HUNT J B TRANSPORT SERVICES INC 10-K 2011
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
J.B. HUNT TRANSPORT SERVICES, INC.
(Exact name of registrant as specified in its charter)
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 Section 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 web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes __X__ No _____
Indicate by check mark 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. [ X ]
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 94,378,929 shares of the registrant’s $0.01 par value common stock held by non-affiliates as of June 30, 2010, was $3.1 billion (based upon $32.67 per share).
As of February 15, 2011, the number of outstanding shares of the registrant’s common stock was 121,349,245.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Notice and Proxy Statement for the Annual Meeting of the Stockholders, to be held April 28, 2011, are incorporated by reference in Part III of this Form 10-K.
J.B. HUNT TRANSPORT SERVICES, INC.
For The Fiscal Year Ended December 31, 2010
Table of Contents
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, insurance costs and availability, claims expense, retention of key employees, terrorist attacks or actions, acts of war, adverse weather conditions, 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.
ITEM 1. BUSINESS
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” 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 the use of a network of cross dock service centers throughout the continental United States. Utilizing a network of thousands of reliable third-party carriers, we also provide comprehensive transportation and logistics services. In addition to dry-van, full load operations, these unrelated outside carriers also provide flatbed, refrigerated, less-than-truckload (LTL) and other specialized equipment, drivers and services. Our customer base is extremely diverse and includes a large number of Fortune 500 companies.
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 edge. These segments include intermodal (JBI), dedicated contract services (DCS), full-load dry-van (JBT) and integrated capacity solutions (ICS). 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, 2010, our consolidated revenue totaled $3.8 billion, after the elimination of intersegment business. Of this total, 56% was generated by our JBI business segment, 24% by DCS, 12% by JBT and 8% by ICS.
Additional general information about us is available on our Internet web site at www.jbhunt.com. We make a number of reports and other information available free of charge on our web site, including our annual report on Form 10-K, our proxy statement and our earnings releases. Our web site also contains corporate governance guidelines, our code of ethics, our whistleblower policy, Board committee charters and other corporate policies.
OUR MISSION AND STRATEGY
We forge long-term partnerships with key customers that include supply chain management as an integral part of their strategy. Working in concert, we drive out cost, add value and function as an extension of our customers’ enterprise. 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 continually analyze where we believe additional capital should be invested and management resources should be focused to provide added benefits to our customers and leverage the services of our business segments. These actions should in turn, yield increasing returns to our stockholders. Unacceptable returns in certain areas have recently caused us to reduce the size of certain business segments and grow others.
Examples of our recent actions include the focus on growth of capacity associated with the JBI segment and continued contraction of the JBT business segment. We have also concentrated on the development and operation of one of the largest nationwide, final mile cross dock networks that consists of approximately 90 service centers supporting local commercial and home delivery activities within our DCS business segment. This network supports our goal to provide best-in-class services that increase delivery and replenishment service offerings to both residential and commercial locations.
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.
Segment information is also included in Note 13 to our Consolidated Financial Statements.
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; a watershed event in the industry and the first agreement that linked major rail and truckload carriers in a joint marketing 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 utilizing third party dray carriers where economical. By performing our own dray services, we are able to provide a cost competitive, seamless coordination of the combined rail and dray movements for our customers.
JBI operates 45,666 pieces of company-controlled trailing equipment systemwide. The fleet is primarily comprised of 53-foot, high-cube containers and is designed to take advantage of intermodal double-stack economics and superior ride quality. JBI also manages a fleet of 2,592 company-owned tractors and 3,198 company drivers that maintain our high service standards. At December 31, 2010, the total JBI employee count was 3,533. Revenue for the JBI segment in 2010 was $2.14 billion.
DCS specializes in the design, development and execution of supply chain solutions which support a variety of transportation networks. Our designs are developed and customized to provide assigned equipment and labor, industry-leading service levels, optimum efficiency, and cost-savings management. DCS focuses on final mile delivery, replenishment, and specialized services supporting private fleet conversion, dedicated fleet creation and transportation system augmentation. We have continued to expand our specialized service offerings in the final mile delivery services with approximately 90 cross dock locations to date. Our operations are managed on site by transportation professionals who work in concert daily with customers and delivery specialists to ensure safe and cost-effective delivery. Operations are governed by longer-term contracts that typically include fixed cost components and fuel surcharge programs on round-trip miles.
At December 31, 2010, this segment operated 4,259 company-owned trucks, 357 customer-owned trucks, and 23 independent contractor trucks. The DCS segment employed 6,355 people at December 31, 2010. DCS revenue for 2010 was $907 million.
