10-K 1 jbht20161231_10k.htm FORM 10-K jbht20161231_10k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended

Commission file number

December 31, 2016

0-11757

    

J.B. HUNT TRANSPORT SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

 Arkansas

 71-0335111

 (State or other jurisdiction of incorporation or organization) 

 (I.R.S. Employer Identification No.)

 

 

615 J.B. Hunt Corporate Drive  
Lowell, Arkansas 72745-0130
(Address of principal executive offices) (ZIP Code)

 

Registrant’s telephone number, including area code: 479-820-0000

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes __X__   No _____

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Yes _____ No __X__

 

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 such 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 website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

 

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 aggregate market value of 88,409,346 shares of the registrant’s $0.01 par value common stock held by non-affiliates as of June 30, 2016, was $7.2 billion (based upon $80.93 per share).

 

As of February 14, 2017, the number of outstanding shares of the registrant’s common stock was 111,310,853.

 

DOCUMENTS INCORPORATED BY REFERENCE
 

Certain portions of the Notice and Proxy Statement for the Annual Meeting of Stockholders, to be held April 20, 2017, are incorporated by reference in Part III of this Form 10-K.

 

 
 

 

 

J.B. HUNT TRANSPORT SERVICES, INC. 

Form 10-K

For The Fiscal Year Ended December 31, 2016

Table of Contents 

    Page
PART I

Item 1.

Business

2

Item 1A.

Risk Factors

6

Item 1B.

Unresolved Staff Comments

9

Item 2.

Properties

9

Item 3.

Legal Proceedings

10

Item 4.

Mine Safety Disclosures

10

     

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

11

Item 6.

Selected Financial Data

14

Item 7.

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

15

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

24

Item 8.

Financial Statements and Supplementary Data

25

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

25

Item 9A.

Controls and Procedures

25

Item 9B.

Other Information

26

     

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

26

Item 11.

Executive Compensation

26

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

26

Item 13.

Certain Relationships and Related Transactions, and Director Independence

26

Item 14.

Principal Accounting Fees and Services

26

     

PART IV

Item 15.

Exhibits, Financial Statement Schedules

26

Signatures

28

Index to Consolidated Financial Information

29


 
1

 

 

FORWARD-LOOKING STATEMENTS

 

This report, including documents which are incorporated by reference and other documents which we file periodically with the Securities and Exchange Commission (SEC), contains statements that may be considered to be “forward-looking statements.” Such statements relate to our predictions concerning future events or operations and are within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are inherently uncertain, subject to risks, and should be viewed with caution. These statements are based on our belief or interpretation of information currently available. Stockholders and prospective investors are cautioned that actual results and future events may differ materially from these forward-looking statements as a result of many factors. Some of the factors and events that are not within our control and that could have a material impact on future operating results include: general economic and business conditions, competition and competitive rate fluctuations, cost and availability of diesel fuel, ability to attract and retain qualified drivers and delivery personnel, a loss of one or more major customers, interference with or termination of our relationships with certain railroads, rail service delays, insurance costs and availability, claims expense, retention of key employees, terrorist attacks or actions, acts of war, adverse weather conditions, disruption or failure of information systems, new or different environmental or other laws and regulations, increased costs for new revenue equipment or decreases in the value of used equipment, and the ability of revenue equipment manufacturers to perform in accordance with agreements for guaranteed equipment trade-in values.

 

You should understand that many important factors, in addition to those listed above, could impact us financially. Our operating results may fluctuate as a result of these and other risk factors or events as described in our filings with the SEC. Some important factors that could cause our actual results to differ from estimates or projections contained in the forward-looking statements are described under “Risk Factors” in Item 1A. We assume no obligation to update any forward-looking statement to the extent we become aware that it will not be achieved for any reason.

  

PART I

 

ITEM 1. BUSINESS

OVERVIEW

 

   We are one of the largest surface transportation, delivery, and logistics companies in North America. J.B. Hunt Transport Services, Inc. is a publicly held holding company that, together with our wholly owned subsidiaries, provides safe and reliable transportation and delivery services to a diverse group of customers and consumers throughout the continental United States, Canada, and Mexico. Unless otherwise indicated by the context, “we,” “us,” “our,” the “Company”, and “JBHT” refer to J.B. Hunt Transport Services, Inc. and its consolidated subsidiaries. We were incorporated in Arkansas on August 10, 1961, and have been a publicly held company since our initial public offering in 1983. 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. 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 full-load, dry-van operations, these unrelated outside carriers also provide flatbed, refrigerated, less-than-truckload (LTL), and other specialized equipment, drivers, and services. Our customers’ business activities are extremely diverse, and our customer base includes a large number of Fortune 500 companies.

 

 

 
2

 

 

We believe our ability to offer multiple services, utilizing our four business segments and a full complement of logistics services through third parties, represents a competitive advantage. These segments include Intermodal (JBI), Dedicated Contract Services® (DCS), Integrated Capacity Solutions (ICS), and Truck (JBT). Our business is somewhat seasonal, with slightly higher freight volumes typically experienced during August through early November. Our DCS segment is subject to somewhat less seasonal variation than our other segments. For the calendar year ended December 31, 2016, our consolidated revenue totaled $6.56 billion, after the elimination of intersegment business. Of this total, 58% was generated by our JBI business segment, 23% by DCS, 13% by ICS, and 6% by JBT. For the year ended December 31, 2015, JBI represented 59%, DCS 24%, ICS 11%, and JBT 6% of our consolidated revenue. For the year ended December 31, 2014, JBI represented 60%, DCS 22%, ICS 12%, and JBT 6% of our consolidated revenue.

 

Additional general information about us is available at www.jbhunt.com. We make a number of reports and other information available free of charge on our website, including our annual report on Form 10-K, our proxy statement, and our earnings releases. Our website also contains corporate governance guidelines, our code of ethics, our whistleblower policy, Board committee charters, and other corporate policies. The information on our website is not, and shall not be deemed to be, a part of this annual report on Form 10-K or incorporated into any other filings we make with the SEC.

 

Our Mission and Strategy

 

We forge long-term partnerships with key customers that include supply-chain management as an integral part of their strategies. Working in concert, we strive to drive out excess cost, add value and function as an extension of their enterprises. Our strategy is based on utilizing an integrated, multimodal approach to provide capacity-oriented solutions centered on delivering customer value and industry-leading service. We believe our unique operating strategy can add value to customers and increase our profits and returns to stockholders.

 

We continually analyze where we believe additional capital should be invested and management’s resources should be focused to provide added benefits to our customers. These actions should, in turn, yield increasing returns to our stockholders.

 

Increasingly, our customers are seeking energy-efficient transportation solutions to reduce both cost and greenhouse-gas emissions. Our intermodal service addresses both demands. Further, we are customizing dedicated solutions aimed at minimizing transportation-related carbon emissions. Efforts to improve fleet fuel efficiency are ongoing, and we are an Environmental Protection Agency (EPA) SmartWaySM Transport Partner.

 

As always, we continue to ingrain safety into our corporate culture and strive to conduct all of our operations as safely as possible.

 

operating segments

 

Segment information is also included in Note 11 to our Consolidated Financial Statements.

 

JBI Segment

 

The transportation service offerings of our JBI segment utilize arrangements with most major North American rail carriers to provide intermodal freight solutions for our customers throughout the continental United States, Canada, and Mexico. Our JBI segment began operations in 1989, forming a unique partnership with what is now the BNSF Railway Company; this was a watershed event in the industry and the first agreement that linked major rail and truckload carriers in a joint service environment. JBI draws on the intermodal services of rail carriers for the underlying linehaul movement of its equipment between rail ramps. The origin and destination pickup and delivery services (drayage) are handled by our company-owned tractors for the majority of our intermodal loads, while third-party dray carriers are used where economical. By performing our own drayage services, we are able to provide a cost-competitive, seamless coordination of the combined rail and dray movements for our customers.

 

 
3

 

 

JBI operates 84,594 pieces of company-owned trailing equipment systemwide. The fleet primarily consists of 53-foot, high-cube containers and is designed to take advantage of intermodal double-stack economics and superior ride quality. We own and maintain our own chassis fleet, consisting of 73,746 units. The containers and chassis are uniquely designed so that they may only be paired together, which we feel creates an operational competitive advantage. JBI also manages a fleet of 4,581 company-owned tractors, 695 independent contractor trucks, and 5,398 company drivers. At December 31, 2016, the total JBI employee count was 6,088. Revenue for the JBI segment in 2016 was $3.80 billion.

 

DCS Segment

 

DCS focuses on private fleet conversion and creation in replenishment, specialized equipment, and final-mile delivery services. We specialize in the design, development, and execution of supply-chain solutions that support a variety of transportation networks. Our final-mile delivery services are supported with a network of approximately 89 cross-dock locations nationwide, with 98% of the continental U.S. population living within 150 miles of a cross-dock location. Contracts with our customers are long-term, ranging from three to 10 years, with the average being approximately five years. Pricing of our contracts typically involves cost-plus arrangements, with our fixed costs being recovered regardless of equipment utilization, but is customized based on invested capital and duration.

