(Mark One) ý | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | | | | | For the Quarter Ended SeptemberJune 30, 20032004 | | OR | | | | | | o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | | Commission file number 0-11757 |
Commission file number 0-11757
J.B. HUNT TRANSPORT SERVICES, INC. | (Exact name of registrant as specified in its charter) | |
|
| Arkansas |
| 71-0335111 | (State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) | | | | 615 J.B. Hunt Corporate Drive, Lowell, Arkansas 72745 | (Address of principal executive offices, and Zip Code) | | | | (479) 820-0000 | (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes ý No o
The number of shares of the registrant’s $.01 par value common stock outstanding on SeptemberJune 30, 20032004 was 80,029,990. Shares outstanding on September 30, 2003, reflect a two for one stock split which was paid on August 29, 2003.80,758,964.
J.B. HUNT TRANSPORT SERVICES, INC. Form 10-Q For The Quarter Ended SeptemberJune 30, 20032004 Table of Contents 2
J.B. HUNT TRANSPORT SERVICES, INC. Condensed Consolidated Statements of Earnings (in thousands, except per share data) (unaudited) | | Three Months Ended September 30 | | Nine Months Ended September 30 | | | Three Months Ended June 30 | | Six Months Ended June 30 | | | | 2003 | | 2002 | | 2003 | | 2002 | | | 2004 | | 2003 | | 2004 | | 2003 | | | | | | | | | | | | | | | | | | | | | Operating revenues | | $ | 621,644 | | $ | 582,671 | | $ | 1,792,723 | | $ | 1,650,221 | | | $ | 679,036 | | $ | 599,866 | | $ | 1,296,735 | | $ | 1,171,079 | | | | | | | | | | | | | | | | | | | | | Operating expenses | | | | | | | | | | | | | | | | | | | Salaries, wages and employee benefits | | 197,618 | | 213,625 | | 584,255 | | 612,152 | | | 207,487 | | 195,551 | | 397,451 | | 386,637 | | Rents and purchased transportation | | 205,905 | | 181,756 | | 584,004 | | 507,400 | | | 221,642 | | 194,017 | | 425,350 | | 378,099 | | Fuel and fuel taxes | | 55,161 | | 54,828 | | 174,853 | | 152,790 | | | 66,626 | | 54,291 | | 130,481 | | 119,692 | | Depreciation and amortization | | 38,197 | | 36,449 | | 113,006 | | 108,353 | | | 36,730 | | 37,273 | | 73,775 | | 74,810 | | Operating supplies and expenses | | 31,212 | | 32,465 | | 90,942 | | 97,612 | | | 31,079 | | 30,014 | | 59,800 | | 59,730 | | Insurance and claims | | 13,946 | | 13,415 | | 49,137 | | 38,079 | | | 15,369 | | 17,746 | | 28,393 | | 35,191 | | Operating taxes and licenses | | 8,219 | | 8,710 | | 24,621 | | 25,037 | | | 8,763 | | 8,142 | | 17,488 | | 16,402 | | General and administrative expenses, net of gains | | 7,996 | | 7,436 | | 26,208 | | 20,402 | | | General and administrative expenses, net of gains and losses | | | 6,477 | | 10,388 | | 15,048 | | 18,212 | | Communication and utilities | | 5,815 | | 5,961 | | 17,822 | | 18,230 | | | 5,689 | | 6,004 | | 11,558 | | 12,007 | | Total operating expenses | | 564,069 | | 554,645 | | 1,664,848 | | 1,580,055 | | | 599,862 | | 553,426 | | 1,159,344 | | 1,100,780 | | Operating income | | 57,575 | | 28,026 | | 127,875 | | 70,166 | | | 79,174 | | 46,440 | | 137,391 | | 70,299 | | Interest expense | | (4,445 | ) | (5,541 | ) | (15,132 | ) | (19,290 | ) | | (1,580 | ) | (5,279 | ) | (3,909 | ) | (10,686 | ) | Equity in loss of associated company | | (23 | ) | (144 | ) | (600 | ) | (1,424 | ) | | (914 | ) | (154 | ) | (1,383 | ) | (577 | ) | Earnings before income taxes | | 53,107 | | 22,341 | | 112,143 | | 49,452 | | | 76,680 | | 41,007 | | 132,099 | | 59,036 | | Income taxes | | 20,446 | | 5,585 | | 43,175 | | 12,363 | | | 31,055 | | 15,878 | | 53,500 | | 22,729 | | Net earnings | | $ | 32,661 | | $ | 16,756 | | $ | 68,968 | | $ | 37,089 | | | $ | 45,625 | | $ | 25,129 | | $ | 78,599 | | $ | 36,307 | | | | | | | | | | | | | | | | | | | | | Average basic shares outstanding | | 79,802 | | 78,453 | | 79,174 | | 75,087 | | | 80,497 | | 79,026 | | 80,331 | | 78,854 | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 0.41 | | $ | 0.21 | | $ | 0.87 | | $ | 0.49 | | | $ | 0.57 | | $ | 0.32 | | $ | 0.98 | | $ | 0.46 | | | | | | | | | | | | | | | | | | | | | Average diluted shares outstanding | | 82,558 | | 80,490 | | 81,487 | | 77,232 | | | 83,206 | | 81,314 | | 83,085 | | 80,946 | | | | | | | | | | | | | | | | | | | | | Diluted earnings per share | | $ | 0.40 | | $ | 0.21 | | $ | 0.85 | | $ | 0.48 | | | $ | 0.55 | | $ | 0.31 | | $ | 0.95 | | $ | 0.45 | |
See accompanying notes to condensed consolidated financial statements. 3
J.B. HUNT TRANSPORT SERVICES, INC. Condensed Consolidated Balance Sheets (in thousands) | | | June 30, 2004 | | December 31, 2003 | | | | September 30, 2003 (unaudited) | | December 31, 2002 | | | (unaudited) | | | | | | | | | | | | | | | ASSETS | | | | | | | | | | | Current assets: | | | | | | | | | | | Cash and cash equivalents | | $ | 93,169 | | $ | 80,628 | | | $ | 41,686 | | $ | 61,229 | | Accounts receivable | | 266,088 | | 237,156 | | | 276,022 | | 256,032 | | Prepaid expenses and other | | 57,550 | | 115,397 | | | 70,853 | | 105,743 | | Total current assets | | 416,807 | | 433,181 | | | 388,561 | | 423,004 | | Property and equipment | | 1,314,031 | | 1,305,653 | | | 1,366,805 | | 1,345,521 | | Less accumulated depreciation | | 472,907 | | 461,091 | | | 401,730 | | 460,556 | | Net property and equipment | | 841,124 | | 844,562 | | | 965,075 | | 884,965 | | Other assets | | 39,359 | | 40,985 | | | 37,665 | | 39,102 | | | | $ | 1,297,290 | | $ | 1,318,728 | | | $ | 1,391,301 | | $ | 1,347,071 | | | | | | | | | | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | Current liabilities: | | | | | | | | | | | Current maturities of long-term debt | | $ | 105,000 | | $ | 97,010 | | | $ | 104,981 | | $ | 104,933 | | Current installments of obligations under capital leases | | 89,819 | | 27,138 | | | 21,601 | | 66,844 | | Trade accounts payable | | 109,748 | | 117,931 | | | 127,514 | | 158,886 | | Claims accruals | | 27,737 | | 14,706 | | | 9,224 | | 7,775 | | Accrued payroll | | 45,807 | | 46,511 | | | 57,044 | | 51,235 | | Other accrued expenses | | 10,893 | | 11,291 | | | 8,604 | | 12,478 | | Deferred income taxes | | 10,495 | | 10,742 | | | 31,922 | | 23,499 | | Total current liabilities | | 399,499 | | 325,329 | | | 360,890 | | 425,650 | | Long-term debt, excluding current maturities | | 9,909 | | 104,815 | | | Obligations under capital leases, excluding current installments | | — | | 114,152 | | | Other long-term liabilities | | 3,517 | | 1,997 | | | 6,564 | | 4,291 | | Deferred income taxes | | 208,676 | | 181,948 | | | 239,966 | | 213,994 | | Stockholders’ equity | | 675,689 | | 590,487 | | | 783,881 | | 703,136 | | | | $ | 1,297,290 | | $ | 1,318,728 | | | $ | 1,391,301 | | $ | 1,347,071 | |
See accompanying notes to condensed consolidated financial statements. 4