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, 2010, the JBT segment operated 1,697 company-owned tractors and employed 2,217 people, 1,865 of whom were drivers. At December 31, 2010, we had 891 independent contractors operating in the JBT segment, some of whom were leasing company-owned tractors. JBT revenue for 2010 was $479 million.
ICS provides non-asset, asset-light, 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 that desire to outsource their transportation functions and utilize our proven supply chain, technology, and design expertise to improve efficiency. ICS operates outside offices as well as on-site logistics personnel working in direct contact with customers.
At December 31, 2010, the ICS segment employed 329 people, with a carrier base of approximately 25,600. ICS revenue for 2010 was $291 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, electronics, and chemicals. Our customer base is extremely diverse and includes a large number of Fortune 500 companies. 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. We provide a broad range of transportation services to larger shippers that seek to use a limited number of “core” carriers and those that desire a provider of complementary services as a way to meet all of their supply chain needs.
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.
We believe that one of the factors differentiating us from our competitors is our service-oriented people. As of December 31, 2010, we had 15,223 employees, which consisted of 10,172 company drivers, 3,821 office personnel and 1,230 mechanics. We also had arrangements with approximately 1,000 independent contractors to transport freight in our trailing equipment. None of our employees is represented by unions or covered by collective bargaining agreements.
Our JBI segment utilizes high-cube containers, which can be separated from the chassis and 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. Our JBT segment operates primarily with 53-foot dry-van trailers. We primarily utilize third-party carriers’ tractor and trailing equipment for our ICS segment.
As of December 31, 2010, our company-owned tractor and truck fleet consisted of 8,548 units. In addition, we had approximately 1,000 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 that operating with relatively newer revenue equipment provides better customer service, attracts quality drivers and lowers maintenance expense. At December 31, 2010, the average age of our combined tractor fleet was 2.9 years, our containers averaged 4.7 years of age and our trailers averaged 8.7 years. We perform routine servicing and preventive maintenance on our equipment at most of our regional terminal facilities.
Effective with model-year 2010 engines, the EPA has mandated lower emission standards for newly manufactured heavy-duty tractors. The 2010 EPA-compliant engines are expected to have no decrease in miles per gallon and a slight increase in operating costs due to more stringent maintenance procedures compared to prior engine standards due to Exhaust Gas Recirculation (EGR) technology, which achieves lower emissions.
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 as well as other full-load carriers that utilize railroads for a portion of the transportation service. Considering the diversified nature of the services provided by our DCS segment, competition ranges from large diversified carriers to local transportation and delivery service providers. 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. 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.
We compete with other transportation service companies primarily in terms of price, on-time pickup and delivery service, revenue equipment quality and availability of carriers for logistics services.
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 all 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.
In December 2010, the FMCSA began reporting to the public through its web site specific safety rating and carrier ranking statistics for more than 500,000 transportation companies in connection with its Compliance Safety Accountability 2010 (CSA 2010) program. The CSA 2010 reporting process tracks and reports data on specific carriers including moving violations, out-of-service events and on-the-road inspections. CSA 2010 also accumulates information on commercial drivers; however individual driver information is only available to carriers and others that subscribe to a reporting service. Our current CSA 2010 scores meet or exceed the FMCSA’s requirements for acceptable performance. As this CSA 2010 carrier and driver information becomes more readily available to shippers, consignees, brokers, carriers and other parties, it is expected that certain carriers and drivers will exit the transportation industry.
In December 2010, the FMCSA also issued proposed changes to the hours of service rules for commercial vehicle drivers. Subsequent to a 60-day comment period, the FMCSA is expected to publish a final rule in July 2011, with an effective date several months later. We believe we are in compliance with all applicable regulations.
In January 2011, the FMCSA issued a regulatory proposal regarding the required use of electronic on-board recorders (EOBR) in an effort to facilitate the reporting and enforcement of driver in-service hours. If these types of rules are eventually implemented, certain transportation companies may be required to utilize EOBR’s.
We are in the process of evaluating all proposed rules to determine their impact on our operations and will continue to monitor the actions of the FMCSA.
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 subject to general economic and business factors, any of which could have a material adverse effect on our results of operations. Economic trends and the tightening of credit in financial markets could adversely affect our ability, and the ability of our suppliers, to obtain financing for operations and capital expenditures.
