JB HUNT TRANSPORT SERVICES 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 endedDecember 31, 2019 , as you read the following discussion. We may make statements in this report that reflect our current expectation regarding future results of operations, performance, and achievements. These are "forward-looking" statements as defined in the Private Securities Litigation Reform Act of 1995, and are based on our belief or interpretation of information currently available. You should realize there are many risks and uncertainties that could cause actual results to differ materially from those described. Some of the factors and events that are not within our control and could have a significant impact on future operating results are general economic and business conditions; competition and competitive rate fluctuations; excess capacity in the intermodal or trucking industries; a loss of one or more major customers; cost and availability of diesel fuel; interference with or termination of our relationships with certain railroads; rail service delays; disruptions toU.S. port-of-call activity; ability to attract and retain qualified drivers, delivery personnel, independent contractors, and third-party carriers; retention of key employees; insurance costs and availability; litigation and claims expense; determination that independent contractors are employees; new or different environmental or other laws and regulations; volatile financial credit markets or interest rates; terrorist attacks or actions; acts of war; adverse weather conditions; national or international health pandemics; disruption or failure of information systems; operational disruption or adverse effects of business acquisitions; increased costs for new revenue equipment; increased tariffs assessed on or disruptions in the procurement of imported revenue equipment; 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 Part I, Item 1A of our Annual Report (Form 10-K) for the year endedDecember 31, 2019 and Part II, Item 1A of this Quarterly Report on Form 10-Q for additional information on risk factors and other events that are not within our control. Our future financial and operating results may fluctuate as a result of these and other risk factors as described from time to time in our filings with theSEC . GENERAL We are one of the largest surface transportation, delivery, and logistics companies inNorth America . We operate five distinct, but complementary, business segments and provide a wide range of transportation and delivery services to a diverse group of customers throughout the continentalUnited States ,Canada , andMexico . 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 continentalUnited States . Utilizing a network of thousands of reliable third-party carriers, we also provide comprehensive transportation and logistics services. In addition to dry-van, full-load operations, these unrelated outside carriers also provide flatbed, refrigerated, less-than-truckload (LTL), and other specialized equipment, drivers, and services. Also, we utilize a combination of company-owned and contracted power units to provide traditional over-the-road full truckload delivery services. We account for our business on a calendar year basis, with our full year ending onDecember 31 and our quarterly reporting periods ending onMarch 31 ,June 30 , andSeptember 30 . The operation of each of our five business segments is described in Note 10, Business Segments, in our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity withU.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. 13
-------------------------------------------------------------------------------- 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 endedDecember 31, 2019 , contains a summary of our critical accounting policies. There have been no material changes to the methodology we apply for critical accounting estimates as previously disclosed in our Annual Report on Form 10-K. RESULTS OF OPERATIONS Comparison of Three Months EndedMarch 31, 2020 to Three Months EndedMarch 31, 2019 Summary of Operating Segment Results For the Three Months Ended March 31, (in millions) Operating Revenues Operating Income/(Loss) 2020 2019 2020 2019 JBI$ 1,150 $ 1,088 $ 102.2 $ 103.3 DCS 542 492 72.9 50.1 ICS 335 301 (18.9 ) 7.0 FMS 154 110 (3.3 ) 0.2 JBT 105 102 1.8 7.2 Subtotal 2,286 2,093 154.7 167.8 Inter-segment eliminations (5 ) (3 ) - - Total$ 2,281 $ 2,090 $ 154.7 $ 167.8 Total consolidated operating revenues increased to$2.28 billion for the first quarter 2020, a 9% increase from$2.09 billion in the first quarter 2019, and a 10% increase excluding fuel surcharge revenues. This increase in operating revenues was primarily driven by a 7% increase in load volume in JBI, a 10% increase in revenues in DCS related to new customer contracts and higher fleet utilization, a 2% increase in load volume and a favorable change in customer freight mix in ICS and a 3% increase in JBT revenue, primarily due to a 15% increase in load volume. In addition, our newly reported FMS segment increased revenue 39% over the first quarter 2019, primarily due to two business acquisitions completed in 2019. These overall