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HUNT J B TRANSPORT SERVICES INC - Quarter Report: 2016 September (Form 10-Q)

jbht20160817_10q.htm

  

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

X

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

 

For the quarterly period ended September 30, 2016

 

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, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    X      Accelerated filer _____    Non-accelerated filer _____     Smaller reporting company _____

 

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, 2016 was 112,185,072.

 

 
 

 

  

J.B. HUNT TRANSPORT SERVICES, INC.

 

Form 10-Q

For The Quarterly Period Ended September 30, 2016

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, 2016 and 2015

3

  

  

  

  

Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

4

  

  

  

  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

  5

  

  

  

  

Notes to Condensed Consolidated Financial Statements as of September 30, 2016

6

  

  

  

Item 2.

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

  12

  

  

  

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

19

  

  

  

Item 4.

Controls and Procedures

20

  

  

  

  

  

  

  

  

  

Part II.    Other Information

  

  

  

  

  

  

Item 1.

Legal Proceedings

20

  

  

  

Item 1A.

Risk Factors

20

  

  

  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

21

  

  

  

Item 3.

Defaults Upon Senior Securities

21

     

Item 4.

Mine Safety Disclosures

21

     

Item 5.

Other Information

21

  

  

  

Item 6.

Exhibits

21

  

  

  

Signatures

23

  

  

  

Exhibits

24

  

 
2

 

 

Part I. Financial Information

 

ITEM 1. FINANCIAL STATEMENTS

 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Condensed Consolidated Statements of Earnings

(in thousands, except per share amounts)

(unaudited)

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2016

   

2015

   

2016

   

2015

 
                                 

Operating revenues, excluding fuel surcharge revenues

  $ 1,538,701     $ 1,419,451     $ 4,448,709     $ 4,043,991  

Fuel surcharge revenues

    151,958       167,043       385,688       522,640  

Total operating revenues

    1,690,659       1,586,494       4,834,397       4,566,631  
                                 

Operating expenses:

                               

Rents and purchased transportation

    846,238       770,148       2,381,547       2,194,683  

Salaries, wages and employee benefits

    374,517       351,651       1,108,997       1,030,438  

Depreciation and amortization

    91,001       86,201       269,717       251,239  

Fuel and fuel taxes

    74,179       76,755       205,082       243,459  

Operating supplies and expenses

    62,191       57,299       173,222       164,497  

General and administrative expenses, net of asset dispositions

    21,025       14,866       61,570       56,471  

Insurance and claims

    21,862       20,078       58,384       55,714  

Operating taxes and licenses

    11,665       10,683       34,156       31,505  

Communication and utilities

    5,004       4,967       15,063       15,824  

Total operating expenses

    1,507,682       1,392,648       4,307,738       4,043,830  

Operating income

    182,977       193,846       526,659       522,801  

Net interest expense

    6,485       7,838       19,347       21,202  

Earnings before income taxes

    176,492       186,008       507,312       501,599  

Income taxes

    67,067       70,869       192,778       191,109  

Net earnings

  $ 109,425     $ 115,139     $ 314,534     $ 310,490  
                                 

Weighted average basic shares outstanding

    112,630       115,456       112,790       116,157  
                                 

Basic earnings per share

  $ 0.97     $ 1.00     $ 2.79     $ 2.67  
                                 

Weighted average diluted shares outstanding

    113,363       116,282       113,709       117,293  
                                 

Diluted earnings per share

  $ 0.97     $ 0.99     $ 2.77     $ 2.65  
                                 

Dividends declared per common share

  $ 0.22     $ 0.21     $ 0.66     $ 0.63  

 

See Notes to Condensed Consolidated Financial Statements.

 

 
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J.B. HUNT TRANSPORT SERVICES, INC.

   

Condensed Consolidated Balance Sheets

(in thousands)

 

   

September 30, 2016

   

December 31, 2015

 
   

(unaudited)

         

ASSETS

               

Current assets:

               

Cash and cash equivalents

  $ 5,481     $ 5,566  

Trade accounts receivable, net

    775,020       654,542  

Prepaid expenses and other

    61,900       197,817  

Total current assets

    842,401       857,925  

Property and equipment, at cost

    4,209,080       4,019,451  

Less accumulated depreciation

    1,400,339       1,318,122  

Net property and equipment

    2,808,741       2,701,329  

Other assets

    78,852       70,290  

Total assets

  $ 3,729,994     $ 3,629,544  
                 
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current liabilities:

               

Trade accounts payable

  $ 402,913     $ 340,332  

Claims accruals

    104,243       104,220  

Accrued payroll

    72,920       59,420  

Other accrued expenses

    20,769       28,445  

Total current liabilities

    600,845       532,417  
                 

Long-term debt

    943,696       998,003  

Other long-term liabilities

    69,302       58,552  

Deferred income taxes

    731,068       740,220  

Stockholders' equity

    1,385,083       1,300,352  

Total liabilities and stockholders' equity

  $ 3,729,994     $ 3,629,544  

 

See Notes to Condensed Consolidated Financial Statements.

