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 September 30, 2019March 31, 2020
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)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,filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller“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, 20September20 30, 2019 was 106,577,902105,460,633.
J.B. HUNT TRANSPORT SERVICES, INC.
Form 10-Q
For The QuarterlyQuarterly Period Ended SeptemberMarch 31, 20 30, 201920
Table of Contents
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| Part I. Financial Information | |||
| Item 1. | Financial Statements | ||
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Condensed Consolidated Statements of Earnings for the Three | 3 | ||
Condensed Consolidated Balance Sheets as of | 4 | ||
| Condensed Consolidated Statements of Stockholders’ Equity for the Three | 5 | ||
Condensed Consolidated Statements of Cash Flows for the | 6 | ||
Notes to Condensed Consolidated Financial Statements as of | 7 | ||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
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Item 4. | Controls and Procedures |
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Part II. Other Information | |||
| Item 1. | Legal Proceedings | 20 | |
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| Item 1A. | Risk Factors | 20 | |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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| Signatures | 23 | ||
Part I. Financial Information |
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ITEM 1. FINANCIAL STATEMENTS
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Operating revenues, excluding fuel surcharge revenues | $ | 2,102,494 | $ | 1,936,653 | $ | 5,954,102 | $ | 5,523,974 | ||||||||
Fuel surcharge revenues | 261,166 | 273,107 | 760,832 | 773,058 | ||||||||||||
Total operating revenues | 2,363,660 | 2,209,760 | 6,714,934 | 6,297,032 | ||||||||||||
Operating expenses: | ||||||||||||||||
Rents and purchased transportation | 1,196,377 | 1,125,386 | 3,282,682 | 3,163,443 | ||||||||||||
Salaries, wages and employee benefits | 554,872 | 495,350 | 1,606,344 | 1,410,942 | ||||||||||||
Depreciation and amortization | 126,803 | 108,801 | 370,728 | 321,807 | ||||||||||||
Fuel and fuel taxes | 114,764 | 117,976 | 344,926 | 341,398 | ||||||||||||
Operating supplies and expenses | 87,044 | 79,225 | 249,480 | 226,352 | ||||||||||||
General and administrative expenses, net of asset dispositions | 49,077 | 42,449 | 140,654 | 112,078 | ||||||||||||
Insurance and claims | 43,956 | 45,594 | 124,963 | 102,464 | ||||||||||||
Operating taxes and licenses | 14,266 | 13,203 | 40,991 | 37,025 | ||||||||||||
Communication and utilities | 8,639 | 7,088 | 25,416 | 23,241 | ||||||||||||
Total operating expenses | 2,195,798 | 2,035,072 | 6,186,184 | 5,738,750 | ||||||||||||
Operating income | 167,862 | 174,688 | 528,750 | 558,282 | ||||||||||||
Net interest expense | 12,357 | 9,961 | 40,153 | 28,969 | ||||||||||||
Earnings before income taxes | 155,505 | 164,727 | 488,597 | 529,313 | ||||||||||||
Income taxes | 37,095 | 33,617 | 116,953 | 128,409 | ||||||||||||
Net earnings | $ | 118,410 | $ | 131,110 | $ | 371,644 | $ | 400,904 | ||||||||
Weighted average basic shares outstanding | 106,735 | 109,254 | 107,610 | 109,484 | ||||||||||||
Basic earnings per share | $ | 1.11 | $ | 1.20 | $ | 3.45 | $ | 3.66 | ||||||||
Weighted average diluted shares outstanding | 107,692 | 110,235 | 108,569 | 110,591 | ||||||||||||
Diluted earnings per share | $ | 1.10 | $ | 1.19 | $ | 3.42 | $ | 3.63 | ||||||||
Dividends declared per common share | $ | 0.26 | $ | 0.24 | $ | 0.78 | $ | 0.72 | ||||||||
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.
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J.B. HUNT TRANSPORT SERVICES, INC. | |||||||
Condensed Consolidated Balance Sheets | |||||||
(in thousands) |
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 75,132 | $ | 7,600 | $ | 48,454 | $ | 35,000 | ||||||||
Trade accounts receivable, net | 1,051,027 | 1,051,698 | 978,280 | 1,011,829 | ||||||||||||
Prepaid expenses and other | 257,297 | 443,683 | 371,235 | 434,470 | ||||||||||||
Total current assets | 1,383,456 | 1,502,981 | 1,397,969 | 1,481,299 | ||||||||||||
Property and equipment, at cost | 5,615,289 | 5,329,243 | 5,682,573 | 5,640,806 | ||||||||||||
Less accumulated depreciation | 1,964,927 | 1,884,132 | 2,064,273 | 2,019,940 | ||||||||||||
Net property and equipment | 3,650,362 | 3,445,111 | 3,618,300 | 3,620,866 | ||||||||||||
Goodwill and intangible assets, net | 189,863 | 105,157 | 199,437 | 202,832 | ||||||||||||
Other assets, net | 162,656 | 38,398 | ||||||||||||||
Other assets | 164,336 | 165,857 | ||||||||||||||
Total assets | $ | 5,386,337 | $ | 5,091,647 | $ | 5,380,042 | $ | 5,470,854 | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current portion of long-term debt | $ | - | $ | 250,706 | ||||||||||||
Trade accounts payable | 654,959 | 709,736 | $ | 497,649 | $ | 602,601 | ||||||||||
Claims accruals | 281,758 | 275,139 | 265,540 | 279,590 | ||||||||||||
Accrued payroll | 66,692 | 80,922 | 75,736 | 68,220 | ||||||||||||
Other accrued expenses | 71,615 | 35,845 | 70,451 | 85,355 | ||||||||||||
Total current liabilities | 1,075,024 | 1,352,348 | 909,376 | 1,035,766 | ||||||||||||
Long-term debt | 1,293,312 | 898,398 | 1,302,756 | 1,295,740 | ||||||||||||
Other long-term liabilities | 180,367 | 96,056 | 170,944 | 173,241 | ||||||||||||
Deferred income taxes | 644,105 | 643,461 | 714,548 | 699,078 | ||||||||||||
Stockholders' equity | 2,193,529 | 2,101,384 | 2,282,418 | 2,267,029 | ||||||||||||
Total liabilities and stockholders' equity | $ | 5,386,337 | $ | 5,091,647 | $ | 5,380,042 | $ | 5,470,854 | ||||||||
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Three Months Ended September 30, 2018 and 2019 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
Common | Paid-in | Retained | Treasury | Stockholders’ | ||||||||||||||||
Stock | Capital | Earnings | Stock | Equity | ||||||||||||||||
Balances at June 30, 2018 | $ | 1,671 | $ | 337,290 | $ | 4,021,055 | $ | (2,326,654 | ) | $ | 2,033,362 | |||||||||
Comprehensive income: | ||||||||||||||||||||
Net earnings | - | - | 131,110 | - | 131,110 | |||||||||||||||
Cash dividend declared and paid ($0.24 per share) | - | - | (26,202 | ) | - | (26,202 | ) | |||||||||||||
Purchase of treasury shares | - | - | - | (50,000 | ) | (50,000 | ) | |||||||||||||
Share-based compensation | - | 11,184 | - | - | 11,184 | |||||||||||||||
Restricted share issuances, net of stock repurchased for payroll taxes and other | - | (16,497 | ) | - | (2,379 | ) | (18,876 | ) | ||||||||||||
Balances at September 30, 2018 | $ | 1,671 | $ | 331,977 | $ | 4,125,963 | $ | (2,379,033 | ) | $ | 2,080,578 | |||||||||
Balances at June 30, 2019 | $ | 1,671 | $ | 367,166 | $ | 4,385,391 | $ | (2,618,872 | ) | $ | 2,135,356 | |||||||||
Comprehensive income: | ||||||||||||||||||||
Net earnings | - | - | 118,410 | - | 118,410 | |||||||||||||||
Cash dividend declared and paid ($0.26 per share) | - | - | (27,809 | ) | - | (27,809 | ) | |||||||||||||
Purchase of treasury shares | - | - | - | (35,946 | ) | (35,946 | ) | |||||||||||||
Share-based compensation | - | 13,850 | - | - | 13,850 | |||||||||||||||
Restricted share issuances, net of stock repurchased for payroll taxes and other | - | (13,073 | ) | - | 2,741 | (10,332 | ) | |||||||||||||
Balances at September 30, 2019 | $ | 1,671 | $ | 367,943 | $ | 4,475,992 | $ | (2,652,077 | ) | $ | 2,193,529 | |||||||||
Nine Months Ended September 30, 2018 and 2019 | ||||||||||||||||||||
Additional | ||||||||||||||||||||
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 | - | - | 400,904 | - | 400,904 | |||||||||||||||
Cash dividend declared and paid ($0.72 per share) | - | - | (78,785 | ) | - | (78,785 | ) | |||||||||||||
Purchase of treasury shares | - | - | - | (100,027 | ) | (100,027 | ) | |||||||||||||
Share-based compensation | - | 37,184 | - | - | 37,184 | |||||||||||||||
Restricted share issuances, net of stock repurchased for payroll taxes and other | - | (16,018 | ) | - | (2,005 | ) | (18,023 | ) | ||||||||||||
Balances at September 30, 2018 | $ | 1,671 | $ | 331,977 | $ | 4,125,963 | $ | (2,379,033 | ) | $ | 2,080,578 | |||||||||
Balances at December 31, 2018 | $ | 1,671 | $ | 340,457 | $ | 4,188,435 | $ | (2,429,179 | ) | $ | 2,101,384 | |||||||||
Comprehensive income: | ||||||||||||||||||||
Net earnings | - | - | 371,644 | - | 371,644 | |||||||||||||||
Cash dividend declared and paid ($0.78 per share) | - | - | (84,087 | ) | - | (84,087 | ) | |||||||||||||
Purchase of treasury shares | - | - | - | (225,680 | ) | (225,680 | ) | |||||||||||||
Share-based compensation | - | 42,154 | - | - | 42,154 | |||||||||||||||
Restricted share issuances, net of stock repurchased for payroll taxes and other | - | (14,668 | ) | - | 2,782 | (11,886 | ) | |||||||||||||
Balances at September 30, 2019 | $ | 1,671 | $ | 367,943 | $ | 4,475,992 | $ | (2,652,077 | ) | $ | 2,193,529 | |||||||||
See Notes to Condensed Consolidated Financial Statements.