increases were partially offset by a 1% decrease in JBI revenue per load and lower rates and changes in customer mix in JBT. JBI segment revenue increased 6% to$1.15 billion during the first quarter 2020, compared with$1.09 billion in 2019. Load volumes during the first quarter 2020 increased 7% over the same period 2019. Transcontinental loads increased 11% during the first quarter 2020, and Eastern network load volume was up 1% compared to the first quarter 2019. The overall increase in load volume was partially offset by a 1% decrease in revenue per load, which is determined by the combination of customer rates, fuel surcharges and freight mix. Revenue per load excluding fuel surcharge revenue was flat year-over-year. JBI reported improved year-over-year tractor and container utilization through the end ofFebruary 2020 , as overall volume increases drove efficiencies in both the rail and dray network. Load volume disruptions related to the recent outbreak of the novel coronavirus (COVID-19) began to emerge in March and escalated through the end of the first quarter 2020. These load volume disruptions and resulting network imbalance could continue throughout the remainder of 2020, as a result of the overall economic effects caused by the ongoing COVID-19 pandemic. JBI segment operating income decreased 1%, to$102.2 million in the first quarter 2020, from$103.3 million in 2019. The increase in revenue was more than offset by an increase in rail purchased transportation costs, which included an$8.2 million accrual resulting from an adjusted calculation of the revenue divisions owed toBNSF Railway Company (BNSF) for 2019 related to the final award of our completed arbitration with BNSF issued in 2019; higher empty repositioning and network balancing expenditures as network fluidity was challenged by the effects of COVID-19 during the quarter; higher personnel costs, primarily related to$4.0 million for a one-time COVID-19 related bonus paid to employee drivers and other key field personnel; and higher costs for dray repositioning compared to the first quarter 2019. The current period ended with 96,480 units of trailing capacity and 5,492 power units assigned to the dray fleet. 14 -------------------------------------------------------------------------------- DCS segment revenue increased 10% to$542 million in the first quarter 2020 from$492 million in 2019. Productivity, defined as revenue per truck per week, increased 2% when compared to 2019. Productivity excluding fuel surcharges increased 3%, primarily due to customer rate increases, better integration of assets between customer accounts, and increased customer supply chain fluidity largely attributed to a mild winter when compared to the first quarter 2019. A net additional 430 revenue producing trucks were in the fleet by the end of the first quarter 2020 compared to a year ago, primarily from private fleet conversions during the current and prior periods. As a result of the ongoing effects of the COVID-19 pandemic, the rate of newly awarded customer private fleet conversions, however, has slowed since late March and could remain slower during the remainder of 2020. DCS segment operating income increased 46% to$72.9 million in the first quarter 2020, from$50.1 million in 2019. The increase in operating income was due primarily to increased fleet productivity and the absence of any significant implementation or weather-related costs in first quarter 2020, compared to the first quarter 2019. Operating income was partially offset by DCS's$6.5 million portion of the one-time COVID-19 bonus paid in first quarter 2020. ICS segment revenue increased 12% to$335 million in the first quarter 2020, from$301 million in 2019. Overall volumes increased 2% while revenue per load increased 9%, primarily due to customer freight mix changes compared to first quarter 2019. Contractual business represented approximately 74% of total load volume and 64% of total revenue in the first quarter 2020, compared to 68% and 51%, respectively, in 2019. Approximately$235 million of first quarter 2020 ICS revenue was executed through the Marketplace forJ.B. Hunt 360° compared to$186 million in the first quarter 2019. ICS segment had an operating loss of$18.9 million in the first quarter of 2020 compared to operating income of$7.0 million in 2019. Gross profit margin decreased to 9.6% in the first quarter 2020, compared to 16.5% in 2019, primarily due to a competitive pricing environment in the contractual business and tightening supply dynamics at various points throughout the current period. Current period operating results were further affected by increased technology spending as the Marketplace forJ.B. Hunt 360° continues to expand in functionality and capacity, continued personnel growth costs, and higher digital marketing and advertising costs, compared to first quarter 2019. ICS's carrier base increased 13% and employee count increased 2% compared to first quarter 2019. ICS could experience reduced overall load volumes throughout the remainder of 2020 as a result of the economic effects caused by the ongoing COVID-19 pandemic. FMS segment revenue increased 39% to$154 million in the