 

 
4

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   

Nine Months Ended

September 30,

 
   

2016

   

2015

 
                 

Cash flows from operating activities:

               

Net earnings

  $ 314,534     $ 310,490  

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

               

Depreciation and amortization

    269,717       251,239  

Share-based compensation

    30,173       27,010  

(Gain)/Loss on sale of revenue equipment and other

    2,357       (1,257 )

Provision for deferred income taxes

    (9,152 )     (5,395 )

Changes in operating assets and liabilities:

               

Trade accounts receivable

    (132,936 )     (17,603 )

Other assets

    64,851       35,591  

Trade accounts payable

    56,827       27,644  

Income taxes payable or receivable

    73,512       75,150  

Claims accruals

    22       3,930  

Accrued payroll and other accrued expenses

    14,058       (9,839 )

Net cash provided by operating activities

    683,963       696,960  
                 

Cash flows from investing activities:

               

Additions to property and equipment

    (498,913 )     (561,774 )

Net proceeds from sale of equipment

    140,159       131,114  

Changes in other assets

    (17 )     (20,095 )

Net cash used in investing activities

    (358,771 )     (450,755 )
                 

Cash flows from financing activities:

               

Proceeds from issuances of long-term debt

    -       349,129  

Payments on long-term debt

    -       (250,000 )

Proceeds from revolving lines of credit and other

    1,087,164       1,576,329  

Payments on revolving lines of credit and other

    (1,152,465 )     (1,629,244 )

Purchase of treasury stock

    (174,760 )     (212,227 )

Stock option exercises and other

    1,342       2,501  

Stock repurchased for payroll taxes

    (18,613 )     (24,263 )

Tax benefit of stock options exercised

    6,532       14,446  

Dividends paid

    (74,477 )     (73,295 )

Net cash used in financing activities

    (325,277 )     (246,624 )

Net change in cash and cash equivalents

    (85 )     (419 )

Cash and cash equivalents at beginning of period

    5,566       5,961  

Cash and cash equivalents at end of period

  $ 5,481     $ 5,542  
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 21,614     $ 25,290  

Income taxes

  $ 118,803     $ 103,832  

 

See Notes to Condensed Consolidated Financial Statements.

 

 
5

 

  

J.B. HUNT TRANSPORT SERVICES, INC.

 

Notes to Condensed Consolidated Financial Statements

(Unaudited) 

 

1.

General

 

Basis of Presentation

 

The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. We believe such statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of our financial position, results of operations and cash flows at the dates and for the periods indicated. Pursuant to the requirements of the Securities and Exchange Commission (SEC) applicable to quarterly reports on Form 10-Q, the accompanying financial statements do not include all disclosures required by GAAP for annual financial statements. While we believe the disclosures presented are adequate to make the information not misleading, these unaudited interim Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015. Operating results for the periods presented in this report are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2016, or any other interim period. Our business is somewhat seasonal with slightly higher freight volumes typically experienced during August through early November in our full-load freight transportation business.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which supersedes virtually all existing revenue recognition guidance. The new standard requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. We have the option of using either a full retrospective or a modified retrospective approach when adopting this new standard. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 one year to interim and annual periods beginning after December 15, 2017. Early adoption is permitted after the original effective date of December 15, 2016. We are currently evaluating the alternative transition methods and the potential effects of the adoption of this update on our financial statements.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments are to be applied by means of a cumulative-effect adjustment to the balance sheet and are effective for interim and annual periods beginning after December 15, 2017. With certain exceptions, early adoption is not permitted. The adoption of the new guidance is not expected to have a material impact on our financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize a right-of-use asset and a lease liability for most leases in the balance sheet as well as other qualitative and quantitative disclosures. ASU 2016-02 is to be applied using a modified retrospective method and is effective for interim and annual periods beginning after December 15, 2018, but early adoption is permitted. We are currently evaluating the potential effects of the adoption of this update on our financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which amends and simplifies certain aspects of accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments are effective for interim and annual periods beginning after December 15, 2016, but early adoption is permitted. The application methods to be used in adoption vary with each component of the standard. We are currently evaluating the potential effects of the adoption of this update on our financial statements.