 

At December 31, 2016, this segment operated 6,976 company-owned trucks, 410 customer-owned trucks, and 15 independent contractor trucks. DCS also operates 16,139 owned pieces of trailing equipment and 6,549 customer-owned trailers. The DCS segment employed 10,291 people, including 8,554 drivers, at December 31, 2016. DCS revenue for 2016 was $1.53 billion.

 

ICS Segment

 

ICS provides traditional freight brokerage and transportation logistics solutions to customers through relationships with thousands of third-party carriers and integration with our owned equipment. By leveraging the J.B. Hunt brand, systems, and network, we provide a broader service offering to customers by providing flatbed, refrigerated, expedited, and LTL, as well as a variety of dry-van and intermodal solutions. ICS provides single-source logistics management for customers desiring to outsource their transportation functions and utilize our proven supply-chain technology and design expertise to improve efficiency. ICS operates 42 remote sales offices or branches, as well as on-site logistics personnel working in direct contact with customers.

 

At December 31, 2016, the ICS segment employed 824 people, with a carrier base of approximately 50,900. ICS revenue for 2016 was $852 million.

 

JBT Segment

 

The service offering in this segment is full-load, dry-van freight, utilizing tractors operating over roads and highways. We typically pick up freight at the dock or specified location of the shipper and transport the load directly to the location of the consignee. We use our company-owned tractors and employee drivers or independent contractors who agree to transport freight in our trailers.

 

At December 31, 2016, the JBT segment operated 1,376 company-owned tractors and employed 1,668 people, 1,433 of whom were drivers. At December 31, 2016, we had 752 independent contractors operating in the JBT segment. JBT revenue for 2016 was $388 million.

 

Marketing and Operations

 

We transport, or arrange for the transportation of, a wide range of freight, including general merchandise, specialty consumer items, appliances, forest and paper products, food and beverages, building materials, soaps and cosmetics, automotive parts, agricultural products, electronics, and chemicals. Our customers’ business activities are extremely diverse, and our customer base includes a large number of Fortune 500 companies. We provide a broad range of transportation services to shippers seeking to use a variety of transportation options to optimize their supply-chain logistics needs.

 

 
4

 

 

We generally market all of our service offerings through a nationwide sales and marketing network. We use a specific sales force in DCS due to the length, complexity, and specialization of the sales cycle. In addition, ICS utilizes its own local branch salespeople. In accordance with our typical arrangements, we bill the customer for all services, and we, in turn, pay all third parties for their portion of transportation services provided.

 

People

 

We believe that one of the factors differentiating us from our competitors is our service-oriented people. As of December 31, 2016, we had 22,190 employees, which consisted of 15,385 company drivers, 5,706 office personnel, and 1,099 maintenance technicians. We also had arrangements with approximately 1,462 independent contractors to transport freight in our trailing equipment. None of our employees are represented by unions or covered by collective bargaining agreements.

 

Revenue Equipment

 

Our JBI segment utilizes uniquely designed high-cube containers and chassis, which can only be paired with each other and can be separated to allow the containers to be double-stacked on rail cars. The composition of our DCS trailing fleet varies with specific customer requirements and may include dry-vans, flatbeds, temperature-controlled, curtain-side vans, straight trucks, and dump trailers. We primarily utilize third-party carriers’ tractor and trailing equipment for our ICS segment. Our JBT segment operates primarily 53-foot dry-van trailers.

 

As of December 31, 2016, our company-owned tractor and truck fleet consisted of 12,933 units. In addition, we had 1,462 independent contractors who operate their own tractors but transport freight in our trailing equipment. We operate with standardized tractors in as many fleets as possible, particularly in our JBI and JBT fleets. Due to our customers’ preferences and the actual business application, our DCS fleet is extremely diversified. We believe operating with relatively newer revenue equipment provides better customer service, attracts quality drivers, and lowers maintenance expense. At December 31, 2016, the average age of our combined tractor fleet was 1.9 years, while our containers averaged 5.9 years of age and our trailers averaged 7.6 years. We perform routine servicing and preventive maintenance on our equipment at our regional terminal facilities.

 

Competition and the Industry

 

The freight transportation markets in which we operate are frequently referred to as highly fragmented and competitive. Our JBI segment competes with other intermodal marketing companies; other full-load carriers that utilize railroads for a portion of the transportation service; and, to a certain extent, some railroads directly. The diversified nature of the services provided by our DCS segment attracts competition from customers’ private fleets, other private fleet outsourcing companies, equipment leasing companies, local and regional delivery service providers, and some truckload carriers. Our ICS segment utilizes the fragmented nature of the truck industry and competes with other non-asset-based logistics companies and freight brokers, as well as full-load carriers. The full-load freight competition of our JBT segment includes thousands of carriers, many of which are very small. While we compete with a number of smaller carriers on a regional basis, only a limited number of companies represent competition in all markets across the country.

 

We compete with other transportation service companies primarily in terms of price, on-time pickup and delivery service, availability and type of equipment capacity, and availability of carriers for logistics services.

 

Regulation

 

Our operations as a for-hire motor carrier are subject to regulation by the U.S. Department of Transportation (DOT) and the Federal Motor Carrier Safety Administration (FMCSA), and certain business is also subject to state rules and regulations. The DOT periodically conducts reviews and audits to ensure our compliance with federal safety requirements, and we report certain accident and other information to the DOT. Our operations into and out of Canada and Mexico are subject to regulation by those countries.

 

 
5

 

 

In 2013, the remaining provisions of the FMCSA’s amendment to the hours-of-service (HOS) safety requirements for commercial truck drivers became effective, and we experienced some negative impact on our productivity as a result. However, in December 2014, as a result of the Consolidated and Further Continuing Appropriations Act of 2015, the FMCSA was required to rescind the 34-hour restart provision of the amended HOS rules to the pre-July 1, 2013 requirements. Furthermore, the FMCSA was required to conduct a field study measuring the safety benefit of the amended HOS rules before and after this rule change. This rule rescission is considered temporary pending the outcome of the study, which remains uncompleted. We continue to evaluate and adjust the various segments of our operations toward the ultimate impact of these changes in HOS safety requirements.

 

In December 2015, the FMCSA published a Final Rule requiring use of an Electronic Logging Device (ELD) by December 2017, for nearly all carriers. We have successfully implemented ELD’s within our fleets. 

        

In 2013, the FMCSA, in conjunction with the National Highway Traffic Safety Administration, submitted a Notice of Proposed Rulemaking, which was finalized and published in 2016, requiring the installation of speed-limiting devices on heavy trucks. This final rule will have minimal implementation cost for us, as all of our heavy trucks subject to this rule already have these devices installed. We do not anticipate a negative impact on our operations or productivity.

 

In 2016, the FMCSA published a Notice of Proposed Rulemaking to adopt revised methodologies towards a Safety Fitness Determination (SFD) for motor carriers. The proposed methodologies would determine when a motor carrier is not fit to operate commercial motor vehicles based on the carrier's on-road safety performance in relation to five of the Agency's seven Behavioral Analysis and Safety Improvement Categories (BASIC), a formal investigation, or a combination of the two. The intent of this action is to more effectively use FMCSA data and resources to identify unfit motor carriers and remove them from interstate commerce. We do not anticipate a negative impact on our operations or productivity.

 

We continue to monitor the actions of the FMCSA and other regulatory agencies, and evaluate all proposed rules to determine their impact on our operations.

 

ITEM 1A. RISK FACTORS

 

In addition to the forward-looking statements outlined previously in this Form 10-K and other comments regarding risks and uncertainties, the following risk factors should be carefully considered when evaluating our business. Our business, financial condition or financial results could be materially and adversely affected by any of these risks.

 

Our business is dependent upon a number of factors that may have a material adverse effect on the results of our operations, many of which are beyond our control. In addition to general U.S. economic trends, and to a lesser extent global economic trends, these factors include interference with or termination of our relationships with certain railroads; rail service delays; disruptions to U.S. port-of-call activity; significant increases or rapid fluctuations in fuel prices, fuel taxes, interest rates, insurance premiums, self-insurance levels, excess capacity in the intermodal or trucking industries, or license and registration fees; terrorist attacks or actions; acts of war; adverse weather conditions; disruption or failure of information technology systems; increased costs for new revenue equipment or decreases in the value of used equipment; increased tariffs assessed on or disruptions in the procurement of imported revenue equipment; volatile financial credit markets; and difficulty in attracting and retaining qualified drivers, independent contractors, and third-party carriers.

 

We are also affected by recessionary economic cycles and downturns in customers’ business cycles, particularly in market segments and industries where we have a significant concentration of customers. Economic conditions represent a greater potential for loss, and we may be required to increase our reserve for bad debt losses. In addition, our results of operations may be affected by seasonal factors. Customers tend to reduce shipments after the winter holiday season, and our operating expenses tend to be higher in the winter months, primarily due to colder weather, which causes higher fuel consumption from increased idle time and higher maintenance costs.

 

 
6

 

  

We depend on third parties in the operation of our business.