J.B. Hunt Transport Services, Inc. Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) | | Nine Months Ended September 30 | | | Six Months Ended June 30 | | | | 2003 | | 2002 | | | 2004 | | 2003 | | Cash flows from operating activities: | | | | | | | | | | | Net earnings | | $ | 68,968 | | $ | 37,089 | | | $ | 78,599 | | $ | 36,307 | | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: | | | | | | | Depreciation and amortization | | 113,006 | | 108,353 | | | 73,775 | | 74,810 | | Loss on sale of revenue equipment | | 1,168 | | 668 | | | 251 | | 1,041 | | Deferred income taxes | | 26,481 | | (8,851 | ) | | 32,667 | | 10,772 | | Equity in loss of associated company | | 600 | | 1,424 | | | Equity in loss (earnings) of associated company | | | 1,383 | | 577 | | Tax benefit of stock options exercised | | 6,610 | | 5,465 | | | 8,864 | | 2,543 | | Amortization of discount, net | | 94 | | 94 | | | 48 | | 62 | | Changes in operating assets and liabilities: | | | | | | | | | | | Trade accounts receivable | | (28,932 | ) | (20,686 | ) | | (19,990 | ) | (20,519 | ) | Prepaid expenses and other assets | | 57,847 | | 40,029 | | | Other assets | | | 34,890 | | 46,738 | | Trade accounts payable | | (8,183 | ) | (44,009 | ) | | (31,372 | ) | (16,480 | ) | Claims accruals | | 13,031 | | (13,937 | ) | | 1,449 | | 9,984 | | Accrued payroll and other accrued expenses | | 418 | | 16,927 | | | 5,937 | | (7,028 | ) | Net cash provided by operating activities | | 251,108 | | 122,566 | | | 186,501 | | 138,807 | | Cash flows from investing activities: | | | | | | | | | | | Additions to property and revenue equipment | | (187,222 | ) | (192,790 | ) | | (262,723 | ) | (125,227 | ) | Proceeds from sale of revenue equipment | | 76,486 | | 69,339 | | | 108,587 | | 45,184 | | Decrease in other assets | | 1,026 | | 1,629 | | | 54 | | 788 | | Net cash used in investing activities | | (109,710 | ) | (121,822 | ) | | (154,082 | ) | (79,255 | ) | Cash flows from financing activities: | | | | | | | | | | | Repayments of long-term debt | | (87,010 | ) | (10,250 | ) | | Principal payments under capital lease obligations | | (51,471 | ) | (20,507 | ) | | (45,243 | ) | (14,790 | ) | Proceeds from sale of common stock | | –– | | 68,096 | | | Re-issuance (acquisition) of treasury stock | | 9,624 | | (1,567 | ) | | (4,305 | ) | 2,943 | | Net cash provided by (used in) financing activities | | (128,857 | ) | 35,772 | | | Dividends paid | | | (2,414 | ) | 0 | | Net cash used in financing activities | | | (51,962 | ) | (11,847 | ) | Net change in cash and cash equivalents | | 12,541 | | 36,516 | | | (19,543 | ) | 47,705 | | Cash and cash equivalents at beginning of period | | 80,628 | | 49,245 | | | 61,229 | | 80,628 | | Cash and cash equivalents at end of period | | $ | 93,169 | | $ | 85,761 | | | $ | 41,686 | | $ | 128,333 | | Supplemental disclosure of cash flow information: | | | | | | | | | | | Cash paid during the period for: | | | | | | | | | | | Interest | | $ | 18,213 | | $ | 21,842 | | | $ | 3,916 | | $ | 10,640 | | Income taxes | | 8,156 | | 21,213 | | | 11,969 | | 3,419 | | Non-cash activities: | | | | | | | Non-monetary proceeds from sale of joint venture | | –– | | 1,161 | | |
See accompanying notes to condensed consolidated financial statements. 5
J.B. HUNT TRANSPORT SERVICES, INC. (Unaudited) 1. Basis of Presentation Our condensed consolidated financial statements included in this Form 10-Q have been prepared without audit (except that the balance sheet information as of December 31, 20022003 has been derived from consolidated financial statements which were audited) in accordance with the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United Sates of America have been condensed or omitted, we believe that the disclosures are adequate to make the information presented not misleading. You should read the accompanying condensed consolidated financial statements in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2002.2003. We believe that all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods presented in this report are not necessarily indicative of the results to be expected for the full calendar year ending December 31, 2003.2004. 2. Stock-based Compensation We have adopted the intrinsic value based method of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for compensation costs for our stock option plans. Accordingly, compensation expense is recognized on the date of grant only if the current market price of the underlying common stock at date of grant exceeds the exercise price. Had we determined compensation cost based on the fair value at the grant date for our stock options under Statement of Financial Accounting Standard No. 123, Accounting for Stock-based Compensation (SFAS No. 123), our net earnings would have been reduced to the pro forma amounts indicated below. All amounts in the chart, except per share amounts, are in thousands. | | Three Months Ended September 30 | | Nine Months Ended September 30 | | | | 2003 | | 2002 | | 2003 | | 2002 | | | | | | | | | | | | Net earnings as reported | | $ | 32,661 | | $ | 16,756 | | $ | 68,968 | | $ | 37,089 | | | | | | | | | | | | Total stock-based compensation expense determined under fair value based methods for all awards, net of taxes | | 1,196 | | 1,054 | | 3,504 | | 3,868 | | Pro forma | | $ | 31,465 | | $ | 15,702 | | $ | 65,464 | | $ | 33,221 | | | | | | | | | | | | Basic earnings per share | | | | | | | | | | | | | | | | | | | | As reported | | $ | 0.41 | | $ | 0.21 | | $ | 0.87 | | $ | 0.49 | | | | | | | | | | | | Pro forma | | $ | 0.39 | | $ | 0.20 | | $ | 0.83 | | $ | 0.44 | | | | | | | | | | | | Diluted earnings per share | | | | | | | | | | | | | | | | | | | | As reported | | $ | 0.40 | | $ | 0.21 | | $ | 0.85 | | $ | 0.48 | | | | | | | | | | | | Pro forma | | $ | 0.38 | | $ | 0.20 | | $ | 0.80 | | $ | 0.43 | |
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| | Three Months Ended June 30 | | Six Months Ended June 30 | | | | 2004 | | 2003 | | 2004 | | 2003 | | | | | | | | | | | | Net earnings as reported (in thousands) | | $ | 45,625 | | $ | 25,129 | | $ | 78,599 | | $ | 36,307 | | | | | | | | | | | | Total stock-based compensation expense determined under fair value based methods for all awards, net of taxes | | 1,269 | | 1,154 | | 2,514 | | 2,306 | | Pro forma | | $ | 44,356 | | $ | 23,975 | | $ | 76,085 | | $ | 34,001 | | | | | | | | | | | | Basic earnings per share | | | | | | | | | | | | | | | | | | | | As reported | | $ | 0.57 | | $ | 0.32 | | $ | 0.98 | | $ | 0.46 | | | | | | | | | | | | Pro forma | | $ | 0.55 | | $ | 0.30 | | $ | 0.95 | | $ | 0.43 | | | | | | | | | | | | Diluted earnings per share | | | | | | | | | | | | | | | | | | | | As reported | | $ | 0.55 | | $ | 0.31 | | $ | 0.95 | | $ | 0.45 | | | | | | | | | | | | Pro forma | | $ | 0.53 | | $ | 0.29 | | $ | 0.92 | | $ | 0.42 | |
Pro forma net earnings reflects only options granted since December 31, 1995. Therefore, the full impact of calculating compensation costs for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options’ vesting periods of 5 to 10 years and compensation cost for options granted prior to January 1, 1996 is not considered. 3. Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). SFAS No. 143 required us to record the fair value of an asset retirement obligation as a liability in the period in which we incur a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. We adopted SFAS No. 143 effective January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on our financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. On October 9, 2003, the FASB staff issued FASB Staff Position (FSP) Financial Interpretation No. 46-6, which deferred the effective date for applying the provisions until March 31, 2004. The adoption of Interpretation No. 46 is not expected to have a material effect on our financial statements.