 

 
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Accounting Pronouncement Adopted in 2016

 

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which amended the current presentation of debt issuance costs in the financial statements. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, instead of as an asset. The amendments are to be applied retrospectively and were effective for interim and annual periods beginning after December 15, 2015. We retroactively adopted ASU 2015-03 in 2016, and have reclassified all prior periods to be consistent with the amendments outlined in the ASU.  The impact of the prior period reclassification was a $1.4 million reduction of current assets, a $5.6 million reduction of other assets, and a $7.0 million reduction of long-term debt at December 31, 2015.

 

2.

Earnings Per Share

 

We compute basic earnings per share by dividing net earnings available to common stockholders by the actual weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if holders of unvested restricted and performance share units or vested and unvested stock options exercised or converted their holdings into common stock. The dilutive effect of restricted and performance share units and stock options was 0.7 million shares during the third quarter 2016, compared to 0.8 million shares during third quarter 2015. During the nine months ended September 30, 2016 and 2015, the dilutive effect of restricted and performance share units and stock options was 0.9 million shares and 1.1 million shares, respectively.

 

3.

Share-based Compensation

 

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

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2016

   

2015

   

2016

   

2015

 

Restricted share units:

 

Pretax compensation expense

  $ 5,390     $ 4,668     $ 22,298     $ 20,372  

Tax benefit

    2,048       1,778       8,473       7,762  

Restricted share unit expense, net of tax

  $ 3,342     $ 2,890     $ 13,825     $ 12,610  

Performance share units:

 

Pretax compensation expense

  $ 1,868     $ 1,645     $ 7,875     $ 6,638  

Tax benefit

    710       627       2,992       2,529  

Performance share unit expense, net of tax

  $ 1,158     $ 1,018     $ 4,883     $ 4,109  

 

As of September 30, 2016, we had $44.0 million and $11.5 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 3.8 years for restricted share units and 2.5 years for performance share units. During the nine months ended September 30, 2016, we issued 519,849 shares for vested restricted share units, 148,733 shares for vested performance share units, and 2,000 shares as a result of stock option exercises. Of these totals, 485,749 shares for vested restricted share units and 148,733 for performance share units were issued during the third quarter, 2016.     

 

 
7

 

  

4.

Financing Arrangements

 

Outstanding borrowings, net of unamortized discount and debt issuance cost, under our current financing arrangements consist of the following (in millions):

 

   

September 30, 2016

   

December 31, 2015

 

Senior revolving line of credit

  $ 82.9     $ 148.7  

Senior notes

    860.8       849.3  

Total long-term debt

  $ 943.7     $ 998.0  

 

Senior Revolving Line of Credit

 

At September 30, 2016, 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 September 2020. 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, 2016, we had $84.0 million outstanding at an average interest rate of 1.55% under this agreement.

 

Senior Notes

 

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

 

Our financing arrangements require us to maintain certain covenants and financial ratios.  We were in compliance with all covenants and financial ratios at September 30, 2016.

 

5.

Derivative Financial Instruments                                                                                                                                                                                             

 

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

 

We entered into receive fixed-rate and pay variable-rate interest rate swap agreements simultaneously with the issuance of our $250 million of 2.40% senior notes due March 2019 and $350 million of 3.30% senior notes due August 2022, to effectively convert this fixed-rate debt to variable-rate. The notional amounts of these interest rate swap agreements equal those of the corresponding fixed-rate debt. The applicable interest rates under these agreements is based on LIBOR plus an established margin, resulting in an interest rate of 1.70% for our $250 million of 2.40% senior notes and 2.18% for our $350 million of 3.30% senior notes at September 30, 2016. The swaps expire when the corresponding senior notes are due. The fair values of these swaps are recorded in other assets in our Condensed Consolidated Balance Sheet at September 30, 2016. See Note 7, Fair Value Measurements, for disclosure of fair value. These derivatives meet the required criteria to be designated as fair value hedges, and as the specific terms and notional amounts of these derivative instruments match those of the fixed-rate debt being hedged, these derivative instruments are assumed to perfectly hedge the related debt against changes in fair value due to changes in the benchmark interest rate. Accordingly, any change in the fair value of these interest rate swaps recorded in earnings is offset by a corresponding change in the fair value of the related debt.

 

 
8

 

  

6.

