JBHT 10-Q Quarter ended Sept. 30, 2019

We compute basic earnings per share by dividing net earnings available to common stockholders by the actual weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if holders of unvested restricted and performance share units converted their holdings into common stock. The dilutive effect of restricted and performance share units was 1.0 million shares during both the third quarter 2019 and 2018. During the nine months ended September 30, 2019 and 2018, the dilutive effect of restricted and performance share units was 1.0 million shares and 1.1 million shares, respectively.

The following table summarizes the components of our share-based compensation program expense (in thousands):

As of September 30, 2019, we had $ 68.5 million and $ 16.5 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 3.3 years for restricted share units and 2.2 years for performance share units. During the nine months ended September 30, 2019, we issued 225,625 shares for vested restricted share units, 127,140 shares for vested performance share units. Of these totals, 225,455 shares for vested restricted share units and 75,699 shares for vested performance share units were issued during the third quarter 2019.

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):

Senior Revolving Line of Credit

At September 30, 2019, we were authorized to borrow up to $ 750 million under a senior revolving line of credit, which is supported by a credit agreement with a group of banks and expires in September 2023. This senior credit facility allows us to request an increase in the total commitment by up to $ 250 million and to request a one -year extension of the maturity date. The applicable interest rate under this agreement is based on either the Prime Rate, the Federal Funds Rate or LIBOR, depending upon the specific type of borrowing, plus an applicable margin based on our credit rating and other fees. At September 30, 2019, we had no outstanding borrowings under this agreement.

Seni or Notes

Our senior notes consist of three separate issuances. The first is $ 250 million of 3.85 % senior notes due March 2024, which was issued in March 2014. Interest payments under this note are due semiannually in March and September of each year, beginning September 2014. The second is $ 350 million of 3.30 % senior notes due August 2022, issued in August 2015. Interest payments under this note are due semiannually in February and August of each year, beginning February 2016. The third is $ 700 million of 3.875 % senior notes due March 2026, issued in March 2019. Interest payments under this note are due semiannually in March and September of each year, beginning September 2019. All three senior notes were issued by J.B. Hunt Transport Services, Inc., a parent-level holding company with no significant assets or operations. The notes are guaranteed on a full and unconditional basis by a wholly-owned subsidiary. All other subsidiaries of the parent are minor. We registered these offerings and the sale of the notes under the Securities Act of 1933, pursuant to shelf registration statements filed in February 2014 and January 2019. All notes are unsecured obligations and rank equally with our existing and future senior unsecured debt. We may redeem for cash some or all of the notes based on a redemption price set forth in the note indenture. See Note 5, Derivative Financial Instruments, for terms of an interest rate swap entered into on the $350 million of 3.30% senior notes due August 2022. Our $ 250 million of 2.40 % senior notes matured in March 2019. The entire outstanding balance was paid in full at maturity.

Our financing arrangements require us to maintain certain covenants and financial ratios.  We were in compliance with all covenants and financial ratios at September 30, 2019.

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

We entered into a receive fixed-rate and pay variable-rate interest rate swap agreement simultaneously with the issuance of our $ 350 million of 3.30 % senior notes due August 2022, to effectively convert this fixed-rate debt to variable-rate. The notional amount of this interest rate swap agreement equals that of the corresponding fixed-rate debt. The applicable interest rate under this agreement is based on LIBOR plus an established margin, resulting in an interest rate of 3.52 % for our $350 million of 3.30% senior notes at September 30, 2019. The swap expires when the corresponding senior notes are due. The fair value of this swap is recorded in other assets in our Condensed Consolidated Balance Sheet at September 30, 2019. See Note 7, Fair Value Measurements, for disclosure of fair value. This derivative meets the required criteria to be designated as a fair value hedge, and as the specific terms and notional amount of this derivative instrument match those of the fixed-rate debt being hedged, this derivative instrument is assumed to perfectly hedge the related debt against changes in fair value due to changes in the benchmark interest rate. Accordingly, any change in the fair value of this interest rate swap recorded in earnings is offset by a corresponding change in the fair value of the related debt.