first quarter 2020 from$110 million in 2019, primarily due to two business acquisitions completed in 2019. Stop count for the first quarter 2020 increased 67%, while productivity, defined as revenue per stop, decreased 17% compared to 2019. The reduction in productivity was primarily due to a change in the mix of service methods to a more asset-light model resulting from the 2019 business acquisitions. FMS segment had an operating loss of$3.3 million in the first quarter of 2020 compared to operating income of$0.2 million in 2019. The current period operating loss was primarily due to increased costs to expand the FMS network, increased costs resulting from the temporary suspension of operations at several customer sites in response to COVID-19, higher bad debt expense,$1.3 million of one-time COVID-19 employee bonus expense, and$1.2 million in additional noncash amortization expense attributable to the 2019 business acquisitions compared to first quarter 2019. A large portion of FMS customers have been significantly impacted by the ongoing response to the COVID-19 pandemic and as a result, the operations of FMS will continue to be impacted as those customers' operations are affected. JBT segment revenue totaled$105 million for the first quarter 2020, an increase of 3% from$102 million in first quarter 2019. Revenue excluding fuel surcharge also increased 3% primarily due to a 15% increase in load volume, partially offset by a 10% decrease in revenue per load compared to first quarter 2019. Revenue per loaded mile in first quarter 2020 decreased 6%, while comparable contractual customer rates decreased 1% compared to first quarter 2019. As a result of the ongoing effects of the COVID-19 pandemic, JBT could experience reduced load volumes and customer rates throughout the remainder of 2020. At the end of the first quarter 2020, JBT operated 1,887 tractors and 7,391 trailers compared to 2,043 tractors and 6,785 trailers in 2019. JBT segment operating income decreased 75% to$1.8 million in 2020, compared with$7.2 million during first quarter 2019. Benefits from the higher load volume were more than offset by higher purchased transportation expense, lower customer rates, increased trailing-related costs, higher technology modernization expenses, and$0.5 million of one-time COVID-19 employee bonus expense compared to first quarter 2019. 15
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Consolidated Operating Expenses
The following table sets forth items in our Condensed Consolidated Statements of
Earnings as a percentage of operating revenues and the percentage increase or
decrease of those items as compared with the prior period.
Three Months Ended March 31,
Percentage
Change
Dollar Amounts as a of Dollar
Percentage of Total Amounts Between
Operating Revenues Quarters
2020 2019 2020 vs. 2019
Total operating revenues 100.0 % 100.0 % 9.1 %
Operating expenses:
Rents and purchased transportation 49.8 47.9 13.6
Salaries, wages and employee benefits 25.2 24.7 11.2
Depreciation and amortization 5.7 5.7 8.5
Fuel and fuel taxes 4.4 5.4 (9.8 )
Operating supplies and expenses 3.8 3.7 9.5
General and administrative expenses, net of
asset dispositions 1.9 2.2 0.3
Insurance and claims 1.4 1.4 11.6
Operating taxes and licenses 0.6 0.6 1.2
Communication and utilities 0.4 0.4 (2.0 )
Total operating expenses 93.2 92.0 10.6
Operating income 6.8 8.0 (7.8 )
Net interest expense 0.5 0.6 (7.7 )
Earnings before income taxes 6.3 7.4 (7.8 )
Income taxes 1.7 1.7 7.7
Net earnings 4.6 % 5.7 % (12.3 )%
Total operating expenses increased 10.6%, while operating revenues increased
9.1%, during the first quarter 2020, from the comparable period 2019. Operating
income decreased to $154.7 million during the first quarter 2020, from $167.8
million in 2019.
Rents and purchased transportation costs increased 13.6% in 2020. This increase
was primarily the result of the increase in load volume, which increased
services provided by third-party rail and truck carriers within JBI and ICS
segments and increased rail and truck carrier purchased transportation rates. In
addition, JBI rail purchased transportation costs included an $8.2 million
accrual resulting from an adjusted calculation of the revenue divisions owed to
BNSF for 2019 related to the final award of our completed arbitration with BNSF
issued in 2019.
Salaries, wages and employee benefit costs increased 11.2% in 2020 compared with
2019. This increase was primarily related to increases in driver pay and office
personnel compensation due to a tighter supply of qualified drivers and an
increase in the number of employees. In addition, first quarter 2020 included a
$12.3 million one-time COVID-19 related bonus paid to employee drivers and other
key field personnel and $3.4 million of additional stock compensation expense
related to the acceleration of equity award vesting for executive employee
retirements.
Depreciation and amortization expense increased 8.5% in 2020, primarily due to
equipment purchases related to new DCS long-term customer contracts. Fuel costs
decreased 9.8% in 2020, compared with 2019, due to a decrease in the price of
fuel, partially offset by an increase in road miles.