 

Our JBI business segment utilizes railroads in the performance of its transportation services. The majority of these services are provided pursuant to contractual relationships with the railroads. While we have agreements with a number of Class I railroads, the majority of our business travels on the BNSF Railway Company (BNSF) and the Norfolk Southern railways. A material change in the relationship with, the ability to utilize one or more of these railroads or the overall service levels provided by these railroads could have a material adverse effect on our business and operating results. In addition, a portion of the freight we deliver is imported to the United States through ports of call that are subject to labor union contracts. Work stoppages or other disruptions at any of these ports could have a material adverse effect on our business.

 

In January, 2017, we exercised our right to utilize the arbitration process to review the division of revenue collected beginning May 1, 2016, as well as to clarify other issues, under our Joint Service Agreement with BNSF.  BNSF has requested the same, and the arbitration process has commenced.  BNSF provides a significant amount of rail transportation services to our JBI business segment.  At this time, we are unable to reasonably predict the outcome of the arbitration, and, as such, no gain or loss contingency can be determined or recorded. Normal commercial business activity between the parties, including load tendering, load tracing, billing and payments, is expected to continue on a timely basis.

 

We also utilize independent contractors and third-party carriers to complete our services. These third parties are subject to similar regulation requirements, which may have a more significant impact on their operations, causing them to exit the transportation industry. Aside from when these third parties may use our trailing equipment to fulfill loads, we do not own the revenue equipment or control the drivers delivering these loads. The inability to obtain reliable third-party carriers and independent contractors could have a material adverse effect on our operating results and business growth.

 

Rapid changes in fuel costs could impact our periodic financial results.

 

Fuel costs can be very volatile. We have a fuel surcharge revenue program in place with the majority of our customers, which has historically enabled us to recover the majority of higher fuel costs. Most of these programs automatically adjust weekly depending on the cost of fuel. However, there can be timing differences between a change in our fuel cost and the timing of the fuel surcharges billed to our customers. In addition, we incur additional costs when fuel price increases cannot be fully recovered due to our engines being idled during cold or warm weather and empty or out-of-route miles that cannot be billed to customers. Rapid increases in fuel costs or shortages of fuel could have a material adverse effect on our operations or future profitability. As of December 31, 2016, we had no derivative financial instruments to reduce our exposure to fuel-price fluctuations.

 

Insurance and claims expenses could significantly reduce our earnings.

 

Our future insurance and claims expenses might exceed historical levels, which could reduce our earnings. If the number or severity of claims for which we are self-insured increases, our operating results could be adversely affected. We have policies in place for 2017 with substantially the same terms as our 2016 policies for personal injury, property damage, workers’ compensation, and cargo loss or damage. We purchase insurance coverage for the amounts above which we are self-insured. If these expenses increase and we are unable to offset the increase with higher freight rates, our earnings could be materially and adversely affected.

   

 
7

 

 

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.

 

For the calendar year ended December 31, 2016, our top 10 customers, based on revenue, accounted for approximately 29% of our revenue. Our JBI, ICS, and JBT segments typically do not have long-term contracts with their customers. While our DCS segment business may involve a long-term written contract, those contracts may contain cancellation clauses, and there is no assurance that our current customers will continue to utilize our services or continue at the same levels. A reduction in or termination of our services by one or more of our major customers could have a material adverse effect on our business and operating results.

 

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.

 

The DOT, FMCSA, and various state agencies exercise broad powers over our business, generally governing matters including authorization to engage in motor carrier service, equipment operation, safety, and financial reporting. We are audited periodically by the DOT to ensure that we are in compliance with various safety, hours-of-service, and other rules and regulations. If we were found to be out of compliance, the DOT could restrict or otherwise impact our operations.

  

Difficulty in attracting and retaining drivers and delivery personnel could affect our profitability and ability to grow.

 

If we are unable to attract and retain the necessary quality and number of employees, we could be required to significantly increase our employee compensation package, let revenue equipment sit idle, dispose of the equipment altogether, or rely more on higher-cost third-party carriers, which could adversely affect our growth and profitability. In addition, our growth could be limited by an inability to attract third-party carriers upon whom we rely to provide transportation services.

 

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 rely on information technology throughout all areas of our business to initiate, track, and complete customer orders; process financial and nonfinancial data; compile results of operations for internal and external reporting; and achieve operating efficiencies and growth. Our information technology systems may be susceptible to various interruptions, including equipment or network failures, failed upgrades or replacement of software, user error, power outages, natural disasters, cyber-attacks, terrorist attacks, computer viruses, hackers, or other security breaches. We have mitigated our exposure to these risks through the establishment and maintenance of technology security programs and disaster recovery plans, but these mitigating activities may not be sufficient. A significant disruption, failure or security breach in our information technology systems could have a material adverse effect on our business, which could include operational disruptions, loss of confidential information, external reporting delays or errors, legal claims, or damage to our business reputation.

 

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.

 

We compete with many other transportation service providers of varying sizes and, to a lesser extent, with LTL carriers and railroads, some of which have more equipment and greater capital resources than we do. Additionally, some of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth rates in the economy, which may limit our ability to maintain or increase freight rates or to maintain our profit margins.

 

In an effort to reduce the number of carriers it uses, a customer often selects so-called “core carriers” as approved transportation service providers, and in some instances, we may not be selected. Many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress freight rates or result in the loss of some business to competitors. Also, certain customers that operate private fleets to transport their own freight could decide to expand their operations, thereby reducing their need for our services.

  

 
8

 

 

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.

 

Certain weather conditions such as ice and snow can disrupt our operations. Increases in the cost of our operations, such as towing and other maintenance activities, frequently occur during the winter months. Natural disasters such as hurricanes and flooding can also impact freight volumes and increase our costs.

 

Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.

 

We are subject to various environmental laws and regulations dealing with the handling of hazardous materials, underground fuel storage tanks, and discharge and retention of storm water. We operate in industrial areas, where truck terminals and other industrial activities are located and where groundwater or other forms of environmental contamination have occurred. Our operations involve the risks of fuel spillage or seepage, environmental damage, and hazardous waste disposal, among others. We also maintain bulk fuel storage and fuel islands at several of our facilities. If a spill or other accident involving hazardous substances occurs, or if we are found to be in violation of applicable laws or regulations, it could have a material adverse effect on our business and operating results. If we should fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

We own our corporate headquarters in Lowell, Arkansas. In addition, we own or lease a number of buildings in Lowell that we utilize for administrative support, customer service, freight dispatch, data processing and warehousing, and data backup and disaster recovery. We also own or lease 42 other significant facilities across the United States where we perform maintenance on our equipment, provide bulk fuel, and employ personnel to support operations. These facilities vary in size from 1 to 39 acres. Each of our business segments utilizes these facilities for various services, including bulk fueling, maintenance, and driver support activities. In addition, we have 89 leased facilities in our DCS cross-dock and delivery system network and 42 leased or owned remote sales offices or branches in our ICS segment. We also own or lease multiple small facilities, offices, and parking yards throughout the country that support our customers’ business needs.

 

A summary of our principal facilities in locations throughout the U.S. follows:

 

Type

 

Acreage

   

Maintenance Shop/

Cross-dock Facility

(square feet)

   

Office Space

(square feet)

 

Maintenance and support facilities

    448       805,000       197,000  

Cross-dock and delivery system facilities

    23       1,304,000       118,000  

Corporate headquarters, Lowell, Arkansas

    99       -       230,000  

Offices and data center, Lowell, Arkansas

    8       -       69,000  

Branch sales offices

    -       -       64,000  

Other facilities, offices, and parking yards

    217       48,000       65,000  

  

ITEM 3. 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 actions 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. 

 

 
9

 

 

In January, 2017, we exercised our right to utilize the arbitration process to review the division of revenue collected beginning May 1, 2016, as well as to clarify other issues, under our Joint Service Agreement with BNSF.  BNSF has requested the same, and the arbitration process has commenced.  BNSF provides a significant amount of rail transportation services to our JBI business segment.  At this time, we are unable to reasonably predict the outcome of the arbitration, and, as such, no gain or loss contingency can be determined or recorded. Normal commercial business activity between the parties, including load tendering, load tracing, billing and payments, is expected to continue on a timely basis.

 

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

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 
10

 

  

PART II

  

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is traded on the NASDAQ Global Select Market (NASDAQ) under the symbol “JBHT.” At December 31, 2016, we were authorized to issue up to 1 billion shares of our common stock, and 167.1 million shares were issued. We had 111.3 million and 113.9 million shares outstanding as of December 31, 2016 and 2015, respectively. The high and low sales prices of our common stock as reported by NASDAQ and the quarterly dividends paid per share on our common shares were:

 

2016

 

Dividends Paid

   

High

   

Low

 
                         

First Quarter

  $ 0.22     $ 86.94     $ 63.58  

Second Quarter

    0.22       89.43       75.71  

Third Quarter

    0.22       86.59       77.52  

Fourth Quarter

    0.22       102.38       76.20  

 

2015

 

Dividends Paid

   

High

   

Low

 
                         

First Quarter

  $ 0.21     $ 90.46     $ 77.50  

Second Quarter

    0.21       93.50       82.06  

Third Quarter

    0.21       86.32       70.92  

Fourth Quarter

    0.21       79.73       69.69  

 

On February 14, 2017, the high and low sales prices for our common stock as reported by NASDAQ were $100.74 and $99.42, respectively, and we had 1,018 stockholders of record.

