jbht20180930_10q.htm
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

X

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

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)

 

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

 

Yes   X            No       

 

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

Yes   X            No       

 

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

 

Large accelerated filer   X    Accelerated filer          Non-accelerated filer        

Smaller reporting company        Emerging growth company       

 

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

 

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

 

            Yes                No  X             

 

The number of shares of the registrant’s $0.01 par value common stock outstanding on September 30, 2018 was 109,176,325.

 

 

 

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Form 10-Q

For The Quarterly Period Ended September 30, 2018

Table of Contents

 

  

  

Page

Part I.    Financial Information

  

  

  

  

  

  

Item 1.

Financial Statements

  

  

  

  

  

Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2018 and 2017

3

  

  

  

  

Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

4

  

  

  

  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017

5

  

 

 

  

Notes to Condensed Consolidated Financial Statements as of September 30, 2018

6

  

  

  

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

  13

  

  

  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

21

  

  

  

Item 4.

Controls and Procedures

22

  

  

  

  

  

  

  

  

  

Part II.    Other Information

  

  

  

  

  

  

Item 1.

Legal Proceedings

22

  

  

  

Item 1A.

Risk Factors

23

  

  

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

23

  

  

  

Item 3.

Defaults Upon Senior Securities

23

     

Item 4.

Mine Safety Disclosures

23

     

Item 5.

Other Information

23

  

  

  

Item 6.

Exhibits

23

  

  

  

Signatures

25

  

  

  

Exhibits

 

 

2

 

 

 

Part I.    Financial Information

 

ITEM 1.   FINANCIAL STATEMENTS

 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Condensed Consolidated Statements of Earnings

(in thousands, except per share amounts)

(unaudited)

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Operating revenues, excluding fuel surcharge revenues

  $ 1,936,653     $ 1,657,380     $ 5,523,974     $ 4,670,200  

Fuel surcharge revenues

    273,107       185,954       773,058       529,208  

Total operating revenues

    2,209,760       1,843,334       6,297,032       5,199,408  
                                 

Operating expenses:

                               

Rents and purchased transportation

    1,125,386       947,145       3,163,443       2,624,707  

Salaries, wages and employee benefits

    495,350       408,340       1,410,942       1,178,524  

Fuel and fuel taxes

    117,976       87,006       341,398       246,725  

Depreciation and amortization

    108,801       95,959       321,807       281,198  

Operating supplies and expenses

    79,225       67,578       226,352       190,085  

General and administrative expenses, net of asset dispositions

    42,449       29,389       112,078       74,597  

Insurance and claims

    45,594       26,463       102,464       76,930  

Operating taxes and licenses

    13,203       10,744       37,025       32,329  

Communication and utilities

    7,088       5,738       23,241       16,337  

Total operating expenses

    2,035,072       1,678,362       5,738,750       4,721,432  

Operating income

    174,688       164,972       558,282       477,976  

Net interest expense

    9,961       8,310       28,969       22,521  

Earnings before income taxes

    164,727       156,662       529,313       455,455  

Income taxes

    33,617       56,277       128,409       154,499  

Net earnings

  $ 131,110     $ 100,385     $ 400,904     $ 300,956  
                                 

Weighted average basic shares outstanding

    109,254       109,703       109,484       110,066  
                                 

Basic earnings per share

  $ 1.20     $ 0.92     $ 3.66     $ 2.73  
                                 

Weighted average diluted shares outstanding

    110,235       110,628       110,591       111,154  
                                 

Diluted earnings per share

  $ 1.19     $ 0.91     $ 3.63     $ 2.71  
                                 

Dividends declared per common share

  $ 0.24     $ 0.23     $ 0.72     $ 0.69  

 

See Notes to Condensed Consolidated Financial Statements.

 

3

 

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Condensed Consolidated Balance Sheets

(in thousands)

 

   

September 30, 2018

   

December 31, 2017

 
   

(unaudited)

         

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 7,587     $ 14,612  

Trade accounts receivable, net

    1,095,638       920,767  

Prepaid expenses and other

    239,257       403,349  

Total current assets

    1,342,482       1,338,728  

Property and equipment, at cost

    5,064,126       4,670,464  

Less accumulated depreciation

    1,822,619       1,687,133  

Net property and equipment

    3,241,507       2,983,331  

Other assets, net

    137,682       143,290  

Total assets

  $ 4,721,671     $ 4,465,349  
                 
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Current portion of long-term debt

  $ 248,680     $ -  

Trade accounts payable

    569,453       598,594  

Claims accruals

    279,136       251,980  

Accrued payroll

    74,802       42,382  

Other accrued expenses

    40,589       28,888  

Total current liabilities

    1,212,660       921,844  
                 

Long-term debt

    820,864       1,085,649  

Other long-term liabilities

    89,141       76,661  

Deferred income taxes

    518,428       541,870  

Stockholders' equity

    2,080,578       1,839,325  

Total liabilities and stockholders' equity

  $ 4,721,671     $ 4,465,349  

 

See Notes to Condensed Consolidated Financial Statements.

 

4

 

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   

Nine Months Ended

 
   

September 30,

 
   

2018

   

2017

 
                 

Cash flows from operating activities:

               

Net earnings

  $ 400,904     $ 300,956  

Adjustments to reconcile net earnings to net cash provided by operating activities:

               

Depreciation and amortization

    321,807       281,198  

Share-based compensation

    37,184       30,953  

Loss on sale of revenue equipment and other

    8,441       5,716  

Deferred income taxes

    (23,442 )     (43,801 )

Changes in operating assets and liabilities:

               

Trade accounts receivable

    (174,871 )     (113,432 )

Other assets

    4,647       58,230  

Trade accounts payable

    77,257       100,020  

Income taxes payable or receivable

    72,926       8,350  

Claims accruals

    25,043       7,901  

Accrued payroll and other accrued expenses

    27,707       (7,542 )

Net cash provided by operating activities

    777,603       628,549  
                 

Cash flows from investing activities:

               

Additions to property and equipment

    (676,097 )     (328,218 )

Net proceeds from sale of equipment

    91,120       13,380  

Business acquisition

    -       (137,630 )

Changes in other assets

    (1,278 )     (3,641 )

Net cash used in investing activities

    (586,255 )     (456,109 )
                 

Cash flows from financing activities:

               

Proceeds from revolving lines of credit and other

    2,407,462       2,108,891  

Payments on revolving lines of credit and other

    (2,409,000 )     (2,006,001 )

Purchase of treasury stock

    (100,027 )     (179,813 )

Stock repurchased for payroll taxes and other

    (18,023 )     (18,067 )

Dividends paid

    (78,785 )     (76,120 )

Net cash used in financing activities

    (198,373 )     (171,110 )

Net change in cash and cash equivalents

    (7,025 )     1,330  

Cash and cash equivalents at beginning of period

    14,612       6,377  

Cash and cash equivalents at end of period

  $ 7,587     $ 7,707  
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 31,479     $ 24,641  

Income taxes

  $ 81,334     $ 187,313  
                 

Noncash investing activities

               

Accruals for equipment received

  $ 30,843     $ 22,984  

 

See Notes to Condensed Consolidated Financial Statements.