4.Long-Term Debt
Long-term debt consists of (in thousands): | | 9/30/2003 | | 12/31/2002 | | | | | | | | Senior notes payable, due September 1, 2003, interest at 6.25% payable semiannually | | $ | 0 | | $ | 87,010 | | | | | | | | Senior notes payable, due September 15, 2004, interest at 7.00% payable semiannually | | 95,000 | | 95,000 | | | | | | | | Senior subordinated notes, due October 30, 2004, interest at 7.80% payable semiannually | | 20,000 | | 20,000 | | | | 115,000 | | 202,010 | | | | | | | | Less current maturities | | (105,000 | ) | (97,010 | ) | | | | | | | Unamortized discount | | (91 | ) | (185 | ) | | | $ | 9,909 | | $ | 104,815 | |
| | June 30, 2004 | | December 31, 2003 | | | | | | | | Senior notes payable, due September 15, 2004, interest at 7.00% payable semiannually | | $ | 95,000 | | $ | 95,000 | | | | | | | | Senior subordinated notes, due October 30, 2004, interest at 7.80% payable semiannually | | 10,000 | | 10,000 | | | | 105,000 | | 105,000 | | | | | | | | Less current maturities | | (104,981 | ) | (104,933 | ) | | | | | | | Unamortized discount | | (19 | ) | (67 | ) | | | $ | — | | $ | — | |
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5.4. Capital Stock
We have a stock option plan (Management Incentive Plan) that provides for the awarding of our common stock and stock options to key employees. A summary of the restricted and non-statutory options to purchase our common stock follows: | | Number of shares | | Weighted average exercise price per share | | Number of shares exercisable | | | Number of shares | | Weighted average exercise price per share | | Number of shares exercisable | | Outstanding at December 31, 2002 | | 8,901,900 | | $ | 8.94 | | 988,826 | | | | | | | | | | | | Outstanding at December 31, 2003 | | | 7,885,557 | | $ | 10.67 | | 711,358 | | Granted | | 125,000 | | 19.07 | | | | | 82,500 | | 28.88 | | | | Exercised | | (1,587,178 | ) | 8.26 | | | | | (1,045,148 | ) | 8.62 | | | | Terminated | | (145,510 | ) | 10.67 | | | | | (18,600 | ) | 20.78 | | | | | | | | | | | | | | | | | | | Outstanding at September 30, 2003 | | 7,294,212 | | $ | 9.22 | | 808,413 | | | Outstanding at June 30, 2004 | | | 6,904,309 | | $ | 11.17 | | 1,111,237 | |
We announced on July 17, 2003April 22, 2004 that our Board of Directors had re-initiated a quarterly cash dividend. We had not paid a dividend since February 2000. The re-initiation of a quarterly dividend was based on our lower debt levels and improved net earnings. On July 22, 2004 our Board of Directors declared a two for one stock splitquarterly cash dividend of $.03 per common share, payable on our common stock, which was payable August 29, 2003,20, 2004 to stockholders of record on July 31, 2003. All common stock related amounts in this Form 10-Q have been adjusted to reflect this stock split.as of August 2, 2004. 6.5. Earnings Per Share
We compute basic earnings per share by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if holders of options or other contracts to issue common stock options exercised or converted their holdings into common stock. Outstanding stock options represent the only dilutive effects on weighted average shares. The chart below presents a reconciliation between basic and diluted weighted average shares outstanding and the related earnings per share. All amounts in the chart, except per share amounts, are expressed in thousands. | | Three Months Ended September 30 | | Nine Months Ended September 30 | | | Three Months Ended June 30 | | Six Months Ended June 30 | | | | 2003 | | 2002 | | 2003 | | 2002 | | | 2004 | | 2003 | | 2004 | | 2003 | | | | | | | | | | | | | | | | | | | | | Net earnings | | $ | 32,661 | | $ | 16,756 | | $ | 68,968 | | $ | 37,089 | | | $ | 45,625 | | $ | 25,129 | | $ | 78,599 | | $ | 36,307 | | | | | | | | | | | | | | | | | | | | | Basic weighted average shares outstanding | | 79,802 | | 78,453 | | 79,174 | | 75,087 | | | 80,497 | | 79,026 | | 80,331 | | 78,854 | | | | | | | | | | | | | | | | | | | | | Dilutive effect of stock options | | 2,756 | | 2,037 | | 2,313 | | 2,145 | | | 2,709 | | 2,288 | | 2,754 | | 2,092 | | | | | | | | | | | | | | | | | | | | | Diluted weighted average shares outstanding | | 82,558 | | 80,490 | | 81,487 | | 77,232 | | | 83,206 | | 81,314 | | 83,085 | | 80,946 | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | | $ | 0.41 | | $ | 0.21 | | $ | 0.87 | | $ | 0.49 | | | $ | 0.57 | | $ | 0.32 | | $ | 0.98 | | $ | 0.46 | | | | | | | | | | | | | | | | | | | | | Diluted earnings per share | | $ | 0.40 | | $ | 0.21 | | $ | 0.85 | | $ | 0.48 | | | $ | 0.55 | | $ | 0.31 | | $ | 0.95 | | $ | 0.45 | |
We had some options to purchase shares of common stock which were outstanding during the periods shown, but were excluded from the computation of diluted earnings per share because the option price was greater than the average market price of the common shares. A summary of those options follows: | | Three Months Ended September 30 | | Nine Months Ended September 30 | | | | 2003 | | 2002 | | 2003 | | 2002 | | | | | | | | | | | | Number of shares under option | | 20,000 | | 154,500 | | 55,000 | | 130,500 | | | | | | | | | | | | Range of exercise price | | $26.19 | | $12.55 - $18.75 | | $18.45 - $26.19 | | $13.07 - $18.75 | |
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| | Three Months Ended June 30 | | Six Months Ended June 30 | | | | 2004 | | 2003 | | 2004 | | 2003 | | Number of shares under option | | 13,000 | | 100,000 | | 28,000 | | 100,000 | | | | | | | | | | | | Range of exercise price | | $ | 33.62 | | $17.28- $19.05 | | $31.63 - $33.62 | | $17.28 - $19.05 | | | | | | | | | | | | |
7.6. Comprehensive Income
Comprehensive income consists of net earnings and foreign currency translation adjustments. During 8
the three and ninesix months ended SeptemberJune 30, 20032004 and 2002,2003, comprehensive income was equal to: (in thousands):to net earnings. | | Three Months Ended September 30 | | Nine Months Ended September 30 | | | | 2003 | | 2002 | | 2003 | | 2002 | | Net earnings | | $ | 32,661 | | $ | 16,756 | | $ | 68,968 | | $ | 37,089 | | Foreign currency translation gain | | — | | — | | — | | 7,037 | | Comprehensive income | | $ | 32,661 | | $ | 16,756 | | $ | 68,968 | | $ | 44,126 | |
8.7. Income Taxes
The effective income tax rates for the three and nine monthssix month periods ended SeptemberJune 30, 20032004, were 40.5%. The effective income tax rates were 38.7% and 2002, were 38.5% for the three and 25.0%,six month periods ending June 30, 2003, respectively. The increase in the 20032004 effective income tax ratesrate was partly a result of the new accountable expense reimbursement plan (driver per diem plan). This new plan, which was implemented in February of 2003, benefits most of our eligible drivers and reduces certain costs which are classified in the salary, wages and employee benefits expense category. The lower benefit costs of the driver per diem plan are partly offset by higher effective income tax rates. The increase in the 2004 effective income tax rate was also due to our increased level of earnings and the suspension, during the fourth quarter of 2003, of recording certain non-cash tax benefits associated with the sale and leaseback transactions as discussed below. In 1999, we entered into a series of transactions effecting a sale and leaseback of a portion of our Intermodal container and chassis fleet for a selling price of approximately $175 million. These transactions used a structure thatThis transaction was examined by the Internal Revenue Service (IRS) has indicated it intends to examine.IRS in an audit of our 1998 and 1999 income tax returns. We have voluntarily disclosedreceived an IRS Notice of Proposed Assessment, which disallows the tax benefits associated with these transactions, toand as a result, we have filed an appeal in the matter. We have not yet been contacted by the IRS andAppeals Division to schedule a hearing to resolve this issue. If a resolution of the matter cannot be reached in October of 2002,the appeals process, the IRS began their examinationwill forward a 90-day letter, also known as a Notice of Deficiency. A resolution of the specific facts of these transactions. As of September 30, 2003, no adverse findings have been asserted bydispute could occur at any point in the IRS.administrative process or could extend through a trial and court appeals. If the IRS challenges our transactions, we intend to vigorously defend them. As of September 30, 2003,are unsuccessful in defending this transaction, we had recognized approximately $31 million of income tax benefits from these transactions. The annual tax benefits recognized from these transactions can be computed from the table contained in Footnote (4), Income Taxes, of our Form 10-K for the years 2002could owe additional taxes and 2001, and by summing the amounts labeled as “sale/leaseback benefit” for the years 1999 through 2002. As of September 30, 2003, weinterest. We estimate our maximum potentialearnings exposure to be approximately $36.5$33 million, includingwhich represents the tax benefits realized through December 31, 2002, plus estimated accrued interest in the eventthrough June 30, 2004. This exposure would result if the IRS successfully challenges allsucceeded in disallowing 100% of the tax benefits realized to date.from this transaction. 9.8. Business Segments