Our business is 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. These factors include interference with, or termination of, our relationships with certain railroads, significant increases or rapid fluctuations in fuel prices, fuel taxes, interest rates, insurance premiums, self-insurance levels, excess capacity in the trucking industry, license and registration fees, terrorist attacks or actions, acts of war, adverse weather conditions, increased costs for new revenue equipment or decreases in the value of used equipment, surpluses in the market for used equipment, 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 such as retail and manufacturing, 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.
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 various Class I railroads, the majority of our business travels on the Burlington Northern Santa Fe and the Norfolk Southern railways. The inability to utilize one or more of 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.
Our ICS business segment utilizes third-party carriers. These third-parties are subject to similar regulation requirements noted previously, which may have a more significant impact on their operations causing them to exit the transportation industry. Aside from periodic use of our trailing equipment to fulfill certain loads, we do not own the revenue equipment or control the drivers delivering the loads. The inability to obtain reliable third-party carriers 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, 2010, 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 renewed our policies for 2011 with substantially the same terms as our 2010 policies for personal injury, cargo and property damage. We have reduced the self-insured portion of our workers’ compensation claims exposure and are fully insured for substantially all claims incurred in 2011. 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.
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, 2010, our top 10 customers, based on revenue, accounted for approximately 34% of our revenue. Our JBI, JBT and ICS segments typically do not have long-term contracts with their customers. While our DCS segment business may involve a 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 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.
Significant changes in hours-of-service regulations and other motor carrier safety regulations could negatively impact our operations due to lower driver productivity or increased capital expenditures for monitoring and recordkeeping equipment. Effective January 2010, a set of more stringent emissions standards became effective for model-year 2010 manufactured tractor engines. Further, CSA 2010 could have a material adverse effect on the ability to obtain qualified drivers. We continue to monitor the impact of new and proposed standards on acquisition and operating costs.
Difficulty in attracting and retaining drivers, delivery personnel and third-party carriers could affect our profitability and ability to grow.
If we are unable to attract and retain the necessary quality and number of employees or contract with enough independent contractors, we could be required to significantly increase our employee compensation package, let revenue equipment sit idle or dispose of the equipment altogether, 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 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 services 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 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.
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
ITEM 2. PROPERTIES
Our corporate headquarters are in Lowell, Arkansas. We occupy a number of buildings in Lowell that we utilize for administrative support, customer service, freight dispatch, and data processing and warehousing. We maintain a backup data center for disaster recovery, maintenance shop and driver operations facility in Lowell. We also own or lease approximately 40 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 from one to 35 acres in size. Each of our business segments utilizes these facilities for various services including bulk fueling, maintenance and driver support activities. In addition, we have approximately 90 leased facilities in our cross dock and delivery system network. Excluded from the following table are leases for small 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:
ITEM 3. LEGAL PROCEEDINGS
We are a defendant in certain class-action allegations 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. Further proceedings have been stayed in these matters pending the California Supreme Court’s decision in a case unrelated to ours involving similar issues. We cannot reasonably estimate at this time the possible loss or range of loss, if any, that may arise from these lawsuits.
We are involved in certain 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 claims and pending litigation will not have a material adverse effect on our financial condition, results of operations or liquidity.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded in the over-the-counter market under the symbol “JBHT.” At December 31, 2010, we were authorized to issue up to 1 billion shares of our common stock and 167.1 million shares were issued. We had 121.5 million and 127.2 million shares outstanding as of December 31, 2010 and 2009, respectively. The high and low sales prices of our common stock as reported by the National Association of Securities Dealers Automated Quotations National Market system (NASDAQ) and the quarterly dividends paid per share on our common shares were:
On February 15, 2011, the high and low sales prices for our common stock as reported by the NASDAQ were $42.65 and $42.16, respectively, and we had 1,251 stockholders of record.
Our dividend policy is subject to review and revision by the Board of Directors, and payments are dependent upon our financial condition, earnings, capital requirements and any other factors the Board of Directors may deem relevant. On February 3, 2011, we announced an increase in our quarterly cash dividend from $0.12 to $0.13, which was paid February 25, 2011, to stockholders of record on February 15, 2011. We currently intend to continue paying cash dividends on a quarterly basis. However, no assurance can be given that future dividends will be paid.