Operating supplies and expenses increased 9.5% in 2020, compared with 2019,
primarily due to higher toll costs, increased tire expenses, and higher building
maintenance expenses. General and administrative expenses for the current
quarter were virtually flat compared with 2019, primarily due to increased
building and computer rentals being offset by a reduction in professional fees
during first quarter 2020. Net loss from sale or disposal of assets was $1.5
million in 2020, compared to a net loss of $2.3 million in 2019. Insurance and
claims expense increased 11.6% in 2020, compared with 2019, due to higher
incident volume, partially offset by a decrease in accident severity.
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Net interest expense decreased 7.7% in 2020, due primarily to lower effective
interest rates on our debt. Income tax expense increased 7.7% in first quarter
2020, compared with 2019, primarily due to a higher effective income tax rate
due to the impact of stock compensation accelerations for executive employee
retirements and the fact that the effective rate for 2019 was reduced by the
favorable settlement of a state income tax audit. The increase in effective
income tax rate was partially offset by decreased taxable earnings. Our
effective income tax rate was 26.5% for the first quarter 2020, compared to
22.7% in 2019. Our annual tax rate for 2020 is expected to be 24.5%. In
determining our quarterly provision for income taxes, we use an estimated annual
effective tax rate, adjusted for discrete items. This rate is based on our
expected annual income, statutory tax rates, best estimate of nontaxable and
nondeductible items of income and expense, and the ultimate outcome of tax
audits.
Liquidity and Capital Resources
Cash Flow Net cash provided by operating activities totaled$249 million during the first three months of 2020, compared with$251 million for the same period 2019. Operating cash flows decreased due to decreased earnings in first quarter 2020, partially offset by the timing of general working capital activities. Net cash used in investing activities totaled$129 million in 2020, compared with$311 million in 2019. The decrease resulted from a decrease in equipment purchases, net of proceeds from the sale of equipment, during the current period and from the fact that the Cory 1st Choice Home Delivery acquisition closed during first quarter 2019. Net cash used in financing activities was$107 million in 2020, compared with net cash provided by financing activities of$105 million in 2019. This change resulted primarily from first quarter 2020 including$75 million of treasury stock purchases, while first quarter 2019 included the issuance of our$700 million of 3.875% senior notes dueMarch 2026 , partially offset by the full retirement of our$250 million of 2.40% senior notes that matured inMarch 2019 . Debt and Liquidity Data December 31, March 31, 2020 2019 March 31, 2019 Working capital ratio 1.54 1.43 1.44 Total debt (millions)$ 1,302.8 $ 1,295.7 $ 1,284.6 Total debt to equity 0.57 0.57 0.58 Total debt as a percentage of total capital 36 % 36 % 37 % Liquidity Our need for capital has typically resulted from the acquisition of containers and chassis, trucks, tractors and trailers required to support our growth and the replacement of older equipment as well as periodic business acquisitions. We are frequently able to accelerate or postpone a portion of equipment replacements or other capital expenditures depending on market and overall economic conditions and will continue to utilize this ability throughout the ongoing COVID-19 pandemic. In the near-term, we are reprioritizing a portion of our 2020 capital spend to items we consider essential and critical. Expenditures are being evaluating based on those that must happen, those that can be deferred to a later period, and those that are capable of being canceled. We have, during the past few years, obtained capital through cash generated from operations, revolving lines of credit and long-term debt issuances. We have also periodically utilized operating leases to acquire revenue equipment. We believe our liquid assets, cash generated from operations, and revolving line of credit will provide sufficient funds for our operating and capital requirements for the foreseeable future. Should COVID-19 related economic conditions warrant, we believe we have sufficient credit resources available to meet our near-term operating and capital needs. AtMarch 31, 2020 , we had a cash balance of$48 million and we had no outstanding balance on our revolving line of credit, which authorizes us to borrow up to$750 million as well as request an increase in the total commitment by up to$250 million .
Our financing arrangements require us to maintain certain covenants and
financial ratios. At
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We are continually evaluating the possible effects of current economic
conditions and reasonable and supportable economic forecasts on operational cash
flows, including the risks of declines in the overall freight market and our
customers' liquidity and ability to pay. We are monitoring working capital on a
daily basis and are in frequent communication with our customers, suppliers and
service providers. Through March 31, 2020 , operational cost reduction activities
consisted primarily of canceling non-essential travel and hiring activities and
the delay of other discretionary spending, which we will continue to do as
necessary. A large portion of our cost structure is variable. Purchased
transportation expense represents more than half of our total costs but is
heavily tied to load volumes. Our second largest cost item is salaries and
wages, the largest portion of which is driver pay, which includes a large
variable component. Currently, we have made no adjustments to our costs that we
consider more fixed in nature. However, we are carefully monitoring the
environment and are prepared to adjust if necessary.
