HUNT J B TRANSPORT SERVICES INC - Annual Report: 2013 (Form 10-K)

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

2013 Compared With 2012

Consolidated Operating Revenues

Our total consolidated operating revenues were $5.6 billion in 2013, a 10.5% increase over 2012, primarily due to increased load volume. Fuel surcharge (FSC) revenues increased to $1.1 billion in 2013, compared with $997 million in 2012, due to overall increased load volumes. If FSC revenues were excluded from both years, our 2013 revenue increased 11.6% over 2012.

Consolidated Operating Expenses

Our 2013 consolidated operating expenses increased 10.7% from 2012, compared to the 10.5% increase in revenue year over year. This combination resulted in our 2013 operating ratio of 89.7% compared to 89.5% in 2012. Rents and purchased transportation costs increased 12.9% in 2013, primarily due to the increase in load volume that increased services from third-party rail and truck carriers. In addition, our JBI segment increased the use of outsourced dray carriers resulting from a challenging driver market, while our ICS segment incurred higher rates paid to third-party carriers in 2013, due to a tighter third-party carrier environment. The total cost of salaries, wages and employee benefits increased 9.7% in 2013 from 2012. This increase was primarily related to increases in driver and other labor pay due to increased business demand, a tighter supply of qualified drivers, and new long-term customer contracts, partially offset by lower overall office personnel compensation and a reduction in driver pay within our JBT segment due to fleet reduction.

Fuel and fuel taxes expense decreased 2.1% in 2013 compared with 2012, due to decreases in the price of fuel. We have fuel surcharge programs in place with the majority of our customers. These programs typically involve a specified computation based on the change in national, regional or local fuel prices. While these programs may adjust fuel cost changes as frequently as weekly, most also reflect a specified miles-per-gallon factor and require a certain minimum change in fuel costs to trigger a change in fuel surcharge revenue. As a result, some of these programs have a time lag between when fuel costs change and when this change is reflected in revenues. Due to these programs, this lag negatively impacts operating income in times of rapidly increasing fuel costs and positively impacts operating income when fuel costs decrease rapidly.

It is not meaningful to compare the amount of fuel surcharge revenue or the change in fuel surcharge revenue between reporting periods to fuel and fuel taxes expense, or the change of fuel expense between periods, as a significant portion of fuel cost is included in our payments to railroads, dray carriers and other third parties. These payments are classified as purchased transportation expense.

Depreciation and amortization expense increased 10.6% in 2013, primarily due to additions to our JBI segment tractor, container, and chassis fleets to support additional business demand, as well as additional equipment purchased related to new DCS long-term customer contracts. These increases were partially offset by the reduction in the JBT tractor fleet. Operating supplies and expenses increased 13.5%, driven primarily by increased general maintenance costs resulting from growth in equipment fleets and a higher cost per unit, increased toll activity and implementation related costs incurred for new DCS long-term customers in 2013. Insurance and claims expense increased 2.5% for 2013, primarily due to an increase in incident volume, offset by a reduction in accident severity. The 67.0% increase in general and administrative expenses was primarily the result of a decrease in net gains from asset sales, higher building and facility rental expense related to new DCS long-term customer contracts, and increased bad debt expense due to two customer bankruptcies. Net gains from the disposal of assets were $5 million in 2013, compared with $17 million in 2012.

Net interest expense for 2013 decreased by 9.5% compared with 2012, due to both reduced average debt levels and lower interest rates.

Our effective income tax rate was 38.15% in 2013 and 38.50% in 2012. The decrease in 2013 was primarily related to the realization of a deferred tax benefit on the sale of property during the second quarter of 2013. We expect our effective income tax rate to be between 38.00% and 38.50% for calendar year 2014.