Capital Stock

 

On October 22, 2015, our Board of Directors authorized the purchase of $500 million of our common stock, of which $276 million was remaining at September 30, 2016. We purchased approximately 2,228,000 shares, or $174.8 million, of our common stock under our repurchase authorization during the nine months ended September 30, 2016. On July 21, 2016, our Board of Directors declared a regular quarterly cash dividend of $0.22, which was paid August 19, 2016, to stockholders of record on August 5, 2016. On October 20, 2016, our Board of Directors declared a regular quarterly dividend of $0.22 per common share, which will be paid on November 18, 2016, to stockholders of record on November 4, 2016.

 

7.

Fair Value Measurements

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

Our assets and liabilities measured at fair value are based on valuation techniques which consider prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. These valuation methods are based on either quoted market prices (Level 1) or inputs, other than quoted prices in active markets, that are observable either directly or indirectly (Level 2). The following are assets and liabilities measured at fair value on a recurring basis at September 30, 2016 (in millions):

 

   

Asset/(Liability)

Balance

   

Input Level

 

Trading investments

  $ 14.8       1  

Interest rate swaps

  $ 16.6       2  

Senior notes

  $ (612.5 )     2  

 

The fair value of trading investments has been measured using the market approach (Level 1) and reflect quoted market prices. The fair values of interest rate swaps and corresponding senior notes have been measured using the income approach (Level 2), which include relevant interest rate curve inputs. Trading investments and interest rate swaps are classified in other assets in our Condensed Consolidated Balance Sheets and the senior notes are classified in long-term debt in our Condensed Consolidated Balance Sheets.

 

Financial Instruments

 

The carrying amount and estimated fair value at September 30, 2016, 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 $331.2 million and $353.0 million, respectively.

 

The carrying amounts of all other instruments at September 30, 2016, approximate their fair value due to the short maturity of these instruments.

 

8.

Income Taxes

 

Our effective income tax rate was 38.0% for the three and nine months ended September 30, 2016, compared with 38.1% for the three and nine months ended September 30, 2015. 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.

 

 
9

 

  

At September 30, 2016, we had a total of $34.7 million in gross unrecognized tax benefits, which are a component of other long-term liabilities on our Condensed Consolidated Balance Sheets. Of this amount, $22.6 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate. The total amount of accrued interest and penalties for such unrecognized tax benefits was $4.9 million at September 30, 2016.

 

9.

Legal Proceedings

 

We are a defendant in certain 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. During the first half of 2014, the court in the lead class-action granted judgment in our favor with regard to all claims. The plaintiffs have appealed the case to the Ninth Circuit Court of Appeals where it is currently pending. The overlapping claims in the remaining action have been stayed pending a decision in the lead class-action case. We cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from these lawsuits.

 

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.

 

 
10

 

 

10.

Business Segments

 

We reported four distinct business segments during the three and nine months ended September 30, 2016 and 2015. 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 11, Segment Information, of our Annual Report (Form 10-K) for the year ended December 31, 2015. A summary of certain segment information is presented below (in millions): 

     

Assets

(Excludes intercompany accounts)

As of

 
     

September 30, 2016

   

December 31, 2015

 

JBI

  $ 2,010     $ 1,848  

DCS

    956       949  

ICS

    134       99  

JBT

    279       286  

Other (includes corporate)

    351       448  

Total

  $ 3,730     $ 3,630  

 

      Operating Revenues  
     

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     

2016

   

2015

   

2016

   

2015

 

JBI

  $ 970     $ 949     $ 2,798     $ 2,698  

DCS

    394       370       1,135       1,082  

ICS

    233       173       620       510  

JBT

    97       98       291       286  

Subtotal

    1,694       1,590       4,844       4,576  

Inter-segment eliminations

    (3 )     (4 )     (10 )     (9 )

Total

  $ 1,691     $ 1,586     $ 4,834     $ 4,567  

 

       

Operating Income

 
       

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
       

2016

   

2015

   

2016

   

2015

 

JBI

  $ 116.9     $ 126.1     $ 325.6     $ 349.0  

DCS

    52.5       45.1       147.7       121.5  

ICS

    8.5       11.5       30.2       23.0  

JBT

    5.1       11.2       23.1       29.4  

Other (includes corporate)

    -       (0.1 )     0.1       (0.1 )

Total

  $ 183.0     $ 193.8     $ 526.7     $ 522.8  

 

     

Depreciation and Amortization Expense

 
     

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
     

2016

   

2015

   

2016

   

2015

 