J.B. HUNT TRANSPORT SERVICES, INC. Condensed Consolidated Statements of Stockholders' Equity (in thousands, except per share amounts) | |||||||
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(unaudited) |
Nine Months Ended | ||||||||
September 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net earnings | $ | 371,644 | $ | 400,904 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 370,728 | 321,807 | ||||||
Noncash lease expense | 28,731 | - | ||||||
Share-based compensation | 42,154 | 37,184 | ||||||
Loss on sale of revenue equipment and other | 9,085 | 8,441 | ||||||
Deferred income taxes | 644 | (23,442 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable | 9,579 | (174,871 | ) | |||||
Other assets | 16,356 | 4,647 | ||||||
Trade accounts payable | 64,578 | 77,257 | ||||||
Income taxes payable or receivable | 89,975 | 72,926 | ||||||
Claims accruals | (4,749 | ) | 25,043 | |||||
Accrued payroll and other accrued expenses | (61,130 | ) | 27,707 | |||||
Net cash provided by operating activities | 937,595 | 777,603 | ||||||
Cash flows from investing activities: | ||||||||
Additions to property and equipment | (722,371 | ) | (676,097 | ) | ||||
Net proceeds from sale of equipment | 135,764 | 91,120 | ||||||
Business acquisition | (98,232 | ) | - | |||||
Changes in other assets | (77 | ) | (1,278 | ) | ||||
Net cash used in investing activities | (684,916 | ) | (586,255 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuances of long-term debt | 700,000 | - | ||||||
Payments on long-term debt | (250,000 | ) | - | |||||
Proceeds from revolving lines of credit and other | 1,590,506 | 2,407,462 | ||||||
Payments on revolving lines of credit and other | (1,904,000 | ) | (2,409,000 | ) | ||||
Purchase of treasury stock | (225,680 | ) | (100,027 | ) | ||||
Stock repurchased for payroll taxes and other | (11,886 | ) | (18,023 | ) | ||||
Dividends paid | (84,087 | ) | (78,785 | ) | ||||
Net cash used in financing activities | (185,147 | ) | (198,373 | ) | ||||
Net change in cash and cash equivalents | 67,532 | (7,025 | ) | |||||
Cash and cash equivalents at beginning of period | 7,600 | 14,612 | ||||||
Cash and cash equivalents at end of period | $ | 75,132 | $ | 7,587 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 42,111 | $ | 31,479 | ||||
Income taxes | $ | 33,738 | $ | 81,334 | ||||
Noncash investing activities | ||||||||
Accruals for equipment received | $ | 26,934 | $ | 30,843 | ||||
Additional | ||||||||||||||||||||
Common | Paid-in | Retained | Treasury | Stockholders’ | ||||||||||||||||
Stock | Capital | Earnings | Stock | Equity | ||||||||||||||||
Balances at December 31, 2018 | $ | 1,671 | $ | 340,457 | $ | 4,188,435 | $ | (2,429,179 | ) | $ | 2,101,384 | |||||||||
Comprehensive income: | ||||||||||||||||||||
Net earnings | - | - | 119,601 | - | 119,601 | |||||||||||||||
Cash dividend declared and paid ($0.26 per share) | - | - | (28,272 | ) | - | (28,272 | ) | |||||||||||||
Share-based compensation | - | 13,571 | - | - | 13,571 | |||||||||||||||
Restricted share issuances, net of stock repurchased for payroll taxes | - | (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 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 thousands)
(unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities: | ||||||||
Net earnings | $ | 104,834 | $ | 119,601 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 130,095 | 119,930 | ||||||
Noncash lease expense | 11,411 | 8,484 | ||||||
Share-based compensation | 18,063 | 13,571 | ||||||
Loss on sale of revenue equipment and other | 1,472 | 2,252 | ||||||
Deferred income taxes | 15,470 | 25,030 | ||||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable | 33,549 | 58,109 | ||||||
Other assets | (60,029 | ) | (54,421 | ) | ||||
Trade accounts payable | (5,392 | ) | (14,325 | ) | ||||
Income taxes payable or receivable | 23,066 | 12,213 | ||||||
Claims accruals | (7,938 | ) | (920 | ) | ||||
Accrued payroll and other accrued expenses | (15,438 | ) | (38,783 | ) | ||||
Net cash provided by operating activities | 249,163 | 250,741 | ||||||
Cash flows from investing activities: | ||||||||
Additions to property and equipment | (166,814 | ) | (257,658 | ) | ||||
Net proceeds from sale of equipment | 38,078 | 45,512 | ||||||
Business acquisition | - | (98,543 | ) | |||||
Change in other assets | 28 | (15 | ) | |||||
Net cash used in investing activities | (128,708 | ) | (310,704 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuances of long-term debt | - | 700,000 | ||||||
Payments on long-term debt | - | (250,000 | ) | |||||
Proceeds from revolving lines of credit and other | 220,607 | 730,618 | ||||||
Payments on revolving lines of credit and other | (220,100 | ) | (1,045,100 | ) | ||||
Purchase of treasury stock | (75,193 | ) | - | |||||
Stock repurchased for payroll taxes | (3,627 | ) | (2,520 | ) | ||||
Dividends paid | (28,688 | ) | (28,272 | ) | ||||
Net cash provided by/(used in) financing activities | (107,001 | ) | 104,726 | |||||
Net change in cash and cash equivalents | 13,454 | 44,763 | ||||||
Cash and cash equivalents at beginning of period | 35,000 | 7,600 | ||||||
Cash and cash equivalents at end of period | $ | 48,454 | $ | 52,363 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 21,673 | $ | 14,363 | ||||
Income taxes | $ | 1,173 | $ | 2,163 | ||||
Noncash investing activities | ||||||||
Accruals for equipment received | $ | 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, 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-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.
Use 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 expect uncertainties around our key accounting estimates to continue to evolve depending on the duration and degree of impact 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 consolidated financial statements as soon as they become known.