Segments

We operated four business segments during calendar year 2013. The operation of each of these businesses is described in our Notes to Consolidated Financial Statements. The following tables summarize financial and operating data by segment:

Operating Data by Segment

JBI Segment

JBI segment revenue increased 12.5% to $3.46 billion in 2013, from $3.07 billion in 2012, primarily due to a 12.6% increase in load volume. Excluding fuel surcharge, revenues increased 13.4% in 2013 over the prior year. Revenue per load was unchanged in 2013 when compared to 2012, and average length of haul remained virtually flat.

Operating income in our JBI segment increased to $447 million in 2013, from $375 million in 2012, primarily due to volume growth, improved container utilization and lower office personnel compensation costs, partially offset by increased outsourced drayage and rail purchased transportation costs and by higher driver procurement and retention expenses.

DCS Segment

DCS segment revenue increased 14.1% to $1.23 billion in 2013, from $1.08 billion in 2012. Revenue, excluding fuel surcharges, increased 16.2% in 2013 compared to 2012, primarily from new long-term contracts related to the conversion of customers’ private fleets. DCS ended 2013 with a net additional 1,154 revenue-producing trucks when compared to 2012.

Operating income decreased to $110 million in 2013, compared with $116 million in 2012. The decrease in operating income was primarily due to higher driver and other personnel pay, increased equipment and maintenance costs, increased purchased transportation expenses, lower gains on equipment sales, increased insurance and claims costs, and increased bad debt expense. In addition, DCS incurred significant implementation costs for new long-term customers during 2013. These implementation costs include, but are not limited to, driver and management hiring and relocation costs, personnel travel costs, equipment repositioning costs, technology design and integration, and telecommunication and operational system infrastructure. A portion of this increased cost is expected to be ongoing until the fleets for these new accounts are operating in the manner for which they were designed with the customer.

ICS Segment

ICS segment revenue grew 17.6% to $537 million in 2013, from $456 million in 2012. This increase in revenue was primarily due to a 19.1% increase in load volume in 2013 when compared to 2012, partially offset by a slight reduction in revenue per load. Both transactional and contractual business experienced increased load volumes.

Operating income remained flat at $16 million in 2013 when compared to 2012. ICS gross profit margin declined to 11.8% for 2013 from 13.0% for 2012, due to higher purchased transportation costs resulting from a tightening third-party carrier environment. Cost increases for additional headcount and branch network expansion also offset increases in revenues.

JBT Segment

JBT segment revenue decreased 19.2% to $391 million in 2013, from $484 million in 2012, primarily due to lower equipment utilization, shorter length of haul, and an 11.3% reduction in tractors year-over-year, primarily from a reduction in independent contractor capacity. Excluding fuel surcharges, revenue for 2013 decreased 19.5% compared to 2012.

JBT segment had operating income of $4 million in 2013 compared with $23 million in 2012. This decrease in operating income was primarily due to lower revenue, increased driver and independent contractor pay, higher maintenance and equipment cost per unit, and fewer gains on equipment sales, partially offset by reductions in office personnel.

2012 Compared With 2011

Consolidated Operating Revenues

Our total consolidated operating revenues were $5.1 billion in 2012, an 11.7% increase over 2011. Higher fuel prices during 2012 and overall increased load volume resulted in fuel surcharge (FSC) revenues of $997 million in 2012, compared with $849 million in 2011. If FSC revenues were excluded from both years, our 2012 revenue increased 10.3% over 2011, driven primarily by our consolidated load growth.

Consolidated Operating Expenses

Our 2012 consolidated operating expenses increased 10.8% from 2011, compared to the 11.7% increase in revenue year over year. This combination resulted in an improvement in our operating ratio to 89.5% from 90.2% in 2011. Rents and purchased transportation costs increased 17.1% in 2012, primarily due to the increase in load volume that increased services from third-party rail and truck carriers. In addition, rates paid to third-party carriers in 2012 increased when compared to 2011 due to a tighter supply of qualified providers and the higher price of fuel, since fuel costs of third-party rail and truck carriers are included in purchased transportation expense. The total cost of salaries, wages and employee benefits increased 3.6% in 2012 from 2011. This increase primarily related to increases in driver pay, caused by increased business demand and a tighter supply of qualified drivers and an increase in overall employee health care costs, partially offset by decreases in office personnel compensation costs.