On April 20, 2017, our Board of Directors authorized the purchase of $ 500 million of our common stock. At September 30, 2019, $ 145 million of this authorization was remaining. We purchased approximately 380,000 shares, or $ 36 million, of our common stock under our repurchase authorization during the three months ended September 30, 2019 and approximately 2.4 million shares, or $ 226 million, of our common stock under our repurchase authorization during the nine months ended September 30, 2019. On July 18, 2019, our Board of Directors declared a regular quarterly cash dividend of $ 0.26 , which was paid August 16, 2019 , to stockholders of record on August 2, 2019 . On October 14, 2019, our Board of Directors declared a regular quarterly dividend of $ 0.26 per common share, which will be paid on November 22, 2019 , to stockholders of record on November 8, 2019 .

Our assets and liabilities measured at fair value are based on valuation techniques which consider prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. These valuation methods are based on either quoted market prices (Level 1 ) or inputs, other than quoted prices in active markets, that are observable either directly or indirectly (Level 2 ). The following are assets and liabilities measured at fair value on a recurring basis at September 30, 2019 ( in millions):

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, 2019, using the income approach (Level 2 ), based on their net present value, discounted at our current borrowing rate, of our senior revolving line of credit and remaining senior notes not measured at fair value on a recurring basis, were $ 941.9 million and $ 1.02 billion, respectively.

The carrying amounts of all other instruments at September 30, 2019, approximate their fair value due to the short maturity of these instruments.

Our effective income tax rate was 23.9 % for the three months ended September 30, 2019, compared to 20.4 % for the three months ended September 30, 2018. Our effective income tax rate was 23.9 % for the first nine months of 2019, compared to 24.3 % in 2018. In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate, adjusted for discrete items. This rate is based on our expected annual income, statutory tax rates, best estimate of nontaxable and nondeductible items of income and expense, and the ultimate outcome of tax audits.

At September 30, 2019, we had a total of $ 52.4 million in gross unrecognized tax benefits, which are a component of other long-term liabilities on our Condensed Consolidated Balance Sheets. Of this amount, $ 43.2 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate. The total amount of accrued interest and penalties for such unrecognized tax benefits was $ 5.3 million at September 30, 2019.

We were a defendant in a certain alleged class-action lawsuit in which the plaintiffs were current and former California-based employee drivers who alleged claims for unpaid wages, failure to provide meal and rest periods, and other items. We reached an agreement and recorded a reserve in September 2018 to resolve all pending claims for a class settlement payment of $ 15 million, subject to Court approval. The United States District Court for the Central District of California entered an order granting final approval of the class settlement in April 2019.

In January 2017 we exercised our right to utilize the arbitration process to review the division of revenue collected beginning May 1, 2016, as well as to clarify other issues, under our Joint Service Agreement with BNSF Railway Company (BNSF). BNSF requested the same. In October 2018 we received the arbitrators’ Interim Award. The details of the Interim Award are confidential, but it required the parties to submit additional information requested by the arbitrators to decide certain unresolved matters. For the determined components of the Interim Award, we recorded an $ 18.3 million pre-tax charge in the third quarter 2018 related to certain charges claimed by BNSF for specific services requested for customers from April 2014 through May 2018. In December 2018 the arbitrators issued their Clarified Interim Award of October 2018 resulting from some of the parties’ additional submissions to the Panel regarding certain issues related to determining the revenue division between the parties. In January 2019 the Panel issued its Second Interim Award ordering that $ 89.4 million is due from the Company to BNSF resulting from the adjusted revenue divisions relating to the 2016 period at issue ($ 52.1 million) and for calendar year 2017 ($ 37.3 million). The parties made further submissions to the Panel on the revenue divisions for calendar year 2018 and going forward, as well as other confidential issues raised during the arbitration process. We recorded pretax charges for contingent liabilities in the fourth quarter 2018 of $ 89.4 million claimed by the BNSF for the period May 1, 2016 through December 31, 2017 and $ 44.6 million for the period January 1, 2018 through December 31, 2018, for a total of $ 134 million.

On October 24, 2019 the arbitrators issued a Final Award. The details of the Final Award are confidential; however, we have recorded pre-tax charges in the third quarter 2019 of $ 26.8 million related to certain charges claimed by BNSF for the period January 1, 2018 through December 31, 2018 and no material adjustments for the period January 1, 2019 through September 30, 2019. In addition, we have recorded a $ 17.4 million charge for legal fees, cost and interest claimed by BNSF, for a total of $ 44.2 million.

In June 2019, we recorded pre-tax charges of $ 20 million for the settlement of a casualty claim within our DCS segment.