Recent Accounting PronouncementPronouncement Adopted in 2020
In June 2016, the Financial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (ASU) 2016-13, Financial Instruments – Credit Losses, which will replacereplaced the currentexisting incurred loss methodology used for establishing a provision against financial assets, including accounts receivable, with a forward-looking expected loss methodology for accounts receivable, loans and other financial instruments. We will adoptadopted the new standard on January 1, 2020, using the cumulative-effect method. The adoption of the new guidance isdid not expected to have a material impact on our financial statements.
Accounting Pronouncement Adopted in 2019
In February 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases, which requires lessees to recognize a right-of-use asset and a lease liability for most leases on the balance sheet as well as other qualitative and quantitative disclosures. ASU 2016-02 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. We adopted the standard using this optional transition method.
The FASB has provided certain practical expedients in applying the standard. Of the allowed practical expedients within the standard applicable to our operations, we elected the package of practical expedients which, among other things, allowed us to carry forward the historical lease classification upon adoption 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 January 1, 2019. The adoption of the standard did not have a material impact on our Condensed Consolidated Statements of Earnings, Condensed Consolidated Statements of Cash Flows or debt covenant compliance.
LeasesAccounts Receivable and Allowance
We recognize a right-of-use asset and a lease liability on the effective date of a lease agreement. Right-of-use assets represent our rightOur trade accounts receivable includes accounts receivable reduced by an allowance for uncollectible accounts. Receivables are recorded at amounts billed to use an underlying assetcustomers when loads are delivered or services are performed. The allowance for uncollectible accounts is calculated over the lease termlife of the underlying receivable and lease liabilities represent the obligationis based on historical experience; any known trends or uncertainties related to make lease payments resulting from the lease agreement. We initially record these assetscustomer billing and liabilitiesaccount collectability; current economic conditions; and reasonable and supportable economic forecasts, each applied to segregated risk pools based on the present valuebusiness segment that generated the receivable. The adequacy of lease payments overour allowance is reviewed quarterly. Balances are charged against the lease term calculated usingallowance when it is determined the receivable will not be recovered. The allowance for uncollectible accounts for our incremental borrowing rate applicabletrade 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 increases to the leased asset orallowance for uncollectible accounts during the implicit rate within the agreement if it is readily determinable. Lease agreements with lease and nonlease components are combined 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 12first months or less, short-term leases, arequarter not2020. recorded on the balance sheet. Lease expense for short-term and long-term operating leases is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.
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 both the thirdfirst quarter 20192020, and 2018. Duringcompared to 0.9 million shares during the ninefirst months endedquarter September 30, 2019 2019.and 2018, the dilutive effect of restricted and performance share units was 1.0 million shares and 1.1 million shares, respectively.
3. | Share-based Compensation |
The following table summarizes the components of our share-based compensation program expense (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
Restricted share units: | Restricted share units: | |||||||||||||||||||||||
Pretax compensation expense | $ | 10,309 | $ | 7,626 | $ | 30,942 | $ | 26,061 | $ | 14,679 | $ | 9,741 | ||||||||||||
Tax benefit | 2,660 | 1,983 | 7,983 | 6,776 | 3,758 | 2,435 | ||||||||||||||||||
Restricted share unit expense, net of tax | $ | 7,649 | $ | 5,643 | $ | 22,959 | $ | 19,285 | $ | 10,921 | $ | 7,306 | ||||||||||||
Performance share units: | Performance share units: | |||||||||||||||||||||||
Pretax compensation expense | $ | 3,541 | $ | 3,557 | $ | 11,212 | $ | 11,123 | $ | 3,384 | $ | 3,830 | ||||||||||||
Tax benefit | 914 | 925 | 2,893 | 2,892 | 866 | 957 | ||||||||||||||||||
Performance share unit expense, net of tax | $ | 2,627 | $ | 2,632 | $ | 8,319 | $ | 8,231 | $ | 2,518 | $ | 2,873 | ||||||||||||
As of September 30, 2019,March 31, 2020, we had $68.5$95.3 million and $16.5$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 averageweighted-average period of approximately 3.33.2 years for restricted share units and 2.22.5 years for performance share units. During the ninefirst months endedquarter September 30, 2019, 2020,we issued 225,625 shares for vested restricted share units, 127,140 shares for vested performance share units. Of these totals, 225,45534,781 shares for vested restricted share units and 75,69944,870 shares for vested performance share units were issued during the third quarter 2019.
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):
September 30, 2019 | December 31, 2018 | |||||||
Senior revolving line of credit | $ | - | $ | 307.1 | ||||
Senior notes | 1,293.3 | 842.0 | ||||||
Less current portion of long-term debt | - | (250.7 | ) | |||||
Total long-term debt | $ | 1,293.3 | $ | 898.4 | ||||
March 31, 2020 | December 31, 2019 | |||||||
Senior notes | 1,302.8 | 1,295.7 | ||||||
Senior Revolving Line of Credit
At September 30, 2019,March 31, 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-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 September 30, 2019,March 31, 2020, we had 0 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 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 September 30, 2019.
March 31, 2020.
| 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 3.52%3.05% for our $350 million of 3.30% senior notes at September 30, 2019.March 31, 2020. The swap expires when the corresponding senior notes are due. The fair value of this swap is recorded in other assets in our Condensed Consolidated Balance Sheet at September 30, 2019.March 31, 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 September 30, 2019,March 31, 2020, $145520 million of thisthe combined authorization was remaining. We purchased approximately 380,000800,000 shares, or $36$75 million, of our common stock under our repurchase authorization during the three months ended September 30, 2019 and approximately 2.4 million shares, or $226 million, of our common stock under our repurchase authorization during the nine months ended September 30, 2019.March 31, 2020. On July 18, 2019,January 22, 2020, we announced an increase in our Board of Directors declared a regular quarterly cash dividend offrom $0.26 to $0.27, which was paid August 16, 2019,February 21, 2020, to stockholders of record on August 2, 2019.February 7, 2020. On October 14, 2019,April 23, 2020, our Board of Directors declared a regular quarterly dividend of $0.26$0.27 per common share, which will be paid on NovemberMay 22, 2019,2020, to stockholders of record on NovemberMay 8, 2019.
2020.
7. | 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) or inputs, other than quoted prices in active markets, that are observable either directly or indirectly (Level 2). The following are assets and liabilities measured at fair value on a recurring basis at September 30, 2019 (in(in millions):
Asset/(Liability) Balance | Asset/(Liability) Balance | ||||||||||||||||||
September 30, 2019 | December 31, 2018 | Input Level | March 31, 2020 | December 31, 2019 | Input Level | ||||||||||||||
Trading investments | $ | 19.4 | $ | 15.7 | 1 | $ | 17.9 | $ | 20.4 | 1 | |||||||||
Interest rate swaps | $ | 2.9 | $ | (4.8 | ) | 2 | $ | 11.4 | $ | 4.8 | 2 | ||||||||
Senior notes, net of unamortized discount and debt issuance costs | $ | (351.4 | ) | $ | (591.3 | ) | 2 | $ | (360.1 | ) | $ | (353.1 | ) | 2 | |||||
The fair value of trading investments has been measured using the market approach (Level 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), which include relevant interest rate curve inputs. Trading investments are classified in other assets in our Consolidated Balance Sheets. Depending on their period end fair value,and interest rate swaps are classified in other assets other long-term liabilities, or other accrued expenses in our 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 September 30, 2019,March 31, 2020, using the income approach (Level 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 $941.9$942.7 million and $1.02 billion,$970.7 million, respectively.
The carrying amounts of all other instruments at September 30, 2019,March 31, 2020, approximate their fair value due to the short maturity of these instruments.
8. | Income Taxes |
Our effective income tax rate was 23.9%26.5% for the three months ended September 30, 2019,March 31, 2020, compared to 20.4%22.7% for the three months ended September 30, 2018.March 31, 2019. Our effective income tax rate was 23.9% for the firstnine months of 2019, compared to 24.3% in 2018.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 September 30, 2019,March 31, 2020, we had a total of $52.4$52.9 million in gross unrecognized tax benefits, which are a component of other long-term liabilities onin our Condensed Consolidated Balance Sheets. Of this amount, $43.2$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 September 30, 2019.
March 31, 2020.