Purchases of Equity Securities
The following table summarizes purchases of our common stock during the three months ended December 31, 2010:
Stock Performance Graph
The following graph compares the cumulative 5-year total return of stockholders of our common stock relative to the cumulative total returns of the S&P 500 index and a customized peer group. The peer group consists of 13 companies: Arkansas Best Corp., CH Robinson Worldwide Inc., CON-Way Inc., Expeditor International Of Washington, HUB Group Inc., Kansas City Southern, Landstar System Inc., Old Dominion Freight Line Inc., Pacer International Inc., Ryder System Inc., UTI Worldwide Inc., Werner Enterprises Inc. and YRC Worldwide Inc. The graph assumes that the value of the investment in our common stock, in each of the peer groups, and in the index (including reinvestment of dividends) was $100 on December 31, 2005, and tracks it through December 31, 2010. The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Securities Authorized For Issuance Under Equity Compensation Plans
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per share amounts)
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. We are substantially self-insured for loss of and damage to our owned and leased revenue equipment. 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 that are completely insured. For periods prior to January 1, 2010, certain policies include a contractual premium adjustment factor to be applied to incurred loss amounts at the end of 48 months from each policy period inception. This contractual premium adjustment factor is used to convert the self-insured losses to fully insured losses and relieves us of any further liability on those claims. For periods beginning January 1, 2010, our personal injury and property damage policies no longer include these premium adjustment factors and the claim liability remains with us for the life of the claim.
The amounts of self-insurance change from time to time based on measurement dates, policy expiration dates, and claim type. During 2008 and 2009, we were self-insured for $500,000 per occurrence for personal injury and property damage and $1 million for workers’ compensation. For 2010, we were self-insured for $500,000 per occurrence for personal injury and property damage and fully insured for substantially all workers’ compensation claims. We have renewed our policies for 2011 with substantially the same terms as our 2010 policies for personal injury, property damage and workers’ compensation.
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 the contractual premium adjustment factor mentioned above. In doing so, the recorded liability considers future claims growth and conversion to fully insured status and provides an allowance for incurred-but-not-reported claims. We do not discount our estimated losses. At December 31, 2010, we had an accrual of approximately $33 million for estimated net claims. In addition, we are required to pay certain advanced deposits and monthly premiums. At December 31, 2010, we had a prepaid insurance asset of approximately $38 million, which represented prefunded claims and premiums.
We operate a significant number of tractors, trucks, containers 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 third parties and various railroads under short-term rental arrangements. Revenue equipment that is purchased 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, 2010.
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.
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 which 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 collectibility. The adequacy of our allowance is reviewed quarterly.
We account for income taxes under the liability method in accordance with current accounting standards. Our deferred tax assets and liabilities represent items that will result in taxable income or a tax deduction 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 compared with when they are recognized in our tax returns. We assess the likelihood that deferred tax assets will be recovered from future taxable income. 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 of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we accrue the largest amount of the benefit that is more likely than not of being 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 6, Income Taxes, in our Consolidated Financial Statements, for a discussion of our current tax contingencies.
YEAR IN REVIEW
Significant events for calendar year 2010 include:
Our 2010 net earnings of $199.6 million, or $1.56 per diluted share, were up 46% from the $136.4 million, or $1.05 per diluted share, earned in 2009. The increase in earnings was due to higher load count and increased activity within our JBI and DCS segments compared with 2009. Our JBT and ICS segments realized higher operating revenues over 2009 despite fewer tractors in JBT and lower load volume in ICS. Utilization of equipment and pricing improved in all segments and the cost reduction practices put in place in 2009 continued to provide benefit throughout 2010. Our response to changing market conditions and a continued focus on growing segments that produce the greatest return on invested capital, enabled us to take advantage of load volume recovery in 2010.
Our 2010 consolidated operating ratio (operating expenses divided by total operating revenues) was 90.8%, compared with 92.3% in 2009. Our 2009 operating income reflected $10.3 million of pretax charges to write down the value of certain assets held for sale.
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 as compared with the prior year.
2010 Compared With 2009
Consolidated Operating Revenues
Our total consolidated operating revenues were $3.8 billion in 2010, an 18.4% increase over 2009. Significantly higher fuel prices resulted in fuel surcharge (FSC) revenues of $516 million in 2010, compared with $326 million in 2009, which impacts the year-to-year comparison. If FSC revenues were excluded from both years, our 2010 revenue increased 14% over 2009. Revenue in all operating segments increased over 2009, with consolidated load growth and rate improvements contributing to the increase in revenues.
Consolidated Operating Expenses
Our 2010 consolidated operating expenses increased 16.6% from 2009. The impact of this increase, and the 18.4% increase in 2010 revenue from 2009, resulted in an improvement in our operating ratio to 90.8% from 92.3% in 2009. Rents and purchased transportation costs increased 22.4% in 2010, as a result of higher load volume, which increased services from these third-party rail and truck carriers. In addition, the higher price of fuel contributed to the increase in rents and purchased transportation costs, since fuel costs of third-party rail and truck carriers are included in purchased transportation expense. The total cost of salaries, wages and employee benefits increased 14.1% in 2010 from 2009. This increase was related to increases in driver and other labor pay due to increased business demand and the increase in final mile delivery service business compared with a year ago. In addition, we were able to reactivate and increase certain compensation and benefit programs for all of our employees in 2010.