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

As of September 30, 2019, we had various obligations remaining under operating lease arrangements related primarily to the rental of maintenance and support facilities, cross-dock and delivery system facilities, office space, parking yards and equipment. Many of these leases include one or more options, at our discretion, to renew and extend the agreement beyond the current lease expiration date or to terminate the agreement prior to the lease expiration date. These options are included in the calculation of our operating lease liability when it becomes reasonably certain the option will be exercised. Our lease obligations typically do not include options to purchase the leased property, nor do they contain residual value guarantees or material restrictive covenants. Operating leases with an initial term of more than 12 months are included in our Condensed Consolidated Balance Sheets as discounted liabilities and corresponding right-of-use assets consisting of the following (in millions):

Right-of-use assets are classified in other assets in our Condensed Consolidated Balance Sheets. Operating lease liability, current is classified in other accrued expenses, while operating lease liability, long-term is classified in other long-term liabilities in our Condensed Consolidated Balance Sheets.

As of September 30, 2019, the weighted-average remaining lease term for our outstanding operating lease obligations was 4.2 years and the weighted-average discount rate was 3.5 %. Future minimum lease payments under these operating leases as of September 30, 2019, are as follows (in millions):

During the three and nine months ended September 30, 2019, cash paid for amounts included in the measurement of operating lease liabilities were $ 12.1 million and $ 32.7 million, respectively, while $ 11.8 million and $ 31.8 million, respectively, of operating lease expense was recognized on a straight-line basis for the same periods. During the third quarter 2019, a total of $ 8.7 million of right-of-use assets were obtained in exchange for new operating lease liabilities. New right-of-use assets obtained during the nine months ended September 30, 2019 was $ 48.2 million, of which, $ 16.0 million were obtained through the business combination discussed at Note 11, Acquisitions.

On January 7, 2019, we entered into an asset purchase agreement to acquire substantially all of the assets and assume certain specified liabilities of the affiliated entities of Cory 1st Choice Home Delivery (Cory), subject to customary closing conditions.  The closing of the transaction was effective on February 15, 2019, with a purchase price of $ 100 million. Total consideration paid in cash under the Cory agreement was $ 98.2 million and consisted of the agreed upon purchase price adjusted for estimated working capital adjustments. In addition, we incurred approximately $ 2.9 million in transaction costs which are recorded in general and administrative expenses, net of asset dispositions in our Condensed Consolidated Statements of Earnings. The Cory acquisition was accounted for as a business combination and operates within our Dedicated Contract Services® business segment. Assets acquired and liabilities assumed were recorded in our Condensed Consolidated Balance Sheet at their estimated fair values, as of the closing date, using cost, market data and valuation techniques that reflect management’s judgment and estimates. As a result of the acquisition, we recorded approximately $ 45.8 million of finite-lived intangible assets and approximately $ 48.2 million of goodwill. Goodwill consists of acquiring and retaining the Cory existing network and expected synergies from the combination of operations. The following table outlines the consideration transferred and purchase price allocation at their respective estimated fair values as of February 15, 2019 ( in millions):

As discussed in Note 11, Acquisitions, during the nine months ended September 30, 2019, we recorded additional goodwill of approximately $ 48.2 million and additional finite-lived intangible assets of approximately $ 45.8 million in connection with the Cory acquisition. Total goodwill was $ 88.3 million and $ 40.1 million at September 30, 2019, and December 31, 2018, respectively. All goodwill is assigned to our Dedicated Contract Services® business segment and no impairment losses have been recorded for goodwill as of September 30, 2019. Prior to the Cory acquisition, our intangible assets consisted of those arising from a previous business acquisition and our purchased LDC network access, both within our Dedicated Contract Services® segment. Identifiable intangible assets consist of the following (in millions):

Our finite-lived intangible assets have no assigned residual values.

Intangible asset amortization expense was $ 3.5 million during the third quarter 2019, compared to $ 2.2 million during third quarter 2018. During the nine months ended September 30, 2019 and 2018, intangible asset amortization expense was $ 9.2 million and $ 6.5 million, respectively. Estimated amortization expense for our finite-lived intangible assets is expected to be approximately $ 12.4 million for 2019, $ 12.7 million for 2020, $ 11.2 million for 2021 and $ 10.8 million for 2022 and 2023. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, impairment or accelerated amortization of intangible assets, and other events.

We reported four distinct business segments during the three and nine months ended September 30, 2019 and 2018. 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, 2018. A summary of certain segment information is presented below (in millions):