 

Dividend Policy

 

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 any other factors the Board of Directors may deem relevant. On January 25, 2017, we announced an increase in our quarterly cash dividend from $0.22 to $0.23 per share, which will be paid February 24, 2017, to stockholders of record on February 10, 2017. We currently intend to continue paying cash dividends on a quarterly basis. However, no assurance can be given that future dividends will be paid.

  

 
11

 

 

Purchases of Equity Securities

 

The following table summarizes purchases of our common stock during the three months ended December 31, 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) (1)

 

October 1 through October 31, 2016

    759,590     $ 78.99 (2)     759,590     $ 216  

November 1 through November 30, 2016

    120,935       124.03 (2)     120,935       201  

December 1 through December 31, 2016

    -       -       -       201  

Total

    880,525     $ 85.18       880,525     $ 201  

 

 

(1)

On October 22, 2015, our Board of Directors authorized an additional purchase of up to $500 million of our common stock.

 

 

(2)

Number of common shares and average price paid per common share reflect the effective total purchases upon completion of our $75 million accelerated repurchase program, which commenced in October 2016. Terms of the program included a deferment of 120,935 shares until program completion in November 2016.

   

 
12

 

 

Stock Performance Graph

 

The following graph compares the cumulative 5-year total return of stockholders of our common stock with the cumulative total returns of the S&P 500 index and two customized peer groups. The peer group labeled “2015 Peer Group” consists of 11 companies: Avis Budget Group Inc., C.H. Robinson Worldwide Inc., CSX Corp, Expeditors International Of Washington Inc., Hertz Global Holdings Inc., Hub Group Inc., Kansas City Southern, Landstar System Inc., Norfolk Southern Corp, Ryder System Inc. and Swift Transportation Co. The peer group labeled “2016 Peer Group” consists of 12 companies: Avis Budget Group Inc., C.H. Robinson Worldwide Inc., CSX Corp, Expeditors International Of Washington Inc., Hertz Global Holdings Inc., Hub Group Inc., Kansas City Southern, Landstar System Inc., Norfolk Southern Corp, Old Dominion Freight Line Inc., Ryder System Inc. and Swift Transportation Co. The graph assumes the value of the investment in our common stock, in the index, and in each of the peer groups (including reinvestment of dividends) was $100 on December 31, 2011, and tracks it through December 31, 2016. The stock price performance included in this graph is not necessarily indicative of future stock price performance.

  

   

Years Ended December 31,

 
   

2011

   

2012

   

2013

   

2014

   

2015

   

2016

 
                                                 

J.B. Hunt Transport Services, Inc.

  $ 100.00     $ 134.19     $ 174.78     $ 192.48     $ 169.33     $ 226.54  

S&P 500

    100.00       116.00       153.58       174.60       177.01       198.18  

2015 Peer Group

    100.00       99.89       143.03       168.32       123.82       154.16  

2016 Peer Group

    100.00       100.60       144.43       171.54       126.39       158.69  

 

Securities Authorized For Issuance Under Equity Compensation Plans

 

Plan Category(1)

 

Number of

Securities To Be

Issued Upon

Exercise of

Outstanding

Options, Warrants,

and Rights

   

Weighted-

average Exercise

Price of

Outstanding

Options,

Warrants, and

Rights

   

Number of Securities

Remaining Available for

Future Issuance Under Equity Compensation

Plans (Excluding

Securities Reflected in Column (A))

 
   

(A)

   

(B)

   

(C)

 

Equity compensation plans approved by security holders

    1,986,710     $ - (2)     6,873,114  

 

(1)

We have no equity compensation plans that are not approved by security holders. We have proposed a restatement to our existing equity compensation plan, subject to security holder approval at our April 20, 2017, Annual Meeting of Stockholders.

  

(2)

Currently, only restricted share units remain outstanding under our equity compensation plan. Upon vesting, restricted share units are settled with shares of our common stock on a one-for-one basis and, accordingly, do not include an exercise price.

  

 
13

 

 

ITEM 6. SELECTED FINANCIAL DATA

(Dollars in millions, except per share amounts)

 

Earnings data for the years ended December 31,

 

2016

   

2015

   

2014

   

2013

   

2012

 

Operating revenues

  $ 6,555     $ 6,188     $ 6,165     $ 5,585     $ 5,055  

Operating income

    721       716       632       577       530  

Net earnings

    432       427       375       342       310  

Basic earnings per share

    3.84       3.69       3.20       2.92       2.64  

Diluted earnings per share

    3.81       3.66       3.16       2.87       2.59  

Cash dividends per share

    0.88       0.84       0.80       0.45       0.71  

Operating expenses as a percentage of operating revenues:

                                       

Rents and purchased transportation

    49.7

%

    48.4

%

    50.0

%

    50.2

%

    49.2

%

Salaries, wages and employee benefits

    22.4       22.5       20.9       20.4       20.5  

Depreciation and amortization

    5.5       5.5       4.8       4.5       4.5  

Fuel and fuel taxes

    4.3       5.1       7.4       8.2       9.2  

Operating supplies and expenses

    3.6       3.6       3.5       3.6       3.5  

General and administrative expenses, net of asset dispositions

    1.3       1.1       0.8       0.8       0.6  

Insurance and claims

    1.2       1.2       1.3       1.0       1.1  

Operating taxes and licenses

    0.7       0.7       0.7       0.7       0.6  

Communication and utilities

    0.3       0.3       0.4       0.3       0.3  

Total operating expenses

    89.0       88.4       89.8       89.7       89.5  

Operating income

    11.0       11.6       10.2       10.3       10.5  

Net interest expense

    0.4       0.4       0.4       0.4       0.5  

Earnings before income taxes

    10.6       11.2       9.8       9.9       10.0  

Income taxes

    4.0       4.3       3.7       3.8       3.9  

Net earnings

    6.6

%

    6.9

%

    6.1

%

    6.1

%

    6.1

%

 

Balance sheet data as of December 31,

 

2016

   

2015

   

2014

   

2013

   

2012

 

Working capital ratio

    1.65       1.61       1.11       0.96       1.10  

Total assets (millions)

  $ 3,829     $ 3,630     $ 3,374     $ 2,818     $ 2,462  

Stockholders’ equity (millions)

  $ 1,414     $ 1,300     $ 1,205     $ 1,012     $ 792  

Current portion of long-term debt (millions)

    -       -     $ 250     $ 250     $ 100  

Total debt (millions)

  $ 986     $ 998     $ 929     $ 707     $ 683  

Total debt to equity

    0.70       0.77       0.77       0.70       0.86  

Total debt as a percentage of total capital

    41

%

    43

%

    44

%

    41

%

    46

%

 

 
14

 

  

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our results of operations and financial condition should be read in conjunction with our financial statements and related notes in Item 8. This discussion contains forward-looking statements. Please see “Forward-looking Statements” and “Risk Factors” for a discussion of items, uncertainties, assumptions and risks associated with these statements.

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements in accordance with U.S. generally accepted accounting principles requires us to make estimates and assumptions that impact the amounts reported in our 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 third parties 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. We consider our critical accounting policies and estimates to be those that require us to make more significant judgments and estimates when we prepare our financial statements and include the following:

 

Workers’ Compensation and Accident Costs

 

We purchase insurance coverage for a portion of expenses related to employee injuries, vehicular collisions, accidents, and cargo damage. Certain insurance arrangements include a level of self-insurance (deductible) coverage applicable to each claim. We have umbrella policies to limit our exposure to catastrophic claim costs. We are substantially self-insured for loss of and damage to our owned and leased revenue equipment.

 

The amounts of self-insurance change from time to time based on measurement dates, policy expiration dates, and claim type. We have policies in place for 2017 with substantially the same terms as our 2016 policies for personal injury, property damage, workers’ compensation, and cargo loss or damage.

 

Our claims accrual policy for all self-insured claims is to recognize a liability at the time of the incident based on our analysis of the nature and severity of the claims and analyses provided by third-party claims administrators, as well as legal, economic, and regulatory factors. Our safety and claims personnel work directly with representatives from the insurance companies to continually update the estimated cost of each claim. The ultimate cost of a claim develops over time as additional information regarding the nature, timing, and extent of damages claimed becomes available. Accordingly, we use an actuarial method to develop current claim information to derive an estimate of our ultimate claim liability. This process involves the use of loss-development factors based on our historical claims experience and includes a contractual premium adjustment factor, if applicable. In doing so, the recorded liability considers future claims growth and, if applicable, conversion to fully insured status and provides a reserve for incurred-but-not-reported claims. We do not discount our estimated losses. At December 31, 2016, we had an accrual of approximately $98 million for estimated claims. In addition, we are required to pay certain advanced deposits and monthly premiums. At December 31, 2016, we had an aggregate prepaid insurance asset of approximately $93 million, which represented prefunded premiums and deposits.