Fuel and fuel taxes expense remained relatively flat, increasing only 0.5% in 2012 compared with 2011, due to increases in fuel prices being offset by improved fuel efficiency and fewer Company road miles.

Depreciation and amortization expense increased 7.1% in 2012, primarily due to additions to our JBI segment container and chassis fleet to support additional business demand, as well as truck and tractor growth and trades in our JBI, DCS and JBT segments. Operating supplies and expenses increased 11.3%, driven primarily by toll rate increases and increased tire cost and usage. Insurance and claims expense increased 19.8% for 2012, primarily due to increased accident severity and customer cargo claims. The 5.8% decrease in general and administrative expenses was primarily the result of a decrease in bad debt expense due to a 2011 customer bankruptcy and an increase in net gains from asset sales. Net gains from sale of revenue equipment were $17 million in 2012, compared with $14 million in 2011.

Net interest expense for 2012 decreased by 10.3% compared with 2011. This decrease was primarily due to a decrease in debt levels and lower interest rates.

Our effective income tax rate was 38.5% in 2012 and 38.2% in 2011. The increase in 2012 was primarily related to an increase in the provision for uncertain tax positions taken in prior years.

JBI Segment

JBI segment revenue increased 14.9% to $3.07 billion in 2012, from $2.67 billion in 2011, primarily due to a 13.4% increase in load volume. Excluding fuel surcharge, revenues increased 13.8% in 2012 over the prior year.

Operating income in our JBI segment increased to $375 million in 2012, from $301 million in 2011, primarily due to volume growth, partially offset by increased purchased transportation cost and driver wages.

DCS Segment

DCS segment revenue increased 4.7% to $1.08 billion in 2012, from $1.03 billion in 2011. Revenue, excluding fuel surcharges, increased 3.9% in 2012 compared to 2011, primarily from new contracts awarded.

Operating income increased to $116 million in 2012, compared with $103 million in 2011. This increase was due to the increased revenue, transfer of assets to more profitable accounts and increased gains on equipment dispositions, partially offset by increased driver wages, insurance and claims expense, and employee health care costs. Additionally, our DCS segment operating income for 2011 was reduced by a charge related to a customer bankruptcy.

ICS Segment

ICS segment revenue grew 28.2% to $456 million in 2012, from $356 million in 2011. This increase in revenue was primarily due to an increase in load volume in both contractual and transactional business.

Operating income increased to $16 million in 2012, compared with $13 million in 2011. The increase was primarily due to increased revenues, partially offset by cost increases for additional headcount, branch network expansion and a single large cargo claim settlement. ICS gross profit margin declined to 13% for 2012 from 13.5% for 2011 attributable to increased rates paid to third-party carriers, which was the result of a tighter supply of qualified purchased transportation providers.

JBT Segment

JBT segment revenue decreased 4% to $484 million in 2012, from $504 million in 2011. Excluding surcharges, revenue for 2012 decreased 4.8% compared to 2011, on a 19% reduction in tractors year-over-year. Increases in customer rates and load volume were offset by a reduction in average length of haul and fewer paid empty miles.

JBT segment had operating income of $23 million in 2012, compared with $27 million in 2011. This decrease in operating income was primarily due to decreased revenue, increased independent contractor costs and fewer gains on equipment sales, partially offset by overall cost decreases related to the reduction in the segment’s tractor fleet.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $574 million in 2013 and $548 million in 2012. This increase in 2013 was primarily due to increased earnings, offset by the timing of the collection of trade and income tax receivables and an increase in prepaid expenses, included in other assets.

Cash flows used in investing activities relate primarily to purchases of revenue equipment, net of proceeds from disposals. The increase to $443 million in 2013 from $370 million in 2012 is the result of an increase in additions to and replacements of revenue equipment, primarily within our JBI and DCS segments, combined with fewer proceeds from asset sales.