The following table summarizes our expected obligations and commitments as of
One Year Or One to Three to After Five
Total Less Three Years Five Years Years
Operating leases $ 129.9 $ 45.5 $ 56.9 $ 18.0 $ 9.5
Debt obligations 1,300.0 - 350.0 250.0 700.0
Interest payments on debt (1) 224.8 47.4 88.6 63.9 24.9
Commitments to acquire revenue
equipment and facilities 903.2 336.9 566.3 - -
Total $ 2,557.9 $ 429.8 $ 1,061.8 $ 331.9 $ 734.4 (1) Interest payments on debt are based on the debt balance and applicable
rate at
Our net capital expenditures were approximately$129 million during the first three months of 2020, compared with$212 million for the same period 2019. Our net capital expenditures include net additions to revenue equipment and non-revenue producing assets that are necessary to contribute to and support the future growth of our various business segments. Capital expenditures in 2020 were primarily for tractors, additional intermodal containers and chassis, and other trailing equipment. We are currently committed to spend approximately$903.2 million during the years 2020 to 2022. We have paused or cancelled certain capital expenditures originally planned for 2020 that, considering the effects of the COVID-19 pandemic, are now viewed as non-essential in the near-term. Accordingly, we now expect to spend in the range of$450 million to$475 million for net capital expenditures during the remainder of 2020. Our ultimate capital expenditure levels could also be affected by manufacturer production slowdowns resulting from the COVID-19 pandemic. We will also continue to evaluate opportunities for business acquisitions within our markets following our established evaluation process which considers liquidity and funding requirements. The table above excludes$57.1 million of potential liabilities for uncertain tax positions, including interest and penalties, which are recorded on our Condensed Consolidated Balance Sheets. However, we are unable to reasonably estimate the ultimate timing of any settlements.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements, other than our net purchase
commitments of 903.2 million, as of
18
--------------------------------------------------------------------------------Risk Factors You should refer to Part I, Item 1A of our Annual Report (Form 10-K) for the year endedDecember 31, 2019 , and Part II, Item 1A of this Quarterly Report (Form 10-Q) under the caption "Risk Factors" for specific details on the following factors and events that are not within our control and could affect our financial results.
? Our business is subject to general economic and business factors, any of which
could have a material adverse effect on our results of operations. Economic
trends and tightening of credit in financial markets could adversely affect
our ability, and the ability of our suppliers, to obtain financing for
operations and capital expenditures.
? Our business is significantly impacted by the effects of national orinternational health pandemics on customer operations, third-party suppliers
and service providers, and on general economic conditions.
? We depend on third parties in the operation of our business.
? Rapid changes in fuel costs could impact our periodic financial results.
? Insurance and claims expenses could significantly reduce our earnings.
? We derive a significant portion of our revenue from a few major customers, the
loss of one or more of which could have a material adverse effect on our
business.
? We operate in a regulated industry, and increased direct and indirect costs of
compliance with, or liability for violation of, existing or future regulations
could have a material adverse effect on our business.
? Difficulty in attracting and retaining drivers, delivery personnel andthird-party carriers could affect our profitability and ability to grow.
? A determination that independent contractors are employees could expose us to
various liabilities and additional costs.
? We may be subject to litigation claims that could result in significant
expenditures.
? We rely significantly on our information technology systems, a disruption,
failure or security breach of which could have a material adverse effect on
our business.
? We operate in a competitive and highly fragmented industry. Numerous factors
could impair our ability to maintain our current profitability and to compete
with other carriers and private fleets.
? Extreme or unusual weather conditions can disrupt our operations, impact
freight volumes and increase our costs, all of which could have a material
adverse effect on our business results.
? Our operations are subject to various environmental laws and regulations,
including legislative and regulatory responses to climate change. Compliance
with environmental requirements could result in significant expenditures and
the violation of these regulations could result in substantial fines or
penalties.
? Acquisitions or business combinations may disrupt or have a material adverse
effect on our operations or earnings.
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