 

5

 

 

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, 2017. Operating results for the periods presented in this report are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2018, or any other interim period. Our business is somewhat seasonal with slightly higher freight volumes typically experienced during August through early November in our full-load freight transportation business.

 

Recent Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (FASB) issued 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 is 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 expect to adopt 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 will elect the package of practical expedients, which among other things, allows us to carry forward the historical lease classification upon adoption of the standard. We will not elect the hindsight practical expedient when determining the lease term for existing leases. In addition, we will not separate nonlease components from lease components by class of underlying assets where appropriate and we will not apply the recognition requirements of the standard to short-term leases, as allowed by the standard.

 

Upon adoption of the standard we expect to record offsetting lease assets and lease liabilities on our Consolidated Balance Sheet. We do not expect the adoption of the standard to have a material impact on our earnings or debt covenant compliance and no impact on our cash flows. See Note 10, Commitments and Contingencies, in our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017 for discussion of our remaining obligations under operating lease arrangements.

 

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The new standard is effective for us on January 1, 2020, but early adoption is permitted. ASU 2018-15 can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The adoption of the new guidance is not expected to have a material impact on our financial statements.

 

6

 

 

Accounting Pronouncement Adopted in 2018

 

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

 

We record revenues on the gross basis at amounts charged to our customers because we control and are primarily responsible for the fulfillment of promised services. Accordingly, we serve as a principal in the transaction. We invoice our customers, and we maintain discretion over pricing. Additionally, we are responsible for selection of third-party transportation providers to the extent used to satisfy customer freight requirements.

 

Revenue 

 

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

 

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

 

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

 

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

 

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

 

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

 

 

2.

Earnings Per Share

 

We compute basic earnings per share by dividing net earnings available to common stockholders by the actual weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if holders of unvested restricted and performance share units converted their holdings into common stock. The dilutive effect of restricted and performance share units was 1.0 million shares during the third quarter 2018, compared to 0.9 million shares during third quarter 2017. During the nine months ended September 30, 2018 and 2017, the dilutive effect of restricted and performance share units was 1.1 million shares for both periods.

 

7

 
 

 

 

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,

 
   

2018

   

2017

   

2018

   

2017

 
Restricted share units:                                

Pretax compensation expense

  $ 7,626     $ 5,977     $ 26,061     $ 22,987  

Tax benefit

    1,983       2,146       6,776       7,793  

Restricted share unit expense, net of tax

  $ 5,643     $ 3,831     $ 19,285     $ 15,194  
Performance share units:                                

Pretax compensation expense

  $ 3,557     $ 1,867     $ 11,123     $ 7,966  

Tax benefit

    925       670       2,892       2,700  

Performance share unit expense, net of tax

  $ 2,632     $ 1,197     $ 8,231     $ 5,266  

 

As of September 30, 2018, we had $63.2 million and $17.1 million of total unrecognized compensation expense related to restricted share units and performance share units, respectively, that is to be recognized over the remaining weighted average period of approximately 3.6 years for restricted share units and 2.5 years for performance share units. During the nine months ended September 30, 2018, we issued 295,186 shares for vested restricted share units, 118,438 shares for vested performance share units. Of these totals, 291,045 shares for vested restricted share units and 118,438 for performance share units were issued during the third quarter, 2018.     

 

 

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, 2018

   

December 31, 2017

 

Senior revolving line of credit

  $ 239.0     $ 241.4  

Senior notes

    830.6       844.2  

Less current portion of long-term debt

    (248.7 )     -  

Total long-term debt

  $ 820.9     $ 1,085.6  

 

Senior Revolving Line of Credit

 

On September 25, 2018, we replaced our $500 million senior revolving credit facility dated September 30, 2015, with a new credit facility authorizing us 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. This new senior credit facility has a five year term expiring on September 25, 2023, and 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 the Prime Rate, the Federal Funds Rate, or LIBOR, depending upon the specific type of borrowing, plus an applicable margin and other fees. At September 30, 2018, we had $241 million outstanding at an average interest rate of 3.23% under this agreement.

 

8

 

 

Senior Notes

 

Our senior notes consist of three separate issuances. The first and second issuances are $250 million of 2.40% senior notes due March 2019 and $250 million of 3.85% senior notes due March 2024, respectively, both of which were issued in March 2014. Interest payments under both notes are due semiannually in March and September of each year, beginning September 2014. The third is $350 million of 3.30% senior notes due August 2022, issued in August 2015. Interest payments under this note are due semiannually in February and August of each year, beginning February 2016. All three senior notes were issued by J.B. Hunt Transport Services, Inc., a parent-level holding company with no significant assets or operations. The notes are guaranteed on a full and unconditional basis by a wholly-owned subsidiary. All other subsidiaries of the parent are minor. We registered these offerings and the sale of the notes under the Securities Act of 1933, pursuant to a shelf registration statement filed in February 2014. 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 interest rate swaps entered into on the $250 million of 2.40% senior notes due March 2019 and the $350 million of 3.30% senior notes due August 2022.  

 

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, 2018. For all debt facilities maturing in 2019, it is our intent to pay the entire outstanding balances in full, on or before the maturity dates, using our existing senior revolving line of credit or other sources of long-term financing.

 

 

5.

Derivative Financial Instruments

 

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

 

We entered into receive fixed-rate and pay variable-rate interest rate swap agreements simultaneously with the issuance of our $250 million of 2.40% senior notes due March 2019 and $350 million of 3.30% senior notes due August 2022, to effectively convert this fixed-rate debt to variable-rate. The notional amounts of these interest rate swap agreements equal those of the corresponding fixed-rate debt. The applicable interest rates under these agreements are based on LIBOR plus an established margin, resulting in an interest rate of 3.18% for our $250 million of 2.40% senior notes and 3.67% for our $350 million of 3.30% senior notes at September 30, 2018. The swaps expire when the corresponding senior notes are due. The fair values of these swaps are recorded in other accrued expenses and other long-term liabilities in our Condensed Consolidated Balance Sheet at September 30, 2018. See Note 7, Fair Value Measurements, for disclosure of fair value. These derivatives meet the required criteria to be designated as fair value hedges, and as the specific terms and notional amounts of these derivative instruments match those of the fixed-rate debt being hedged, these derivative instruments are 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 these interest rate swaps recorded in earnings is offset by a corresponding change in the fair value of the related debt.

