
Share-based compensation | - | 12,036 | - | - | 12,036 | |||||||||||||||||||||||||||||||||||
Restricted share issuances, net of stock repurchased for payroll taxes | - | (136 | ) | - | 37 | (99 | ) | |||||||||||||||||||||||||||||||||
Balances at March 31, 2018 | $ | 1,671 | $ | 322,711 | $ | 3,895,645 | $ | (2,276,964 | ) | $ | 1,943,063 | |||||||||||||||||||||||||||||
Stock | Capital | Earnings | Stock | Equity | ||||||||||||||||||||||||||||||||||||
Balances at December 31, 2018 | $ | 1,671 | $ | 340,457 | $ | 4,188,435 | $ | (2,429,179 | ) | $ | 2,101,384 | $ | 1,671 | $ | 340,457 | $ | 4,188,435 | $ | (2,429,179 | ) | $ | 2,101,384 | ||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Net earnings | - | - | 119,601 | - | 119,601 | - | - | 119,601 | - | 119,601 | ||||||||||||||||||||||||||||||
Cash dividend declared and paid ($0.26 per share) | - | - | (28,272 | ) | - | (28,272 | ) | |||||||||||||||||||||||||||||||||
Cash dividend declared and paid ($0.26 per share) | - | - | (28,272 | ) | - | (28,272 | ) | |||||||||||||||||||||||||||||||||
Share-based compensation | - | 13,571 | - | - | 13,571 | - | 13,571 | - | - | 13,571 | ||||||||||||||||||||||||||||||
Restricted share issuances, net of stock repurchased for payroll taxes | - | (2,147 | ) | - | (373 | ) | (2,520 | ) | - | (2,147 | ) | - | (373 | ) | (2,520 | ) | ||||||||||||||||||||||||
Balances at March 31, 2019 | $ | 1,671 | $ | 351,881 | $ | 4,279,764 | $ | (2,429,552 | ) | $ | 2,203,764 | |||||||||||||||||||||||||||||
Balances at March 31, 2019 | $ | 1,671 | $ | 351,881 | $ | 4,279,764 | $ | (2,429,552 | ) | $ | 2,203,764 | |||||||||||||||||||||||||||||
Balances at December 31, 2019 | $ | 1,671 | $ | 374,049 | $ | 4,592,938 | $ | (2,701,629 | ) | $ | 2,267,029 | |||||||||||||||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Net earnings | - | - | 104,834 | - | 104,834 | |||||||||||||||||||||||||||||||||||
Cash dividend declared and paid ($0.27 per share) | - | - | (28,688 | ) | - | (28,688 | ) | |||||||||||||||||||||||||||||||||
Purchase of treasury shares | - | - | - | (75,193 | ) | (75,193 | ) | |||||||||||||||||||||||||||||||||
Share-based compensation | - | 18,063 | - | - | 18,063 | |||||||||||||||||||||||||||||||||||
Restricted share issuances, net of stock repurchased for payroll taxes | - | (3,535 | ) | - | (92 | ) | (3,627 | ) | ||||||||||||||||||||||||||||||||
Balances at March 31, 2020 | $ | 1,671 | $ | 388,577 | $ | 4,669,084 | $ | (2,776,914 | ) | $ | 2,282,418 |
See Notes to Condensed Consolidated Financial Statements.
J.B. HUNT TRANSPORT SERVICES, INC.
Condensed Consolidated Statements of Cash Flows
(in(in thousands)
(unaudited)
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net earnings | $ | 119,601 | $ | 118,142 | $ | 104,834 | $ | 119,601 | ||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 119,930 | 105,583 | 130,095 | 119,930 | ||||||||||||
Noncash lease expense | 8,484 | - | 11,411 | 8,484 | ||||||||||||
Share-based compensation | 13,571 | 12,036 | 18,063 | 13,571 | ||||||||||||
Loss on sale of revenue equipment and other | 2,252 | 2,815 | 1,472 | 2,252 | ||||||||||||
Deferred income taxes | 25,030 | 3,412 | 15,470 | 25,030 | ||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Trade accounts receivable | 58,109 | 19,864 | 33,549 | 58,109 | ||||||||||||
Other assets | (54,421 | ) | (49,189 | ) | (60,029 | ) | (54,421 | ) | ||||||||
Trade accounts payable | (14,325 | ) | (10,650 | ) | (5,392 | ) | (14,325 | ) | ||||||||
Income taxes payable or receivable | 12,213 | 35,434 | 23,066 | 12,213 | ||||||||||||
Claims accruals | (920 | ) | 12,543 | (7,938 | ) | (920 | ) | |||||||||
Accrued payroll and other accrued expenses | (38,783 | ) | 11,628 | (15,438 | ) | (38,783 | ) | |||||||||
Net cash provided by operating activities | 250,741 | 261,618 | 249,163 | 250,741 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Additions to property and equipment | (257,658 | ) | (206,108 | ) | (166,814 | ) | (257,658 | ) | ||||||||
Net proceeds from sale of equipment | 45,512 | 27,063 | 38,078 | 45,512 | ||||||||||||
Business acquisition | (98,543 | ) | - | - | (98,543 | ) | ||||||||||
Change in other assets | (15 | ) | (299 | ) | 28 | (15 | ) | |||||||||
Net cash used in investing activities | (310,704 | ) | (179,344 | ) | (128,708 | ) | (310,704 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from issuances of long-term debt | 700,000 | - | - | 700,000 | ||||||||||||
Payments on long-term debt | (250,000 | ) | - | - | (250,000 | ) | ||||||||||
Proceeds from revolving lines of credit and other | 730,618 | 687,036 | 220,607 | 730,618 | ||||||||||||
Payments on revolving lines of credit and other | (1,045,100 | ) | (750,400 | ) | (220,100 | ) | (1,045,100 | ) | ||||||||
Purchase of treasury stock | (75,193 | ) | - | |||||||||||||
Stock repurchased for payroll taxes | (2,520 | ) | (99 | ) | (3,627 | ) | (2,520 | ) | ||||||||
Dividends paid | (28,272 | ) | (26,341 | ) | (28,688 | ) | (28,272 | ) | ||||||||
Net cash provided by/(used in) financing activities | 104,726 | (89,804 | ) | (107,001 | ) | 104,726 | ||||||||||
Net change in cash and cash equivalents | 44,763 | (7,530 | ) | 13,454 | 44,763 | |||||||||||
Cash and cash equivalents at beginning of period | 7,600 | 14,612 | 35,000 | 7,600 | ||||||||||||
Cash and cash equivalents at end of period | $ | 52,363 | $ | 7,082 | $ | 48,454 | $ | 52,363 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||
Cash paid during the period for: | ||||||||||||||||
Interest | $ | 14,363 | $ | 11,769 | $ | 21,673 | $ | 14,363 | ||||||||
Income taxes | $ | 2,163 | $ | 1,834 | $ | 1,173 | $ | 2,163 | ||||||||
Noncash investing activities | ||||||||||||||||
Accruals for equipment received | $ | 49,639 | $ | 42,554 | $ | 22,395 | $ | 49,639 |
See Notes to Condensed Consolidated Financial Statements.
J.B. HUNT TRANSPORT SERVICES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. | General |
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, 2018. 2019. 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, 2019, 2020, 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.