Net cash used in financing activities decreased to $132 million in 2013 from $178 million in 2012, primarily due to a net increase in borrowings on our revolving line of credit and decrease in dividends paid, partially offset by payments on our long-term debt and an increase in treasury stock purchases.

Our dividend policy is subject to review and revision by the Board of Directors, and payments are dependent upon our financial condition, liquidity, earnings, capital requirements, and other factors the Board of Directors may deem relevant. We paid a $0.13 per share quarterly dividend in 2011, a $0.14 per share quarterly dividend in 2012, and a $0.15 per share quarterly dividend in 2013, with the first quarter dividend being pulled forward and paid in fourth quarter 2012. On January 29, 2014, we announced an increase in our quarterly cash dividend from $0.15 to $0.20 per share, which will be paid February 27, 2014, to stockholders of record on February 13, 2014. We currently intend to continue paying cash dividends on a quarterly basis. However, no assurance can be given that future dividends will be paid.

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 obtain capital through cash generated from operations, revolving lines of credit, and long-term debt issuances. We have also periodically utilized capital and operating leases for revenue equipment.

At December 31, 2013, we were authorized to borrow up to $500 million under a senior revolving line of credit, which is supported by a credit agreement with a group of banks and expires in August 2016. 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 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 December 31, 2013, we had $208.7 million outstanding at an average interest rate of 1.12% under this agreement.

Our senior term loan at December 31, 2013, consists of an unsecured $150 million variable-rate agreement, which matures in March 2014. The entire $150 million balance is payable at maturity. The applicable interest rate under this agreement is based on the Prime Rate, the Federal Funds Rate, or LIBOR, depending upon the specific type of borrowing, plus an applicable margin based on our credit rating and other fees. At December 31, 2013, the interest rate on this facility was 1.17%.

Our senior notes consist of two separate issuances. The first is $100 million of 6.08% senior notes, which mature in July 2014. The entire $100 million balance is payable at maturity. Interest payments are due semiannually in January and July. The second is $250 million of 3.375% senior notes, which mature in September 2015. The entire $250 million balance is payable at maturity. Interest payments are due semiannually in March and September. We have the option to redeem for cash some or all of the notes based on a redemption price set forth in the note indenture.

Our financing arrangements require us to maintain certain covenants and financial ratios. We were in compliance with all covenants and financial ratios at December 31, 2013. For all debt facilities maturing in 2014, 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.

We believe our liquid assets, cash generated from operations, and various financing arrangements will provide sufficient funds for our operating and capital requirements for the foreseeable future. Our debt-to-equity ratio decreased from 2012, due to an increase in equity as a result of current-year earnings, which is partially offset by an increase in treasury stock purchases in 2013.

We are currently committed to spend approximately $607 million, net of proceeds from sales or trade-ins during 2014, which is primarily related to the acquisition of containers, chassis, and tractors.

Off-Balance Sheet Arrangements

Our only off-balance sheet arrangements are related to operating leases. As of December 31, 2013, we had approximately $31.5 million of obligations, primarily related to facility leases.

Contractual Obligations and Commitments

The following table summarizes our expected obligations and commitments (in millions) as of December 31, 2013:

We had standby letters of credit outstanding of approximately $4.5 million at December 31, 2013, that expire at various dates in fiscal year 2014, which are related to certain operating agreements and our self-insured retention levels for casualty and workers’ compensation claims. We plan to renew these letters of credit in accordance with our third-party agreements. The table above excludes $33.9 million of liabilities related to uncertain tax positions, including interest and penalties, as we are unable to reasonably estimate the ultimate timing of settlement. See Note 6, Income Taxes, in the Notes to Consolidated Financial Statements for further discussion.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest rate risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates on variable-rate debt outstanding. Of our total $708.4 million of debt, we had $358.7 million of variable-rate debt outstanding at December 31, 2013, under our revolving lines of credit and our senior term loan. These have variable interest rates, which are based on 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. Our earnings would be affected by changes in these short-term variable interest rates. At our current level of borrowing, a one-percentage-point increase in our applicable rate would reduce annual pretax earnings by $3.6 million. Our remaining debt is fixed-rate debt, and therefore changes in market interest rates do not directly impact our interest expense. Periodically, we enter into derivative instruments in response to market interest rates; however, at December 31, 2013, we had no such derivative financial instruments in place.