 

 

6.

Capital Stock

 

On October 22, 2015, our Board of Directors authorized the purchase of $500 million of our common stock. On April 20, 2017, our Board of Directors authorized an additional purchase of up to $500 million of our common stock. At September 30, 2018, $421 million of the most recent authorization was remaining. We purchased approximately 422,000 shares, or $50 million, of our common stock under our repurchase authorization during the three months ended September 30, 2018 and approximately 842,000 shares, or $100 million, of our common stock under our repurchase authorizations during the nine months ended September 30, 2018. On July 19, 2018, our Board of Directors declared a regular quarterly cash dividend of $0.24, which was paid August 17, 2018, to stockholders of record on August 3, 2018. On October 18, 2018, our Board of Directors declared a regular quarterly dividend of $0.24 per common share, which will be paid on November 16, 2018, to stockholders of record on November 9, 2018.

 

9

 
 

 

 

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, 2018 (in millions):

 

   

Asset/(Liability)

Balance

       
    September 30, 2018     December 31, 2017     Input Level  

Trading investments

  $ 17.5     $ 16.4     1  

Interest rate swaps

  $ (16.0 )   $ (1.4 )   2  

Senior notes, net of unamortized discount and debt issuance costs

  $ (581.8 )   $ (595.6 )   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, 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 Consolidated Balance Sheets.

 

Financial Instruments

 

The carrying amount and estimated fair value at September 30, 2018, 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 $487.8 million and $489.6 million, respectively.

 

The carrying amounts of all other instruments at September 30, 2018, approximate their fair value due to the short maturity of these instruments.

 

 

8.

Income Taxes

 

Our effective income tax rate was 20.4% for the three months ended September 30, 2018, compared to 35.9% for the three months ended September 30, 2017. Our effective income tax rate was 24.3% for the first nine months of 2018, compared to 33.9% in 2017. 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.

 

The Tax Cuts and Jobs Act (the Act) was enacted in December 2017. Beginning in 2018, the Act reduced the U.S. federal corporate tax rate from 35% to 21%. We are applying the guidance in the Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 118 when accounting for the enactment-date effects of the Act. At September 30, 2018, we have not yet completed our accounting for all of the tax effects of the Act. However, we have made a reasonable estimate of the effects on our existing deferred tax assets and liabilities. We will continue to make and refine our calculations as additional analysis is completed. Our estimates may also be affected as we gain a more thorough understanding of the tax law. Our effective income tax rate for the first nine months of 2017 included the effect of a one-time after-tax benefit of $13.6 million for the claiming of federal research and development tax credits and domestic production tax deductions for the 2012 through 2016 tax years.

 

10

 

 

At September 30, 2018, we had a total of $43.2 million in gross unrecognized tax benefits, which are a component of other long-term liabilities on our Condensed Consolidated Balance Sheets. Of this amount, $34.1 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 $4.1 million at September 30, 2018.

 

 

9.

Legal Proceedings

 

We are a defendant in certain possible class-action lawsuits in which the plaintiffs are current and former California-based drivers who allege claims for unpaid wages, failure to provide meal and rest periods, and other items. In the lead class-action, the United States District Court for the Central District of California issued an Order in late July 2018 granting in part and denying in part Plaintiffs’ motion for partial summary judgment. In early August 2018 the Court issued an Order decertifying the class and granting in part and denying in part our motion for partial summary judgment on certain claims. Plaintiffs requested the United States Court of Appeals for the Ninth Circuit to review the Court’s decertification Order and to stay the September 2018 trial of the named plaintiffs’ individual claims. In September 2018, we reached an agreement to resolve all pending claims for a class settlement payment of $15 million, subject to Court approval. The Court’s preliminary settlement approval hearing is scheduled for late October 2018. The overlapping claims in the other lawsuits remain stayed pending final approval of the settlement in the lead class-action case. 

 

In January 2017, we exercised our right to utilize the arbitration process to review the division of revenue collected beginning May 1, 2016, as well as to clarify other issues, under our Joint Service Agreement with BNSF Railway Company (BNSF). BNSF requested the same, and the arbitration process is on-going. On October 5, 2018, we received the arbitrators’ Interim Award. The details of the Interim Award are confidential and require the parties to submit additional information requested by the arbitrators over the next several months 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. The other financial implications from the Interim Award will not be fully determined until the arbitrators issue additional award(s) following their review of each party’s requested additional submissions. At this time, we are unable to reasonably predict the final outcome of the arbitration, and, as such, no further gain or loss contingency can be determined or recorded. If decided adversely, this matter could result in a liability material to our financial condition or results of operations. BNSF provides a significant amount of rail transportation services to our JBI business segment. Normal commercial business activity between the parties, including load tendering, load tracing, billing and payments, is expected to continue on a timely basis.

 

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

 

11

 
 

 

 

10.

Business Segments

 

We reported four distinct business segments during the three and nine months ended September 30, 2018 and 2017. These segments included Intermodal (JBI), Dedicated Contract Services® (DCS), Integrated Capacity Solutions (ICS), and Truckload (JBT). The operation of each of these businesses is described in Note 13, Segment Information, of our Annual Report (Form 10-K) for the year ended December 31, 2017. A summary of certain segment information is presented below (in millions):

 

   

Assets

(Excludes intercompany accounts)

As of

 
   

September 30, 2018

   

December 31, 2017

 

JBI

  $ 2,243     $ 2,108  

DCS

    1,457       1,182  

ICS

    226       204  

JBT

    268       283  

Other (includes corporate)

    528       688  

Total

  $ 4,722     $ 4,465  

 

    Operating Revenues  
   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 

JBI

  $ 1,218     $ 1,048     $ 3,453     $ 2,987  

DCS

    543       438       1,567       1,242  

ICS

    346       269       989       701  

JBT

    106       93       300       281  

Subtotal

    2,213       1,848       6,309       5,211  

Inter-segment eliminations

    (3 )     (5 )     (12 )     (12 )

Total

  $ 2,210     $ 1,843     $ 6,297     $ 5,199  

 

   

Operating Income

 
   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 

JBI

  $ 120.3       109.1     $ 368.6     $ 314.1  

DCS

    35.0       42.9       134.0       136.2  

ICS

    10.2       7.3       34.0       11.5  

JBT

    9.2       5.7       21.8       16.2  

Other (includes corporate)

    -       -       (0.1 )     -  

Total

  $ 174.7     $ 165.0     $ 558.3     $ 478.0  

 

   