Fuel and fuel taxes expense increased 25.7% in 2010, primarily due to a 23% higher fuel cost per gallon and slightly lower fuel miles per gallon. 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 incorporate fuel cost increases as frequently as weekly, most also reflect a specified miles-per-gallon factor and require a certain minimum change in fuel costs (e.g., $0.05 per gallon) 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 costs is included in our payments to railroads, dray carriers and other third parties. These payments are classified as purchased transportation expense.
Depreciation and amortization expense increased 4.2% in 2010 primarily due to additions to our JBI and DCS segments for power and trailing equipment in support of additional business demand. Insurance and claims expense decreased 5.0% for 2010, due to fewer cargo claim incidents and a lower cost per claim for casualty. The 21.9% decrease in general and administrative expenses was primarily due to the pretax write-down of $10.3 million recorded in 2009 related to assets held for sale. This decrease was offset by increases in a charitable contribution and building rental expense. In addition, 2010 included a gain on asset sales of $4 million, compared with losses on asset sales of $0.4 million in 2009.
Net interest expense for 2010 increased by 2.1% compared with 2009. This increase was primarily due to increased outstanding debt balances, offset slightly by reduced interest rates on our variable rate debt.
The “equity in operations of affiliated company” item on our Consolidated Statement of Earnings reflects our share of the operating results of Transplace, Inc. (TPI). The change from 2009 is due to the sale of our interests in 2009. See Note 12, Affiliated Company, in our Notes to Consolidated Financial Statements for more information on these transactions.
Our effective income tax rate was 37.6% in 2010 and 39.1% in 2009. The decrease in 2010 was primarily related to the resolution of uncertain tax positions and the impact in 2009 of the sale of our interests in TPI. We expect our effective income tax rate to approximate 38.5% for calendar year 2011.
We operated four business segments during calendar year 2010. The operation of each of these businesses is described in our notes to the Consolidated Financial Statements. The following tables summarize financial and operating data by segment:
JBI segment revenue increased 21.4% to $2.14 billion in 2010, from $1.76 billion in 2009. A significant portion of this increase in revenue related to the 17.4% increase in load volume and improvement in revenue per load compared with 2009.
Operating income in our JBI segment increased to $237 million in 2010, from $183 million in 2009. Increased equipment utilization and higher revenues, resulted in the operating income increase over 2009.
DCS segment revenue increased 19.8% to $907 million in 2010, from $757 million in 2009. This increase in revenue was primarily due to an increase in productivity and truck counts, primarily related to growth in delivery and replenishment business. This increase was partially offset by a decrease in the capacity business.
Operating income increased to $83 million in 2010, compared with $63 million in 2009. This increase in operating income was due to the increased revenue and the improved leverage gained from those higher revenues.
JBT segment revenue increased 7.3% to $479 million in 2010, from $447 million in 2009. This increase in revenue was primarily the result of increases in rates and longer lengths of haul compared with 2009.
Our JBT segment had operating income of $19 million in 2010, compared with an operating loss of $11 million in 2009. This was mainly a result of increased rates and the impact of our network refinement and tractor fleet count reduction which allowed for effective cost control measures.
ICS segment revenue grew 12.3% to $291 million in 2010, from $259 million in 2009. This increase in revenue was primarily due to an increase in load volume and higher pricing in both contractual and transactional business.
Operating income decreased 29.2% to $9 million in 2010, compared with $13 million in 2009. The decrease primarily relates to higher transportation costs and fuel prices as well as new branch location costs.
2009 Compared With 2008
Consolidated Operating Revenues
Our total consolidated operating revenues were $3.2 billion in 2009, a 14.2% decrease from 2008. Significantly lower fuel prices resulted in FSC revenues of $326 million in 2009, compared with $730 million in 2008. This change in FSC revenue impacted our year-to-year comparison. If FSC revenues were excluded from both years, our 2009 revenue decreased 4% from 2008. While load volume increased 9.3% and 69.0% in 2009 for JBI and ICS, respectively, we experienced a decrease in revenue in all segments except ICS. The decreases in our JBI, DCS and JBT segments were primarily a result of competitive rates, as well as decreased activity for certain customers due to the overall economic recession. In addition, JBT segment revenue decreased as a result of reduced tractor utilization and our continued effort to reduce the size of the JBT segment to an appropriate level for our service offerings.