9. | Legal Proceedings |
We were a defendant in a certain alleged class-action lawsuit in which the plaintiffs were current and former California-based employee drivers who alleged claims for unpaid wages, failure to provide meal and rest periods, and other items. 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 in April 2019.
In January 2017 we exercised our right to utilize the arbitration process to review the division of revenue collected beginning May 1, 2016, as well as to clarify other issues, under our Joint Service Agreement with BNSF Railway Company (BNSF). BNSF requested the same. In October 2018 we received the arbitrators’ Interim Award. The details of the Interim Award are confidential, but it required 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 made further submissions to the Panel on the revenue divisions for calendar year 2018 and going forward, as well as other confidential issues raised during the arbitration process. 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.
On October 24, 2019 the arbitrators issued a Final Award. The detailsOn January 17, 2020, we filed under seal in the United States District Court for the Western District of Arkansas a motion to confirm and enforce the Final Award, are confidential; however, we have recorded pre-tax chargesseeking the Court’s specific enforcement of certain confidential contractual rights the arbitrators 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 thirdfirst quarter 20192020 of $26.8 million related to certain charges claimed by BNSF for the period January 1, 2018 through December 31, 2018 and no material adjustments for the period January 1, 2019 through September 30, 2019. In addition, we have recorded a $17.4an $8.2 million charge for legal fees, cost and interest claimed byresulting from an adjusted calculation of the revenue divisions owed to BNSF for a total of $44.2 million.
In June 2019, we recorded pre-tax charges of $20 million forunder the settlement of a casualty claim within our DCS segment.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.
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As of September 30, 2019, we had various obligations remaining under operating lease arrangements related primarily to the rental of maintenance and support facilities, cross-dock and delivery system facilities, office space, parking yards and equipment. Many of these leases include one or more options, at our discretion, to renew and extend the agreement beyond the current lease expiration date or to terminate the agreement prior to the lease expiration date. These options are included in the calculation of our operating lease liability when it becomes reasonably certain the option will be exercised. Our lease obligations typically do not include options to purchase the leased property, nor do they contain residual value guarantees or material restrictive covenants. Operating leases with an initial term of more than 12 months are included in our Condensed Consolidated Balance Sheets as discounted liabilities and corresponding right-of-use assets consisting of the following (in millions):
Asset/(Liability) Balance | ||||
September 30, 2019 | ||||
Right-of-use assets | $ | 122.8 | ||
Lease liabilities, current | $ | (42.2 | ) | |
Lease liabilities, long-term | $ | (79.7 | ) | |
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 September 30, 2019, the weighted-average remaining lease term for our outstanding operating lease obligations was 4.2 years and the weighted-average discount rate was 3.5%. Future minimum lease payments under these operating leases as of September 30, 2019, are as follows (in millions):
Year one | $ | 42.8 | ||
Year two | 34.2 | |||
Year three | 24.2 | |||
Year four | 15.2 | |||
Year five | 6.4 | |||
Thereafter | 8.3 | |||
Total lease payments | 131.1 | |||
Less interest | (9.2 | ) | ||
Present value of lease liabilities | $ | 121.9 |
During the three and nine months ended September 30, 2019, cash paid for amounts included in the measurement of operating lease liabilities were $12.1 million and $32.7 million, respectively, while $11.8 million and $31.8 million, respectively, of operating lease expense was recognized on a straight-line basis for the same periods. During the third quarter 2019, a total of $8.7 million of right-of-use assets were obtained in exchange for new operating lease liabilities. New right-of-use assets obtained during the nine months ended September 30, 2019 was $48.2 million, of which, $16.0 million were obtained through the business combination discussed at Note 11, Acquisitions.
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On January 7, 2019, we entered into an asset purchase agreement to acquire substantially all of the assets and assume certain specified liabilities of the affiliated entities of Cory 1st Choice Home Delivery (Cory), subject to customary closing conditions. The closing of the transaction was effective on February 15, 2019, with a purchase price of $100 million. Total consideration paid in cash under the Cory agreement was $98.2 million and consisted of the agreed upon purchase price adjusted for estimated working capital adjustments. In addition, we incurred approximately $2.9 million in transaction costs which are recorded in general and administrative expenses, net of asset dispositions in our Condensed Consolidated Statements of Earnings. The Cory acquisition was accounted for as a business combination and operates within our Dedicated Contract Services® business segment. Assets acquired and liabilities assumed were recorded in our Condensed Consolidated Balance Sheet at their estimated fair values, as of the closing date, using cost, market data and valuation techniques that reflect management’s judgment and estimates. As a result of the acquisition, we recorded approximately $45.8 million of finite-lived intangible assets and approximately $48.2 million of goodwill. Goodwill consists of acquiring and retaining the Cory existing network and expected synergies from the combination of operations. The following table outlines the consideration transferred and purchase price allocation at their respective estimated fair values as of February 15, 2019 (in millions):
Consideration | $ | 98.2 | ||
Accounts receivable | 8.9 | |||
Other current assets | 0.3 | |||
Property and equipment | 0.8 | |||
Right-of-use assets | 16.0 | |||
Intangible | 45.8 | |||
Accounts payable and accrued liabilities | (5.8 | ) | ||
Lease liabilities | (16.0 | ) | ||
Goodwill | $ | 48.2 |
10. Business Segments |
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As discussed in NoteIn 11, Acquisitions, during the nine months ended September 30, 2019,March 2020, we recorded additional goodwillchanged the way we internally evaluate the operating performance of approximately $48.2 millionour business units and additional finite-lived intangible assetsadopted a new segment reporting structure. As part of approximately $45.8 million in connection with the Cory acquisition. Total goodwill was $88.3 million and $40.1 million at September 30, 2019, and December 31, 2018, respectively. All goodwill is assigned tothis new structure, we separated our Dedicated Contract Services® business segment and 0 impairment losses have been recorded for goodwill as ofinto September 30, 2019. twoPrior 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 reportable segments: Dedicated Contract Services® segment. Identifiable intangible assets consist of the following (in millions):
Weighted Average | ||||||||||||
| September 30, | December 31, | Amortization | ||||||||||
2019 | 2018 | Period | ||||||||||
Finite-lived intangibles: | ||||||||||||
Non-competition agreements | $ | 6.4 | $ | 0.2 | 6.9 | |||||||
Customer relationships | 111.1 | 75.3 | 11.6 | |||||||||
Trade names | 3.8 | - | 2.0 | |||||||||
LDC Network | 10.5 | 10.5 | 10.0 | |||||||||
Total finite-lived intangibles | 131.8 | 86.0 | ||||||||||
Less accumulated amortization | (30.2 | ) | (20.9 | ) | ||||||||
Total identifiable intangible assets, net | $ | 101.6 | $ | 65.1 | ||||||||
Our finite-lived intangible assets have 0 assigned residual values.
Intangible asset amortization expense was $3.5 million during the third quarter 2019, compared to $2.2 million during third quarter 2018. During the nine months ended September 30, 2019 Services and 2018, intangible asset amortization expense was $9.2 million and $6.5 million, respectively. Estimated amortization expense for our finite-lived intangible assets is expected to be approximately $12.4 million for 2019, $12.7 million for 2020, $11.2 million for 2021 and $10.8 million for 2022 and 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.