Depreciation and Amortization Expense

 
   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2018

   

2017

   

2018

   

2017

 

JBI

  $ 43.1     $ 40.4     $ 128.1     $ 121.2  

DCS

    50.3       40.4       146.4       114.1  

ICS

    0.4       0.3       1.1       0.9  

JBT

    9.3       10.2       29.5       30.7  

Other (includes corporate)

    5.7       4.7       16.7       14.3  

Total

  $ 108.8     $ 96.0     $ 321.8     $ 281.2  

 

12

 
 

 

 

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should refer to the attached interim Condensed Consolidated Financial Statements and related notes and also to our Annual Report (Form 10-K) for the year ended December 31, 2017, as you read the following discussion. We may make statements in this report that reflect our current expectation regarding future results of operations, performance, and achievements. These are “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995, and are based on our belief or interpretation of information currently available. You should realize there are many risks and uncertainties that could cause actual results to differ materially from those described. Some of the factors and events that are not within our control and could have a significant impact on future operating results are general economic and business conditions, competition and competitive rate fluctuations, cost and availability of diesel fuel, ability to attract and retain qualified drivers and delivery personnel, a loss of one or more major customers, interference with or termination of our relationships with certain railroads, rail service delays, insurance costs and availability, claims expense, retention of key employees, terrorist attacks or actions, acts of war, adverse weather conditions, disruption or failure of information systems, new or different environmental or other laws and regulations, operational disruption or adverse effects of business acquisitions, increased costs for new revenue equipment or decreases in the value of used equipment, and the ability of revenue equipment manufacturers to perform in accordance with agreements for guaranteed equipment trade-in values. Additionally, our business is somewhat seasonal with slightly higher freight volumes typically experienced during August through early November in our full-load transportation business. You should also refer to Item 1A of our Annual Report (Form 10-K) for the year ended December 31, 2017, for additional information on risk factors and other events that are not within our control. Our future financial and operating results may fluctuate as a result of these and other risk factors as described from time to time in our filings with the SEC.

 

GENERAL

 

We are one of the largest surface transportation, delivery, and logistics companies in North America. We operate four distinct, but complementary, business segments and provide a wide range of transportation and delivery services to a diverse group of customers throughout the continental United States, Canada, and Mexico. Our service offerings include transportation of full-truckload containerized freight, which we directly transport utilizing our company-controlled revenue equipment and company drivers or independent contractors. We have arrangements with most of the major North American rail carriers to transport freight in containers or trailers, while we perform the majority of the pickup and delivery services. We also provide customized freight movement, revenue equipment, labor, systems, and delivery services that are tailored to meet individual customers’ requirements and typically involve long-term contracts. These arrangements are generally referred to as dedicated services and may include multiple pickups and drops, local and home deliveries, freight handling, specialized equipment, and freight network design. Our local and home delivery services typically are provided through a network of cross-dock service centers throughout the continental United States. Utilizing a network of thousands of reliable third-party carriers, we also provide comprehensive transportation and logistics services. In addition to dry-van, full-load operations, these unrelated outside carriers also provide flatbed, refrigerated, LTL, and other specialized equipment, drivers, and services. Also, we utilize a combination of company-owned and contracted power units to provide traditional over-the-road full truckload delivery services. We account for our business on a calendar year basis, with our full year ending on December 31 and our quarterly reporting periods ending on March 31, June 30, and September 30. The operation of each of our four business segments is described in Note 13, Segment Information, of our Annual Report (Form 10-K) for the year ended December 31, 2017.

 

13

 

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that impact the amounts reported in our Condensed Consolidated Financial Statements and accompanying notes. Therefore, the reported amounts of assets, liabilities, revenues, expenses, and associated disclosures of contingent liabilities are affected by these estimates. We evaluate these estimates on an ongoing basis, utilizing historical experience, consultation with experts, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates. Any effects on our business, financial position, or results of operations resulting from revisions to these estimates are recognized in the accounting period in which the facts that give rise to the revision become known.

 

Information regarding our Critical Accounting Policies and Estimates can be found in our Annual Report (Form 10-K). The critical accounting policies that we believe require us to make more significant judgments and estimates when we prepare our financial statements include those relating to self-insurance accruals, revenue equipment, revenue recognition, and income taxes. We have discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors. In addition, Note 2, Summary of Significant Accounting Policies, to the financial statements in our Annual Report (Form 10-K) for the year ended December 31, 2017, and Note 1, General, to the financial statements of this report on Form 10-Q, contain summaries 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, 2018 to Three Months Ended September 30, 2017

 

   

Summary of Operating Segment Results

For the Three Months Ended September 30,

(in millions)

 
    Operating Revenues     Operating Income  
   

2018

   

2017

   

2018

   

2017

 
JBI   $ 1,218     $ 1,048     $ 120.3     $ 109.1  

DCS

    543       438       35.0       42.9  

ICS

    346       269       10.2       7.3  

JBT

    106       93       9.2       5.7  

Subtotal

    2,213       1,848       174.7       165.0  

Inter-segment eliminations

    (3 )     (5 )     -       -  
    $ 2,210     $ 1,843     $ 174.7     $ 165.0  

 

Total consolidated operating revenues were $2.21 billion for the third quarter 2018, compared to $1.84 billion for the third quarter 2017. Current quarter total operating revenue, excluding fuel surcharges, increased 17% versus the comparable quarter in 2017. This increase was primarily due to a 15% increase in revenue per load in JBI, a 15% increase in revenue producing trucks and a 7% increase in asset productivity in DCS, a 41% increase in load volumes in ICS, and a 19% increase in rates per loaded mile in JBT.

 

JBI segment revenue increased 16% to $1.22 billion during the third quarter 2018, compared with $1.05 billion in 2017. This increase in segment revenue was primarily a result of a 1% increase in load volume and a 15% increase in revenue per load, which is the combination of changes in freight mix, customer rates, and fuel surcharge revenue, compared to a year ago. Revenue per load excluding fuel surcharges increased 12% compared to third quarter 2017. Load volume in our eastern network increased 9.5%, and transcontinental loads decreased 5% over the third quarter 2017. Network disruptions caused by five major derailments in our national intermodal network and the service disruption from hurricane Florence combined to limit our ability to handle approximately 4,000 loads in the current period. Operating income of our JBI segment increased 10% to $120.3 million in 2018, from $109.1 million in 2017. Benefits from customer rate increases were partially offset by higher driver wage and retention expenses and increases in costs from inefficiencies due to rail congestion. Current period operating income was further impacted by an $18.3 million charge to rail purchase transportation expense resulting from the issuance of an Interim Award regarding our ongoing arbitration with BNSF and an $8.6 million charge to insurance and claims expense, primarily related to the settlement of lawsuits with current and former drivers. Both of these items are further discussed in Part II, Item 1, Legal Proceedings of this report on Form 10-Q.