Consolidated Operating Expenses
Our 2009 consolidated operating expenses decreased 12.4% from 2008. The impact of this decrease, and the 14.2% decrease in 2009 revenue from 2008, resulted in an increase in our operating ratio to 92.3% from 90.4% in 2008. Rents and purchased transportation costs decreased 5.5% in 2009, primarily due to lower payments made to railroads and drayage companies. This decrease was partially offset by an increase related to third-party carriers servicing ICS due to growth in that segment. The total cost of salaries, wages and employee benefits decreased 7.1% in 2009 from 2008, primarily due to decreases in total driver pay. This reduction in total driver pay was primarily the result of a 33% decrease in the number of drivers in the JBT segment.
Fuel and fuel taxes expense decreased 47.5% in 2009, primarily due to a 36.7% lower fuel cost per gallon and slightly higher fuel miles per gallon.
Depreciation and amortization expense decreased 6.5%, which was primarily the result of the reduction of our tractor fleet related to the rightsizing of the JBT segment. This decrease was partially offset by an increase in the container and chassis depreciation due to volume growth in the JBI segment. Operating supplies and expenses decreased 4.0%, primarily due to decreased costs of driver expenses and toll expenses. Insurance and claims expense decreased 16.4% for 2009, due to fewer accidents and lower claims costs. The 14.6% increase in general and administrative expenses was primarily due to the 2009 charges to write down to estimated fair value certain assets held for sale compared with the 2008 write-down. During 2009 and 2008, these pretax write-down charges were $10.3 million and $3.9 million, respectively. In addition, 2009 included losses on asset sales of $0.4 million, compared with gains on asset sales of $1.2 million in 2008.
Net interest expense for 2009 decreased by 20.6% compared with 2008. This decrease was primarily due to reduced outstanding debt balances and reduced interest rates on our variable rate debt. The decrease was partially offset by the effect of a refund in 2008 related to a prior-period tax settlement.
The “equity in operations of affiliated company” item on our Consolidated Statement of Earnings reflects our share of the operating results of Transplace, Inc. (TPI). Prior to December 2009, we owned a 37% equity interest in this global transportation and logistics company. The increase in 2009 compared with 2008 was primarily due to certain transactions in the fourth quarter of 2009, which were treated as a sale of all interests in this logistics company. These transactions resulted in a pretax gain of approximately $3.3 million during 2009. See Note 12, Affiliated Company, in our Notes to Consolidated Financial Statements for more information on these transactions.
Our effective income tax rate was 39.1% in 2009 and 37.8% in 2008. The increase in 2009 was partly related to the transactions with TPI, which resulted in a valuation allowance on the deferred tax benefits related to the sale.
JBI segment revenue decreased 9.6% to $1.76 billion in 2009, from $1.95 billion in 2008. A significant portion of this decline in revenue related to decreased fuel surcharge revenue due to reduced fuel costs. Excluding fuel surcharge revenue, JBI segment revenue increased 1% in 2009 from 2008. Although load counts increased 9.3%, revenue per load decreased 17.3% and average length of haul decreased 2.6%.
Operating income in our JBI segment declined to $183 million in 2009, from $254 million in 2008. Declining rates and a pretax charge to write down the value of certain equipment held for sale contributed to our operating income decreasing by 27.8% in 2009.
DCS segment revenue declined 18.3% to $757 million in 2009, from $927 million in 2008. Excluding fuel surcharge revenue, DCS segment revenue decreased 9% in 2009 from 2008. This decrease in revenue was primarily due to a 6.3% decrease in average truck count and lower load counts as we worked with our customers to reach the optimum fleet size for their businesses.
Operating income decreased to $63 million in 2009, compared with $92 million in 2008. This decrease in operating income was due to decreased revenue, higher implementation expenses for new and expanded contracts, increased operating costs for facilities, and a pretax charge to write down the value of certain equipment held for sale.
JBT segment revenue declined 34.0% to $447 million in 2009, from $676 million in 2008. The decrease in revenue was the result of a 19.9% decrease in load count due to much softer demand in 2009 than in 2008, as well as significant decreases in rates.
Our JBT segment had an operating loss of $11 million in 2009, compared to operating income of $1.4 million in 2008, mainly a result of reduced rates and a reduction in revenue due to lower tractor count and utilization. This decrease in operating income was partially offset by cost-controlling measures implemented to reduce hiring costs and other operating costs.