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WeFinal Mile Services®. Accordingly, we reported 45 distinct business segments during the three and ninemonths ended September 30, 2019March 31, 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 | Assets (Excludes intercompany accounts) As of | ||||||||||||||||||
September 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | ||||||||||||||||
JBI | $ | 2,338 | $ | 2,221 | $ | 2,228 | $ | 2,217 | |||||||||||
DCS | 1,878 | 1,595 | 1,410 | 1,445 | |||||||||||||||
ICS | 208 | 212 | 203 | 208 | |||||||||||||||
FMS | 418 | 432 | |||||||||||||||||
JBT | 253 | 307 | 242 | 241 | |||||||||||||||
Other (includes corporate) | 709 | 757 | 879 | 928 | |||||||||||||||
Total | $ | 5,386 | $ | 5,092 | $ | 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 | ||||
Operating Revenues | ||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Operating Income/(Loss) For The Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
JBI | $ | 1,240 | $ | 1,218 | $ | 3,477 | $ | 3,453 | $ | 102.2 | $ | 103.3 | ||||||||||||
DCS | 696 | 543 | 1,978 | 1,567 | 72.9 | 50.1 | ||||||||||||||||||
ICS | 337 | 346 | 972 | 989 | (18.9 | ) | 7.0 | |||||||||||||||||
FMS | (3.3 | ) | 0.2 | |||||||||||||||||||||
JBT | 94 | 106 | 296 | 300 | 1.8 | 7.2 | ||||||||||||||||||
Subtotal | 2,367 | 2,213 | 6,723 | 6,309 | ||||||||||||||||||||
Inter-segment eliminations | (3 | ) | (3 | ) | (8 | ) | (12 | ) | ||||||||||||||||
Total | $ | 2,364 | $ | 2,210 | $ | 6,715 | $ | 6,297 | $ | 154.7 | $ | 167.8 | ||||||||||||
Operating Income | ||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Depreciation and Amortization Expense For The Three Months Ended March 31, | ||||||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | |||||||||||||||||||
JBI | $ | 88.7 | $ | 120.3 | $ | 316.4 | $ | 368.6 | $ | 46.5 | $ | 44.4 | ||||||||||||
DCS | 78.3 | 35.0 | 189.0 | 134.0 | 56.3 | 51.0 | ||||||||||||||||||
ICS | (5.6 | ) | 10.2 | 0.8 | 34.0 | 0.4 | 0.9 | |||||||||||||||||
FMS | 8.1 | 6.4 | ||||||||||||||||||||||
JBT | 6.6 | 9.2 | 22.7 | 21.8 | 8.2 | 8.8 | ||||||||||||||||||
Other (includes corporate) | (0.1 | ) | - | (0.1 | ) | (0.1 | ) | 10.6 | 8.4 | |||||||||||||||
Total | $ | 167.9 | $ | 174.7 | $ | 528.8 | $ | 558.3 | $ | 130.1 | $ | 119.9 | ||||||||||||
Depreciation and Amortization Expense | ||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
JBI | $ | 45.8 | $ | 43.1 | $ | 134.9 | $ | 128.1 | ||||||||
DCS | 63.1 | 50.3 | 182.0 | 146.4 | ||||||||||||
ICS | 0.9 | 0.4 | 2.7 | 1.1 | ||||||||||||
JBT | 8.2 | 9.3 | 25.4 | 29.5 | ||||||||||||
Other (includes corporate) | 8.8 | 5.7 | 25.7 | 16.7 | ||||||||||||
Total | $ | 126.8 | $ | 108.8 | $ | 370.7 | $ | 321.8 | ||||||||
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,expense; determination that independent contractors are employees, retention of key employees, terrorist attacks or actions, acts of war, adverse weather conditions, disruption or failure of information systems,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, and Note 1, General, to the financial statements of this report on Form 10-Q, contain summaries2019, 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 September 30, 2019 to Three Months Ended SeptemberMarch 31, 2020 30, to Three Months Ended March 31, 201819
Summary of Operating Segment Results For the Three Months Ended September 30, (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 | $ | 1,240 | $ | 1,218 | $ | 88.7 | $ | 120.3 | $ | 1,150 | $ | 1,088 | $ | 102.2 | $ | 103.3 | ||||||||||||||||
DCS | 696 | 543 | 78.3 | 35.0 | 542 | 492 | 72.9 | 50.1 | ||||||||||||||||||||||||
ICS | 337 | 346 | (5.6 | ) | 10.2 | 335 | 301 | (18.9 | ) | 7.0 | ||||||||||||||||||||||
FMS | 154 | 110 | (3.3 | ) | 0.2 | |||||||||||||||||||||||||||
JBT | 94 | 106 | 6.6 | 9.2 | 105 | 102 | 1.8 | 7.2 | ||||||||||||||||||||||||
| Other (includes corporate) | - | - | (0.1 | ) | - | |||||||||||||||||||||||||||
Subtotal | 2,367 | 2,213 | 167.9 | 174.7 | 2,286 | 2,093 | 154.7 | 167.8 | ||||||||||||||||||||||||
Inter-segment eliminations | (3 | ) | (3 | ) | - | - | (5 | ) | (3 | ) | - | - | ||||||||||||||||||||
| $ | 2,364 | $ | 2,210 | $ | 167.9 | $ | 174.7 | |||||||||||||||||||||||||
Total | $ | 2,281 | $ | 2,090 | $ | 154.7 | $ | 167.8 | ||||||||||||||||||||||||
Total consolidated operating revenues were $2.36increased to $2.28 billion for the thirdfirst quarter 2020, a 9% increase from $2.09 billion in the first quarter 2019, compared to $2.21 billion for the third quarter 2018. Current quarter total operating revenue,and a 10% increase excluding fuel surcharges, increased 9% versus the comparable quarter in 2018.surcharge revenues. This increase in operating revenues was primarily driven by a 7% increase in load volume in JBI, a 10% increase in revenues in DCS related to new customer contracts and higher fleet utilization, a 2% increase in load volume and a favorable change in customer freight mix in ICS and a 3% increase in JBT revenue, primarily due to a 2%15% increase in load volume. In addition, our newly reported FMS segment increased revenue per load39% over the first quarter 2019, primarily due to two business acquisitions completed in JBI, a 13% increase in revenue producing trucks and a 9% increase in asset productivity in DCS,2019. These overall increases were partially offset by a 4%1% decrease in JBI revenue per load volumesand lower rates and changes in ICS, and a 5% decrease in rates per loaded milecustomer mix in JBT.
JBI segment revenue increased 2%6% to $1.24$1.15 billion during the thirdfirst quarter 2019,2020, compared with $1.22$1.09 billion in 2018. This2019. Load volumes during the first quarter 2020 increased 7% over the same period 2019. Transcontinental loads increased 11% during the first quarter 2020, and Eastern network load volume was up 1% compared to the first quarter 2019. The overall increase in segment revenueload volume was primarilypartially offset by a result of a 2% increase1% decrease in revenue per load, which is determined by the combination of changes in freight mix, customer rates, fuel surcharges and fuel surcharge revenue, compared to a year ago.freight mix. Revenue per load excluding fuel surcharges increased 5% compared to third quarter 2018. Load volumes forsurcharge revenue was flat year-over-year. JBI reported improved year-over-year tractor and container utilization through the third quarter 2019 were flat when compared to 2018.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 our easternMarch and escalated through the end of the first quarter 2020. These load volume disruptions and resulting network decreased 11%, while transcontinental loads increased 7% overimbalance could continue throughout the third quarter 2018. Operating incomeremainder of our2020, as a result of the overall economic effects caused by the ongoing COVID-19 pandemic. JBI segment operating income decreased 26%1%, to $88.7$102.2 million in 2019,the first quarter 2020, from $120.3$103.3 million in 2018. Benefits from customer rate increases were2019. The increase in revenue was more than offset by higheran increase in rail purchased transportation costs, increased box repositioning costs, lower box turns and higher driver recruiting expenses. Current period operating income was further impacted by a $26.8which included an $8.2 million charge to rail purchase transportation expenseaccrual resulting from an adjusted calculation of the issuancerevenue divisions owed to BNSF Railway Company (BNSF) for 2019 related to the final award of an award regarding our completed arbitration with BNSF issued in 2019; higher empty repositioning and network balancing 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 $17.4 million chargeone-time COVID-19 related bonus paid to insurance and claims expense, for arbitration related legal fees, cost and interest claimed by BNSF. Both of these items are further discussed in Part II, Item 1, Legal Proceedings of this report on Form 10-Q. Third quarter 2018 operating income included $27.3 million in charges for arbitrationemployee drivers and other legal claimskey field personnel; and a customer bankruptcy. Excluding these 2018 charges andhigher costs for dray repositioning compared to the 2019 arbitration related charges of $44.2 million, operating income for thirdfirst quarter 2019, decreased 10%. Third quarter 20192019. The current period ended with approximately 96,70096,480 units of trailing capacity and 5,6435,492 power units assigned to the dray fleet.