 

14

 

 

DCS segment revenue increased 24% to $543 million in 2018, from $438 million in 2017. Productivity, defined as revenue per truck per week, increased by approximately 7% versus 2017, while productivity excluding fuel surcharges increased by approximately 4% 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. In addition, the growth in DCS revenue includes an increase of $23 million in Final Mile Services (FMS) revenue, approximately $10 million of which was derived from the 2017 acquisition of Special Logistics Dedicated (SLD). A net additional 1,261 revenue producing trucks were in the fleet by the end of the current quarter compared to prior year, primarily from private fleet conversions and growth in FMS in the current and prior periods. Customer retention rates remain above 98%. Operating income of our DCS segment decreased 18% to $35.0 million in 2018, from $42.9 million in 2017. The decrease is primarily due to an $8.4 million charge to insurance and claims expense, primarily related to the settlement of lawsuits with current and former drivers, further discussed in Part II, Item 1, Legal Proceedings of this report on Form 10-Q. Current period operating income was further impacted by approximately $4 million in implementation costs for new customer contracts in the early stages of operations, higher costs from the expanded FMS network, increased driver wages and recruiting costs, and higher salaries and benefits costs compared to the third quarter 2017.

 

ICS segment revenue increased 28% to $346 million in the third quarter 2018, from $269 million in the third quarter 2017. Overall volumes increased 41%. Revenue per load decreased 9%, primarily due to a higher mix of contractual LTL volume compared to a year ago. Contractual business represented approximately 72% of total load volume and 49% of total revenue in the current period compared to 65% and 48%, respectively, in third quarter 2017. Approximately $151 million of third quarter 2018 ICS revenue was executed through the marketplace for JBHunt360. Gross profit margin improved to 15.5% in the current quarter versus 12.8% last year primarily due to improved contractual margins and increased spot market activity compared to third quarter 2017. ICS segment operating income increased 40% to $10.2 million, from $7.3 million in 2017, primarily due to higher gross profit margins and increased operating leverage in branches more than two years old. These benefits were partially offset by a $2.2 million charge to bad debt expense for a customer bankruptcy, higher insurance and claims cost, higher personnel costs and higher technology development costs. ICS’s carrier base increased 26% and employee count increased 26% compared to third quarter 2017.

 

JBT segment revenue increased 14% to $106 million for the third quarter 2018, from $93 million in the third quarter 2017. Revenue excluding fuel surcharges increased 13%, primarily due to a 19% increase in rates per loaded mile, partially offset by a 5% decrease in length of haul. Core customer rates increased 13% compared to the same period in 2017. At the end of the current quarter, JBT operated 1,972 tractors compared to 2,040 in 2017. JBT segment operating income increased 61% to $9.2 million in 2018, compared with $5.7 million in 2017. The increase in operating income was driven primarily by higher rates per loaded mile and lower equipment ownership costs, partially offset by increased insurance and claims expense, higher driver wages, higher independent contractor costs per mile, and higher driver and independent contractor recruiting costs compared to third quarter 2017.

 

15

 

 

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,  
   

Dollar Amounts as a

Percentage of Total

Operating Revenues

   

Percentage Change

of Dollar Amounts

Between Quarters

 
    2018     2017     2018 vs. 2017  

Total operating revenues

  100.0

%

    100.0

%

    19.9 %  

Operating expenses:

                       

Rents and purchased transportation

  50.9       51.4       18.8    

Salaries, wages and employee benefits

  22.4       22.2       21.3    

Fuel and fuel taxes

  5.3       4.7       35.6    

Depreciation and amortization

  4.9       5.2       13.4    

Operating supplies and expenses

  3.6       3.7       17.2    

General and administrative expenses, net of asset dispositions

  1.9       1.6       44.4    

Insurance and claims

  2.1       1.4       72.3    

Operating taxes and licenses

  0.7       0.6       22.9    

Communication and utilities

  0.3       0.3       23.5    

Total operating expenses

  92.1       91.1       21.3    

Operating income

  7.9       8.9       5.9    

Net interest expense

  0.5       0.4       19.9    

Earnings before income taxes

  7.4       8.5       5.1    

Income taxes

  1.5       3.1       (40.3 )  

Net earnings

  5.9

%

    5.4

%

    30.6 %  

 

Total operating expenses increased 21.3%, while operating revenues increased 19.9% during the third quarter 2018, from the comparable period 2017. Operating income increased to $174.7 million during the third quarter 2018 from $165.0 million in 2017.

 

Rents and purchased transportation costs increased 18.8% in 2018. This increase was primarily the result of increased third-party purchased transportation rates within JBI and ICS and the increase in truck and rail load volume, which increased services provided by third-party carriers to ICS and JBI segments. In addition, JBI rail purchased transportation costs included an $18.3 million charge resulting from the issuance of an Interim Award regarding our ongoing arbitration with BNSF which is further discussed in Part II, Item 1, Legal Proceedings of this report on Form 10-Q.

 

Salaries, wages and employee benefits costs increased 21.3% during the third quarter 2018, compared with 2017. This increase was primarily related to increases in driver pay and office personnel compensation due to a tighter supply of qualified drivers and an increase in the number of employees.

 

Fuel costs increased 35.6% in 2018, compared with 2017, due to an increase in the price of fuel and an increase in road miles. Depreciation and amortization expense increased 13.4% in 2018, primarily due to additions to our JBI segment tractor, container and chassis fleets to support additional business demand and equipment purchased related to new DCS long-term customer contracts.

 

Operating supplies and expenses increased 17.2%, driven primarily by higher equipment maintenance expenses, increased tire expense, higher travel costs, and higher building maintenance expenses. General and administrative expenses increased 44.4% for the current quarter from the comparable period in 2017, primarily due to increased building and computer rentals, higher professional fees, increased advertising costs, and an increase in bad debt expense driven by a customer bankruptcy. Net loss from sale or disposal of assets was $2.0 million in 2018, compared to a net loss of $2.3 million in 2017. Insurance and claims expense increased 72.3% in 2018 compared with 2017, primarily due to 2018 including specific reserve charges for pending legal matters, primarily related to the settlement of lawsuits with current and former drivers, further discussed in Part II, Item 1, Legal Proceedings of this report on Form 10-Q.