LeasesUse of Estimates
The novel coronavirus (COVID-19) pandemic has created and may continue to create significant uncertainty in macro-economic conditions, which may cause global economic recession, business slowdowns or shutdowns, depressed demand for our transportation and logistics businesses, and adversely impact our results of operations. During the three months ended March 31,2020, we faced increasing uncertainties around our estimates on our annual effective tax rate, accounts receivable credit losses and intangibles. We recognize a right-of-use asset and a lease liabilityexpect uncertainties around our key accounting estimates to continue to evolve depending on the effective dateduration and degree of a lease agreement. Right-of-use assets representimpact associated with the COVID-19 pandemic. Our estimates may change, as new events occur and additional information is obtained, which are recognized or disclosed in 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 incremental 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 combinedconsolidated financial statements as a single lease component. Right-of-use assets additionally include net prepaid lease expenses. Options to extend or terminate an agreement are included in the 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 long-term operating leases is recognized on a straight-line bases over the lease term, while variable lease payments are expensedsoon as incurred.they become known.
Accounting Pronouncement Adopted in 20120920
In FebruaryJune 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases,2016-13, Financial Instruments – Credit Losses, which requires lessees to recognizereplaced the existing incurred loss methodology used for establishing a right-of-use assetprovision against financial assets, including accounts receivable, with a forward-looking expected loss methodology for accounts receivable, loans and a lease liability for most leases on the balance sheet as well as other qualitative and quantitative disclosures. ASU 2016-02 is to be applied using a modified retrospective method and was effective for us 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 required.financial instruments. We adopted the new 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 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 the standard we recorded offsetting lease assets and 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 Balance Sheet, as of on January 1, 2019.2020, using the cumulative-effect method. The adoption of the standardnew guidance did not have a material impact on our Condensed Consolidated Statementsfinancial statements.
Accounts Receivable and Allowance
Our trade accounts receivable includes accounts receivable reduced by an allowance for uncollectible accounts. Receivables are recorded at amounts billed to customers when loads are delivered or services are performed. The allowance for uncollectible accounts is calculated over the life of Earnings, Condensed Consolidated Statementsthe underlying receivable and is based on historical experience; any known trends or uncertainties related to customer billing and account collectability; current economic conditions; and reasonable and supportable economic forecasts, each applied to segregated risk pools based on the business segment that generated the receivable. The adequacy of Cash Flowsour allowance is reviewed quarterly. Balances are charged against the allowance when it is determined the receivable will not be recovered. The allowance for uncollectible accounts for our trade accounts receivable was $14.5 million at March 31, 2020 and $13.3 million at December 31, 2019. There were no material write-offs charged or debt covenant compliance.increases to the allowance for uncollectible accounts during the first quarter 2020.
2. | Earnings Per Share |
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 first quarter 2020, compared to 0.9 million shares during the first quarter 2019, compared to 1.1 million shares during the first quarter 2018.2019.
3. | Share-based Compensation |
The following table summarizes the components of our share-based compensation program expense (in thousands):
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Restricted share units: | ||||||||||||||||
Pretax compensation expense | $ | 9,741 | $ | 8,591 | $ | 14,679 | $ | 9,741 | ||||||||
Tax benefit | 2,435 | 2,234 | 3,758 | 2,435 | ||||||||||||
Restricted share unit expense, net of tax | $ | 7,306 | $ | 6,357 | $ | 10,921 | $ | 7,306 | ||||||||
Performance share units: | ||||||||||||||||
Pretax compensation expense | $ | 3,830 | $ | 3,445 | $ | 3,384 | $ | 3,830 | ||||||||
Tax benefit | 957 | 896 | 866 | 957 | ||||||||||||
Performance share unit expense, net of tax | $ | 2,873 | $ | 2,549 | $ | 2,518 | $ | 2,873 |
As of March 31, 2019, 2020, we had $88.1$95.3 million and $23.8$24.2 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 3.33.2 years for restricted share units and 2.32.5 years for performance share units. During the first quarter 2019,2020, we issued 17034,781 shares for vested restricted share units and 51,44144,870 shares for vested performance share units.
4. | Financing Arrangements |
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):
March 31, 2019 | December 31, 2018 | |||||||
Senior revolving line of credit | $ | - | $ | 307.1 | ||||
Senior notes | 1,284.6 | 842.0 | ||||||
Less current portion of long-term debt | - | (250.7 | ) | |||||
Total long-term debt | $ | 1,284.6 | $ | 898.4 |
March 31, 2020 | December 31, 2019 | |||||||
Senior notes | 1,302.8 | 1,295.7 |
Senior Revolving Line of Credit
At March 31, 2019, 2020, we were authorized to borrow up to $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 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 March 31, 2019, 2020, we had no0 outstanding borrowings under this agreement.
Senior Notes
Our senior notes consist of three separate issuances. The first is $250 million of 3.85% senior notes due March 2024, which was issued in March 2014. Interest payments under this note are due semiannually in March and 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 shelf registration statements filed in February 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 swap entered into on the $350$350 million of 3.30% senior notes due August 2022. Our $250 million of 2.40% senior notes matured in March 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 March 31, 2019.2020.
5. | Derivative Financial Instruments |
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 agreement simultaneously with the issuance of our $350 million of 3.30% senior notes due August 2022, to effectively convert this fixed-rate debt to variable-rate. The notional amount of this interest rate swap agreement equals that of the corresponding fixed-rate debt. The applicable interest rate under this agreement is based on LIBOR plus an established margin, resulting in an interest rate of 4.04%3.05% for our $350$350 million of 3.30% senior notes at March 31, 2019. 2020. The swap expires when the corresponding senior notes are due. The fair value of this swap is recorded in other long-term liabilitiesassets in our Condensed Consolidated Balance Sheet at March 31, 2019. 2020. See Note 7, Fair Value Measurements, for disclosure of fair value. This derivative meets the required criteria to be designated as a fair value hedge, and as the specific terms and notional amount of this derivative instrument match those of the fixed-rate debt being hedged, this derivative instrument 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 this interest rate swap recorded in earnings is offset by a corresponding change in the fair value of the related debt.
6. | Capital Stock |
On April 20, 2017, our Board of Directors authorized the purchase of up to $500 million of our common stock. On January 22, 2020, our Board of Directors authorized an additional purchase of up to $500 million of our common stock. At March 31, 2019, $3712020, $520 million of the combined authorization was remaining. We did not purchase anypurchased approximately 800,000 shares, or $75 million, of our common stock under our repurchase authorization during the three months ended March 31, 2019. 2020. On January 23, 2019, 22, 2020, we announced an increase in our quarterly cash dividend from $0.24$0.26 to $0.26,$0.27, which was paid February 22, 2019, 21, 2020, to stockholders of record on February 8, 2019. 7, 2020. On April 18, 2019, 23, 2020, our Board of Directors declared a regular quarterly dividend of $0.26$0.27 per common share, which will be paid on May 17, 2019, 22, 2020, to stockholders of record on May 3, 2019.8, 2020.