 

Revenue Equipment

 

We operate a significant number of tractors, trucks, containers, chassis, and trailers in connection with our business. This equipment may be purchased or acquired under lease agreements. In addition, we may rent revenue equipment from various third parties under short-term rental arrangements. Purchased revenue equipment is depreciated on the straight-line method over the estimated useful life to an estimated salvage or trade-in value. We periodically review the useful lives and salvage values of our revenue equipment and evaluate our long-lived assets for impairment. We have not identified any impairment to our assets at December 31, 2016.

  

 
15

 

 

We have agreements with our primary tractor suppliers for residual or trade-in values for certain new equipment. We have utilized these trade-in values, as well as other operational information such as anticipated annual miles, in accounting for depreciation expense. If our suppliers were unable to perform under the terms of our agreements for trade-in values, it could have a material adverse effect on our financial results.

 

Revenue Recognition

 

We recognize revenue based on the relative transit time of the freight transported and as other services are provided. Accordingly, a portion of the total revenue that will be billed to the customer once a load is delivered is recognized in each reporting period based on the percentage of the freight pickup and delivery service that has been completed at the end of the reporting period.

 

We record revenues on the gross basis at amounts charged to our customers because we are the primary obligor, we are a principal in the transaction, we invoice our customers and retain all credit risks, and we maintain discretion over pricing. Additionally, we are responsible for the selection of third-party transportation providers.

 

Our trade accounts receivable includes amounts due from customers that have been reduced by an allowance for uncollectible accounts and revenue adjustments. The allowance for uncollectible accounts and revenue adjustments is based on historical experience, as well as any known trends or uncertainties related to customer billing and account collectability. The adequacy of our allowance is reviewed quarterly.

 

Income Taxes

 

We account for income taxes under the liability method. Our deferred tax assets and liabilities represent items that will result in a tax deduction or taxable income in future years for which we have already recorded the related tax expense or benefit in our statement of earnings. Deferred tax accounts arise as a result of timing differences between when items are recognized in our Consolidated Financial Statements and when they are recognized in our tax returns. We assess the likelihood that deferred tax assets will be recovered from future taxable income or the reversal of temporary timing differences. To the extent we believe recovery does not meet the more-likely-than-not threshold, a valuation allowance is established. To the extent we establish a valuation allowance, we include an expense as part of our income tax provision.

 

Significant judgment is required in determining and assessing the impact of complex tax laws and certain tax-related contingencies on our provision for income taxes. As part of our calculation of the provision for income taxes, we assess whether the benefits of our tax positions are at least more likely than not to be sustained upon audit based on the technical merits of the tax position. For tax positions that are not more likely than not to be sustained upon audit, we accrue the largest amount of the benefit that is not more likely than not to be sustained in our Consolidated Financial Statements. Such accruals require us to make estimates and judgments, whereby actual results could vary materially from these estimates. Further, a number of years may elapse before a particular matter for which we have established an accrual is audited and resolved. See Note 7, Income Taxes, in our Consolidated Financial Statements for a discussion of our current tax contingencies.

  

 
16

 

  

RESULTS OF OPERATIONS

 

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 compared with the prior year.

  

   

Percentage of

Operating Revenues

   

Percentage Change

Between Years

 
   

2016

   

2015

   

2014

   

2016 vs. 2015

   

2015 vs. 2014

 

Operating revenues

    100.0

%

    100.0

%

    100.0

%

    5.9

%

    0.4

%

                                         

Operating expenses:

                                       

Rents and purchased transportation

    49.7       48.4       50.0       8.7       (2.9

)

Salaries, wages and employee benefits

    22.4       22.5       20.9       5.4       8.1  

Depreciation and amortization

    5.5       5.5       4.8       6.4       15.3  

Fuel and fuel taxes

    4.3       5.1       7.4       (9.5

)

    (31.0

)

Operating supplies and expenses

    3.6       3.6       3.5       5.7       0.9  

General and administrative expenses, net of asset dispositions

    1.3       1.1       0.8       20.0       43.3  

Insurance and claims

    1.2       1.2       1.3       6.4       (9.1

)

Operating taxes and licenses

    0.7       0.7       0.7       6.7       11.1  

Communication and utilities

    0.3       0.3       0.4       (3.0

)

    (1.1

)

Total operating expenses

    89.0       88.4       89.8       6.6       (1.1

)

Operating income

    11.0       11.6       10.2       0.7       13.3  

Net interest expense

    0.4       0.4       0.4       (1.1

)

    (5.4

)

Earnings before income taxes

    10.6       11.2       9.8       0.8       14.2  

Income taxes

    4.0       4.3       3.7       0.3       14.4  

Net earnings

    6.6

%

    6.9

%

    6.1

%

    1.1

%

    14.0

%

 

2016 Compared With 2015

 

Consolidated Operating Revenues

 

Our total consolidated operating revenues increased 5.9% to $6.56 billion in 2016, compared to $6.19 billion in 2015, primarily due to overall increased load volume, partially offset by lower revenue per load in our JBI, ICS, and JBT segments. Fuel surcharge revenues decreased 18.4% to $548 million in 2016, compared to $671 million in 2015. If fuel surcharge revenues were excluded from both years, our 2016 revenue increased 8.9% over 2015.

 

Consolidated Operating Expenses

 

Our 2016 consolidated operating expenses increased 6.6% from 2015, while year-over-year revenue increased 5.9%, resulting in a 2016 operating ratio of 89.0% compared to 88.4% in 2015. Rents and purchased transportation costs increased 8.7% in 2016, 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 benefit costs increased 5.4% in 2016 from 2015. This increase was primarily related to increases in driver pay and office personnel compensation due to an increase in the number of employees and a tighter supply of qualified drivers, partially offset by a $15.2 million, one-time benefit recorded to reflect a change in our employee paid time off policy.

 

Depreciation and amortization expense increased 6.4% 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 new replacement equipment in JBT.

 

 
17

 

 

Fuel and fuel taxes expense decreased 9.5% in 2016 compared with 2015, due to decreases in the price of fuel during 2016, partially offset by increased road miles. 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 address 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.

 

Operating supplies and expenses increased 5.7%, driven primarily by increased toll activity and tire expense. General and administrative expenses increased 20.0% from 2015, primarily due to increased charitable contributions and the absence of net gains from asset sales and disposals in 2016. Net losses from sale or disposal of assets were $5 million in 2016, compared to net gains of $1 million in 2015. Insurance and claims expense increased 6.4% in 2016, primarily due to higher incident volume.

 

Net interest expense for 2016 decreased by 1.1% compared with 2015, due primarily to lower effective interest rates.

 

Our effective income tax rate was 37.90% in 2016 and 38.10% in 2015. The decrease in 2016 was primarily due to a reduction in permanent differences related to executive compensation and lower state tax rates.

 

Segments

 

We operated four business segments during calendar year 2016. 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 Revenue by Segment

 
   

Years Ended December 31, (in millions)

 
   

2016

   

2015

   

2014

 

JBI

  $ 3,796     $ 3,665     $ 3,687  

DCS

    1,533       1,451       1,394  

ICS

    852       699       718  

JBT

    388       386       386  

Total segment revenues

    6,569       6,201       6,185  

Intersegment eliminations

    (14

)

    (13

)

    (20

)

Total

  $ 6,555     $ 6,188     $ 6,165  

 

   

Operating Income by Segment

 
   

Years Ended December 31, (in millions)

 
   

2016

   

2015

   

2014

 

JBI

  $ 450     $ 477     $ 461  

DCS

    205       163       117  

ICS

    36       36       30  

JBT

    30       40       24  

Total

  $ 721     $ 716     $ 632  

  

 
18

 

  

Operating Data by Segment

 

   

Years Ended December 31,

 
   

2016

   

2015

   

2014

 

JBI

                       

Loads

    1,916,303       1,772,808       1,700,374  

Average length of haul (miles)

    1,657       1,652       1,656  

Revenue per load

  $ 1,981     $ 2,067     $ 2,169  

Average tractors during the period(1)

    5,222       4,949       4,502  

Tractors (end of period)

                       

Company-owned

    4,581       4,276       3,916  

Independent contractor

    695       805       761  

Total tractors

    5,276       5,081       4,677  

Trailing equipment (end of period)

    84,594       78,957       73,298  

Average effective trailing equipment usage

    77,179       72,622       68,683  
                         

DCS

                       

Loads

    2,401,332       2,250,099       2,101,707  

Average length of haul (miles)

    177       175       177  

Revenue per truck per week(2)

  $ 4,077     $ 4,028     $ 4,098  

Average trucks during the period(3)

    7,307       7,012       6,641  

Trucks (end of period)

                       

Company-owned

    6,976       6,762       6,425  

Independent contractor

    15       10       7  

Customer-owned (Dedicated-operated)

    410       436       448  

Total trucks

    7,401       7,208       6,880  

Trailing equipment (end of period)

    22,688       21,672       20,516  

Average effective trailing equipment usage

    22,827       22,391       20,927  
                         

ICS

                       

Loads

    852,179       542,947       453,410  

Revenue per load

  $ 999     $ 1,288     $ 1,584  

Gross profit margin

    14.3

%

    15.3

%

    13.0

%

Employee count (end of period)

    824       670       582  

Approximate number of third-party carriers (end of period)

    50,900       45,700       39,100  
                         

JBT

                       

Loads

    385,298       366,297       370,555  

Average length of haul (miles)