DCS segment revenue increased 28%10% to $696$542 million in 2019,the first quarter 2020 from $543$492 million in 2018.2019. Productivity, defined as revenue per truck per week, increased by approximately 9% versus 2018, while productivity2% when compared to 2019. Productivity excluding fuel surcharges increased by approximately 11% from a year ago. The increase in productivity was3%, primarily a result ofdue to customer rate increases, better integration of assets between customer accounts, customer rate increases, and increased customer supply chain fluidity. In addition, the growth in DCS revenue includes an increase of $53 million in Final Mile Services (FMS) revenue, the majority of which was derived fromfluidity largely attributed to a mild winter when compared to the first quarter 2019 Cory acquisition.2019. A net additional 1,277430 revenue producing trucks were in the fleet by the end of the currentfirst quarter 2020 compared to priora year ago, primarily from private fleet conversions and growth in FMS induring the current and prior periods. Customer retention ratesAs 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 above 98%.slower during the remainder of 2020. DCS segment operating income increased 46% to $72.9 million in the first quarter 2020, from $50.1 million in 2019. The increase in operating income was due primarily to increased fleet productivity and the absence of any significant implementation or weather-related costs in first quarter 2020, compared to the first quarter 2019. Operating income of our DCS segment increased 124% to $78.3 million in 2019, from $35.0 million in 2018. Third quarter 2018 operating income included $8.4 million in charges for legal claims. Excluding these 2018 charges, operating income for third quarter 2019, increased 80%. The increase is primarily due to increased productivity, additional trucks under contract and more consistent and predictable contract start-up costs,was partially offset by higher costs fromDCS’s $6.5 million portion of the expanded FMS network, increased driver wages and recruiting costs, and approximately $1.4 millionone-time COVID-19 bonus paid in additional non-cash amortization expense compared to thirdfirst quarter 2018.2020.
ICS segment revenue decreased 3%increased 12% to $337$335 million in the thirdfirst quarter 2019,2020, from $346$301 million in the third quarter 2018.2019. Overall volumes decreased 4%increased 2% while revenue per load increased 2%9%, primarily due to a lowercustomer freight mix of contractual LTL volume and a competitive pricing environment for contractual truckload businesschanges compared to 2018.first quarter 2019. Contractual business represented approximately 74% of total load volume and 62%64% of total revenue in the current periodfirst quarter 2020, compared to 72%68% and 49%51%, respectively, in third quarter 2018.2019. Approximately $205$235 million of thirdfirst quarter 20192020 ICS revenue was executed through the Marketplace for J.B. Hunt 360° compared to $151$186 million in thirdthe first quarter 2018.2019. ICS segment had an operating loss of $18.9 million in the first quarter of 2020 compared to operating income of $7.0 million in 2019. Gross profit margin decreased to 12.7%9.6% in the currentfirst quarter versus 15.5% last year2020, compared to 16.5% in 2019, primarily due to decreaseda competitive pricing environment in the contractual marginsbusiness and decreased spot market activitytightening supply dynamics at various points throughout the current period. Current period operating results were further affected by increased technology spending as the Marketplace for J.B. Hunt 360° continues to expand in functionality and capacity, continued personnel growth costs, and higher digital marketing and advertising costs, compared to thirdfirst quarter 2018.2019. ICS’s carrier base increased 13% and employee count increased 2% compared to first quarter 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 incurredrevenue 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 $5.6$3.3 million in thirdthe first quarter 2019,of 2020 compared to operating income of $10.2$0.2 million in 2018. Third quarter 20182019. The current period operating income included $3 million in charges for a customer bankruptcy and insurance and claims costs. Excluding these 2018 charges, operating income for third quarter 2019, decreased $18.9 million,loss was primarily due to lower gross profit margins,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 personnel costs, higher technology development costsbad debt expense, $1.3 million of one-time COVID-19 employee bonus expense, and increased digital marketing expenses. ICS’s carrier base increased 20% and employee count increased 5%$1.2 million in additional noncash amortization expense attributable to the 2019 business acquisitions compared to thirdfirst quarter 2018.2019. 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 decreased 11% to $94totaled $105 million for the thirdfirst quarter 2019,2020, an increase of 3% from $106$102 million in the thirdfirst quarter 2018.2019. Revenue excluding fuel surcharges decreased 10%,surcharge also increased 3% primarily due to a 5%15% increase in load volume, partially offset by a 10% decrease in ratesrevenue per load compared to first quarter 2019. Revenue per loaded mile in first quarter 2020 decreased 6%, while comparable contractual customer rates decreased 1% compared to first quarter 2019. As a 2% decrease in lengthresult of haul and a 3% decrease inthe ongoing effects of the COVID-19 pandemic, JBT could experience reduced load volumes compared to third quarter 2018. Coreand customer rates increased 1.5% compared tothroughout the same period in 2018.remainder of 2020. At the end of the currentfirst quarter 2020, JBT operated 1,8961,887 tractors and 7,391 trailers compared to 1,9722,043 tractors and 6,785 trailers in 2018.2019. JBT segment operating income decreased 28%75% to $6.6$1.8 million in 2019,2020, compared with $9.2$7.2 million in 2018. The decrease in operating income was driven primarilyduring first quarter 2019. Benefits from the higher load volume were more than offset by higher purchased transportation expense, lower spot market activity,customer rates, increased trailing-related costs, higher empty miles per loadtechnology modernization expenses, and the reduction in overall load volumes.$0.5 million of one-time COVID-19 employee bonus expense compared to first quarter 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 September 30, | 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 | % | 7.0 | % | 100.0 | % | 100.0 | % | 9.1 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Rents and purchased transportation | 50.6 | 50.9 | 6.3 | 49.8 | 47.9 | 13.6 | ||||||||||||||||||
Salaries, wages and employee benefits | 23.5 | 22.4 | 12.0 | 25.2 | 24.7 | 11.2 | ||||||||||||||||||
Depreciation and amortization | 5.3 | 4.9 | 16.5 | 5.7 | 5.7 | 8.5 | ||||||||||||||||||
Fuel and fuel taxes | 4.8 | 5.3 | (2.7 | ) | 4.4 | 5.4 | (9.8 | ) | ||||||||||||||||
Operating supplies and expenses | 3.7 | 3.6 | 9.9 | 3.8 | 3.7 | 9.5 | ||||||||||||||||||
General and administrative expenses, net of asset dispositions | 2.1 | 1.9 | 15.6 | 1.9 | 2.2 | 0.3 | ||||||||||||||||||
Insurance and claims | 1.9 | 2.1 | (3.6 | ) | 1.4 | 1.4 | 11.6 | |||||||||||||||||
Operating taxes and licenses | 0.6 | 0.7 | 8.1 | 0.6 | 0.6 | 1.2 | ||||||||||||||||||
Communication and utilities | 0.4 | 0.3 | 21.9 | 0.4 | 0.4 | (2.0 | ) | |||||||||||||||||
Total operating expenses | 92.9 | 92.1 | 7.9 | 93.2 | 92.0 | 10.6 | ||||||||||||||||||
Operating income | 7.1 | 7.9 | (3.9 | ) | 6.8 | 8.0 | (7.8 | ) | ||||||||||||||||
Net interest expense | 0.5 | 0.5 | 24.1 | 0.5 | 0.6 | (7.7 | ) | |||||||||||||||||
Earnings before income taxes | 6.6 | 7.4 | (5.6 | ) | 6.3 | 7.4 | (7.8 | ) | ||||||||||||||||
Income taxes | 1.6 | 1.5 | 10.3 | 1.7 | 1.7 | 7.7 | ||||||||||||||||||
Net earnings | 5.0 | % | 5.9 | % | (9.7 | %) | 4.6 | % | 5.7 | % | (12.3 | )% | ||||||||||||
Total operating expenses increased 7.9%10.6%, while operating revenues increased 7.0%9.1%, during the thirdfirst quarter 2019,2020, from the comparable period 2018.2019. Operating income decreased to $167.9$154.7 million during the thirdfirst quarter 20192020, from $174.7$167.8 million in 2018.2019.