| Fair Value Measurements |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Our assets and liabilities measured at fair value are based on valuation techniques which consider prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. These valuation methods are based on either quoted market prices (Level 1)1) or inputs, other than quoted prices in active markets, that are observable either directly or indirectly (Level 2)2). The following are assets and liabilities measured at fair value on a recurring basis (in millions):
Asset/(Liability) Balance | |||||||||||
March 31, 2020 | December 31, 2019 | Input Level | |||||||||
Trading investments | $ | 17.9 | $ | 20.4 | 1 | ||||||
Interest rate swaps | $ | 11.4 | $ | 4.8 | 2 | ||||||
Senior notes, net of unamortized discount and debt issuance costs | $ | (360.1 | ) | $ | (353.1 | ) | 2 |
Asset/(Liability) Balance | |||||||||||
March 31, 2019 | December 31, 2018 | Input Level | |||||||||
Trading investments | $ | 18.4 | $ | 15.7 | 1 | ||||||
Interest rate swaps | $ | (4.9 | ) | $ | (4.8 | ) | 2 | ||||
Senior notes, net of unamortized discount and debt issuance costs | $ | (343.4 | ) | $ | (591.3 | ) | 2 |
The fair value of trading investments has been measured using the market approach (Level 1)1) and reflect quoted market prices. The fair values of interest rate swaps and corresponding senior notes have been measured using the income approach (Level 2)2), which include relevant interest rate curve inputs. Trading investments and interest rate swaps are classified in other assets in our Consolidated Balance Sheets. Interest rate swaps are classified in other long-term liabilities and other accrued expenses in our Condensed Consolidated Balance Sheets. The senior notes are classified in long-term debt and current portion of long-term debt in our Condensed Consolidated Balance Sheets.
Financial Instruments
The carrying amount and estimated fair value at March 31, 2019, 2020, using the income approach (Level 2)2), based on their net present value, discounted at our current borrowing rate, of our senior revolving line of credit and remaining senior notes not measured at fair value on a recurring basis, were $941.2$942.7 million and $979.2$970.7 million, respectively.
The carrying amounts of all other instruments at March 31, 2019, 2020, approximate their fair value due to the short maturity of these instruments.
8. | Income Taxes |
Our effective income tax rate was 26.5% for the three months ended March 31, 2020, compared to 22.7% for the three months ended March 31, 2019, compared to 26.0% for the three months ended March 31, 2018. 2019. 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. Our effective income tax rate for the first quarter 2019 included the effect of a favorable settlement of a state income tax audit.
At March 31, 2019, 2020, we had a total of $49.5$52.9 million in gross unrecognized tax benefits, which are a component of other long-term liabilities in our Condensed Consolidated Balance Sheets. Of this amount, $40.9$43.6 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate. The total amount of accrued interest and penalties for such unrecognized tax benefits was $5.3$4.2 million at March 31, 2019.2020.
9. | Legal Proceedings |
|
We are a defendant in certain alleged class-action lawsuits in which the plaintiffs are current and former California-based employee drivers who allege claims for unpaid wages, failure to provide meal and rest periods, and other items. In the lead class-action, we reached an agreement and recorded a reserve in September 2018 to resolve all pending claims for a class settlement payment of $15 million, subject to Court approval. The United States District Court for the Central District of California entered an order granting final approval of the class settlement on April 23, 2019. We anticipate the overlapping class claims in the other alleged class-action lawsuits that have been stayed pending final approval of the class settlement in the lead class-action case will be dismissed.
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 requested the same, and the arbitration process is on-going.same. In October 2018 we received the arbitrators’ Interim Award. The details of the Interim Award are confidential and require the parties to submit additional information requested by 2019 the arbitrators issued a Final Award. On January 17, 2020, we filed under seal in the United States District Court for the Western District of Arkansas a motion to decideconfirm and enforce the Final Award, seeking the Court’s specific enforcement of certain unresolved matters. Forconfidential contractual rights the determined componentsarbitrators decided in our favor. BNSF has moved to confirm the Final Award in the United States District Court for the District of Columbia. During the Interim Award,first quarter 2020 we recorded an $18.3$8.2 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 somean adjusted calculation 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 duringowed to BNSF under 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. Normal commercial business activity between the parties, including load tendering, load tracing, billing and payments, is expected to continue on a timely basis.Final Award.
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 March 31, 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):
Asset/(Liability) Balance | ||||
March 31, 2019 | ||||
Right-of-use assets | $ | 117.5 | ||
Lease liabilities, current | $ | (38.5 | ) | |
Lease liabilities, long-term | $ | (78.2 | ) |
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 March 31, 2019, the weighted-average remaining lease term for our outstanding operating lease obligations was 4.4 years and the weighted-average discount rate was 3.5%. Future minimum lease payments under these operating leases as of March 31, 2019, are as follows (in millions):
Year one | $ | 38.4 | ||
Year two | 32.9 | |||
Year three | 22.9 | |||
Year four | 15.0 | |||
Year five | 7.2 | |||
Thereafter | 9.7 | |||
Total lease payments | 126.1 | |||
Less interest | (9.4 | ) | ||
Present value of lease liabilities | $ | 116.7 |
During the three months ended March 31, 2019, cash paid for amounts included in the measurement of operating lease liabilities was $9.6 million, while $9.4 million of operating lease expense was recognized on a straight-line basis. In addition, a total of $23.7 million of right-of-use assets were obtained during the first quarter 2019, in exchange for new operating lease liabilities, of which, $16.0 million were obtained through the business combination discussed at Note 11, Acquisitions.
10. Business Segments
|
|
On January 7, 2019, In March 2020, we entered into an asset purchase agreement to acquire substantially allchanged the way we internally evaluate the operating performance of the assetsour business units and assume certain specified liabilitiesadopted a new segment reporting structure. As part 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,this new structure, 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 will operate withinseparated 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 recorded approximately $65.5 million of definite-lived intangible assets and approximately $28.4 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):
Consideration | $ | 98.5 | ||
Accounts receivable | 8.9 | |||
Other current assets | 0.5 | |||
Property and equipment | 1.5 | |||
Right-of-use assets | 16.0 | |||
Intangible | 65.5 | |||
Accounts payable and accrued liabilities | (6.3 | ) | ||
Lease liabilities | (16.0 | ) | ||
Goodwill | $ | 28.4 |
|
|
As discussed in Note 11, Acquisitions, in first quarter 2019, we recorded additional goodwill of approximately $28.4 million and additional finite-lived intangible assets of approximately $65.5 million in connection with the Cory acquisition. Total goodwill was $68.5 million and $40.1 million at March 31, 2019, and December 31, 2018, respectively. All goodwill is assigned to oursegment into two reportable segments: Dedicated Contract Services® business segmentServices and no impairment losses have been recorded for goodwill as of March 31, 2019. Prior to the Cory acquisition, our intangible assets consisted of those arising from a previous business acquisition and our purchased LDC network access, both within our Dedicated ContractFinal Mile Services® segment. Identifiable intangible assets consist of the following (in millions):
Weighted Average | |||||||||
Amortization | |||||||||
March 31, 2019 | December 31, 2018 | Period | |||||||
Finite-lived intangibles: | |||||||||
Non-competition agreements | $ | 1.2 | $ | 0.2 | 6.7 | ||||
Customer relationships | 139.8 | 75.3 | 10.0 | ||||||
LDC Network | 10.5 | 10.5 | 10.0 | ||||||
Total finite-lived intangibles | 151.5 | 86.0 | |||||||
Less accumulated amortization | (23.1 | ) | (20.9 | ) | |||||
Total identifiable intangible assets, net | $ | 128.4 | $ | 65.1 |
Our finite-lived intangible assets have no assigned residual values.