    455       448       411  

Loaded miles (000)

    175,038       163,115       151,725  

Total miles (000)

    207,998       193,856       179,036  

Average nonpaid empty miles per load

    85.6       83.9       73.7  

Revenue per tractor per week(2)

  $ 3,458     $ 3,698     $ 4,068  

Average tractors during the period(1)

    2,191       2,051       1,868  

Tractors (end of period)

                       

Company-owned

    1,376       1,462       1,296  

Independent contractor

    752       687       590  

Total tractors

    2,128       2,149       1,886  

Trailing equipment (end of period)

    7,642       7,604       7,215  

Average effective trailing equipment usage

    6,956       6,460       5,891  

 

(1)

Includes company-owned and independent contractor tractors

(2)

Using weighted workdays

(3)

Includes company-owned, independent contractor, and customer-owned trucks

  

 
19

 

  

JBI Segment

 

JBI segment revenue increased 3.6% to $3.80 billion in 2016, from $3.66 billion in 2015. This increase in revenue was primarily a result of an 8.1% increase in load volume, offset by a 4.2% decrease in revenue per load, which is the combination of changes in freight mix, customer rates, and fuel surcharge revenue. Load volume in our eastern network increased 6.7%, and transcontinental loads grew 9.0% compared to 2015. Excluding fuel surcharge, revenues increased 7.1% and revenue per load decreased 1.0% in 2016 over the prior year. Average length of haul remained relatively flat in 2016 when compared to 2015.

 

Operating income of the JBI segment decreased to $450 million in 2016, from $477 million in 2015. Benefits from volume growth, improved network efficiency, improved rail service, and approximately $5.7 million from the change in paid time off policy 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.

 

DCS Segment

 

DCS segment revenue increased 5.6% to $1.53 billion in 2016, from $1.45 billion in 2015. Productivity, defined as revenue per truck per week, increased 1.2% when compared to 2015. Revenue, excluding fuel surcharges, increased 7.3% in 2016 compared to 2015, and productivity excluding fuel surcharge revenue increased 2.8% from 2015, 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. DCS ended 2016 with a net additional 193 revenue-producing trucks when compared to 2015.

 

Operating income of our DCS segment increased to $205 million in 2016, from $163 million in 2015. The increase is primarily due to increased revenue, improved asset utilization, and approximately $7.3 million from the change in paid time off policy, partially offset by higher driver wage and recruiting costs, increased salaries and benefits expenses, and higher equipment ownership costs.

 

ICS Segment

 

ICS segment revenue increased 21.7% to $852 million in 2016, from $699 million in 2015. Overall volumes increased 57.0%. Revenue per load decreased 22.5% primarily due to freight mix changes driven by customer demand. Contractual business was approximately 74% of the total load volume and 64% of the total revenue in the 2016, compared to 71% of the total load volume and 63% of the total revenue in 2015.

 

Operating income remained flat at $36 million for both 2016 and 2015, primarily due to increased revenue and approximately $1.0 million from the change in paid time off policy, being offset by a 6.3% decrease in gross profit margin, increased claim costs, higher technology costs and increased personnel costs, as the total branch count increased to 42 from 34 at the end of 2015. ICS gross profit margin decreased to 14.3% for 2016 from 15.3% for 2015. ICS’s carrier base increased 11.4%, and the employee count increased 23.0% when compared to 2015.

 

JBT Segment

 

JBT segment revenue increased 0.6% to $388 million in 2016, from $386 million in 2015. Excluding fuel surcharges, revenue for 2016 increased 3.8% compared to 2015, primarily due to increased average truck count, partially offset by core customer rate decreases and freight mix changes.

 

JBT segment had operating income of $30 million in 2016 compared with $40 million in 2015. Benefits from an increased average truck count, higher load volume, and approximately $1.2 million from the change in paid time off policy, were more than offset by increased driver recruiting costs, higher independent contractor cost per mile, higher safety and insurance costs, and increased tractor maintenance costs.

  

 
20

 

  

2015 Compared With 2014

 

Consolidated Operating Revenues

 

Our total consolidated operating revenues were $6.19 billion in 2015, remaining relatively flat when compared to $6.17 billion in 2014. Overall customer rate increases and load growth, and increased fleet counts in our JBI, DCS, and JBT segments, were offset by a 38.0% decrease in fuel surcharge revenue to $671 million in 2015 when compared to $1.08 billion in 2014, due to decreases in the price of fuel during the year. If fuel surcharge revenues were excluded from both years, our 2015 revenue increased 8.5% over 2014.

 

Consolidated Operating Expenses

 

Our 2015 consolidated operating expenses decreased 1.1% from 2014, while year-over-year revenue remained flat, resulting in a 2015 operating ratio of 88.4% compared to 89.8% in 2014. Rents and purchased transportation costs decreased 2.9% in 2015, primarily the result of the lower fuel component in the cost of services provided by third-party rail and truck carriers within JBI, DCS, and ICS segments. Salaries, wages and employee benefit costs increased 8.1% in 2015 from 2014. This increase was primarily related to increases in driver pay and office personnel compensation due to an increase in the number of employees and a tighter supply of qualified drivers.

 

Depreciation and amortization expense increased 15.3% in 2015, 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 new replacement equipment in JBT.

 

Fuel and fuel taxes expense decreased 31.0% in 2015 compared with 2014, due to decreases in the price of fuel during 2015, partially offset by increased road miles. 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 address 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.

 

Operating supplies and expenses increased 0.9%, driven primarily by increased toll rates and activity, partially offset by decreased general equipment maintenance and repair costs. General and administrative expenses increased 43.3% from 2014, due primarily to costs related to corporate wide streamlining and technology redevelopment efforts. Net gains from sale or disposal of assets were $1 million in 2015, compared with $6 million in 2014. Insurance and claims expense decreased 9.1% in 2015, primarily due to decreased accident severity and fewer incidents.

 

Net interest expense for 2015 decreased by 5.4% compared with 2014, primarily due to lower effective interest rates. 

 

Our effective income tax rate was 38.10% in 2015 and 38.01% in 2014. The increase in 2015 was primarily related to an increase in state income tax expense.

  

 
21

 

  

JBI Segment

 

JBI segment revenue decreased 0.6% to $3.66 billion in 2015, from $3.69 billion in 2014, resulting from a decrease in revenue per load, which is attributable to customer rate increases offset by lower fuel surcharges and freight mix. This decrease was partially offset by increases in load volume in both our eastern and transcontinental networks. Excluding fuel surcharge, revenues increased 8.7% and revenue per load increased 4.4% in 2015 over the prior year. Average length of haul remained relatively flat in 2015 when compared to 2014.

 

Operating income in our JBI segment increased to $477 million in 2015, from $461 million in 2014. This increase was primarily due to customer rate increases, increased load volume, reduced reliance on outsourced dray carriers, lower insurance and cargo claim costs, and lower maintenance costs, partially offset by increases in rail purchased transportation rates, higher equipment depreciation expense, higher driver procurement and retention expenses, and $6.4 million in corporate-wide streamlining and technology redevelopment costs.

 

DCS Segment

 

DCS segment revenue increased 4.1% to $1.45 billion in 2015, from $1.39 billion in 2014. Productivity, defined as revenue per truck per week, decreased 1.7% when compared to 2014, primarily from lower fuel surcharge revenue. Revenue, excluding fuel surcharges, increased 10.0% in 2015 compared to 2014, and productivity excluding fuel surcharge revenue increased 3.9% from 2014, primarily from customer rate increases and additional activity at customer accounts. DCS ended 2015 with a net additional 328 revenue-producing trucks when compared to 2014.

 

Operating income increased to $163 million in 2015, compared with $117 million in 2014. The increase in operating income was primarily due to increased revenue, improved asset utilization, less reliance on third-party carriers and lower maintenance costs, partially offset by increased equipment depreciation expense, higher driver wage and recruiting costs, and $2.6 million in corporate-wide streamlining and technology redevelopment costs.

 

ICS Segment

 

ICS segment revenue decreased 2.6% to $699 million in 2015, from $718 million in 2014. This decrease in revenue was primarily due to decreased revenue per load resulting from lower fuel prices, changes in freight mix, and less transactional customer demand, partially offset by an increase in overall load volume. Contractual business was approximately 71% of the total load volume and 63% of the total revenue in the 2015, compared to 63% of the total load volume and 55% of the total revenue in 2014.

 

Operating income increased to $36 million in 2015, compared to $30 million in 2014, primarily due to improved gross profit margin. ICS gross profit margin increased to 15.3% for 2015 from 13.0% for 2014. Improvements in gross profit margin were offset by approximately $4.4 million in corporate-wide streamlining and technology redevelopment costs and higher personnel costs as the total branch count increased to 34 from 29 at the end of 2014. ICS’s carrier base increased 17%, and the employee count increased 15% when compared to 2014.

 

JBT Segment

 

JBT segment revenue remained flat at $386 million in 2015 when compared to 2014. Excluding fuel surcharges, revenue for 2015 increased 7.5% compared to 2014, primarily due to increased truck count and core rate increases.