We operated three distinct business segments during the ninesix months ended SeptemberJune 30, 20032004 and 2002.2003. These segments included: Truck (JBT), Intermodal (JBI) and Dedicated Contract Services (DCS). The operation of each of these businesses is described in footnote (10)(11) of our annual report (Form 10-K) for the year ended December 31, 2002.2003. A summary of certain segment information is presented below (in millions): | | Assets | | | | As of June 30 | | | | 2004 | | 2003 | | JBT | | $ | 740 | | $ | 797 | | JBI | | 406 | | 283 | | DCS | | 324 | | 247 | | Other (includes corporate) | | (79 | ) | 11 | | Total | | $ | 1,391 | | $ | 1,338 | |
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| | | Operating Revenues | | | | Assets As of September 30 | | | Three Months Ended June 30 | | Six Months Ended June 30 | | | | 2003 | | 2002 | | | 2004 | | 2003 | | 2004 | | 2003 | | JBT | | $ | 773 | | $ | 846 | | | $ | 233 | | $ | 208 | | $ | 443 | | $ | 407 | | JBI | | 315 | | 216 | | | 263 | | 227 | | 505 | | 441 | | DCS | | 268 | | 219 | | | 187 | | 169 | | 357 | | 331 | | Other (includes corporate) | | (59 | ) | 18 | | | Subtotal | | | 683 | | 604 | | 1,305 | | 1,179 | | Inter-segment eliminations | | | (4 | ) | (4 | ) | (8 | ) | (8 | ) | Total | | $ | 1,297 | | $ | 1,299 | | | $ | 679 | | $ | 600 | | $ | 1,297 | | $ | 1,171 | |
| | Operating Income | | | | Three Months Ended June 30 | | Six Months Ended June 30 | | | | 2004 | | 2003 | | 2004 | | 2003 | | JBT | | $ | 29.2 | | $ | 12.4 | | $ | 43.9 | | $ | 13.7 | | JBI | | 31.8 | | 21.9 | | 60.9 | | 40.8 | | DCS | | 17.8 | | 12.1 | | 32.0 | | 15.8 | | Other (includes corporate) | | .4 | | — | | .6 | | — | | Total | | $ | 79.2 | | $ | 46.4 | | $ | 137.4 | | $ | 70.3 | |
| | Operating Revenues | | | | Three Months Ended September 30 | | Nine Months Ended September 30 | | | | 2003 | | 2002 | | 2003 | | 2002 | | JBT | | $ | 214 | | $ | 215 | | $ | 621 | | $ | 614 | | JBI | | 241 | | 207 | | 682 | | 591 | | DCS | | 170 | | 164 | | 501 | | 458 | | Subtotal | | 625 | | 586 | | 1,804 | | 1,663 | | Inter-segment eliminations | | (3 | ) | (3 | ) | (11 | ) | (13 | ) | Total | | $ | 622 | | $ | 583 | | $ | 1,793 | | $ | 1,650 | |
| | Operating Income | | | | Three Months Ended September 30 | | Nine Months Ended September 30 | | | | 2003 | | 2002 | | 2003 | | 2002 | | JBT | | $ | 17.9 | | $ | 10.1 | | $ | 31.6 | | $ | 18.8 | | JBI | | 25.1 | | 13.2 | | 65.8 | | 35.0 | | DCS | | 14.6 | | 4.1 | | 30.5 | | 16.2 | | Other (includes corporate) | | — | | .6 | | — | | .2 | | Total | | $ | 57.6 | | $ | 28.0 | | $ | 127.9 | | $ | 70.2 | |
| | Depreciation and Amortization Expense | | | | Three Months Ended September 30 | | Nine Months Ended September 30 | | | | 2003 | | 2002 | | 2003 | | 2002 | | JBT | | $ | 17 | | $ | 17 | | $ | 51 | | $ | 52 | | JBI | | 5 | | 5 | | 15 | | 14 | | DCS | | 13 | | 12 | | 39 | | 35 | | Other (includes corporate) | | 3 | | 2 | | 8 | | 7 | | Total | | $ | 38 | | $ | 36 | | $ | 113 | | $ | 108 | |
10. Reclassifications
We have reclassified certain amounts from our 2002 financial statements so they will be consistent with the way we have classified amounts in 2003.
| | Depreciation and Amortization Expense | | | | Three Months Ended June 30 | | Six Months Ended June 30 | | | | 2004 | | 2003 | | 2004 | | 2003 | | JBT | | $ | 15.0 | | $ | 16.9 | | $ | 30.6 | | $ | 33.6 | | JBI | | 5.5 | | 5.0 | | 10.9 | | 9.9 | | DCS | | 13.6 | | 12.6 | | 26.8 | | 25.6 | | Other (includes corporate) | | 2.6 | | 2.8 | | 5.5 | | 5.7 | | Total | | $ | 36.7 | | $ | 37.3 | | $ | 73.8 | | $ | 74.8 | |
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INDEPENDENT ACCOUNTANTS’ REVIEW REPORT The Board of Directors J.B. Hunt Transport Services, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of J.B. Hunt Transport Services, Inc. and subsidiaries as of SeptemberJune 30, 2003,2004, and the related condensed consolidated statements of earnings for the threethree-month and nine monthsix-month periods ended SeptemberJune 30, 20032004 and 2002,2003, and the condensed consolidated statements of cash flows for the ninesix month periods ended SeptemberJune 30, 20032004 and 2002.2003. These condensed consolidated financial statements are the responsibility of the Company’s management. We conducted our review in accordance with standards established byof the American Institute of Certified Public Accountants.Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditingthe standards generally accepted inof the United States of America,Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted inof the United States of America,Public Company Accounting Oversight Board (United States), the consolidated balance sheet of J.B. Hunt Transport Services, Inc. and subsidiaries as of December 31, 2002,2003, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated January 30, 2003,2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002,2003, is fairly presented,stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. | | /s/ KPMG LLP | | | | | | | | | | Tulsa, Oklahoma | | July 15, 2004 | | October 13, 2003
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ITEM 2.2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION You should refer to the attached interim condensed consolidated financial statements and related notes and also to our annual report (Form 10-K) for the year ended December 31, 20022003 as you read the following discussion. We may make statements in this report, and in documents we incorporate by reference, that reflect our current expectation regarding future results of operations, performance and achievements. These are “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995, and are based on our belief or interpretation of information currently available. You should realize there are many risks and uncertainties that could cause actual results to differ materially from those described. Some of the factors and events that are not within our control and could have a significant impact on future operating results are general economic conditions, cost and availability of diesel fuel, adverse weather conditions, competitive rate fluctuations, availability of drivers, and audits or tax assessments of various federal, state or local taxing authorities, including the Internal Revenue Service. You should also refer to Item 7 of our annual report (Form 10-K) for the year ended December 31, 2002,2003, for additional information on risk factors and other events that are not within our control. Current and future changes in fuel prices could result in significant fluctuations of quarterly earnings. Our future financial and operating results may fluctuate as a result of these and other risk factors as described from time to time in our filings with the Securities and Exchange Commission. GENERAL We are one of the largest full-load transportation companies in North America. We operate three distinct, but complementary, business segments and provide a wide range of general and specifically tailored freight and logistics services to our customers. We generate revenues primarily from the actual movement of freight from shippers to consignees and from serving as a logistics provider by offering or arranging for others to provide the transportation service. We account for our business on a calendar year basis with our full year ending on December 31 and our quarterly reporting periods ending on March 31, June 30 and September 30. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Certain amounts included in or affecting our financial statements and related disclosures must be estimated, requiring certain assumptions with respect to values or conditions that cannot be known with certainty at the time the financial statements are prepared.
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect: •impact the amounts reported for assetsin our consolidated financial statements and liabilities;
•the disclosure of contingent assets and liabilities at the date of the financial statements; and
•the amounts reported for revenues and expenses during the reporting period.
accompanying notes. Therefore, the reported amounts of assets, and liabilities, revenues, and expenses and associated disclosures with respect toof contingent assets and obligationsliabilities are necessarily affected by these estimates. We evaluate these estimates on an ongoing basis, utilizing historical experience, consultingconsultation with experts and using 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 recordedrecognized in the accounting period in which the facts that give rise to the revision become known. In preparingWe 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 related disclosures, we also must use estimates in determininginclude the economic useful lives of assets, provisions for uncollectible accounts receivable, exposures under self insurance plans and various other recorded or disclosed amounts. However, we believe that certainfollowing:
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accounting policies are of more significance in the financial statement preparation process than others and are discussed below. To the extent that actual outcomes differ from our estimates, or additional facts and circumstances cause us to revise estimates, earnings will be affected.