JBI

  $ 40.3     $ 37.8     $ 119.4     $ 109.3  

DCS

    35.8       33.9       106.3       98.4  

ICS

    0.1       0.1       0.3       0.7  

JBT

    10.1       10.5       30.4       31.1  

Other (includes corporate)

    4.7       3.9       13.3       11.7  

Total

  $ 91.0     $ 86.2     $ 269.7     $ 251.2  

  

 
11

 

  

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, 2015, 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 conditions, interference with or termination of our relationships with certain railroads, cost and availability of fuel, accidents, adverse weather conditions, disruption or failure of information technology systems, competitive rate fluctuations, availability of drivers, adverse legal decisions and audits or tax assessments of various federal, state, or local taxing authorities. 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, 2015, 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, 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 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 11, Segment Information, of our Annual Report (Form 10-K) for the year ended December 31, 2015. 

 

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.

 

 
12

 

  

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, 2015, 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 Ended September 30, 2016 to Three Months Ended September 30, 2015

 

   

Summary of Operating Segment Results

For the Three Months Ended September 30,

(in millions)

 
   

Operating Revenues

   

Operating Income

 
   

2016

   

2015

   

2016

   

2015

 

JBI

  $ 970     $ 949     $ 116.9     $ 126.1  

DCS

    394       370       52.5       45.1  

ICS

    233       173       8.5       11.5  

JBT

    97       98       5.1       11.2  

Other (includes corporate)

    -       -       -       (0.1 )

Subtotal

    1,694       1,590       183.0       193.8  

Inter-segment eliminations

    (3 )     (4 )     -       -  

Total

  $ 1,691     $ 1,586     $ 183.0     $ 193.8  

 

Total consolidated operating revenues were $1.69 billion for the third quarter 2016, compared to $1.59 billion for the third quarter 2015. Current quarter total operating revenue, excluding fuel surcharges, increased 8% versus the comparable quarter in 2015. This increase was primarily due to load growth of 7% in JBI, improved asset productivity and a 3% increase in revenue producing trucks in DCS, load growth of 88% in ICS, and a 4% increase in truck count in JBT, partially offset by lower customer rates in JBI, ICS, and JBT and tepid customer demand.

 

JBI segment revenue increased 2% to $970 million during the third quarter 2016, compared with $949 million in 2015. This increase in segment revenue was primarily a result of a 7% increase in load volume, partially offset by a 4% decrease 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 decreased 2% compared to third quarter 2015. Load volume in our eastern network increased 5%, and transcontinental loads grew 8% over the third quarter 2015. Operating income of our JBI segment decreased 7% to $116.9 million in 2016, from $126.1 million in 2015. Benefits from volume growth, improved operating efficiencies from network balance and reduced reliance on third party dray carriers, were offset by lower customer rates, increased rail purchased transportation rates, equipment ownership costs, lower box utilization, increased insurance and claims costs and higher driver wage and retention expenses.

 

DCS segment revenue increased 6% to $394 million in 2016, from $370 million in 2015. Productivity, defined as revenue per truck per week, increased 3% in the third quarter 2016, when compared to the same period in 2015. Productivity excluding fuel surcharge increased 4% from a year ago primarily from improved overall operational efficiencies, including better integration of assets between customer accounts, fewer unseated trucks, increased customer supply chain fluidity, load counts and customer rate increases. A net additional 205 revenue producing trucks were in the fleet by the end of the current quarter compared to prior year, primarily from private fleet conversions in the current and prior periods. Customer retention rates remain above 98%. Operating income of our DCS segment increased 16% to $52.5 million in 2016, from $45.1 million in 2015. The increase is primarily due to increased revenue and improved asset utilization. These benefits were partially offset by higher driver wage and recruiting costs, increased salaries and benefits expenses, and higher equipment ownership costs.

 

 
13

 

  

ICS segment revenue increased 35% to $233 million in the third quarter 2016, from $173 million in the third quarter 2015. Overall volumes increased 88%. Contractual business represented approximately 75% of total load volume and 64% of total revenue in the current period compared to 66% and 60%, respectively, in third quarter 2015. Revenue per load decreased 29%, primarily from lower fuel prices, freight mix changes driven by customer demand, and lower customer rates on contractual business versus third quarter 2015. Operating income of our ICS segment decreased 26% to $8.5 million from $11.5 million in 2015, primarily due to a decrease in gross profit margin. Gross profit margin decreased to 12.8% in the current quarter compared to 15.9% in the third quarter 2015, primarily due to rate decreases on contractual business and lower customer spot rates. Personnel costs increased as the total branch count grew to 40 compared to 33 at the end of the comparable period last year. ICS’s carrier base increased 14% and employee count increased 18% compared to third quarter 2015.