 

JBT segment had operating income of $40 million in 2015 compared with $24 million in 2014. Benefits from an increased truck count, core rate increases, and improvements in equipment maintenance costs, insurance and claims costs, and fuel economy were partially offset by lower asset utilization, higher driver wage and hiring costs, lower gains on equipment sales, increased equipment depreciation expense, increased driver and independent contractor costs per mile, and corporate-wide streamlining and technology redevelopment costs.

  

 
22

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Net cash provided by operating activities was $854 million in 2016 and $873 million in 2015. This decrease in 2016 was primarily due to the timing of collections of trade and other receivables, partially offset by increased earnings, collection of income taxes receivable and the timing of the payments of trade payables.

 

Net cash used in investing activities totaled $485 million in 2016, compared with $577 million in 2015. The decrease resulted primarily from a reduction in equipment purchases, partially offset by a decrease in proceeds from the sale of equipment in 2016, compared to 2015.

 

Net cash used in financing activities was $368 million in 2016, compared with $297 million in 2015. This change resulted primarily from higher long-term debt repayments, net of proceeds from long-term debt, in 2016, partially offset by a reduction 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 $0.20 per share quarterly dividend in 2014, a $0.21 per share quarterly dividend in 2015, and a $0.22 per share quarterly dividend in 2016. On January 25, 2017, we announced an increase in our quarterly cash dividend from $0.22 to $0.23 per share, which will be paid February 24, 2017, to stockholders of record on February 10, 2017. 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, 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 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, 2016, we had $140 million outstanding at an average interest rate of 1.76% under this agreement.

 

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. The third issuance 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. We may redeem for cash some or all of these notes based on a redemption price set forth in the note indenture. We currently have interest rate swap agreements which effectively convert our $250 million of 2.40% fixed-rate senior notes due March 2019 and our $350 million of 3.30% fixed-rate senior notes due August 2022 to variable rates, resulting in interest rates of 1.81% and 2.26%, respectively, at December 31, 2016. The applicable interest rates under these swap agreements are based on LIBOR plus an established margin.

 

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, 2016.

 

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.

  

 
23

 

 

We are currently committed to spend approximately $967 million, net of proceeds from sales or trade-ins, during 2017 and 2018, 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, 2016, we had approximately $36.7 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, 2016:

 

   

Total

   

2017

    2018-2019     2020-2021    

2022 and

thereafter

 

Operating leases

  $ 36.7     $ 15.2     $ 15.3     $ 6.1     $ 0.1  

Long-term debt obligations

    990.0       -       250.0       140.0       600.0  

Interest payments on debt (1)

    134.3       24.5       45.7       37.2       26.9  

Commitments to acquire revenue equipment and facilities

    966.6       302.4       664.2       -       -  

Total

  $ 2,127.6     $ 342.1     $ 975.2     $ 183.3     $ 627.0  

 

(1) Interest payments on debt are based on the debt balance and applicable rate at December 31, 2016.

 

We had standby letters of credit outstanding of approximately $4.4 million at December 31, 2016, that expire at various dates in 2017, 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 $39.8 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 7, 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. Our total long-term debt consists of both fixed and variable interest rate facilities. Our senior notes have fixed interest rates ranging from 2.40% to 3.85%. These fixed-rate facilities reduce the impact of changes to market interest rates on future interest expense. 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% fixed-rate senior notes due March 2019 and our $350 million of 3.30% fixed-rate senior notes due August 2022 to variable rates. The applicable interest rates under these swap agreements are based on LIBOR plus an established margin. 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 $7.4 million.

 

Although we conduct business in foreign countries, international operations are not material to our consolidated financial position, results of operations, or cash flows. Additionally, foreign currency transaction gains and losses were not material to our results of operations for the year ended December 31, 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. 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.

  

 
24

 

 

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 volatile fluctuations in fuel prices will continue in the future or the extent to which fuel surcharges could be collected to offset fuel-price increases. As of December 31, 2016, 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, 2016 and 2015

Consolidated Statements of Earnings for years ended December 31, 2016, 2015, and 2014

Consolidated Statements of Stockholders’ Equity for years ended December 31, 2016, 2015, and 2014

Consolidated Statements of Cash Flows for years ended December 31, 2016, 2015, and 2014

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 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 December 31, 2016.

 

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.

  

 
25

 

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. 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 (2013 Framework). Based on our assessment, we believe that as of December 31, 2016, our internal control over financial reporting is effective based on those criteria.

 

The effectiveness of internal control over financial reporting as of December 31, 2016, 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, 2016, 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

 

The information required for Item 10 is hereby incorporated by reference from the Notice and Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 2017.

 

ITEM 11.  EXECUTIVE COMPENSATION

 

The information required for Item 11 is hereby incorporated by reference from the Notice and Proxy Statement for the Annual Meeting of Stockholders to be held April 20, 2017.

 

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 the Annual Meeting of Stockholders to be held April 20, 2017.

 

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 the Annual Meeting of Stockholders to be held April 20, 2017.

 

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 the Annual Meeting of Stockholders to be held April 20, 2017.

 

PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

(A)     Financial Statements, Financial Statement Schedules and Exhibits:

 

(1)   Financial Statements

The financial statements included in Item 8 above are filed as part of this annual report.

  

 
26

 

 

(2)   Financial Statement Schedules

Schedule II – Valuation and Qualifying Accounts (in millions)

 

Allowance for Doubtful

Accounts and Revenue

Adjustments for the Years Ended:

 

Balance at

Beginning of

Year

   

Charged to

Expense/
Against

Revenue

   

Write-Offs,

Net of

Recoveries

   

Balance at

End of Year

 
                                 

December 31, 2014

  $ 8.1     $ 19.0     $ (17.6 )   $ 9.5  

December 31, 2015

    9.5       9.5       (9.1 )     9.9  

December 31, 2016

    9.9       19.5       (16.0 )     13.4  

 

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.

 

(3)   Exhibits

The response to this portion of Item 15 is submitted as a separate section of this report on Form 10-K (Exhibit Index).

 

 
27

 

 

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 23rd day of February, 2017.

  

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

 

 

 

 

(Registrant)

 

 

 

 

 

 

 

By:

 

/s/ John N. Roberts, III

 

 

 

 

John N. Roberts, III

 

 

 

 

President and Chief Executive Officer

 

                                     

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on the 23rd day of February, 2017, on behalf of the registrant and in the capacities indicated.

  

 

/s/   John N. Roberts, III

 

President and Chief Executive Officer, Member

 

John N. Roberts, III

 

of the Board of Directors 

 

 

 

(Principal Executive Officer)

       
 

/s/   David G. Mee 

 

Executive Vice President, Finance and

 

David G. Mee 

 

Administration, Chief Financial Officer and

      Corporate Secretary
      (Principal Financial Officer)
 

 

 

 

 

/s/   John Kuhlow

 

Senior Vice President Finance, Controller,

 

John Kuhlow

 

Chief Accounting Officer 

       
  /s/   Kirk Thompson   Chairman of the Board of Directors
  Kirk Thompson    
       
  /s/   James L. Robo   Member of the Board of Directors
  James L. Robo   (Lead Director)
       
  /s/   Douglas G. Duncan   Member of the Board of Directors
  Douglas G. Duncan    
       
  /s/   Francesca M. Edwardson   Member of the Board of Directors
  Francesca M. Edwardson    
       
  /s/   Wayne Garrison   Member of the Board of Directors
  Wayne Garrison    
       
  /s/   Sharilyn S. Gasaway   Member of the Board of Directors
  Sharilyn S. Gasaway    
       
  /s/   Gary C. George   Member of the Board of Directors
  Gary C. George    
       
  /s/   J. Bryan Hunt, Jr.   Member of the Board of Directors
  J. Bryan Hunt, Jr.    
       
  /s/   Coleman H. Peterson   Member of the Board of Directors
  Coleman H. Peterson    

 

 
28

 

 

EXHIBIT INDEX

 

Exhibit
Number

  Description
     
3.1  

Amended and Restated Articles of Incorporation of J.B. Hunt Transport Services, Inc. dated May 19, 1988 (incorporated by reference from Exhibit 3.1 of the Company’s quarterly report on Form 10-Q for the period ended March 31, 2005, filed April 29, 2005)

     

3.2

 

Amended and Restated Bylaws of J.B. Hunt Transport Services, Inc. dated April 23, 2015 (incorporated by reference from Exhibit 3.1 of the Company’s current report on Form 8-K, filed April 27, 2015)

     

10.1

 

Amended and Restated Employee Retirement Plan (incorporated by reference from Exhibit 99 of the Company’s registration statement on Form S-8, filed December 30, 1994)

     

10.2

 

Second Amended and Restated Management Incentive Plan (incorporated by reference from Exhibit 10.1 of the Company’s quarterly report on Form 10-Q for the period ended June 30, 2012, filed July 31, 2012)

     

10.3

 

Amendment to Second Amended and Restated Management Incentive Plan (incorporated by reference from Exhibit 10.1 of the Company’s current report on Form 8-K, filed July 26, 2016)

     

10.4

 

Summary of Compensation Arrangements with Named Executive Officers (incorporated by reference from Exhibit 99.1 of the Company’s current report on Form 8-K, filed October 24, 2016)

     

10.5

 

Indenture (incorporated by reference from Exhibit 4.1 of the Company’s registration statement on Form S-3ASR, filed September 14, 2010)

     

10.6

 

Second Supplemental Indenture (incorporated by reference from Exhibit 4.2 of the Company’s current report on Form 8-K, filed March 6, 2014)

     

10.7

 

Third Supplemental Indenture (incorporated by reference from Exhibit 4.4 of the Company’s current report on Form 8-K, filed March 6, 2014)

     

10.8

 

Fourth Supplemental Indenture (incorporated by reference from Exhibit 4.3 of the Company’s current report on Form 8-K, filed August 6, 2015)

     

10.9

 

Credit Agreement and related documents (incorporated by reference from Exhibit 10.1 of the Company’s current report on Form 8-K, filed October 2, 2015)

     

21.1

 

Subsidiaries of J.B. Hunt Transport Services, Inc.