Workers’ Compensation and Accident Costs
We purchase insurance coverage for a portion of expenses related to employee injuries (workers’ compensation), vehicular collisions and accidents and cargo claims. Most insurance arrangements include a level of self insuranceself-insurance (deductible) coverage applicable to each claim, but provide an umbrella policy to limit our exposure to catastrophic claim costs that are completely insured. The amounts of self insurance self-insurance 12
change from time to time based on certain measurement dates and policy expiration dates. Our current insurance coverage specifies that theDuring 2003, we were self-insured limit on the majorityfor a portion of our claims isexposure resulting from cargo loss, personal injury, property damage, workers’ compensation and health claims for amounts up to the first $1.5 million which is prefunded withof each claim. In January 2004, we changed our insurance carrier. level of self-insurance to $2 million for auto accidents and $1 million for workers’ compensation. Our claims accrual policy for all self-insuranceself-insured claims is to recognize a liability at the expense whentime of the event occursincident based on: (i) our analysis of the nature and severity of the costsclaims, (ii) analyses provided by third-party claims administrators and (iii) economic and regulatory factors. Our safety and claims personnel work directly with representatives from the insurance companies to continually update the estimated cost of such events are probableeach claim. The ultimate cost of a claim develops over time as additional information regarding the nature, timing and reasonably estimable. We apply loss development factorsextent of damages claimed becomes available. Accordingly, we use an actuarial method to our accident and workers’ compensation claims history, as a partdevelop current claim information to derive an estimate of our ultimate claim liability. This process involves the use of recordingloss-development factors based on our historical claims experience. In doing so, the expense of losses which are Incurred But Not Reported (IBNR).recorded ultimate liability considers future claims growth and provides an allowance for incurred-but-not-reported claims. We do not discount our estimated losses. We are also substantially self-insured for loss of and damage to our owned and leased revenue equipment. Our safety and claims personnel work directly with representatives from the insurance companies to continually update the estimated ultimate cost of each claim. At SeptemberJune 30, 2003,2004, we had approximately $28$9 million of estimated net claims payable. In addition, we are required to pay certain advanced deposits and monthly premiums. At SeptemberJune 30, 2003,2004, we had a prepaid insurance asset of approximately $17 million.$27 million, which represented pre-funded claims and premiums. Revenue Equipment
We operate a significant number of tractors, trailers and containers in connection with our business. This equipment may be purchased or acquired under capital or operating leases.lease agreements. In addition, we may rent revenue equipment from third parties and various railroads under short-term rental arrangements. RevenuePurchased revenue equipment which is purchased is depreciated on the straight-line method over the estimated useful life down to an estimated salvage or trade-in value. Equipment acquired under capital leases is initially recorded at the net present value of the minimum lease payments and amortized on the straight-line method over the lease term or the estimated useful life, whichever is shorter. We have an arrangementagreement with our primary tractor supplier for fixedguaranteed residual or trade-in values for certain new equipment acquired since 1999. During the fourth quarter of 2003, we reviewed the useful lives and salvage values of our tractor fleet. We have utilized thesethe guaranteed trade-in values as well as other operational information, such as anticipated annual miles, in accounting for purchased and leased tractors. If theour tractor supplier iswas unable to perform under the terms of such agreements,our agreement for guaranteed trade-in values, it could have a materialmaterially negative impact on our financial results. Revenue Recognition
We recognize revenue based on the relative transit time of the freight transported. Accordingly, a portion of the total revenue which will be billed to ourthe 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. SEGMENTSSegments
We operated three segments during the ninefirst six months ended September 30, 2003of 2004 and 2002. These segments included: Truck (JBT), Intermodal (JBI) and Dedicated Contract Services (DCS).2003. The operation of each of these businesses is described in footnote (10)(11) of our annual report (Form 10-K) for the year ended December 31, 2002.2003. 13
RESULTS OF OPERATIONS Comparison of ThirdSecond Quarter 20032004 to ThirdSecond Quarter 20022003 Summary of Operating Segments Results For The Three Months Ended SeptemberJune 30 (dollars in millions) | | Operating Revenue | | Operating Income | | | Operating Revenue | | Operating Income | | | | 2003 | | 2002 | | % Change | | 2003 | | 2002 | | | 2004 | | 2003 | | % Change | | 2004 | | 2003 | | JBT | | $ | 214 | | $ | 215 | | 0 | % | $ | 17.9 | | $ | 10.1 | | | $ | 233 | | $ | 208 | | 12 | % | $ | 29.2 | | $ | 12.4 | | JBI | | 241 | | 207 | | 16 | | 25.1 | | 13.2 | | | 263 | | 227 | | 16 | | 31.8 | | 21.9 | | DCS | | 170 | | 164 | | 4 | | 14.6 | | 4.1 | | | 187 | | 169 | | 11 | | 17.8 | | 12.1 | | Other | | — | | — | | — | | — | | .6 | | | — | | — | | — | | 0.4 | | — | | Subtotal | | 625 | | 586 | | 7 | % | 57.6 | | 28.0 | | | 683 | | 604 | | 13 | % | 79.2 | | 46.4 | | Inter-segment eliminations | | (3 | ) | (3 | ) | — | | — | | — | | | (4 | ) | (4 | ) | — | | — | | — | | Total | | $ | 622 | | $ | 583 | | 7 | % | $ | 57.6 | | $ | 28.0 | | | $ | 679 | | $ | 600 | | 13 | % | $ | 79.2 | | $ | 46.4 | |
OverviewOur total consolidated operating revenue for the thirdsecond quarter of 20032004 was $622$679 million, an increase of approximately 7%13% over the $583$600 million in the thirdsecond quarter of 2002.2003. Fuel surcharge revenue hashad an impact on this comparison. The amount of fuel surcharge revenue billed in the current quarter was $8.6$13.7 million more than the amount billed induring the thirdsecond quarter of 2002.2003. Excluding fuel surcharges, total operating revenue during the current quarter increased 5%11% over the comparable period of 2002.2003. JBT segment revenue totaled $214$233 million for the thirdsecond quarter of 2003, essentially equal to2004, an increase of 12% over the $215$208 million in the thirdsecond quarter of 2002.2003. If the amount of fuel surcharge revenue was excluded from both the 20032004 and 20022003 periods, segment revenue would have decreased approximately 2% in 2003.increased 11%. This 2% decline11% increase in revenue was primarily a result of an approximate 5%7.7% increase in revenue per loaded mile, exclusive of fuel surcharges, offset by a 1% decrease in the size of the tractor fleet and 5% lower miles per tractor. The average number of total tractors operated in the JBT fleet declined by 24 during the third quarter of 2003, compared with the third quarter of 2002. The percentage of empty miles increased to 10.2% in 2003, from 9.0% in 2002, although some of our customers paid us for running certain empty miles at their request.surcharges. The increase in revenue per loaded mile, excluding fuel surcharges, significantly contributed to the improvement in operating income of the JBT segment. The higher revenue per mile was primarily a result of our yield management initiatives launched in late 2001.activities. In addition, we implemented an accountable expense reimbursement plan (driver per diem plan)significantly lower accident, workers’ compensation and bad debt costs in February of 2003. This new plan benefits most of our eligible drivers and also favorably impacted our net earnings during2004 contributed to the third quarter of 2003.improvement in segment operating income. JBT operating income for the thirdsecond quarter of 20032004 was $17.9$29.2 million, compared with $10.1$12.4 million in 2002.2003. The operating ratio of the JBT segment was 91.6%87.5% in 20032004 and 95.3%94.0% in 2002.2003. JBI segment revenue increased 16%, to $241$263 million during the thirdsecond quarter of 2003,2004, compared with $207$227 million in 2002.2003. If the amount of fuel surcharge revenue was excluded from both the 20032004 and 20022003 periods, the increase in JBI revenue would have been 15%14%. The increase in revenue was primarily due to an approximate 13%12% increase in load volume and a 2% increase in revenue per load. The highervolume. Operating revenue per load resulted from changes in freight mix which generated longer average length2004 increased about 1.9% over the comparable period of haul and an approximate 0.6% increase in revenue per loaded mile, excluding fuel surcharges.2003. Operating income of the JBI segment was $25.1rose to $31.8 million in the thirdsecond quarter of 2003,2004, compared with $13.2$21.9 million in 2002.2003. The operating ratio of the JBI segment was 89.6%87.9% in 20032004 and 93.6%90.3% in 2002.2003. In addition to higher revenue per load, 2003volumes, 2004 operating income was enhanced by lower maintenance costs, lower equipment ownership costs and improved utilization of revenue equipment. DCS segment revenue rose 4%grew 11%, to $170$187 million in 2003,2004, from $164$169 million in 2002.2003. If fuel surcharge 14