Rents and purchased transportation costs increased 6.3%13.6% in 2019.2020. This increase was primarily the result of the increase in load volume, which increased services provided by third-party rail and truck carriers within JBI and ICS segments and increased rail and truck third-partycarrier purchased transportation rates within JBI and ICS in third quarter 2019.rates. In addition, JBI rail purchased transportation costs included a $26.8an $8.2 million chargeaccrual resulting from an adjusted calculation of the issuancerevenue divisions owed to BNSF for 2019 related to the final award of an award regarding our completed arbitration with BNSF which is further discussedissued in Part II, Item 1, Legal Proceedings of this report on Form 10-Q. These increases in rents and purchased transportation costs were partially offset by decreased load volumes in ICS, which decreased services provided by third-party truck carriers in 2019, and the fact that third quarter 2018, included additional rail purchased transportation expense related to arbitration charges.2019.
Salaries, wages and employee benefitsbenefit costs increased 12.0% during the third quarter 2019,11.2% in 2020 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 16.5%8.5% in 2019,2020, primarily due to equipment purchases related to new DCS long-term customer contracts. Fuel costs decreased 2.7%9.8% in 2019,2020, compared with 2018,2019, due to a decrease in the price of fuel, partially offset by an increase in road miles.
Operating supplies and expenses increased 9.9%, driven9.5% in 2020, compared with 2019, primarily bydue to higher equipment maintenancetoll costs, increased tire expenses, and increased toll costs.higher building maintenance expenses. General and administrative expenses increased 15.6% for the current quarter from the comparable period in 2018,were virtually flat compared with 2019, primarily due to higher FMS network facility costs, increased technology spend on the J.B. Hunt 360° platformbuilding and legacy system upgrades and higher net loss from sale or disposal of assets.computer rentals being offset by a reduction in professional fees during first quarter 2020. Net loss from sale or disposal of assets was $4.0$1.5 million in 2019,2020, compared to a net loss of $2.0$2.3 million in 2018.2019. Insurance and claims expense decreased 3.6%increased 11.6% in 20192020, compared with 2018, primarily2019, due to 2018 including specific reserve charges related to the settlement of lawsuits with current and former drivers,higher incident volume, partially offset by 2019 including $17.4 milliona decrease in reserve charges for arbitration related legal fees, cost and interest claimed by BNSF, further discussed in Part II, Item 1, Legal Proceedings of this report on Form 10-Q.accident severity.
Net interest expense increased 24.1%decreased 7.7% in 20192020, due primarily to an increase in average debt levels and higherlower effective interest rates on our debt compared to third quarter 2018.debt. Income tax expense increased 10.3%7.7% in 2019,first quarter 2020, compared with 2018,2019, primarily due to a higher effective income tax rate in third quarter 2019, 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 reductionstate income tax audit. The increase in discreeteffective income tax benefits recognized related to share-based compensation vesting,rate was partially offset by decreased taxable earnings. Our effective income tax rate was 23.9%26.5% for the thirdfirst quarter 2019,2020, compared with 20.4% for the third quarter 2018.to 22.7% in 2019. Our annual tax rate for 20192020 is expected to be 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.
Comparison of NineMonths Ended September 30, 2019 to Nine Months Ended September 30, 2018
Summary of Operating Segment Results For the Nine Months Ended September 30, (in millions) | ||||||||||||||||
Operating Revenues | Operating Income | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
JBI | $ | 3,477 | $ | 3,453 | $ | 316.4 | $ | 368.6 | ||||||||
DCS | 1,978 | 1,567 | 189.0 | 134.0 | ||||||||||||
ICS | 972 | 989 | 0.8 | 34.0 | ||||||||||||
JBT | 296 | 300 | 22.7 | 21.8 | ||||||||||||
Other (includes corporate) | - | - | (0.1 | ) | (0.1 | ) | ||||||||||
Subtotal | 6,723 | 6,309 | 528.8 | 558.3 | ||||||||||||
Inter-segment eliminations | (8 | ) | (12 | ) | - | - | ||||||||||
Total | $ | 6,715 | $ | 6,297 | $ | 528.8 | $ | 558.3 | ||||||||
Total consolidated operating revenues were $6.72 billion for the first nine months 2019, a 7% increase from $6.30 billion for the comparable period 2018. Fuel surcharge revenues were $760.8 million during the first nine months 2019, compared with $773.1 million in 2018. If fuel surcharge revenues were excluded from both periods, the increase of 2019 revenue from 2018 was 8%.
JBI segment revenue increased 1%, to $3.48 billion during the first nine months of 2019, compared with $3.45 billion in 2018. Load volume during the first nine months of 2019 decreased 5%, which was offset by a 6% increase in revenue per load, which is the combination of changes in freight mix, customer rate changes, and fuel surcharge revenue, compared to a year ago. Revenue per load, excluding fuel surcharge revenue, increased 8% from the first nine months of 2018. Operating income of the JBI segment decreased to $316.4 million in the first nine months of 2019, from $368.6 million in 2018. Benefits from customer rate increases and freight mix were more than offset by decreased volumes, which includes volume lost to rail rationalization, increased rail purchased transportation costs, higher equipment ownership and maintenance costs, increased technology modernization expenses, lower box turns, higher box repositioning costs and increased driver wages and recruiting costs. Current period operating income was further impacted by a $26.8 million charge to rail purchase transportation expense resulting from the issuance of an award regarding our arbitration with BNSF and a $17.4 million charge to insurance and claims expense, for arbitration related legal fees, cost and interest claimed by BNSF. Both of these items are further discussed in Part II, Item 1, Legal Proceedings of this report on Form 10-Q.
DCS segment revenue increased 26%, to $1.98 billion during the first nine months of 2019, from $1.57 billion in 2018. Productivity, defined as revenue per truck per week, increased 8% from a year ago. Productivity excluding fuel surcharge for the first nine months of 2019 increased 9% from a year ago. The increase in productivity was primarily a result of better integration of assets between customer accounts, customer rate increases, and increased customer supply chain fluidity during 2019 compared to 2018. In addition, the growth in DCS revenue includes an increase of $128 million in FMS revenue, the majority of which was derived from the first quarter 2019 Cory acquisition. Operating income of our DCS segment increased to $189.0 million in 2019, from $134.0 million in 2018. The increase is primarily due to increased productivity and additional trucks under contract, partially offset by higher insurance and claims costs, which includes a $20.0 million FMS claim charge in second quarter 2019, higher costs from the expanded FMS network, increased driver wages and recruiting costs, and additional non-cash amortization expense compared to 2018.
ICS revenue decreased 2% to $972 million during the first nine months of 2019, from $989 million in 2018. Overall volumes during the first nine months of 2019 remained flat when compared to 2018. Revenue per load decreased 2% primarily due to customer mix changes, a lower spot pricing market and a competitive pricing environment for contractual truckload business, when compared to 2018. Gross profit margin decreased to 14.1% in the current year versus 14.9% last year primarily due to weaker spot market activity and lower contractual rates on committed business compared to the first nine months of 2018. ICS segment operating income decreased to $0.8 million, from $34.0 million in 2018, primarily due to lower gross profit margins, higher personnel costs, higher technology development costs and increased digital marketing expenses. Approximately $614 million of ICS revenue for the first nine months of 2019 was executed through the Marketplace for J.B. Hunt 360°.
JBT segment revenue decreased 1% to $296 million for the first nine months of 2019, from $300 million in 2018. Revenue excluding fuel surcharges for the first nine months of 2019 was flat compared to 2018, on a flat load count. Our JBT segment operating income increased 4% to $22.7 million during the first nine months 2019, from $21.8 million in 2018. The increase in operating income was driven primarily by lower equipment ownership costs and decreased non-driver personnel expenses, partially offset by higher driver and independent contractor cost per mile, higher driver and independent contractor recruiting costs, lower spot market activity and higher empty miles per load compared to the first nine months of 2018.