ICS segment revenue grew 23.8% to $259 million in 2009, from $209 million in 2008. This increase in revenue was primarily due to a 69% increase in load volume from both new and existing customers.
Operating income increased 22.6% to $13 million in 2009, compared with $11 million in 2008. The large revenue growth was partially offset by increased operating expenses, including higher personnel and technology costs related to growing and investing in the ICS segment. In 2009, we continued to gain operating leverage from the higher revenue growth that began to cover related increases in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $428 million in 2010, $357 million in 2009 and $505 million in 2008. The increase in 2010 cash provided by operating activities relative to 2009, after consideration of adjustments for noncash items such as depreciation, share-based compensation and impairment charges, was primarily due to increased earnings in 2010 over 2009. In addition, the timing of cash activity related to insurance claims and payroll accruals increased cash provided from operations. These increases were partially offset by a decrease related to the timing of collections from customers and the payments to vendors.
Cash flows used in investing activities primarily relates to additions to our revenue equipment fleet, net of proceeds from disposals. The lower level of cash used in investing activities during 2010 was the result of decreases in tractor and trailer purchases in our JBT segment. This decrease was partially offset by an increase in container and chassis purchases in our JBI segment as well as additional investments in specialized revenue equipment for new DCS customers. The decrease in proceeds received from equipment sales reflects the smaller quantity of revenue equipment sold or traded in 2010 compared with 2009.
Net cash used in financing activities during 2010 increased from 2009, primarily due to our stock repurchases, repayments on our revolving lines of credit, and an increase in dividends paid in 2010. The increase in cash used in financing activities was partially offset by the proceeds received from our public debt offering in September 2010.
Our dividend policy is subject to review and revision by the Board of Directors and payments are dependent upon our financial condition, earnings, capital requirements and other factors the Board of Directors may deem relevant. We paid a $0.10 per share quarterly dividend in 2008, an $0.11 per share quarterly dividend in 2009, and a $0.12 per share quarterly dividend in 2010. On February 3, 2011, we announced an increase in our quarterly cash dividend from $0.12 to $0.13, which was paid on February 25, 2011. We currently intend to continue paying cash dividends on a quarterly basis. However, no assurance can be given that future dividends will be paid.
Our need for capital has typically related to the acquisition of revenue equipment required to support our growth and the replacement of older equipment with new, late-model equipment. We are able to accelerate or postpone a portion of equipment replacements depending on market conditions. We obtained capital through cash generated from operations, revolving lines of credit and long-term debt issuances. We have also periodically utilized leases to acquire revenue equipment.
At December 31, 2010, we were authorized to borrow up to $350 million under a revolving line of credit, which is supported by a credit agreement with a group of banks and expires in March 2012. The applicable interest rate under this agreement is based on either the prime rate or LIBOR, depending upon the specific type of borrowing, plus a margin based on the level of borrowings and our credit rating. At December 31, 2010, we had $5 million outstanding at an average interest rate of 3.35% under this agreement.
Our senior notes consist of three separate issuances. The first is $200 million of 5.31% senior notes, which mature in March 2011. Interest payments are due semiannually in March and September of each year. The second is $200 million of 6.08% senior notes, which mature in July 2014. For this second issuance, principal payments in the amount of $50.0 million are due in July 2012 and 2013, with the remainder due upon maturity. Interest payments are due semiannually in January and July of each year. The third is $250 million of 3.375% senior notes, which mature in September 2015. Interest payments are due semiannually in March and September of each year, beginning March 2011. We may redeem for cash some or all of the 3.375% notes based on a redemption price set forth in the note indenture.
Our financing arrangements require us to maintain certain covenants and financial ratios. We were in compliance with all covenants and financial ratios at December 31, 2010.
We believe that our liquid assets, cash generated from operations and revolving lines of credit will provide sufficient funds for our operating and capital requirements for the foreseeable future. Our working capital ratio decreased from 2009, primarily as a result of reclassifying our $200 million 2011 senior note to current liabilities based on a maturity date of March 2011. We anticipate refinancing all or a portion of this note upon maturity. Our debt to equity ratio increased from 2009, due to an increase in debt related to the current year issuance and a reduction in equity due to the share repurchase program.
We are currently committed to spend approximately $406 million, net of proceeds from sales or trade-ins during 2011, which is primarily related to tractors and containers and chassis.
Off-Balance Sheet Arrangements
Our only off-balance sheet arrangements are related to operating leases. As of December 31, 2010, we had approximately $16.1 million of obligations primarily related to facilities leases.