 

JBT segment revenue of $97 million for the third quarter 2016 was flat when compared to the third quarter 2015. Revenue excluding fuel surcharges increased 2%, primarily from a 4% increase in truck count and a 2% increase in utilization, partially offset by a 4% decrease in revenue per loaded mile excluding fuel surcharge, primarily from changes in customer driven freight mix. Core customer rates were flat compared to the same period in 2015. At the end of the current quarter, JBT operated 2,183 tractors compared to 2,100 in 2015. JBT segment operating income decreased 55% to $5.1 million in 2016, compared with $11.2 million in 2015. The decrease in operating income was driven primarily by lower rates per loaded mile, increased driver recruiting costs, higher safety and insurance costs, and increased tractor maintenance costs compared to third quarter 2015.

 

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

 
      2016       2015       2016 vs. 2015  

Total operating revenues

    100.0

%

    100.0

%

    6.6 %

Operating expenses:

                       

Rents and purchased transportation

    50.1       48.5       9.9  

Salaries, wages and employee benefits

    22.2       22.2       6.5  

Depreciation and amortization

    5.4       5.4       5.6  

Fuel and fuel taxes

    4.4       4.8       (3.4 )

Operating supplies and expenses

    3.7       3.6       8.5  

General and administrative expenses, net of asset dispositions

    1.1       1.0       41.4  

Insurance and claims

    1.3       1.3       8.9  

Operating taxes and licenses

    0.7       0.7       9.2  

Communication and utilities

    0.3       0.3       0.7  

Total operating expenses

    89.2       87.8       8.3  

Operating income

    10.8       12.2       (5.6 )

Net interest expense

    0.4       0.5       (17.3 )

Earnings before income taxes

    10.4       11.7       (5.1 )

Income taxes

    3.9       4.4       (5.4 )

Net earnings

    6.5

%

    7.3

%

    (5.0 )%

 

Total operating expenses increased 8.3%, while operating revenues increased 6.6% during the third quarter 2016, from the comparable period 2015. Operating income decreased to $183.0 million during the third quarter 2016 from $193.8 million in 2015.

 

 
14

 

  

Rents and purchased transportation costs increased 9.9% in 2016. This increase was primarily the result of increased rail 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 6.5% during the third quarter 2016, compared with 2015. 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.

 

Depreciation and amortization expense increased 5.6% in 2016, primarily due to additions to our JBI segment tractor, container and chassis fleets to support additional business demand, equipment purchased related to new DCS long-term customer contracts, and replacement equipment in JBT. Fuel costs decreased 3.4% in 2016, compared with 2015, due to decreases in the price of fuel, partially offset by increased road miles.

 

Operating supplies and expenses increased 8.5%, driven primarily by increases in toll activity and tire expense. General and administrative expenses increased 41.1% for the current quarter from the comparable period in 2015, primarily due to higher professional fees expenses and the absence of net gains from asset sales and disposals. Net loss from sale or disposal of assets was $1.3 million in 2016, compared to a net gain of $1.4 million in 2015. Insurance and claims expense increased 8.9% in 2016 compared with 2015, primarily due to higher incident volume.

 

Net interest expense decreased 17.3% in 2016 due primarily to a decrease in average debt levels during the current period, resulting from the overlap of refinanced maturing debt in 2015. Our effective income tax rate was 38.0% for the three months ended September 30, 2016, compared with 38.1% for the three months ended September 30, 2015. 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, 2016 to Nine Months Ended September 30, 2016

 

   

Summary of Operating Segment Results

For the Nine Months Ended September 30,

(in millions)

 
   

Operating Revenues

   

Operating Income

 
   

2016

   

2015

   

2016

   

2015

 

JBI

  $ 2,798     $ 2,698     $ 325.6     $ 349.0  

DCS

    1,135       1,082       147.7       121.5  

ICS

    620       510       30.2       23.0  

JBT

    291       286       23.1       29.4  

Other (includes corporate)

    -       -       0.1       (0.1 )

Subtotal

    4,844       4,576       526.7       522.8  

Inter-segment eliminations

    (10 )     (9 )     -       -  

Total

  $ 4,834     $ 4,567     $ 526.7     $ 522.8  

 

Total consolidated operating revenues were $4.83 billion for the first nine months 2016, a 6% increase from $4.57 billion for the comparable period 2015. Fuel surcharge revenues were $385.7 million during the first nine months 2016, compared with $522.6 million in 2015. If fuel surcharge revenues were excluded from both periods, the increase of 2016 revenue from 2015 was 10%.