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 year ended December 31, 2013. 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. To date, we have not entered into any 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 will continue in the future or the extent to which fuel surcharges could be collected to offset such increases. As of December 31, 2013, we had no derivative financial instruments to reduce our exposure to fuel-price fluctuations.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements, Notes to Consolidated Financial Statements, and reports thereon of our independent registered public accounting firm as specified by this Item are presented following Item 15 of this report and include:

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2013 and 2012

Consolidated Statements of Earnings for years ended December 31, 2013, 2012, and 2011

Consolidated Statements of Stockholders’ Equity for years ended December 31, 2013, 2012, and 2011

Consolidated Statements of Cash Flows for years ended December 31, 2013, 2012, and 2011

Notes to Consolidated Financial Statements

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.   CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC, and to process, summarize, and disclose this information within the time periods specified in the SEC rules. Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this report, conducted by our management and with the participation of our Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer believe these controls and procedures are effective to ensure that we are able to collect, process, and disclose the information we are required to disclose in our reports filed with the SEC within the required time periods.

The certifications of our Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (1992 Framework). Based on our assessment, we believe that as of December 31, 2013, our internal control over financial reporting is effective based on those criteria.

The effectiveness of internal control over financial reporting as of December 31, 2013, has been audited by Ernst & Young LLP, an independent registered public accounting firm that also audited our Consolidated Financial Statements. Ernst & Young LLP’s report on internal control over financial reporting is included herein.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the fourth quarter ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.   OTHER INFORMATION

None.

PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors

The schedule of directors is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 24, 2014.

Executive Officers

The schedule of executive officers is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 24, 2014.

Code of Ethics

We have adopted a code of ethics that applies to our principal executive officer, principal financial and accounting officer, and all other officers, employees, and directors. Our code of ethics is available on our Internet website at www.jbhunt.com. If we make substantive amendments to this code of ethics or grant any waiver, including any implicit waiver, we will disclose the nature of such amendment or waiver on our website or in a report on Form 8-K within four days of such amendment or waiver.

Corporate Governance

In complying with the rules and regulations required by the Sarbanes-Oxley Act of 2002, NASDAQ, Public Company Accounting Oversight Board (PCAOB), and others, we have attempted to do so in a manner that clearly meets legal requirements but does not create a bureaucracy of forms, checklists, and other inefficient or expensive procedures. We have adopted a code of conduct, code of ethics, whistleblower policy, and charters for all of our Board of Director Committees and other formal policies and procedures. Most of these items are available on our website, www.jbhunt.com. If we make significant amendments to our code of ethics or whistleblower policy, or grant any waivers to these items, we will disclose such amendments or waivers on our website or in a report on Form 8-K within four days of such action.

Audit Committee

The information required by Regulation S-K, Item 407(d) is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 24, 2014.

ITEM 11.   EXECUTIVE COMPENSATION

The information required for Item 11 is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 24, 2014.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required for Item 12 is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 24, 2014.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required for Item 13 is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 24, 2014.

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required for Item 14 is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 24, 2014.

PART IV

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES

All other schedules have been omitted either because they are not applicable or because the required information is included in our Consolidated Financial Statements or the notes thereto.

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) 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 21st day of February, 2014.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on the 21st day of February, 2014, on behalf of the registrant and in the capacities indicated.

EXHIBIT INDEX

INDEX TO CONSOLIDATED FINANCIAL INFORMATION

Management’s Report on Internal Control Over Financial Reporting