Intangible asset amortization expense was $2.2 million for the first quarter 2019 and 2018. Estimated amortization expense for our finite-lived intangible assets is expected to be approximately $12.8 million for 2019 and $14.2 million for 2020 through 2023. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment or accelerated amortization of intangible assets, and other events.
|
|
We. Accordingly, we reported four5 distinct business segments during the three months ended March 31, 2019 2020 and 2018.2019. These segments included Intermodal (JBI), Dedicated Contract Services®Services (DCS), Integrated Capacity SolutionsSolutions™ (ICS), Final Mile Services (FMS) and Truckload (JBT). which are based primarily on the services each segment provides. The operationJBI segment includes freight that is transported by rail over at least some portion of eachthe 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. 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 agreements or contracts that govern services performed and applicable rates. 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 LTL, as well as a variety of these businessesdry-van and intermodal solutions. FMS provides final-mile delivery services to customers through a nationwide network of cross-dock and other delivery system network locations. FMS provides both asset and non-asset big and bulky delivery and installation services, as well as fulfilment and retail-pooling distributions services. JBT business includes full-load, dry-van freight that is describedtransported utilizing company-owned revenue equipment or third-party carriers utilizing company-owned trailing equipment. This freight is typically transported over roads and highways and does not move by rail. All transactions between reporting segments are eliminated in Note 13, Segment Information, of our Annual Report (Form 10-K) forconsolidation. Our customers are geographically dispersed across the year ended December 31, 2018.United States. A summary of certain segment information is presented below (in millions):
Assets (Excludes intercompany accounts) As of | ||||||||
March 31, 2020 | December 31, 2019 | |||||||
JBI | $ | 2,228 | $ | 2,217 | ||||
DCS | 1,410 | 1,445 | ||||||
ICS | 203 | 208 | ||||||
FMS | 418 | 432 | ||||||
JBT | 242 | 241 | ||||||
Other (includes corporate) | 879 | 928 | ||||||
Total | $ | 5,380 | $ | 5,471 |
Operating Revenues For The Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
JBI | $ | 1,150 | $ | 1,088 | ||||
DCS | 542 | 492 | ||||||
ICS | 335 | 301 | ||||||
FMS | 154 | 110 | ||||||
JBT | 105 | 102 | ||||||
Subtotal | 2,286 | 2,093 | ||||||
Inter-segment eliminations | (5 | ) | (3 | ) | ||||
Total | $ | 2,281 | $ | 2,090 |
Assets (Excludes intercompany accounts) As of | ||||||||
March 31, 2019 | December 31, 2018 | |||||||
JBI | $ | 2,273 | $ | 2,221 | ||||
DCS | 1,833 | 1,595 | ||||||
ICS | 206 | 212 | ||||||
JBT | 291 | 307 | ||||||
Other (includes corporate) | 724 | 757 | ||||||
Total | $ | 5,327 | $ | 5,092 |
��
Operating Revenues For The Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
JBI | $ | 1,088 | $ | 1,070 | ||||
DCS | 602 | 494 | ||||||
ICS | 301 | 296 | ||||||
JBT | 102 | 93 | ||||||
Subtotal | 2,093 | 1,953 | ||||||
Inter-segment eliminations | (3 | ) | (5 | ) | ||||
Total | $ | 2,090 | $ | 1,948 |
Operating Income For The Three Months Ended March 31, | Operating Income/(Loss) For The Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
JBI | $ | 103.3 | $ | 114.2 | $ | 102.2 | $ | 103.3 | ||||||||
DCS | 50.3 | 40.6 | 72.9 | 50.1 | ||||||||||||
ICS | 7.0 | 8.9 | (18.9 | ) | 7.0 | |||||||||||
FMS | (3.3 | ) | 0.2 | |||||||||||||
JBT | 7.2 | 5.1 | 1.8 | 7.2 | ||||||||||||
Total | $ | 167.8 | $ | 168.8 | $ | 154.7 | $ | 167.8 |
Depreciation and Amortization Expense For The Three Months Ended March 31, | Depreciation and Amortization Expense For The Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
JBI | $ | 44.4 | $ | 42.7 | $ | 46.5 | $ | 44.4 | ||||||||
DCS | 57.4 | 46.9 | 56.3 | 51.0 | ||||||||||||
ICS | 0.9 | 0.4 | 0.4 | 0.9 | ||||||||||||
FMS | 8.1 | 6.4 | ||||||||||||||
JBT | 8.8 | 10.2 | 8.2 | 8.8 | ||||||||||||
Other (includes corporate) | 8.4 | 5.4 | 10.6 | 8.4 | ||||||||||||
Total | $ | 119.9 | $ | 105.6 | $ | 130.1 | $ | 119.9 |
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, 2018,2019, 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,conditions; competition and competitive rate fluctuations, cost and availability of diesel fuel, ability to attract and retain qualified drivers and delivery personnel,fluctuations; excess capacity in the intermodal or trucking industries; a loss of one or more major customers,customers; cost and availability of diesel fuel; interference with or termination of our relationships with certain railroads,railroads; rail service delays,delays; disruptions to U.S. port-of-call activity; ability to attract and retain qualified drivers, delivery personnel, independent contractors, and third-party carriers; retention of key employees; insurance costs and availability,availability; litigation and claims expense, retention of key employees, terrorist attacks or actions, acts of war, adverse weather conditions, disruption or failure of information systems,expense; determination that independent contractors are employees; new or different environmental or other laws and regulations,regulations; volatile financial credit markets or interest rates; terrorist attacks or actions; acts of war; adverse weather conditions; national or international health pandemics; disruption or failure of information systems; operational disruption or adverse effects of business acquisitions,acquisitions; increased costs for new revenue equipmentequipment; increased tariffs assessed on or disruptions in the procurement of imported revenue equipment; decreases in the value of used equipment,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 Part I, Item 1A of our Annual Report (Form 10-K) for the year ended December 31, 2018,2019 and Part II, Item 1A of this Quarterly Report on Form 10-Q 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 fourfive 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 fourfive business segments is described in Note 13, Segment Information, of10, Business Segments, in our AnnualCondensed Consolidated Financial Statements included in this Quarterly Report (Form 10-K) for the year ended December 31, 2018.on Form 10-Q.