 

JBI segment revenue increased 4%, to $2.80 billion during the first nine months of 2016, compared with $2.70 billion in 2015. This increase in revenue was primarily a result of a 9% increase in load volume, offset by a 5% decrease in revenue per load, which is the combination of changes in freight mix, customer rates, and fuel surcharge revenue, compared to a year ago. Operating income of the JBI segment decreased to $325.6 million in the first nine months of 2016, from $349.0 million in 2015. Benefits from volume growth, improved network efficiency and improved rail service, were offset by increased rail purchased transportation costs, higher equipment ownership costs, increased insurance and cargo claim expense and higher driver wage and retention costs. The first nine months of 2015 included approximately $6.4 million in corporate wide streamlining and technology redevelopment costs.

 

 
15

 

  

DCS segment revenue increased 5%, to $1.14 billion during the first nine months of 2016, from $1.08 billion in 2015. Productivity, defined as revenue per truck per week, remained flat during the first nine months of 2016, when compared to a year ago. Productivity excluding fuel surcharge for the first nine months of 2016 increased 2% from a year ago primarily from improved overall operational efficiencies, including better integration of assets between customer accounts, fewer unseated trucks, increased customer supply chain fluidity, load counts and customer rate increases. Operating income of our DCS segment increased to $147.7 million in 2016, from $121.5 million in 2015. The increase is primarily due to increased revenue and improved asset utilization, partially offset by higher driver wage and recruiting costs, increased salaries and benefits expenses, and higher equipment ownership costs. The first nine months of 2015 included approximately $2.6 million in corporate wide streamlining and technology redevelopment costs.

 

ICS revenue increased 22% to $620 million during the first nine months of 2016, from $510 million in 2015. Overall volumes increased 66%. Revenue per load decreased 27% primarily due to lower fuel prices and freight mix changes driven by customer demand. ICS segment operating income increased to $30.2 million, from $23.0 million in 2015, primarily from increased revenue. Gross profit margin of 14.9% during the first nine months of 2016 remained relatively flat when compared to 15.0% in 2015. The first nine months of 2015 included approximately $4.4 million in corporate wide streamlining and technology redevelopment costs.

 

JBT segment revenue increased 2% to $291 million for the first nine months 2016, from $286 million in 2015. Revenue excluding fuel surcharges increased 6%, primarily from increased average truck count. Our JBT segment operating income decreased to $23.1 million during the first nine months 2016, from $29.4 million in 2015. The decrease in operating income was driven primarily by lower rates per loaded mile, increased driver recruiting costs, higher independent contractor cost per mile, higher safety and insurance costs, and increased tractor maintenance costs compared to 2015. The first nine months of 2015 included approximately $700,000 in corporate wide streamlining and technology redevelopment costs.

 

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

 
   

2016

   

2015

   

2016 vs. 2015

 

Total operating revenues

    100.0

%

    100.0

%

    5.9 %

Operating expenses:

                       

Rents and purchased transportation

    49.3       48.1       8.5  

Salaries, wages and employee benefits

    22.9       22.6       7.6  

Depreciation and amortization

    5.6       5.5       7.4  

Fuel and fuel taxes

    4.2       5.3       (15.8 )

Operating supplies and expenses

    3.6       3.6       5.3  

General and administrative expenses, net of asset dispositions

    1.3       1.3       9.0  

Insurance and claims

    1.2       1.2       4.8  

Operating taxes and licenses

    0.7       0.7       8.4  

Communication and utilities

    0.3       0.3       (4.8 )

Total operating expenses

    89.1       88.6       6.5  

Operating income

    10.9       11.4       0.7  

Net interest expense

    0.4       0.4       (8.7 )

Earnings before income taxes

    10.5       11.0       1.1  

Income taxes

    4.0       4.2       0.9  

Net earnings

    6.5

%

    6.8

%

    1.3 %

  

 
16

 

 

Total operating expenses increased 6.5%, while operating revenues increased 5.9%, during the first nine months 2016, from the comparable period of 2015. Operating income increased to $526.7 million during the first nine months 2016, from $522.8 million in 2015.

 

Rents and purchased transportation costs increased 8.5% in 2016. This increase was primarily the result of increased rail 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 7.6% in 2016 from 2015. 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.

 

Depreciation and amortization expense increased 7.4% in 2016 primarily due to additions to our JBI segment tractor, container and chassis fleets to support additional business demand, equipment purchased related to new DCS long-term customer contracts, and replacement equipment in JBT. Fuel costs decreased 15.8% in 2016, compared with 2015, due to decreases in the price of fuel, partially offset by increased road miles.