 

Net interest expense increased 19.9% in 2018 due to an increase in average debt levels, higher effective interest rates on our debt, and expenses incurred to refinance our revolving line of credit compared to third quarter 2017. Income tax expense decreased 40.3% in 2018, compared with 2017, primarily due to a lower effective income tax rate in third quarter 2018, due to the impact of the Tax Cuts and Jobs Act of 2017, and our recognition of discreet tax benefits related to the statute expiration of uncertain tax positions. Our effective income tax rate was 20.4% for the quarter ended September 30, 2018, compared with 35.9% for the quarter ended September 30, 2017. Our annual tax rate for 2018 is expected to be 24.0%. In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate, adjusted for discrete items. This rate is based on our expected annual income, statutory tax rates, best estimate of nontaxable and nondeductible items of income and expense, and the ultimate outcome of tax audits.

 

16

 

 

Comparison of Nine Months Ended September 30, 2018 to Nine Months Ended September 30, 2017

 

   

Summary of Operating Segment Results

For the Nine Months Ended September 30,

(in millions)

 
   

Operating Revenues

   

Operating Income

 
   

2018

   

2017

   

2018

   

2017

 

JBI

  $ 3,453     $ 2,987     $ 368.6     $ 314.1  

DCS

    1,567       1,242       134.0       136.2  

ICS

    989       701       34.0       11.5  

JBT

    300       281       21.8       16.2  

Other (includes corporate)

    -       -       (0.1 )     -  

Subtotal

    6,309       5,211       558.3       478.0  

Inter-segment eliminations

    (12 )     (12 )     -       -  

Total

  $ 6,297     $ 5,199     $ 558.3     $ 478.0  

 

Total consolidated operating revenues were $6.30 billion for the first nine months 2018, a 21% increase from $5.20 billion for the comparable period 2017. Fuel surcharge revenues were $773.1 million during the first nine months 2018, compared with $529.2 million in 2017. If fuel surcharge revenues were excluded from both periods, the increase of 2018 revenue from 2017 was 18%.

 

JBI segment revenue increased 16%, to $3.45 billion during the first nine months of 2018, compared with $2.99 billion in 2017. This increase in revenue was primarily a result of a 3% increase in load volume and a 12% increase in revenue per load, which is the combination of changes in freight mix, customer rates, and fuel surcharge revenue, compared to a year ago. Revenue per load, excluding fuel surcharge revenue, increased 8% from the first nine months of 2017. Operating income of the JBI segment increased to $368.6 million in the first nine months of 2018, from $314.1 million in 2017. Benefits from volume growth and customer rate increases were partially offset by increases in rail transportation costs, higher driver wage and retention costs, higher driver recruiting expenses, higher outsourced dray costs, increased costs for onboarding and integration of container tracking technologies, higher equipment ownership costs, and costs of reduced efficiency and disruptions within the rail network. In addition, 2018 operating income was further impacted by an $18.3 million charge to rail purchase transportation expense resulting from the issuance of an Interim Award regarding our ongoing arbitration with BNSF and an $8.6 million charge to insurance and claims expense, primarily related to the settlement of lawsuits with current and former drivers. 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 $1.57 billion during the first nine months of 2018, from $1.24 billion in 2017. Productivity, defined as revenue per truck per week, increased 8% from a year ago. Productivity excluding fuel surcharge for the first nine months of 2018 increased 5% 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 2018 compared to 2017. In addition, the growth in DCS revenue includes an increase of $97 million in FMS revenue, approximately $61 million of which was derived from the 2017 acquisition of SLD. Operating income of our DCS segment decreased to $134.0 million in 2018, from $136.2 million in 2017. Increased revenue and improved asset integration was offset by higher costs from the expanded FMS network, increased driver wages and recruiting costs, higher non-driver salaries, wages and benefits, increased maintenance costs on equipment scheduled to be traded in the current year, higher overall insurance and claims costs, implementation costs for new customer contracts and approximately $4.4 million in additional non-cash amortization expense compared to the first nine months of 2017. In addition, 2018 operating income was further impacted by an $8.4 million charge to insurance and claims expense, primarily related to the settlement of lawsuits with current and former drivers, further discussed in Part II, Item 1, Legal Proceedings of this report on Form 10-Q.

 

17

 

 

ICS revenue increased 41% to $989 million during the first nine months of 2018, from $701 million in 2017. Overall volumes increased 28%. Revenue per load increased 10% primarily due to increased contractual and spot rates. Gross profit margin improved to 14.9% in the current year versus 12.9% last year primarily due to improved contractual margins and increased spot market activity compared to the first nine months of 2017. ICS segment operating income increased to $34.0 million, from $11.5 million in 2017, primarily due to higher gross profit margins and increased operating leverage in branches more than two years old, partially offset by higher personnel costs, higher technology development costs, and increase bad debt expense due to a customer bankruptcy. Approximately $384 million of ICS revenue for the first nine months of 2018 was executed through the marketplace for JBHunt360.

 

JBT segment revenue increased 7% to $300 million for the first nine months of 2018, from $281 million in 2017. Revenue excluding fuel surcharges increased 5%, primarily from a 14% increase in rates per loaded mile, partially offset by an 8% decrease in load count. Our JBT segment operating income increased to $21.8 million during the first nine months of 2018, from $16.2 million in 2017. The increase in operating income was driven primarily by higher rates per loaded mile and lower equipment ownership costs, partially offset by increased driver wage and retention costs, higher driver and independent contractor recruiting expenses, and higher independent contractor costs compared to the first nine months of 2017.

 

Consolidated Operating Expenses

 

The following table sets forth items in our Condensed Consolidated Statements of Earnings as a percentage of operating revenues and the percentage increase or decrease of those items as compared with the prior period.

 

    Nine Months Ended September 30,  
   

Dollar Amounts as a

Percentage of Total

Operating Revenues

   

Percentage Change

of Dollar Amounts

Between Periods

 
    2018     2017     2018 vs. 2017  

Total operating revenues

  100.0

%

    100.0

%

    21.1 %  

Operating expenses:

                       

Rents and purchased transportation

  50.2       50.5       20.5    

Salaries, wages and employee benefits

  22.4       22.7       19.7    

Fuel and fuel taxes

  5.4       4.7       38.4    

Depreciation and amortization

  5.1       5.4       14.4    

Operating supplies and expenses

  3.6       3.7       19.1    

General and administrative expenses, net of asset dispositions

  1.8       1.4       50.2    

Insurance and claims

  1.6       1.5       33.2    

Operating taxes and licenses

  0.6       0.6       14.5    

Communication and utilities

  0.4       0.3       42.3    

Total operating expenses

  91.1       90.8       21.5    

Operating income

  8.9       9.2       16.8    

Net interest expense

  0.5       0.4       28.6    

Earnings before income taxes

  8.4       8.8       16.2    

Income taxes

  2.0       3.0       (16.9 )  

Net earnings

  6.4

%

    5.8

%

    33.2 %  

 

Total operating expenses increased 21.5%, while operating revenues increased 21.1%, during the first nine months 2018, from the comparable period of 2017. Operating income increased to $558.3 million during the first nine months 2018, from $478.0 million in 2017.