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, 2018,2019, 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, 20120920 to Three Months Ended March 31, 201819
Summary of Operating Segment Results For the Three Months Ended March 31, (in millions) | Summary of Operating Segment Results For the Three Months Ended March 31, (in millions) | |||||||||||||||||||||||||||||||
Operating Revenues | Operating Income | Operating Revenues | Operating Income/(Loss) | |||||||||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
JBI | $ | 1,088 | $ | 1,070 | $ | 103.3 | $ | 114.2 | $ | 1,150 | $ | 1,088 | $ | 102.2 | $ | 103.3 | ||||||||||||||||
DCS | 602 | 494 | 50.3 | 40.6 | 542 | 492 | 72.9 | 50.1 | ||||||||||||||||||||||||
ICS | 301 | 296 | 7.0 | 8.9 | 335 | 301 | (18.9 | ) | 7.0 | |||||||||||||||||||||||
FMS | 154 | 110 | (3.3 | ) | 0.2 | |||||||||||||||||||||||||||
JBT | 102 | 93 | 7.2 | 5.1 | 105 | 102 | 1.8 | 7.2 | ||||||||||||||||||||||||
Subtotal | 2,093 | 1,953 | 167.8 | 168.8 | 2,286 | 2,093 | 154.7 | 167.8 | ||||||||||||||||||||||||
Inter-segment eliminations | (3 | ) | (5 | ) | - | - | (5 | ) | (3 | ) | - | - | ||||||||||||||||||||
Total | $ | 2,090 | $ | 1,948 | $ | 167.8 | $ | 168.8 | $ | 2,281 | $ | 2,090 | $ | 154.7 | $ | 167.8 |
Total consolidated operating revenues increased to $2.09$2.28 billion for the first quarter 2019,2020, a 7%9% increase from $1.95$2.09 billion in the first quarter 2018,2019, and an 8%a 10% increase excluding fuel surcharge revenues. This increase in operating revenues was primarily due to an 11%driven by a 7% increase in revenue per load excluding fuel surcharges,volume in JBI, a 22%10% increase in revenues in DCS related to new customer contracts and rate increases,higher fleet utilization, a 15%2% increase in load volume and a favorable change in customer freight mix in ICS and a 10%3% increase in JBT revenue, primarily due to customer rate increases and a larger operating fleet compared15% increase in load volume. In addition, our newly reported FMS segment increased revenue 39% over the first quarter 2019, primarily due to the same periodtwo business acquisitions completed in 2018.2019. These overall increases were partially offset by a 7%1% decrease in JBI load volume and a 12% decrease in revenue per load and lower rates and changes in ICS.customer mix in JBT.
JBI segment revenue increased 2%6% to $1.09$1.15 billion during the first quarter 2019,2020, compared with $1.07$1.09 billion in 2018.2019. Load volumes during the first quarter 2019 decreased2020 increased 7% over the same period 2018.2019. Transcontinental loads declined 8%increased 11% during the first quarter 2019, while the2020, and Eastern network load volume was down 7%up 1% compared to the first quarter 2018. Approximately half of this decrease in volume is attributable to anticipated rail lane closures and persistent severe winter weather events in the Midwest region that impacted operations.2019. The 2%overall increase in revenueload volume was primarily due topartially offset by a 10% increase1% decrease 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 11% year over year.was flat year-over-year. JBI reported improved year-over-year tractor and container utilization through the end of February 2020, as overall volume increases drove efficiencies in both the rail and dray network. Load volume disruptions related to the recent outbreak of the novel coronavirus (COVID-19) began to emerge in March and escalated through the end of the first quarter 2020. These load volume disruptions and resulting network imbalance could continue throughout the remainder of 2020, as a result of the overall economic effects caused by the ongoing COVID-19 pandemic. JBI segment operating income decreased 10%1%, to $103.3$102.2 million in the first quarter 2019,2020, from $114.2$103.3 million in 2018. Benefits from customer rate increases and freight mix were2019. The increase in revenue was more than offset by an increase in rail purchased transportation costs; reducedcosts, which included an $8.2 million accrual resulting from an adjusted calculation of the revenue divisions owed to BNSF Railway Company (BNSF) for 2019 related to the final award of our completed arbitration with BNSF issued in 2019; higher empty repositioning and network utilizationbalancing expenditures as network fluidity was challenged by the effects of COVID-19 during the quarter; higher personnel costs, primarily related to $4.0 million for a one-time COVID-19 related bonus paid to employee drivers and lowerother key field personnel; and higher costs for dray efficiency created from winter weather interruptions; higher equipment ownership and maintenance costs; and increased driver wages and recruiting costsrepositioning compared to the first quarter 2018.2019. The current period ended with approximately 95,80096,480 units of trailing capacity and 5,6715,492 power units assigned to the dray fleet.
DCS segment revenue increased 22%10% to $602$542 million in the first quarter 20192020 from $494$492 million in 2018.2019. Productivity, defined as revenue per truck per week, increased 6%2% when compared to 2018.2019. Productivity excluding fuel surcharges increased 4%3%, primarily due to customer rate increases, and better integration of assets between customer accounts, duringand increased customer supply chain fluidity largely attributed to a mild winter when compared to the first quarter of 2019 compared to 2018. In addition, the growth in DCS revenue includes an increase of $26 million in Final Mile Services (FMS) revenue compared to first quarter 2018.2019. A net additional 1,644430 revenue producing trucks were in the fleet by the end of the first quarter 20192020 compared to a year ago, primarily from private fleet conversions and growth in FMS induring the current and prior periods. As a result of the ongoing effects of the COVID-19 pandemic, the rate of newly awarded customer private fleet conversions, however, has slowed since late March and could remain slower during the remainder of 2020. DCS segment operating income increased 24%46% to $50.3$72.9 million in the first quarter 2019,2020, from $40.6$50.1 million in 2018. Increased revenue2019. The increase in operating income was partially offset bydue primarily to increased driver wagesfleet productivity and recruitingthe absence of any significant implementation or weather-related costs and higher facilities rent and costs to expand the FMS network,in first quarter 2020, compared to the first quarter 2018.2019. Operating income was partially offset by DCS’s $6.5 million portion of the one-time COVID-19 bonus paid in first quarter 2020.
ICS segment revenue increased 2%12% to $301$335 million in the first quarter 2019,2020, from $296$301 million in 2018.2019. Overall volumes increased 15%2% while revenue per load decreased 12%increased 9%, primarily due to customer freight mix changes and a lower spot pricing market when compared to first quarter 2018.2019. Contractual business represented approximately 68%74% of total load volume and 51%64% of total revenue in the first quarter 2019,2020, compared to 67%68% and 44%51%, respectively, in 2018.2019. Approximately $186$235 million of first quarter 20192020 ICS revenue was executed through the Marketplace for J.B. Hunt 360° compared to $96$186 million in the first quarter 2018.2019. ICS segment had an operating income decreased 22% to $7.0loss of $18.9 million in the first quarter 2019, from $8.9of 2020 compared to operating income of $7.0 million in 2018.2019. Gross profit margin increaseddecreased to 16.5%9.6% in the first quarter 2019,2020, compared to 14.4%16.5% in 2018,2019, primarily due to an adequatea competitive pricing environment in the contractual business and tightening supply of carrier capacity to accommodate customer demand duringdynamics at various points throughout the current period. Increased gross profit margin was more than offsetCurrent period operating results were further affected by continued personnel growth costs and increased technology spending as the Marketplace for J.B. Hunt 360° continues to expand in functionality and capacity.capacity, continued personnel growth costs, and higher digital marketing and advertising costs, compared to first quarter 2019. ICS’s carrier base increased 29%13% and employee count increased 18%2% compared to first quarter 2018.2019. ICS could experience reduced overall load volumes throughout the remainder of 2020 as a result of the economic effects caused by the ongoing COVID-19 pandemic.