revenue was excluded from both of the 20032004 and 20022003 periods, the increase in DCS revenue would have been 2%9%. This increase in DCS segment revenue was driven by an 8%a 5% increase in net revenue per tractor, excluding fuel surcharge partly offset byand a 6% decrease3% increase in the average size of the tractor fleet. Operating 14
income of our DCS segment climbed to $14.6$17.8 million in 2003,2004, from $4.1$12.1 million in 2002.2003. The DCS operating ratio was 91.4%90.5% in 20032004 and 97.5%92.9% in 2002.2003. Improvements in operating income were driven by better tractor utilization, improved productivity and pricing, expense controlsreduced workers’ compensation expenses and lower start-up costs associated with new business. The following table sets forth items in our Condensed Consolidated Statements of Earnings as a percentage of operating revenues and the percentage increase or decrease of those items as compared with the prior period. | | Three Months Ended September 30 | | | Three Months Ended June 30 | | | | Percentage of Operating Revenues | | Percentage Change Between Quarters | | | Percentage of Operating Revenues | | Percentage Change Between Quarters | | | | 2003 | | 2002 | | 2003 vs. 2002 | | | 2004 | | 2003 | | 2004 vs. 2003 | | Operating revenues | | 100.0 | % | 100.0 | % | 6.7 | % | | 100.0 | % | 100.0 | % | 13.2 | % | Operating expenses | | | | | | | | | | | | | | | Salaries, wages and employee benefits | | 31.8 | % | 36.7 | % | (7.5 | )% | | 30.6 | % | 32.6 | % | 6.1 | % | Rents and purchased transportation | | 33.1 | | 31.2 | | 13.3 | | | 32.6 | | 32.3 | | 14.2 | | Fuel and fuel taxes | | 8.9 | | 9.4 | | 0.6 | | | 9.8 | | 9.1 | | 22.7 | | Depreciation and amortization | | 6.1 | | 6.2 | | 4.8 | | | 5.4 | | 6.2 | | (1.5 | ) | Operating supplies and expenses | | 5.0 | | 5.6 | | (3.9 | ) | | 4.6 | | 5.0 | | 3.6 | | Insurance and claims | | 2.2 | | 2.3 | | 4.0 | | | 2.3 | | 3.0 | | (13.4 | ) | Operating taxes and licenses | | 1.3 | | 1.5 | | (5.6 | ) | | 1.3 | | 1.4 | | 7.6 | | General and administrative expenses, net of gains | | 1.3 | | 1.3 | | 7.5 | | | 0.9 | | 1.7 | | (37.7 | ) | Communication and utilities | | 1.0 | | 1.0 | | (2.5 | ) | | 0.8 | | 1.0 | | (5.3 | ) | Total operating expenses | | 90.7 | | 95.2 | | 1.7 | | | 88.3 | | 92.3 | | 8.4 | | Operating income | | 9.3 | | 4.8 | | 105.4 | | | 11.7 | | 7.7 | | 70.5 | | Interest expense | | (0.8 | ) | (1.0 | ) | (19.8 | ) | | (0.3 | ) | (0.9 | ) | (70.1 | ) | Equity in loss of associated companies | | — | | — | | (84.0 | ) | | (0.1 | ) | — | | — | | Earnings before income taxes | | 8.5 | | 3.8 | | 137.7 | | | 11.3 | | 6.8 | | 87.0 | | Income taxes | | 3.2 | | 0.9 | | 266.1 | | | 4.6 | | 2.6 | | 95.6 | | Net earnings | | 5.3 | % | 2.9 | % | 94.9 | % | | 6.7 | % | 4.2 | % | 81.6 | % |
Consolidated Operating Expenses
Total operating expenses during the thirdsecond quarter of 20032004 increased 1.7%8.4% over the comparable period of 2002. Salaries,2003. The total cost of salaries, wages and employee benefits increased 6.1% in 2004. However, this expense category declined 7.5% in 2003 and decreased to 31.8%30.6% of operating revenues in 20032004, from 36.7%32.6% in 2002. A portion2003. While we experienced some increases in certain salary, wage and benefit costs, the primary reasons for this expense category decline as a percentage of this decline in salariesrevenue were higher revenue per loaded mile, continued growth of Intermodal volume and wages was a resultgrowth of our implementation of an accountable expense reimbursement plan (driver per diem plan) for certain drivers during the first quarter of 2003. This plan reduces certain costs which are classified in the salary, wages and employee benefits expense category, but is partly offset by higher effective income tax rates. Lower workers’ compensation expense and a reduction in the number of mechanics employed during 2003 also impacted this comparison.independent contractor (IC) fleet. Rents and purchased transportation costs rose 13.3%14.2% in 2003,2004, primarily relateddue to additional funds paid to railroads and drayage companies, related to our JBI business growth, and to the continued expansion of our independent contractorIC fleet. The 0.6%22.7% increase in fuel and fuel taxes was due toprimarily a result of fuel prices averaging about 19% higher in 2004 and an approximate 3% lower miles per gallon. The higher fuel costs and slightly lower miles per gallon in 2003, substantially offset by lower miles driven by company-operated tractors. During the third quarter of 2003, our fuel cost per gallon averaged approximately 8% higher than the comparable period of 2002. These higher fuel costs2004 were substantially offset byrecovered through additional fuel surcharges billed to customers which are included in operating revenues. After a 38% riseour customers. While rapid changes in fuel cost per gallon during the first quarter of 15
2003, the lower ratemay result in certain timing differences of fuel costs and fuel surcharges between accounting periods, we have been able to recover the majority of our higher 2004 fuel cost increase during the second and third quarters of 2003 allowed fuel surcharge revenues to substantially recover first quarter losses. Operating supplies and expenses declined 3.9%, partly due to the reduced amount of outsourced tractor and trailing equipment maintenance work.per gallon. The 4.0% rise13.4% decline in insurance and claims expenses was primarily due to reduced claims costs and reflects escalating liability insurance premiums, which have been experiencedour continued focus on safety throughout the industry and slightly higher accident costs, partly off set by lower cargo claims expense. organization.
The 7.5% increasesignificant decline in general and administrative expenses was primarily a result of higherlower bad 15
debt expense and increasedprofessional fees in 2004. In addition, we experienced a net gain of $1.7 million on asset dispositions in 2004, compared with a net loss of $0.6 million in 2003. These positive cost trends were partly offset by higher driver recruiting costs. Our netexpenditures in 2004. Net interest expense declined significantly in 2003, partly2004 due to the approximate $68 million of capital we raised through a secondary public offering of common stock in mid 2002.lower debt levels. We increased our effective income tax rate to 38.5%40.5% in 2003,2004, from 25.0%38.7% in 2002,2003, primarily due to the new driver per diem plan and our increasedhigher level of earnings.earnings and the suspension during the fourth quarter of 2003, of recording certain non-cash tax benefits associated with the sale and leaseback transactions. The equity in loss of associated company item on our consolidated statement of earnings reflects our share of the operating results for Transplace, Inc. (TPI). Effective January 1, 2003, we increased our interest in TPI to approximately 37% from 27%. Comparison of NineSix Months Ended SeptemberJune 30, 20032004 to NineSix Months Ended SeptemberJune 30, 20022003 Summary of Operating Segments Results For The NineSix Months Ended SeptemberJune 30 (dollars in millions) | | Operating Revenue | | Operating Income | | | Operating Revenue | | Operating Income | | | | 2003 | | 2002 | | % Change | | 2003 | | 2002 | | | 2004 | | 2003 | | % Change | | 2004 | | 2003 | | JBT | | $ | 621 | | $ | 614 | | 1 | % | $ | 31.6 | | $ | 18.8 | | | $ | 443 | | $ | 407 | | 9 | % | $ | 43.9 | | $ | 13.7 | | JBI | | 682 | | 591 | | 15 | | 65.8 | | 35.0 | | | 505 | | 441 | | 15 | | 60.9 | | 40.8 | | DCS | | 501 | | 458 | | 9 | | 30.5 | | 16.2 | | | 357 | | 331 | | 8 | | 32.0 | | 15.8 | | Other | | — | | — | | — | | — | | 0.2 | | | — | | — | | — | | 0.6 | | — | | Subtotal | | 1,804 | | 1,663 | | 8 | % | 127.9 | | 70.2 | | | 1,305 | | 1,179 | | 11 | % | 137.4 | | 70.3 | | Inter-segment eliminations | | (11 | ) | (13 | ) | (14 | ) | — | | — | | | (8 | ) | (8 | ) | — | | — | | — | | Total | | $ | 1,793 | | $ | 1,650 | | 9 | % | $ | 127.9 | | $ | 70.2 | | | $ | 1,297 | | $ | 1,171 | | 11 | % | $ | 137.4 | | $ | 70.3 | |
Overview
Our total consolidated operating revenue for the first ninesix months ended June 30, 2004 was $1,297 million, an increase of 2003 was $1.793 billion, up 9%approximately 11% over the $1.650 billion for$1,171 million in the first nine monthscomparable period of 2002.2003. Fuel surcharge revenue hashad an impact on this comparison. The amount of fuel surcharge revenue billed forduring the nine monthssix month period ended SeptemberJune 30, 20032004, was $44.2$14.7 million more thatthan the amount billed during the comparable period in 2002. If2003. Excluding fuel surcharges, total operating revenue during the amountfirst half of fuel surcharge revenue was excluded from both of the 2003 and 2002 periods, revenue growth would have been 6 %.2004 increased 10% over 2003. JBT segment revenue increased 1%, to $621totaled $443 million for the first ninesix months ended June 30, 2004, an increase of 2003, compared with $6149% over the $407 million in 2002.the comparable period of 2003. If the amount of fuel surcharge revenue was excluded from both the 2004 and 2003 and 2002 periods, JBTsegment revenue would have declined 2%increased 8%. This 2% decrease8% increase in revenue was primarily a result of an approximate 5%7.1% increase in revenue per loaded mile, exclusive of fuel surcharges and a 2% increase in company tractor utilization, partly offset by a 2% decrease in the size of the tractor fleet. The increase in revenue per loaded mile, excluding fuel surcharges, offset by a 3% decrease in the size of the average tractor fleet, 2% lower tractor miles and an increase in empty miles. Part of the decline in miles per tractor was due to relatively soft freight levels during the first quarter and April. The increase in revenue per loaded mile, excluding fuel surcharges,significantly contributed to the improvement in operating income of the JBT segment. OperatingThe higher revenue per mile was primarily a result of our yield management activities. In addition, significantly lower accident, workers’ compensation, equipment ownership and bad debt costs in 2004 contributed to the improvement in segment operating income. JBT operating income for the first nine monthshalf of 20032004 was $31.6$43.9 million, compared with $18.8$13.7 million in 2002.2003. The operating ratio of the JBT segment was 94.9% for the first nine months of 200390.1% in 2004 and 96.9% for the first nine months of 2002. In addition, the driver per diem plan, which was implemented96.6% in February of 2003, contributed to the improvement in operating income.2003. 16
