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

 

 

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)

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

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.

 

 

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.

 

 

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.

 

 

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.

 

 

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.

 

 

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.

 

 

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	%

 

 

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.

 

 

●

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.

 

 

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.

 

 

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

 

 

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

 

 

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)

 

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