FMS segment revenue increased 39% to $154 million in the first quarter 2020 from $110 million in 2019, primarily due to two business acquisitions completed in 2019. Stop count for the first quarter 2020 increased 67%, while productivity, defined as revenue per stop, decreased 17% compared to 2019. The reduction in productivity was primarily due to a change in the mix of service methods to a more asset-light model resulting from the 2019 business acquisitions. FMS segment had an operating loss of $3.3 million in the first quarter of 2020 compared to operating income of $0.2 million in 2019. The current period operating loss was primarily due to increased costs to expand the FMS network, increased costs resulting from the temporary suspension of operations at several customer sites in response to COVID-19, higher bad debt expense, $1.3 million of one-time COVID-19 employee bonus expense, and $1.2 million in additional noncash amortization expense attributable to the 2019 business acquisitions compared to first quarter 2019. A large portion of FMS customers have been significantly impacted by the ongoing response to the COVID-19 pandemic and as a result, the operations of FMS will continue to be impacted as those customers’ operations are affected.
JBT segment revenue totaled $102$105 million for the first quarter 2019,2020, an increase of 10%3% from $93$102 million in first quarter 2018.2019. Revenue excluding fuel surcharge also increased 12%3% primarily from customer rate increases anddue to a 4%15% increase in load countvolume, partially offset by a 10% decrease in revenue per load compared to first quarter 2018. Load volume in the first quarter 2019 was negatively impacted by severe winter weather events in the Midwest region of operations.2019. Revenue per load excluding fuel surcharge increased 8%, primarily from a 12% increase in rates per loaded mile partially offset by a 4% decrease in length of haul whenfirst quarter 2020 decreased 6%, while comparable contractual customer rates decreased 1% compared to first quarter 2018.2019. As a result of the ongoing effects of the COVID-19 pandemic, JBT could experience reduced load volumes and customer rates throughout the remainder of 2020. At the end of the first quarter 2019,2020, JBT operated 1,887 tractors and 7,391 trailers compared to 2,043 tractors compared to 1,926and 6,785 trailers in 2018.2019. JBT segment operating income increased 41%decreased 75% to $7.2$1.8 million in 2019,2020, compared with $5.1$7.2 million during first quarter 2018.2019. Benefits from the higher revenue per load and lower equipment ownership costsvolume were partiallymore than offset by higher driverpurchased transportation expense, lower customer rates, increased trailing-related costs, higher technology modernization expenses, and independent contractor costs per mile and higher recruiting costs per driver and independent contractor$0.5 million of one-time COVID-19 employee bonus expense compared to first quarter 2018.2019.
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, | Three Months Ended March 31, | ||||||||||||||||||||
Dollar Amounts as a Percentage of Total Operating Revenues | Percentage Change of Dollar Amounts Between Quarters | Dollar Amounts as a Percentage of Total Operating Revenues | Percentage Change of Dollar Amounts Between Quarters | ||||||||||||||||||
2019 | 2018 | 2019 vs. 2018 | 2020 | 2019 | 2020 vs. 2019 | ||||||||||||||||
Total operating revenues | 100.0 | % | 100.0 | % | 7.3 | % | 100.0 | % | 100.0 | % | 9.1 | % | |||||||||
Operating expenses: | |||||||||||||||||||||
Rents and purchased transportation | 47.9 | 49.5 | 3.6 | 49.8 | 47.9 | 13.6 | |||||||||||||||
Salaries, wages and employee benefits | 24.7 | 23.1 | 14.7 | 25.2 | 24.7 | 11.2 | |||||||||||||||
Depreciation and amortization | 5.7 | 5.4 | 13.6 | 5.7 | 5.7 | 8.5 | |||||||||||||||
Fuel and fuel taxes | 5.4 | 5.5 | 3.9 | 4.4 | 5.4 | (9.8 | ) | ||||||||||||||
Operating supplies and expenses | 3.7 | 3.6 | 10.6 | 3.8 | 3.7 | 9.5 | |||||||||||||||
General and administrative expenses, net of asset dispositions | 2.2 | 1.7 | 39.3 | 1.9 | 2.2 | 0.3 | |||||||||||||||
Insurance and claims | 1.4 | 1.5 | 1.7 | 1.4 | 1.4 | 11.6 | |||||||||||||||
Operating taxes and licenses | 0.6 | 0.6 | 13.6 | 0.6 | 0.6 | 1.2 | |||||||||||||||
Communication and utilities | 0.4 | 0.4 | 5.8 | 0.4 | 0.4 | (2.0 | ) | ||||||||||||||
Total operating expenses | 92.0 | 91.3 | 8.0 | 93.2 | 92.0 | 10.6 | |||||||||||||||
Operating income | 8.0 | 8.7 | (0.6 | ) | 6.8 | 8.0 | (7.8 | ) | |||||||||||||
Net interest expense | 0.6 | 0.5 | 42.4 | 0.5 | 0.6 | (7.7 | ) | ||||||||||||||
Earnings before income taxes | 7.4 | 8.2 | (3.0 | ) | 6.3 | 7.4 | (7.8 | ) | |||||||||||||
Income taxes | 1.7 | 2.1 | (15.2 | ) | 1.7 | 1.7 | 7.7 | ||||||||||||||
Net earnings | 5.7 | % | 6.1 | % | 1.2 | % | 4.6 | % | 5.7 | % | (12.3 | )% |
Total operating expenses increased 8.0%10.6%, while operating revenues increased 7.3%9.1%, during the first quarter 2019,2020, from the comparable period 2018.2019. Operating income decreased to $167.8$154.7 million during the first quarter 2019,2020, from $168.8$167.8 million in 2018.2019.
Rents and purchased transportation costs increased 3.6%13.6% in 2019.2020. This increase was primarily the result of increased third-party rail purchased transportation ratesthe increase in JBI and increased load volumes in ICS,volume, which increased services provided by third-party rail and truck carriers.carriers within JBI and ICS segments and increased rail and truck carrier purchased transportation rates. In addition, JBI rail purchased transportation costs included an $8.2 million accrual resulting from an adjusted calculation of the revenue divisions owed to BNSF for 2019 related to the final award of our completed arbitration with BNSF issued in 2019.
Salaries, wages and employee benefit costs increased 14.7%11.2% in 20192020 compared with 2018.2019. 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. In addition, first quarter 2020 included a $12.3 million one-time COVID-19 related bonus paid to employee drivers and other key field personnel and $3.4 million of additional stock compensation expense related to the acceleration of equity award vesting for executive employee retirements.
Depreciation and amortization expense increased 13.6%8.5% in 2019,2020, primarily due to equipment purchases related to new DCS long-term customer contracts. Fuel costs increased 3.9%decreased 9.8% in 2019,2020, compared with 2018,2019, due to increased road miles, partially offset by a decrease in the price of fuel.fuel, partially offset by an increase in road miles.
Operating supplies and expenses increased 10.6%9.5% in 2019,2020, compared with 2018,2019, primarily due to higher equipment maintenancetoll costs, increased toll coststire expenses, and higher travelbuilding maintenance expenses. General and administrative expenses increased 39.3% for the current quarter from the comparable period in 2018,were virtually flat compared with 2019, primarily due to increased technology spend on the J.B. Hunt 360° platformbuilding and legacy system upgrades, higher FMS network facility costs, and increased advertising expenses.computer rentals being offset by a reduction in professional fees during first quarter 2020. Net loss from sale or disposal of assets was $2.3$1.5 million in 2019,2020, compared to a net loss of $2.8$2.3 million in 2018.2019. Insurance and claims expense increased 1.7%11.6% in 2019,2020, compared with 2018,2019, due to higher incident volume.volume, partially offset by a decrease in accident severity.