 

Operating supplies and expenses increased 5.3% driven primarily by increases in toll activity and tire expense. General and administrative expenses increased 9.0% from the comparable period in 2015, primarily due to increased charitable contributions in 2016 and the absence of net gains from asset sales and disposals, partially offset by the costs related to corporate wide streamlining and technology redevelopment efforts in 2015, which were not present in 2016. Net loss from sale or disposal of assets was $2.4 million in 2016, compared to a net gain of $1.3 million in 2015. Insurance and claims expense increased 4.8% in 2016 compared with 2015, primarily due to higher incident volume.

 

Net interest expense decreased 8.7% in 2016, due primarily to a decrease in average debt levels during the current period, resulting from the overlap of refinanced maturing debt in 2015. Our effective income tax rate was 38.0% for the nine months ended September 30, 2016, compared with 38.1% for the nine months ended September 30, 2015. 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 $684.0 million during the first nine months of 2016, compared with $697.0 million for the same period 2015. Operating cash flows decreased due primarily to the timing of trade receivables, partially offset by increased earnings and the fluctuation of other working capital. Net cash used in investing activities totaled $358.8 million in 2016, compared with $450.8 million in 2015. The decrease resulted from a decrease in equipment purchases in 2016 combined with an increase in proceeds from the sale of equipment during the same period. Net cash used in financing activities was $325.3 million in 2016, compared with $246.6 million in 2015. This change resulted primarily from higher long-term debt repayments, net of proceeds from long-term debt issuances, in 2016, partially offset by a reduction in treasury stock purchases.

 

Debt and Liquidity Data

 

   

September 30, 2016

   

December 31, 2015

   

September 30, 2015

 

Working capital ratio

    1.40       1.61       1.38  

Current portion of long-term debt (millions)

    -       -       -  

Total debt (millions)

  $ 943.7     $ 998.0     $ 987.1  

Total debt to equity

    0.68       0.77       0.79  

Total debt as a percentage of total capital

    41 %     43 %     44 %

  

 
17

 

 

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.

 

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, 2016 (in millions):

 

   

Total

   

One

Year Or

Less

   

One to

Three

Years

   

Three to

Five Years

   

After Five

Years

 

Operating leases

  $ 30.9     $ 12.9     $ 13.1     $ 4.8     $ 0.1  

Debt obligations

    934.0       -       250.0       84.0       600.0  

Interest payments on debt (1)

    133.9       22.8       43.5       35.9       31.7  

Commitments to acquire revenue equipment and facilities

    365.9       365.9       -       -       -  

Total

  $ 1,464.7     $ 401.6     $ 306.6     $ 124.7     $ 631.8  

 

(1)      Interest payments on debt are based on the debt balance and applicable rate at September 30, 2016.     

 

Our net capital expenditures were approximately $359 million during the first nine months of 2016, compared with $431 million for the same period 2015. 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 2016 were primarily for tractors, additional intermodal containers and chassis, and other trailing equipment. We are currently committed to spend approximately $366 million during the remainder of 2016 and 2017. We expect to spend in the range of $500 million to $525 million for net capital expenditures during calendar year 2016. The table above excludes $39.6 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, 2016, 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, 2015, 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.

  

 
18

 

 

 

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 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.

 

ITEM 3.     Quantitative And Qualitative Disclosures AbouT Market Risk

 

Our outstanding debt at September 30, 2016 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 $6.8 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, 2016. 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, 2016, 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, 2016, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

 

 
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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, 2016.

 

There were no changes in our internal control over financial reporting during the third quarter of 2016 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 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. During the first half of 2014, the court in the lead class-action granted judgment in our favor with regard to all claims. The plaintiffs have appealed the case to the Ninth Circuit Court of Appeals where it is currently pending. The overlapping claims in the remaining action have been stayed pending a decision in the lead class-action case. We cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from these lawsuits.

 

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, 2015.

 

 
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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, 2016:

 

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, 2016

    -     $ -       -     $ 351  

August 1 through August 31, 2016

    611,542       81.76       611,542       301  

September 1 through September 30, 2016

    310,942       79.63       310,942       276  

Total

    922,484     $ 81.04       922,484     $ 276  

 

 

(1)

On October 22, 2015 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

 

 
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Exhibit

Number

Exhibit
     

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)

     

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

 

 
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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 28th day of October, 2016.

 

 

 

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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