     

23.1

 

Consent of Ernst & Young LLP

     

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

 

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

 

 
29

 

 

INDEX TO CONSOLIDATED FINANCIAL INFORMATION

 

 

  PAGE
   

Management’s Report on Internal Control Over Financial Reporting

31

   

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

32

   

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

33

   

Consolidated Balance Sheets as of December 31, 2016 and 2015

34

   

Consolidated Statements of Earnings for years ended December 31, 2016, 2015, and 2014

35

   

Consolidated Statements of Stockholders’ Equity for years ended December 31, 2016, 2015, and 2014

36

   

Consolidated Statements of Cash Flows for years ended December 31, 2016, 2015, and 2014

37

   

Notes to Consolidated Financial Statements

38

 

 
30

 

 

Management’s Report on Internal Control Over Financial Reporting

 

We are responsible for the preparation, integrity, and fair presentation of our Consolidated Financial Statements and related information appearing in this report. We take these responsibilities very seriously and are committed to maintaining controls and procedures that are designed to ensure that we collect the information we are required to disclose in our reports to the SEC and to process, summarize, and disclose this information within the time periods specified by the SEC.

 

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, we believe our 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.

 

We are 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. We assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013 Framework). Based on our assessment, we believe that as of December 31, 2016, our internal control over financial reporting is effective based on those criteria.

 

The effectiveness of internal control over financial reporting as of December 31, 2016, 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.

 

 

 

/s/John N. Roberts, III  

 

/s/ David G. Mee

 

John N. Roberts, III  

 

David G. Mee

 

President and Chief Executive Officer  

 

Executive Vice President, Finance and

 

(Principal Executive Officer)     Administration, Chief Financial Officer  
    (Principal Financial Officer)  

 

 
31

 

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders of J.B. Hunt Transport Services, Inc. 

 

We have audited the accompanying consolidated balance sheets of J.B. Hunt Transport Services, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of earnings, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of J.B. Hunt Transport Services, Inc. at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), J.B. Hunt Transport Services, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 23, 2017 expressed an unqualified opinion thereon.

 

 

 

/s/ Ernst & Young LLP

 

 

 

 

 

Rogers, Arkansas

 

 

 

February 23, 2017

 

 

 

  

 
32

 

  

Report of Independent Registered Public Accounting Firm

 

 

The Board of Directors and Stockholders of J.B. Hunt Transport Services, Inc. 

 

We have audited J.B. Hunt Transport Services, Inc.’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). J.B. Hunt Transport Services, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, J.B. Hunt Transport Services, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of J.B. Hunt Transport Services, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016, and our report dated February 23, 2017 expressed an unqualified opinion thereon. 

 

 

 

 

/s/ Ernst & Young LLP

 

 

 

 

 

Rogers, Arkansas

 

 

 

February 23, 2017

 

 

 

   

 
33

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

Consolidated Balance Sheets

December 31, 2016 and 2015

(in thousands, except share data)

 

   

2016

   

2015

 
Assets                

Current assets:

               

Cash and cash equivalents

  $ 6,377     $ 5,566  

Trade accounts receivable, net

    745,288       624,294  
Other receivables     67,926       106,986  

Inventories

    18,577       23,191  

Prepaid expenses

    107,513       97,888  

Total current assets

    945,681       857,925  

Property and equipment, at cost:

               

Revenue and service equipment

    3,820,439       3,636,767  

Land

    46,827       39,026  

Structures and improvements

    175,900       154,142  

Furniture and office equipment

    215,749       189,516  

Total property and equipment

    4,258,915       4,019,451  

Less accumulated depreciation

    1,440,124       1,318,122  

Net property and equipment

    2,818,791       2,701,329  

Other assets

    64,516       70,290  

Total assets

  $ 3,828,988     $ 3,629,544  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities:

               

Trade accounts payable

  $ 384,308     $ 340,332  

Claims accruals

    109,745       104,220  

Accrued payroll

    51,929       59,420  

Other accrued expenses

    27,152       28,445  

Total current liabilities

    573,134       532,417  

Long-term debt

    986,278       998,003  

Other long-term liabilities

    64,881       58,552  

Deferred income taxes

    790,634       740,220  

Total liabilities

    2,414,927       2,329,192  

Commitments and contingencies (Note 10)

               

Stockholders’ equity:

               

Preferred stock, $100 par value. 10 million shares authorized; none outstanding

    -       -  

Common stock, $.01 par value. 1 billion shares authorized; (167,099,432 shares issued at December 31, 2016 and 2015, of which 111,305,021 shares and 113,947,780 shares were outstanding at December 31, 2016 and 2015, respectively)

    1,671       1,671  

Additional paid-in capital

    293,087       268,728  

Retained earnings

    3,218,943       2,885,843  

Treasury stock, at cost (55,794,411 shares at December 31, 2016, and 53,151,652 shares at December 31, 2015)

    (2,099,640 )     (1,855,890 )

Total stockholders’ equity

    1,414,061       1,300,352  
                 

Total liabilities and stockholders' equity

  $ 3,828,988     $ 3,629,544  

 

See Notes to Consolidated Financial Statements.

 

 
34

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

Consolidated Statements of Earnings

Years Ended December 31, 2016, 2015 and 2014

(in thousands, except per share amounts)

 

   

2016

   

2015

   

2014

 
                         

Operating revenues, excluding fuel surcharge revenues

  $ 6,007,347     $ 5,516,282     $ 5,082,827  

Fuel surcharge revenues

    548,112       671,364       1,082,614  

Total operating revenues

    6,555,459       6,187,646       6,165,441  

Operating expenses:

                       

Rents and purchased transportation

    3,255,692       2,994,586       3,085,276  

Salaries, wages and employee benefits

    1,469,187       1,394,239       1,290,404  

Depreciation and amortization

    361,510       339,613       294,496  

Fuel and fuel taxes

    283,437       313,034       453,919  

Operating supplies and expenses

    233,223       220,597       218,539  

General and administrative expenses, net of asset dispositions

    87,053       72,522       50,596  

Insurance and claims

    78,410       73,689       81,062  

Operating taxes and licenses

    45,954       43,084       38,796  

Communication and utilities

    19,973       20,588       20,811  

Total operating expenses

    5,834,439       5,471,952       5,533,899  

Operating income

    721,020       715,694       631,542  

Interest income

    71       86       87  

Interest expense

    25,294       25,577       27,028  

Earnings before income taxes

    695,797       690,203       604,601  

Income taxes

    263,707       262,968       229,809  

Net earnings

  $ 432,090     $ 427,235     $ 374,792  
                         

Weighted average basic shares outstanding

    112,474       115,677       117,000  

Basic earnings per share

  $ 3.84     $ 3.69     $ 3.20  

Weighted average diluted shares outstanding

    113,361       116,728       118,445  

Diluted earnings per share

  $ 3.81     $ 3.66     $ 3.16  

Dividends declared per common share

  $ 0.88     $ 0.84     $ 0.80  

 

See Notes to Consolidated Financial Statements.

 

 
35

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

Consolidated Statements of Stockholders' Equity

Years Ended December 31, 2016, 2015 and 2014

(in thousands, except per share amounts)

 

           

Additional

                         
   

Common

   

Paid-in

   

Retained

   

Treasury

   

Stockholders’

 
   

Stock

   

Capital

   

Earnings

   

Stock

   

Equity

 

Balances at December 31, 2013

  $ 1,671     $ 226,595     $ 2,274,784     $ (1,490,598 )   $ 1,012,452  

Comprehensive income:

                                       

Net earnings

    -       -       374,792       -       374,792  

Cash dividend declared and paid ($0.80 per share)

    -       -       (93,604 )     -       (93,604 )

Tax benefit of stock options exercised and restricted shares issued

    -       16,645       -       -       16,645  

Purchase of treasury shares

    -       -       -       (125,000 )     (125,000 )

Share-based compensation

    -       35,333       -       -       35,333  

Stock option exercises and restricted share issuances, net of stock repurchased for payroll taxes

    -       (30,932 )     -       14,837       (16,095 )
                                         

Balances at December 31, 2014

  $ 1,671     $ 247,641     $ 2,555,972     $ (1,600,761 )   $ 1,204,523  

Comprehensive income:

                                       

Net earnings

    -       -       427,235