JBI segment revenue increased 15%, to $682$505 million during the first nine monthshalf of 2003,2004, compared with $591 16
$441 million in 2002. The increase in segment revenue would have been 13% if2003. If the amount of fuel surcharge revenue was excluded from both periods.the 2004 and 2003 periods, the increase in JBI revenue would have been 13%. The increase in revenue was primarily due to an approximate 10%12% increase in load volume and a 2% increase in revenue per load. The highervolume. Operating revenue per load resulted from changes in freight mix which generated a longer average length2004 increased about 1.7% over the comparable period of haul and an approximate 0.8% increase in revenue per loaded mile, exclusive of fuel surcharges.2003. Operating income inof the JBI segment totaled $65.8rose to $60.9 million in 2003,the first half of 2004, compared with $35.0$40.8 million in 2002. This increase2003. The operating ratio of the JBI segment was primarily due87.9% in 2004 and 90.8% in 2003. In addition to higher revenue levels,volumes, 2004 operating income was enhanced by lower maintenance and equipment ownerships costs, and improved utilization of revenue equipment. The JBI operating ratio was 90.3% for the first nine months of 2003 and 94.1% for the comparable period of 2002. Revenue rose 9% in the DCS segment to $501 million during the first nine months of 2003, compared with $458 million in 2002. This increase in DCS segment revenue would have been 7% ifgrew 8%, to $357 million in 2004, from $331 million in 2003. If fuel surcharge revenue was excluded from both periods.the 2004 and 2003 periods, the increase in DCS revenue would have been 7%. This increase in DCS segment revenue was driven by a 6% increase in net revenue per tractor, excluding fuel surcharge and a 1% increase in the size of the average tractor fleet.surcharge. Operating income roseof our DCS segment climbed to $30.5$32.0 million in 2003,2004, from $16.2$15.8 million in 2002.2003. The DCS segment operating ratio for the first nine months of 2003 was 93.9%, compared to 96.5% for the first nine months of 2002. This improvement91.0% in 20032004 and 95.2% in 2003. Improvements in operating income was primarily due towere driven by better tractor utilization, of tractors in service, rate increasesimproved productivity and efforts to reducepricing, reduced accident and workers’ compensation expenses and lower start-up costs including driver wages.associated with new business.
The following table sets forth items in our Condensed Consolidated Statements of Earnings as a percentage of operating revenues and the percentage increase or decrease of those items as compared with the prior period. | | Nine months Ended September 30 | | | Six Months Ended June 30 | | | | Percentage of Operating Revenues | | Percentage Change Between Periods | | | Percentage of Operating Revenues | | Percentage Change Between Periods | | | | 2003 | | 2002 | | 2003 vs. 2002 | | | 2004 | | 2003 | | 2004 vs. 2003 | | Operating revenues | | 100.0 | % | 100.0 | % | 8.6 | % | | 100.0 | % | 100.0 | % | 10.7 | % | Operating expenses | | | | | | | | | | | | | | | Salaries, wages and employee benefits | | 32.6 | % | 37.1 | % | (4.6 | )% | | 30.7 | % | 33.0 | % | 2.8 | % | Rents and purchased transportation | | 32.6 | | 30.7 | | 15.1 | | | 32.8 | | 32.3 | | 12.5 | | Fuel and fuel taxes | | 9.7 | | 9.3 | | 14.4 | | | 10.0 | | 10.2 | | 9.0 | | Depreciation and amortization | | 6.3 | | 6.6 | | 4.3 | | | 5.7 | | 6.4 | | (1.4 | ) | Operating supplies and expenses | | 5.1 | | 5.9 | | (6.8 | ) | | 4.6 | | 5.1 | | 0.1 | | Insurance and claims | | 2.7 | | 2.3 | | 29.0 | | | 2.2 | | 3.0 | | (19.3 | ) | Operating taxes and licenses | | 1.4 | | 1.5 | | (1.7 | ) | | 1.3 | | 1.4 | | 6.6 | | General and administrative expenses, net of gains | | 1.5 | | 1.2 | | 28.5 | | | 1.2 | | 1.6 | | (17.4 | ) | Communication and utilities | | 1.0 | | 1.1 | | (2.2 | ) | | 0.9 | | 1.0 | | (3.7 | ) | Total operating expenses | | 92.9 | | 95.7 | | 5.4 | | | 89.4 | | 94.0 | | 5.3 | | Operating income | | 7.1 | | 4.3 | | 82.3 | | | 10.6 | | 6.0 | | 95.4 | | Interest expense | | (0.8 | ) | (1.2 | ) | (21.6 | ) | | (0.3 | ) | (0.9 | ) | (63.4 | ) | Equity in loss of associated companies | | — | | (0.1 | ) | (57.9 | ) | | (0.1 | ) | (0.1 | ) | 139.7 | | Earnings before income taxes | | 6.3 | | 3.0 | | 126.8 | | | 10.2 | | 5.0 | | 123.8 | | Income taxes | | 2.4 | | 0.8 | | 249.2 | | | 4.1 | | 1.9 | | 135.4 | | Net earnings | | 3.9 | % | 2.2 | % | 86.0 | % | | 6.1 | % | 3.1 | % | 116.5 | % |
Consolidated Operating Expenses
Total operating expenses forduring the first nine months of 2003 were up 5.4%six month period ended June 30, 2004 increased 5.3% over the comparable period of 2002. Salaries,2003. The total cost of salaries, wages and employee benefits increased 2.8% in 2004. However, this expense category declined 4.6% in 2003, and decreased to 32.6%30.7% of operating revenues in 2003,2004, from 37.1%33.0% in 2002. A portion2003. While we experienced some increases in certain salary, wages and benefits costs during the first half of 2004, the primary reasons for this expense category decline in salaries and wages wasas a resultpercentage of our driver per diem plan, which was implemented in February of 2003. Rents and purchasedrevenue were higher revenue 17
per loaded mile, continued growth of Intermodal volume and growth of our IC fleet. Rents and purchased transportation expense increased 15.1%,costs rose 12.5% in 2004, primarily due to the increase in JBI business, which resulted in larger paymentsadditional funds paid to railroads and drayage companies. In addition, paymentscompanies, related to independent contractors increase as we grow thisJBI business growth, and to the continued expansion of our IC fleet. The 14.4%9.0% increase in fuel and fuel taxes was dueprimarily a result of fuel prices averaging about 8% higher in 2004 and a slight decline in miles per gallon. The higher fuel costs in 2004 were substantially recovered through additional fuel surcharges billed to significantly higherour customers. While rapid changes in fuel cost per gallon may result in 2003, partly offset by lower miles run by company-operated tractors. Ourcertain timing differences of fuel cost per gallon duringcosts and fuel surcharges between accounting periods, we have been able to recover the first nine months of 2003 averaged 16.6% more than the comparable period of 2002. The 6.8% decline in operating supplies and expenses was partly due to the reduced amount of outsourced tractor and trailing equipment maintenance work. We are moving moremajority of our maintenance and revenue equipment repair work to our own shops.higher 2004 fuel costs per gallon. The 29.0% rise19.3% decline in insurance and claims costexpenses was primarily due to reduced claims costs and reflects escalating liability insurance premiums, which have been experiencedour continued focus on safety throughout the industry and higher accident costs. organization. The significant increasedecline in general and administrative expenses was primarily a result of higherlower bad debt expense and increasedprofessional fees in 2004. In addition, we experienced a net loss of $0.3 million on asset dispositions in 2004, compared with a net loss of $1.0 million in 2003. These positive cost trends were partly offset by higher driver recruiting costs.expenditures in 2004. Net interest expense declined 21.6%, partlysignificantly in 2004 due to lower debt levels. We increased our effective income tax rate to 40.5% in 2004, from 38.5% in 2003, primarily due to our higher level of earnings and the approximate $68.0 millionsuspension, during the fourth quarter of capital we raised through a secondary public offering2003, of common stock in mid 2002.recording certain non-cash tax benefits associated with the sale and leaseback transactions. The equity in loss of associated company line item on our consolidated statement of earnings reflects our share of the operating results for Transplace, Inc. (TPI). Effective January 1, 2003, we increased our interest in TPI to approximately 37% from 27%.TPI. Liquidity and Capital Resources Cash Flow We typically generate significant amounts of cash from operating activities. Net cash provided by operating activities totaled $251$186.5 million during the first nine months of 2003,six month period ended June 30, 2004, compared with $123$138.8 million for the same period of 2002. Operating activities which significantly increased2003. The significant increase in 2004 operating cash in 2003,flows, relative to 2002, included2003, resulted from substantially higher net earnings and deferred income taxestaxes. A reduction in our 2004 accounts payable balance was more pronounced than the comparable period of 2003, and prepaid expenses. Cash was consumedpartly offset the higher level of cash provided by increases in accounts receivable and a decrease in trade accounts payable. operating activities. Net cash used in 2004 investing activities was $110$154.1 million, compared with $79.3 million in 2003, compared with $122 million 2002.2003. This change was primarily a result of increased capital spending for revenue equipment. Net cash of approximately $129$52.0 million was used in financing activities during the first nine monthshalf of 2003,2004, compared with $36$11.8 million provided from financing activities in 2002. Net2003. Additional cash provided from financing activitieswas used in 2002 reflected approximately $68.0 million2004 to pay off debt, for shares received in lieu of proceeds from the salecash in connection with stock option activity and to fund dividends. We re-initiated payment of a secondary stock offering, which closed during the second quarter.quarterly dividend in May of 2004. 18