 

Rents and purchased transportation costs increased 20.5% in 2018. This increase was primarily the result of increased rail and truck purchased transportation rates and the increase in load volume, which increased services provided by third-party rail and truck carriers within JBI and ICS segments.

 

Salaries, wages and employee benefits costs increased 19.7% in 2018 from 2017. This increase was primarily related to increases in driver pay and office personnel compensation due to a tighter supply of qualified drivers and an increase in the number of employees.

 

18

 

 

Fuel costs increased 38.4% in 2018, compared with 2017, due to increases in the price of fuel and an increase in road miles. Depreciation and amortization expense increased 14.4% in 2018 primarily due to additions to our JBI segment tractor, container and chassis fleets to support additional business demand and equipment purchased related to new DCS long-term customer contracts.

 

Operating supplies and expenses increased 19.1% driven primarily by higher equipment maintenance expenses, increased tire expense, higher travel costs, increased toll costs, and higher building maintenance expenses. General and administrative expenses increased 50.2% from the comparable period in 2017, primarily due to increased building and computer rentals, higher professional fees, higher advertising costs, higher bad debt expense driven by a customer bankruptcy, and increased net losses from asset sales and disposals. Net loss from sale or disposal of assets was $8.4 million in 2018, compared to a net loss of $5.7 million in 2017. Insurance and claims expense increased 33.2% in 2018 compared with 2017, primarily due to higher incident volume during the current period and 2018 including specific reserve charges for pending legal matters, primarily related to the settlement of lawsuits with current and former drivers, further discussed in Part II, Item 1, Legal Proceedings of this report on Form 10-Q.

 

Net interest expense increased 28.6% in 2018, due primarily to an increase in average debt levels, higher effective interest rates on our debt, and expenses incurred to refinance our revolving line of credit compared to 2017. Income tax expense decreased 16.9%, compared with 2017, primarily due to a lower effective income tax rate in 2018, due to the impact of the Tax Cuts and Jobs Act of 2017, and our recognition of discreet tax benefits related to the statute expiration of uncertain tax positions. These items were partially offset by a one-time after-tax benefit of $13.6 million for the claiming of federal research and development tax credits and domestic production tax deductions for the 2012 through 2016 tax years, recorded in the first nine months of 2017. Our effective income tax rate was 24.3% for the nine months ended 2018, compared to 33.9% in 2017. Our annual tax rate for 2018 is expected to be 24.0%. In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate, adjusted for discrete items. This rate is based on our expected annual income, statutory tax rates, best estimate of nontaxable and nondeductible items of income and expense, and the ultimate outcome of tax audits.

 

Liquidity and Capital Resources

 

Cash Flow

 

Net cash provided by operating activities totaled $777.6 million during the first nine months of 2018, compared with $628.5 million for the same period 2017. Operating cash flows increased due to increased earnings and the timing of general working capital activities. Net cash used in investing activities totaled $586.3 million in 2018, compared with $456.1 million in 2017. The increase resulted from an increase in equipment purchases, net of proceeds from the sale of equipment, in 2018, partially offset by the purchase of SLD, which closed during the third quarter 2017. Net cash used in financing activities was $198.4 million in 2018, compared with $171.1 million in 2017. This increase resulted primarily from a higher amount of net borrowings under our revolving line of credit in 2017, used primarily for the purchase of SLD.

 

Debt and Liquidity Data

 

   

September 30, 2018

   

December 31, 2017

   

September 30, 2017

 

Working capital ratio

    1.11       1.45       1.48  

Current portion of long-term debt (millions)

    248.7       -       -  

Total debt (millions)

  $ 1,069.5     $ 1,085.6     $ 1,084.8  

Total debt to equity

    0.51       0.59       0.74  

Total debt as a percentage of total capital

    34 %     37 %     42 %

 

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Liquidity

 

Our need for capital has typically resulted from the acquisition of containers, chassis, trucks, tractors, and trailers required to support our growth and the replacement of older equipment. We are frequently able to accelerate or postpone a portion of equipment replacements depending on market conditions. We have, during the past few years, obtained capital through cash generated from operations, revolving lines of credit, and long-term debt issuances. We have also periodically utilized operating leases to acquire revenue equipment. For our senior notes maturing in 2019, it is our intent to pay the entire outstanding balances in full, on or before the maturity dates, using our existing senior revolving line of credit or other sources of long-term financing. On September 25, 2018, we replaced our $500 million senior revolving credit facility dated September 30, 2015, with a new credit facility authorizing us to borrow up to $750 million under a senior revolving line of credit.

 

We believe our liquid assets, cash generated from operations and revolving line of credit will provide sufficient funds for our operating and capital requirements for the foreseeable future. The following table summarizes our expected obligations and commitments as of September 30, 2018 (in millions):

 

   

Total

   

One

Year Or

Less

   

One to

Three

Years

   

Three to

Five

Years

   

After

Five

Years

 

Operating leases

  $ 109.4     $ 34.3     $ 45.6     $ 20.5     $ 9.0  

Debt obligations

    1,091.0       250.0       -       591.0       250.0  

Interest payments on debt (1)

    146.2       34.3       60.5       46.6       4.8  

Commitments to acquire revenue equipment and facilities

    645.4       163.3       482.1       -       -  

Total

  $ 1,992.0     $ 481.9     $ 588.2     $ 658.1     $ 263.8  

 

(1)

Interest payments on debt are based on the debt balance and applicable rate at September 30, 2018.

 

Our net capital expenditures were approximately $585 million during the first nine months of 2018, compared with $315 million for the same period 2017. Our net capital expenditures include net additions to revenue equipment and non-revenue producing assets that are necessary to contribute to and support the future growth of our various business segments. Capital expenditures in 2018 were primarily for tractors, additional intermodal containers and chassis, and other trailing equipment. We are currently committed to spend approximately $645 million during the remainder of 2018 and 2019. We expect to spend in the range of $750 million to $800 million for net capital expenditures during calendar year 2018. The table above excludes $47.3 million of potential liabilities for uncertain tax positions, including interest and penalties, which are recorded on our Condensed Consolidated Balance Sheets. However, we are unable to reasonably estimate the ultimate timing of any settlements.

 

Off-Balance Sheet Arrangements

 

Our only off-balance sheet arrangements as of September 30, 2018, were operating leases related primarily to facility lease obligations.