Contractual Obligations and Commitments
The following table summarizes our expected obligations and commitments (in millions) as of December 31, 2010:
(1) Interest payments on debt are based on the debt balance and applicable rate at December 31, 2010.
We had standby letters of credit outstanding of approximately $10.7 million at December 31, 2010, that expire at various dates in fiscal year 2011, 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 $20.2 million of liabilities related to uncertain tax positions as we are unable to reasonably estimate the ultimate timing of settlement. See Note 6, Income Taxes, in the Notes to Consolidated Financial Statements for further discussion.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates on variable-rate debt outstanding. Of our total $654.2 million of debt, we had $5.0 million of variable-rate debt outstanding at December 31, 2010, under our revolving lines of credit. The interest rates applicable to these agreements are based on either the prime rate or LIBOR. Our earnings would be affected by changes in these short-term interest rates related to this variable-rate debt outstanding. Our remaining debt is fixed-rate debt, and therefore changes in market interest rates do not directly impact our interest expense. Periodically, we enter into derivative instruments in response to market interest rates; however, at December 31, 2010, we had no such derivative financial instruments in place.
Although we conduct business in foreign countries, international operations are not material to our consolidated financial position, results of operations or cash flows. Additionally, foreign currency transaction gains and losses were not material to our results of operations for the year ended December 31, 2010. Accordingly, we are not currently subject to material foreign currency exchange rate risks from the effects that exchange rate movements of foreign currencies would have on our future costs or on future cash flows we would receive from our foreign investment. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.
The price and availability of diesel fuel are subject to fluctuations due to changes in the level of global oil production, seasonality, weather and other market factors. Historically, we have been able to recover a majority of fuel-price increases from our customers in the form of fuel surcharges. We cannot predict the extent to which high fuel price levels will continue in the future or the extent to which fuel surcharges could be collected to offset such increases. As of December 31, 2010, 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, 2010 and 2009
Consolidated Statements of Earnings for years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders’ Equity for years ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for years ended December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The information required by Regulation S-K, Item 304(a) has previously been reported and is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 28, 2011. There have been no disagreements with our accountants, as defined in Regulation S-K, Item 304(b).
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC, and to process, summarize and disclose this information within the time periods specified in the SEC rules. Based on an evaluation of our disclosure controls and procedures, as of the end of the period covered by this report, and conducted by our management, with the participation of our Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer believe that these controls and procedures are effective to ensure that we are able to collect, process and disclose the information we are required to disclose in our reports filed with the SEC within the required time periods.
The certifications of our Chief Executive Officer and Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act have been filed as Exhibits 31.1 and 31.2 to this report.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. 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. Based on our assessment, we believe that as of December 31, 2010, our internal control over financial reporting is effective based on those criteria.
The effectiveness of internal control over financial reporting as of December 31, 2010, 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, 2010, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The schedule of directors is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 28, 2011.
The schedule of executive officers is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 28, 2011.
Code of Ethics
We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer/controller, and all other officers, employees and directors. Our code of ethics is available on our Internet web site at www.jbhunt.com. If we make substantive amendments to this code of ethics or grant any waiver, including any implicit waiver, we will disclose the nature of such amendment or waiver on our web site or in a report on Form 8-K within four days of such amendment or waiver.
In complying with the rules and regulations required by the Sarbanes-Oxley Act of 2002, NASDAQ, Public Company Accounting Oversight Board (PCAOB) and others, we have attempted to do so in a manner that clearly meets legal requirements but does not create a bureaucracy of forms, checklists and other inefficient or expensive procedures. We have adopted a code of conduct, code of ethics, whistleblower policy and charters for all of our Board of Director Committees and other formal policies and procedures. Most of these items are available on our Company web site, www.jbhunt.com. If we make significant amendments to our code of ethics or whistleblower policy, or grant any waivers to these items, we will disclose such amendments or waivers on our web site or in a report on Form 8-K within four days of such action.
The information required by Regulation S-K, Item 407(d) is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 28, 2011.
ITEM 11. EXECUTIVE COMPENSATION
The information required for Item 11 is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 28, 2011.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required for Item 12 is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 28, 2011.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required for Item 13 is hereby incorporated by reference from Note 12, Affiliated Company, of the Notes to Consolidated Financial Statements and from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 28, 2011.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required for Item 14 is hereby incorporated by reference from the Notice and Proxy Statement for Annual Meeting of Stockholders to be held April 28, 2011.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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 25th day of February, 2011.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on the 25th day of February, 2011, on behalf of the registrant and in the capacities indicated.