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.
| Nine Months Ended September 30, | ||||||||||||
Dollar Amounts as a Percentage of Total Operating Revenues | Percentage Change of Dollar Amounts Between Periods | |||||||||||
| 2019 | 2018 | 2019 vs. 2018 | ||||||||||
Total operating revenues | 100.0 | % | 100.0 | % | 6.6 | % | ||||||
Operating expenses: | ||||||||||||
Rents and purchased transportation | 48.9 | 50.2 | 3.8 | |||||||||
Salaries, wages and employee benefits | 23.9 | 22.4 | 13.8 | |||||||||
Depreciation and amortization | 5.5 | 5.1 | 15.2 | |||||||||
Fuel and fuel taxes | 5.1 | 5.4 | 1.0 | |||||||||
Operating supplies and expenses | 3.7 | 3.6 | 10.2 | |||||||||
General and administrative expenses, net of asset dispositions | 2.2 | 1.8 | 25.5 | |||||||||
Insurance and claims | 1.8 | 1.6 | 22.0 | |||||||||
Operating taxes and licenses | 0.6 | 0.6 | 10.7 | |||||||||
Communication and utilities | 0.4 | 0.4 | 9.4 | |||||||||
Total operating expenses | 92.1 | 91.1 | 7.8 | |||||||||
Operating income | 7.9 | 8.9 | (5.3 | ) | ||||||||
Net interest expense | 0.6 | 0.5 | 38.6 | |||||||||
Earnings before income taxes | 7.3 | 8.4 | (7.7 | ) | ||||||||
Income taxes | 1.8 | 2.0 | (8.9 | ) | ||||||||
Net earnings | 5.5 | % | 6.4 | % | (7.3 | %) | ||||||
Total operating expenses increased 7.8%, while operating revenues increased 6.6%, during the first nine months 2019, from the comparable period of 2018. Operating income decreased to $528.8 million during the first nine months 2019, from $558.3 million in 2018.
Rents and purchased transportation costs increased 3.8% in 2019. This increase was primarily the result of increased rail and truck third-party purchased transportation rates within JBI and ICS. In addition, JBI rail purchased transportation costs included a $26.8 million charge resulting from the issuance of an award regarding our arbitration with BNSF which is further discussed in Part II, Item 1, Legal Proceedings of this report on Form 10-Q. These increases in rents and purchased transportation costs were partially offset by decreased load volumes in JBI, which decreased services provided by third-party rail carriers.
Salaries, wages and employee benefits costs increased 13.8% in 2019 from 2018. 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.
Depreciation and amortization expense increased 15.2% in 2019 primarily due to equipment purchases related to new DCS long-term customer contracts. Fuel costs increased 1.0% in 2019, compared with 2018, due to an increase in road miles, partially offset by a decrease in the price of fuel.
Operating supplies and expenses increased 10.2% driven primarily by higher equipment maintenance costs, increased toll costs, and higher travel expenses. General and administrative expenses increased 25.5% from the comparable period in 2018, primarily due to increased technology spend on the J.B. Hunt 360° platform and legacy system upgrades, higher FMS network facility costs, and increased advertising expenses. Net loss from sale or disposal of assets was $9.1 million in 2019, compared to a net loss of $8.4 million in 2018. Insurance and claims expense increased 22.0% in 2019 compared with 2018, primarily due to 2019 including specific reserve charges for arbitration related legal fees, cost and interest claimed by BNSF, further discussed in Part II, Item 1, Legal Proceedings of this report on Form 10-Q, and the inclusion of a $20.0 million FMS claim charge within DCS, partially offset by 2018 including specific reserve charges for the settlement of lawsuits with current and former drivers.
Net interest expense increased 38.6% in 2019, due primarily to an increase in average debt levels and higher effective interest rates on our debt. Income tax expense decreased 8.9% during the first nine months of 2019, compared with 2018. Our effective income tax rate was 23.9% for the nine months ended 2019, compared to 24.3% in 2018. Our annual tax rate for 2019 is expected to be 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 $937.6$249 million during the first ninethree months of 2019,2020, compared with $777.6$251 million for the same period 2018.2019. Operating cash flows increaseddecreased due to decreased earnings in first quarter 2020, partially offset by the timing of general working capital activities and increased operating income, excluding depreciation.activities. Net cash used in investing activities totaled $684.9$129 million in 2019,2020, compared with $586.3$311 million in 2018.2019. The increasedecrease resulted from a decrease in equipment purchases, net of proceeds from the purchasesale of equipment, during the current period and from the fact that the Cory which1st Choice Home Delivery acquisition closed during first quarter 2019. Net cash used in financing activities was $185.1$107 million in 2019,2020, compared with $198.4net cash provided by financing activities of $105 million in 2018.2019. This decreasechange 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, whichpartially offset by the full retirement of our $250 million of 2.40% senior notes that matured in March 2019, and an increase in treasury stock purchased in 2019.
Debt and Liquidity Data
September 30, 2019 | December 31, 2018 | September 30, 2018 | March 31, 2020 | December 31, 2019 | March 31, 2019 | |||||||||||||||||||
Working capital ratio | 1.29 | 1.11 | 1.11 | 1.54 | 1.43 | 1.44 | ||||||||||||||||||
Current portion of long-term debt (millions) | - | $ | 250.7 | 248.7 | ||||||||||||||||||||
Total debt (millions) | $ | 1,293.3 | $ | 1,149.1 | $ | 1,069.5 | $ | 1,302.8 | $ | 1,295.7 | $ | 1,284.6 | ||||||||||||
Total debt to equity | 0.59 | 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.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 September 30, 2019March 31, 2020 (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 | $ | 131.1 | $ | 42.8 | $ | 58.4 | $ | 21.6 | $ | 8.3 | $ | 129.9 | $ | 45.5 | $ | 56.9 | $ | 18.0 | $ | 9.5 | ||||||||||||||||||||
Debt obligations | 1,300.0 | - | 350.0 | 250.0 | 700.0 | 1,300.0 | - | 350.0 | 250.0 | 700.0 | ||||||||||||||||||||||||||||||
Interest payments on debt (1) | 253.3 | 49.1 | 97.1 | 68.7 | 38.4 | |||||||||||||||||||||||||||||||||||
Interest payments on debt (1) | 224.8 | 47.4 | 88.6 | 63.9 | 24.9 | |||||||||||||||||||||||||||||||||||
Commitments to acquire revenue equipment and facilities | 935.9 | 374.4 | 561.5 | - | - | 903.2 | 336.9 | 566.3 | - | - | ||||||||||||||||||||||||||||||
Total | $ | 2,620.3 | $ | 466.3 | $ | 1,067.0 | $ | 340.3 | $ | 746.7 | $ | 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. |
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Our net capital expenditures were approximately $587$129 million during the first ninethree months of 2019,2020, compared with $585$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 $903.2 million during 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 $650$450 million to $675$475 million for net capital expenditures during the remainder of 2020. 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 the full calendar year of 2019. On February 15, 2019, we completedbusiness 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 $57.7$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 $935.9903.2 million, as of September 30, 2019.March 31, 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 September 30, 2019March 31, 2020 includes our senior revolving line of credit and senior notes issuances. Our senior notes have fixed interest rates ranging from 3.30% to 3.85%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 or nine months ended September 30, 2019.March 31, 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 September 30, 2019,March 31, 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 September 30, 2019,March 31, 2020, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.
ITEM 4.CONTROLS AND PROCEDURES |
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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 September 30, 2019.March 31, 2020.
There were no changes in our internal control over financial reporting during the thirdfirst 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 |
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. In October 2018 we received the arbitrators’ Interim Award. The details of the Interim Award are confidential, but it required 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 made further submissions to the Panel on the revenue divisions for calendar year 2018 and going forward, as well as other confidential issues raised during the arbitration process. 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.
On October 24, 2019 the arbitrators issued a Final Award. The details of the Final Award are confidential; however, we have recorded pre-tax charges in the third quarter 2019 of $26.8 million related to certain charges claimed by BNSF for the period January 1, 2018 through December 31, 2018 and no material adjustments for the period January 1, 2019 through September 30, 2019. In addition, we have recorded a $17.4 million charge for legal fees, cost and interest claimed by BNSF, for a total of $44.2 million.
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. 20 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 September 30, 2019: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) | ||||||||||||
July 1 through July 31, 2019 | - | $ | - | - | $ | 181 | ||||||||||
August 1 through August 31, 2019 | 379,828 | 94.64 | 379,828 | 145 | ||||||||||||
September 1 through September 30, 2019 | - | - | - | 145 | ||||||||||||
Total | 379,828 | $ | 94.64 | 379,828 | $ | 145 | ||||||||||
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 | ||||||||||
(1) |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable.
Not applicable.
Not applicable.
Index to Exhibits
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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 1st day of
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