Net interest expense increased 42.4%decreased 7.7% in 2019,2020, due primarily to increased debt levels and higherlower effective interest rates on our debt. Income tax expense decreased 15.2%increased 7.7% in first quarter 2019,2020, compared with 2018,2019, primarily due to decreased taxable earnings and a lowerhigher effective income tax rate due to the impact of stock compensation accelerations for executive employee retirements and the fact that the effective rate for 2019 was reduced by the favorable settlement of a state income tax audit during the current period.audit. The increase in effective income tax rate was partially offset by decreased taxable earnings. Our effective income tax rate was 22.7%26.5% for the first quarter 2019,2020, compared to 26.0%22.7% in 2018.2019. Our annual tax rate for 20192020 is expected to be 24.0%24.5%. 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 $251$249 million during the first three months of 2019,2020, compared with $262$251 million for the same period 2018.2019. Operating cash flows decreased due to decreased earnings in first quarter 2020, partially offset by the timing of general working capital activities. Net cash used in investing activities totaled $129 million in 2020, compared with $311 million in 2019, compared with $179 million in 2018.2019. The increasedecrease resulted from the purchase of Cory, which closed during first quarter 2019, and an increasea decrease in equipment purchases, net of proceeds from the sale of equipment, during the current period.period and from the fact that the Cory 1st Choice Home Delivery acquisition closed during first quarter 2019. Net cash used in financing activities was $107 million in 2020, compared with net cash provided by financing activities wasof $105 million in 2019, compared with net cash used in financing activities of $90 million in 2018.2019. This change resulted primarily from first quarter 2020 including $75 million of treasury stock purchases, while first quarter 2019 included the issuance of our $700 million of 3.875% senior notes due March 2026, partially offset by the full retirement of our $250 million of 2.40% senior notes that matured in March 2019 and the pay down of our senior revolving line of credit to zero, during first quarter 2019.
Debt and Liquidity Data
March 31, 2019 | December 31, 2018 | March 31, 2018 | March 31, 2020 | December 31, 2019 | March 31, 2019 | |||||||||||||||||||
Working capital ratio | 1.44 | 1.11 | 1.13 | 1.54 | 1.43 | 1.44 | ||||||||||||||||||
Current portion of long-term debt (millions) | - | $ | 250.7 | $ | 247.6 | |||||||||||||||||||
Total debt (millions) | $ | 1,284.6 | $ | 1,149.1 | $ | 1,000.0 | $ | 1,302.8 | $ | 1,295.7 | $ | 1,284.6 | ||||||||||||
Total debt to equity | 0.58 | 0.55 | 0.51 | 0.57 | 0.57 | 0.58 | ||||||||||||||||||
Total debt as a percentage of total capital | 37 | % | 35 | % | 34 | % | 36 | % | 36 | % | 37 | % |
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 as well as periodic business acquisitions. We are frequently able to accelerate or postpone a portion of equipment replacements or other capital expenditures depending on market conditions.and overall economic conditions and will continue to utilize this ability throughout the ongoing COVID-19 pandemic. In the near-term, we are reprioritizing a portion of our 2020 capital spend to items we consider essential and critical. Expenditures are being evaluating based on those that must happen, those that can be deferred to a later period, and those that are capable of being canceled. 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.
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. Should COVID-19 related economic conditions warrant, we believe we have sufficient credit resources available to meet our near-term operating and capital needs. At March 31, 2020, we had a cash balance of $48 million and we had no outstanding balance on our revolving line of credit, which authorizes us to borrow up to $750 million as well as request an increase in the total commitment by up to $250 million.
Our financing arrangements require us to maintain certain covenants and financial ratios. At March 31, 2020, we were well above compliance with all covenants and financial ratios, and we fully intend and expect to emerge from the current COVID-19 related economic environment with our investment-grade rating intact.
We are continually evaluating the possible effects of current economic conditions and reasonable and supportable economic forecasts on operational cash flows, including the risks of declines in the overall freight market and our customers' liquidity and ability to pay. We are monitoring working capital on a daily basis and are in frequent communication with our customers, suppliers and service providers. Through March 31, 2020, operational cost reduction activities consisted primarily of canceling non-essential travel and hiring activities and the delay of other discretionary spending, which we will continue to do as necessary. A large portion of our cost structure is variable. Purchased transportation expense represents more than half of our total costs but is heavily tied to load volumes. Our second largest cost item is salaries and wages, the largest portion of which is driver pay, which includes a large variable component. Currently, we have made no adjustments to our costs that we consider more fixed in nature. However, we are carefully monitoring the environment and are prepared to adjust if necessary.
The following table summarizes our expected obligations and commitments as of March 31, 20192020 (in millions):
Total | One Year Or Less | One to Three Years | Three to Five Years | After Five Years |
Total |
One Year Or Less |
One to Three Years |
Three to Five Years |
After Five Years | |||||||||||||||||||||||||||||||
Operating leases | $ | 126.1 | $ | 38.4 | $ | 55.8 | $ | 22.2 | $ | 9.7 | $ | 129.9 | $ | 45.5 | $ | 56.9 | $ | 18.0 | $ | 9.5 | ||||||||||||||||||||
Debt obligations | 1,300.0 | - | - | 600.0 | 700.0 | 1,300.0 | - | 350.0 | 250.0 | 700.0 | ||||||||||||||||||||||||||||||
Interest payments on debt (1) | 284.1 | 50.9 | 101.8 | 79.4 | 52.0 | |||||||||||||||||||||||||||||||||||
Interest payments on debt (1) | 224.8 | 47.4 | 88.6 | 63.9 | 24.9 | |||||||||||||||||||||||||||||||||||
Commitments to acquire revenue equipment and facilities | 278.3 | 278.3 | - | - | - | 903.2 | 336.9 | 566.3 | - | - | ||||||||||||||||||||||||||||||
Total | $ | 1,988.5 | $ | 367.6 | $ | 157.6 | $ | 701.6 | $ | 761.7 | $ | 2,557.9 | $ | 429.8 | $ | 1,061.8 | $ | 331.9 | $ | 734.4 |
(1) Interest payments on debt are based on the debt balance and applicable rate at March 31, 2020. |
|
Our net capital expenditures were approximately $212$129 million during the first three months of 2019,2020, compared with $179$212 million for the same period 2018.2019. 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 20192020 were primarily for tractors, additional intermodal containers and chassis, and other trailing equipment. We are currently committed to spend approximately $278$903.2 million during 2019 and 2020.the years 2020 to 2022. We have paused or cancelled certain capital expenditures originally planned for 2020 that, considering the effects of the COVID-19 pandemic, are now viewed as non-essential in the near-term. Accordingly, we now expect to spend in the range of $410$450 million to $430$475 million for net capital expenditures during the remainder of 2019. On February 15, 2019, we completed2020. Our ultimate capital expenditure levels could also be affected by manufacturer production slowdowns resulting from the COVID-19 pandemic. We will also continue to evaluate opportunities for business acquisitions within our acquisition of substantially all of the assetsmarkets following our established evaluation process which considers liquidity and assumption of certain specified liabilities of the affiliated entities of Cory; see Note 11, Acquisitions, in our Condensed Consolidated Financial Statements. We used our existing revolving credit facility to finance this transaction and to provide any necessary liquidity for current and future operations. This acquisition did not have a material impact on our interest expense.funding requirements. The table above excludes $54.8$57.1 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
We had no off-balance sheet arrangements, other than our net purchase commitments of $278903.2 million, as of March 31, 2019.2020.