 

Risk Factors

 

You should refer to Item 1A of our Annual Report (Form 10-K) for the year ended December 31, 2017, under the caption “Risk Factors” for specific details on the following factors and events that are not within our control and could affect our financial results.

 

 

Our business is subject to general economic and business factors, any of which could have a material adverse effect on our results of operations. Economic trends and tightening of credit in financial markets could adversely affect our ability, and the ability of our suppliers, to obtain financing for operations and capital expenditures.

 

 

We depend on third parties in the operation of our business.

 

 

Rapid changes in fuel costs could impact our periodic financial results.

 

 

Insurance and claims expenses could significantly reduce our earnings.

 

 

We derive a significant portion of our revenue from a few major customers, the loss of one or more of which could have a material adverse effect on our business.

 

20

 

 

 

We operate in a regulated industry, and increased direct and indirect costs of compliance with, or liability for violation of, existing or future regulations could have a material adverse effect on our business.

 

 

Difficulty in attracting and retaining drivers, delivery personnel, and third-party carriers could affect our profitability and ability to grow.

 

 

We may be subject to litigation claims that could result in significant expenditures.

 

 

We rely significantly on our information technology systems, a disruption, failure or security breach of which could have a material adverse effect on our business.

 

 

We operate in a competitive and highly fragmented industry. Numerous factors could impair our ability to maintain our current profitability and to compete with other carriers and private fleets.

 

 

Extreme or unusual weather conditions can disrupt our operations, impact freight volumes, and increase our costs, all of which could have a material adverse effect on our business results.

 

 

Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.

 

 

Acquisitions or business combinations may disrupt or have a material adverse effect on our operations or earnings.

 

ITEM 3.  Quantitative And Qualitative Disclosures AbouT Market Risk

 

Our outstanding debt at September 30, 2018 includes our senior revolving line of credit and senior notes issuances. Our senior notes have fixed interest rates ranging from 2.40% to 3.85%. 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 interest rate swap agreements which effectively convert our $250 million of 2.40% and $350 million of 3.30% fixed rate senior notes due March 2019 and August 2022, respectfully, to variable rates, to allow us to maintain a desired mix of variable and fixed rate debt. The applicable interest rates under these agreements are 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 $8.4 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, 2018. 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, 2018, 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, 2018, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

 

21

 

 

ITEM 4.  CONTROLS AND PROCEDURES

 

We maintain controls and procedures designed to ensure that the information we are required to disclose in the reports we file with the SEC is recorded, processed, summarized and reported, within the time periods specified in the SEC rules, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2018.

 

There were no changes in our internal control over financial reporting during the third quarter of 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Part II. Other Information 

 

ITEM 1. LEGAL PROCEEDINGS

 

We are a defendant in certain possible class-action lawsuits in which the plaintiffs are current and former California-based drivers who allege claims for unpaid wages, failure to provide meal and rest periods, and other items. In the lead class-action, the United States District Court for the Central District of California issued an Order in late July 2018 granting in part and denying in part Plaintiffs’ motion for partial summary judgment. In early August 2018 the Court issued an Order decertifying the class and granting in part and denying in part our motion for partial summary judgment on certain claims. Plaintiffs requested the United States Court of Appeals for the Ninth Circuit to review the Court’s decertification Order and to stay the September 2018 trial of the named plaintiffs’ individual claims. In September 2018, we reached an agreement to resolve all pending claims for a class settlement payment of $15 million, subject to Court approval. The Court’s preliminary settlement approval hearing is scheduled for late October 2018. The overlapping claims in the other lawsuits remain stayed pending final approval of the settlement in the lead class-action case. 

 

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. BNSF requested the same, and the arbitration process is on-going. On October 5, 2018, we received the arbitrators’ Interim Award. The details of the Interim Award are confidential and require the parties to submit additional information requested by the arbitrators over the next several months 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. The other financial implications from the Interim Award will not be fully determined until the arbitrators issue additional award(s) following their review of each party’s requested additional submissions. At this time, we are unable to reasonably predict the final outcome of the arbitration, and, as such, no further gain or loss contingency can be determined or recorded. If decided adversely, this matter could result in a liability material to our financial condition or results of operations. BNSF provides a significant amount of rail transportation services to our JBI business segment. Normal commercial business activity between the parties, including load tendering, load tracing, billing and payments, is expected to continue on a timely basis.

 

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

 

22

 

 

ITEM 1A.

RISK FACTORS

 

Information regarding 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 and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017.

 

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, 2018:

 

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, 2018

    422,254     $ 118.41       422,254     $ 421  

August 1 through August 31, 2018

    -       -       -       421  

September 1 through September 30, 2018

    -       -       -       421  

Total

    422,254     $ 118.41       422,254     $ 421  

 

(1)

On April 20, 2017 our Board of Directors authorized the purchase of up to $500 million of our common stock.

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION

 

Not applicable.

 

ITEM 6.

EXHIBITS

 

Index to Exhibits

 

23

 

 

Exhibit  

Number

Exhibits
     

3.1

 

Amended and Restated Articles of Incorporation of J.B. Hunt Transport Services, Inc. dated May 19, 1988 (incorporated by reference from Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2005, filed April 29, 2005)

     

3.2

 

Amended and Restated Bylaws of J.B. Hunt Transport Services, Inc. dated April 23, 2015 (incorporated by reference from Exhibit 3.1 of the Company’s current report on Form 8-K, filed April 27, 2015)

     

10.1

 

Credit Agreement and related documents (incorporated by reference from Exhibit 10.1 of the Company’s current report on Form 8-K, filed September 28, 2018)

     

31.1

 

Rule 13a-14(a)/15d-14(a) Certification

     

31.2

 

Rule 13a-14(a)/15d-14(a) Certification

     

32.1

 

Section 1350 Certification

     

32.2

 

Section 1350 Certification

     

101.INS

XBRL Instance Document

     

101.SCH

XBRL Taxonomy Extension Schema Document

     

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

     

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

     

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

     

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

24

 

 

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 29th day of October, 2018.

 

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

(Registrant)                                        

 

 

 

 

 

 

 

 

 

 

BY:

/s/ John N. Roberts, III

 

 

 

John N. Roberts, III

 

 

 

President and Chief Executive Officer

(Principal Executive Officer)

 

 

 

 

 

 

 

BY:

/s/ David G. Mee

 

 

 

David G. Mee

 

 

 

Executive Vice President, Finance and

Administration and Chief Financial Officer

(Principal Financial Officer)

 

 

 

 

 

 

 

BY:

/s/ John K. Kuhlow

 

 

 

John K. Kuhlow

 

 

 

Senior Vice President-Finance, Controller,

Chief Accounting Officer

(Principal Accounting Officer)

 

 

25