Risk Factors
You should refer to Part I, Item 1A of our Annual Report (Form 10-K) for the year ended December 31, 2018,2019, and Part II, Item 1A of this Quarterly Report (Form 10-Q) 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. |
● | Our business is significantly impacted by the effects of national or international health pandemics on customer operations, third-party suppliers and service providers, and on general economic conditions. |
● | 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. |
● | ||
A determination that independent contractors are employees could expose us to various liabilities and additional costs. |
● | ||
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, including legislative and regulatory responses to climate change. Compliance with environmental requirements could result in significant expenditures and the violation of |
● | ||
Acquisitions or business combinations may disrupt or have a material adverse effect on our operations or earnings. |
ITEM 3. Quantitative And Qualitative Disclosures AbouT Market Risk
Our outstanding debt at March 31, 20192020 includes our senior revolving line of credit and senior notes issuances. Our senior notes have fixed interest rates ranging from 3.30% to 3.875%. Our senior revolving line of credit has variable interest rates, which are based on the Prime Rate, the Federal Funds Rate, or LIBOR, depending upon the specific type of borrowing, plus any applicable margins. We currently have an interest rate swap agreement which effectively converts our $350 million of 3.30% fixed rate senior notes due August 2022 to a variable rate, to allow us to maintain a desired mix of variable and fixed rate debt. The applicable interest rate under this agreement is based on LIBOR plus an established margin. Risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates. Our earnings would be affected by changes in these short-term variable interest rates. At our current level of borrowing, a one percentage point increase in our applicable rate would reduce annual pretax earnings by $3.5 million.
Although we conduct business in foreign countries, international operations are not material to our consolidated financial position, results of operations or cash flows. Additionally, foreign currency transaction gains and losses were not material to our results of operations for the three months ended March 31, 2019.2020. Accordingly, we are not currently subject to material foreign currency exchange rate risks from the effects that exchange rate movements of foreign currencies would have on our future costs or on future cash flows we would receive from our foreign investment. As of March 31, 2019,2020, we had no foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
The price and availability of diesel fuel are subject to fluctuations due to changes in the level of global oil production, seasonality, weather and other market factors. Historically, we have been able to recover a majority of fuel price increases from our customers in the form of fuel surcharges. We cannot predict the extent to which high fuel price levels may occur in the future, or the extent to which fuel surcharges could be collected to offset such increases. As of March 31, 2019,2020, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
ITEM 4. CONTROLS AND PROCEDURES
We maintain controls and procedures designed to ensure that the information we are required to disclose in the reports we file with the SEC is recorded, processed, summarized and reported, within the time periods specified in the SEC rules, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2019.2020.
There were no changes in our internal control over financial reporting during the first quarter of 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
ITEM 1. LEGAL PROCEEDINGS
We are a defendant in certain alleged class-action lawsuits in which the plaintiffs are current and former California-based employee drivers who allege claims for unpaid wages, failure to provide meal and rest periods, and other items. In the lead class-action, we reached an agreement and recorded a reserve in September 2018 to resolve all pending claims for a class settlement payment of $15 million, subject to Court approval. The United States District Court for the Central District of California entered an order granting final approval of the class settlement on April 23, 2019. We anticipate the overlapping class claims in the other alleged class-action lawsuits that have been stayed pending final approval of the class settlement in the lead class-action case will be dismissed.
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 requested the same, and the arbitration process is on-going. In October 2018 we received the arbitrators’ Interim Award. The details of the Interim Award are confidential and 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. Normal commercial business activity between the parties, including load tendering, load tracing, billing and payments, is expected to continue on a timely basis.
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.
ITEM 1A. RISK FACTORS
|
|
Information regardingExcept as noted below, there have been no material changes to our risk factors appears in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report on Form 10-Q andas previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.
Our business is significantly impacted by the effects of national or international health pandemics on general economic conditions and the operations of our customersand third-party suppliers and service providers.
Our operations can be heavily impacted by the effects of a widespread outbreak of contagious disease, principally the recent outbreak of the COVID-19 virus. This virus has spread throughout multiple countries, including the United States, and in March 2020, the World Health Organization designated COVID-19 as a pandemic. The effects of COVID-19 have and may continue to disrupt or restrict the freight shipping activities of some of our customers, on which our business is dependent. In addition, adverse economic conditions caused by COVID-19 may also require us to increase our reserve for bad debt losses. Furthermore, the continuation of COVID-19 related social and economic disruptions may lead to other events which could negatively impact our operations including service limitations of our third-party purchased transportation providers, reduced availability of drivers and other key employees, disruptions in the procurement of revenue equipment, restrictions at U.S. ports of call, excess capacity or rate reductions within the intermodal or trucking industries, inability of suppliers to continue activities, or volatile financial credit markets. The extent to which the COVID-19 outbreak will impact general economic and business conditions is highly uncertain and unpredictable; however, any of these factors could have a significant adverse effect on our financial condition and results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities
The following table summarizes purchases of our common stock during the three months ended March 31, 2020:
Period | Number of Common Shares Purchased | Average Price Paid Per Common Share Purchased | Total Number of Shares Purchased as Part of a Publicly Announced Plan (1) | Maximum Dollar Amount of Shares That May Yet Be Purchased Under the Plan (in millions) | ||||||||||||
January 1 through January 31, 2020 | - | $ | - | - | $ | 595 | ||||||||||
February 1 through February 29, 2020 | 482,160 | 98.49 | 482,160 | 548 | ||||||||||||
March 1 through March 31, 2020 | 316,168 | 87.63 | 316,168 | 520 | ||||||||||||
Total | 798,328 | $ | 94.19 | 798,328 | $ | 520 |
|
|
ITEM 3. DEFAULTS UPON SENIORSECURITIES AND USE OF PROCEEDS
Not applicable.
|
|
Not applicable.
| ITEM 4. MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5. OTHER INFORMATION |
Not applicable.
| ITEM 6. EXHIBITS |
Index to Exhibits
Exhibit | |||
Number | Exhibits | ||
3.1 | |||
3.2 | |||
| |||
| |||
| |||
| |||
| |||
31.1 | |||
31.2 | |||
32.1 | |||
32.2 | |||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | ||
|
|
|
| Inline XBRL Taxonomy Extension Schema Document |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||
104 | Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101) |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the city of Lowell, Arkansas, on the 26th1st day of April, 2019.May, 2020.
J.B. HUNT TRANSPORT SERVICES, INC. | |||||
(Registrant) | |||||
BY: | |||||
| /s/ | ||||
John N. Roberts, III | |||||
John N. Roberts, III | President and Chief Executive Officer | ||||
(Principal Executive Officer) | |||||
BY: | /s/ John | ||||
John | |||||
Senior Vice President Finance, Controller, Chief Accounting Officer, and Interim Chief Financial Officer (Principal Financial Officer) | |||||