Selected Balance Sheet Data | | As of | | | | September 30, 2003 | | December 31, 2002 | | September 30, 2002 | | Working capital ratio | | 1.04 | | 1.33 | | 1.32 | | | | | | | | | | Current maturities of long-term debt and current installments of obligations under capital leases (millions) | | $ | 195 | | $ | 124 | | $ | 127 | | | | | | | | | | Total debt and obligations under capital leases (millions) | | $ | 205 | | $ | 343 | | $ | 361 | | | | | | | | | | Total debt to equity | | .30 | | .58 | | .63 | | | | | | | | | | Total debt as a ratio to total capital | | .23 | | .37 | | .39 | |
| | As of | | | | June 30, 2004 | | December 31, 2003 | | June 30, 2003 | | Working capital ratio | | 1.08 | | .99 | | 1.20 | | | | | | | | | | Current maturities of long-term debt and current installments of obligations under capital leases (millions) | | $ | 127 | | $ | 172 | | $ | 196 | | | | | | | | | | Total debt and obligations under capital leases (millions) | | $ | 127 | | $ | 172 | | $ | 323 | | | | | | | | | | Total debt to equity | | .16 | | .24 | | .51 | | | | | | | | | | Total debt as a ratio to total capital | | .14 | | .20 | | .34 | |
Our current working capital ratio and current maturitiesreflects the fact that all of long-termour debt and current installments of obligations under capital leases amounts shown in the above tableare current as of SeptemberJune 30, 2003 were impacted by a reclassification. As2004. We currently plan to pay off all of December 31, 2002, we had plannedour debt obligations as they mature later this year and also anticipate purchasing the tractors currently on capital lease as those leases come due this year. We expect these funds to extend certain capital leases with initial terms coming due within the next year. Partly due to favorable interest rates and cash flows, we elected to purchase some of this equipment as these initial lease terms came due. While we have retained an option to extend certain capital leases, this change of intent resulted in the reclassification of approximately $82 million of capitalized lease debtbe generated from long-term to current. This reclassification had no effect on total debt 18
or earnings. We began purchasing this equipment in July of 2003.operating activities.
Liquidity
Our need for capital typically has resulted from the acquisition of revenue equipment to support growth and the replacement of older tractors and trailing equipment with new, late model equipment. We are frequently able to accelerate or postpone some equipment replacements depending on market conditions. In the past we have obtained capital through public stock offerings, debt financing, revolving lines of credit and cash generated from operations. We have also utilized capital and operating leases, from time to time, to acquire revenue equipment. Equipment acquired under capital leases is initially recorded at the net present value of the minimum lease payments. We have an agreement with our primary tractor supplier for guaranteed residual or trade-in values for certain equipment on capitalized leases. We have utilized these values in accounting for these capitalized leases. To date, none of our operating leases contain any guaranteed residual value clauses. Net capital expenditures were $140$154.1 million during the first ninesix months of 20032004 compared with $123$80.0 million for the same period of 2002.2003. We are currently anticipate spending in the rangecommitted to purchase approximately $112 million of $220 million,revenue equipment, net of expected proceeds from salesales or trade-in allowances, on revenue equipment for the full calendar year of 2003.allowances. We retired approximately $87 million of senior notes, as scheduled, on September 1, 2003, utilizing funds on hand. We are authorized to borrow up to $150 million under our current revolving line of credit and had no balances outstanding on this line at SeptemberJune 30, 2003.2004. This line of credit expires on November 14, 2005. We believe that our liquid assets, cash generated from our secondary stock offering described above, cash generated from operations and revolving line of credit will provide sufficient funds for our operating and capital requirements for the foreseeable future.
| | Contractual Cash Obligations As of September 30, 2003 Amounts Due by Period (dollars in millions) | | | | Total | | One Year Or Less | | One To Three Years | | Four To Five Years | | After Five Years | | Operating leases | | $ | 234 | | $ | 71 | | $ | 99 | | $ | 59 | | $ | 5 | | Capital leases | | 91 | | 91 | | — | | — | | — | | Senior and subordinated notes payable | | 115 | | 105 | | 10 | | — | | — | | Subtotal | | $ | 440 | | 267 | | $ | 109 | | $ | 59 | | $ | 5 | | Commitments to acquire revenue equipment | | 296 | | 50 | | 246 | | — | | — | | Total | | $ | 736 | | $ | 317 | | $ | 355 | | $ | 59 | | $ | 5 | |
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| | Financing Commitments Expiring By Period As of September 30, 2003 (dollars in millions) | | | | Total | | One Year Or Less | | One To Three Years | | Four To Five Years | | After Five Years | | Revolving credit arrangements | | $ | 150 | | — | | $ | 150 | | — | | — | | Standby letters of credit | | 29 | | 29 | | — | | — | | — | | Total | | $ | 179 | | $ | 29 | | $ | 150 | | — | | — | | | | | | | | | | | | | | | | |
| | Contractual Cash Obligations As of June 30, 2004 Amounts Due by Period | | | | (dollars in millions) | | | | Total | | One Year Or Less | | One To Three Years | | Four To Five Years | | After Five Years | | Operating leases | | $ | 185 | | $ | 66 | | $ | 84 | | $ | 31 | | $ | 4 | | Capital leases | | 22 | | 22 | | — | | — | | — | | Senior and subordinated notes payable | | 105 | | 105 | | — | | — | | — | | Subtotal | | $ | 312 | | 193 | | $ | 84 | | $ | 31 | | $ | 4 | | Commitments to acquire revenue equipment, net of $52 million of expected proceeds from sales or trade-in allowances | | 112 | | 112 | | — | | — | | — | | Total | | $ | 424 | | $ | 305 | | $ | 84 | | $ | 31 | | $ | 4 | |
| | Financing Commitments Expiring By Period As of June 30, 2004 | | | | (dollars in millions) | | | | Total | | One Year Or Less | | One To Three Years | | Four To Five Years | | After Five Years | | Revolving credit arrangements | | $ | 150 | | — | | $ | 150 | | — | | — | | Standby letters of credit | | 20 | | 20 | | — | | — | | — | | Total | | $ | 170 | | $ | 20 | | $ | 150 | | — | | — | | | | | | | | | | | | | | | | |
Risk Factors You should refer to Item 7 of our annual report (Form 10-K) for the year ended December 31, 2002,2003, under the caption “Risk Factors” for additional informationspecific details on the following factors and events that are not within our control and could affect our financial results. •Our effective income tax rates for the threebusiness is subject to general economic and nine months ended September 30, 2003business factors that are largely out of our control, any of which could have a materially adverse effect on our results of operations. •We operate in a highly competitive and 2002, were 38.5%fragmented industry. Numerous factors could impair our ability to maintain our current profitability and 25.0%, respectively. to compete with other carriers. •We implemented an accountable expense reimbursement plan (driver per diem plan) forderive a significant portion of our driversrevenue from a few major customers, the loss of one or more of which could have a materially adverse effect on our business. •We depend on third parties in February of 2003. While this plan will benefit both the majorityoperation of our business. • �� Difficulty in attracting drivers could affect our profitability and ability to grow. •Ongoing insurance and claims expenses could significantly reduce our net earnings, it resultsearnings. •Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties. 20
•We operate in a higher effective income tax rate. Partlyhighly regulated industry, and increased direct and indirect costs of compliance with, or liability for violation of, existing or future regulations could have a materially adverse effect on our business. •We have a $13.6 million note receivable from Transportacion Maritima Mexicana (TMM) related to the sale of our share of a Mexican joint venture. An interest payment on this note was received as a resultscheduled in June 2004. We agreed to extend the due date of this plannote and anticipated higher earnings, we are currently estimating an effective incomein negotiations with the intent to collect this entire note receivable. •The Internal Revenue Service (IRS) has proposed to disallow the tax rate of 38.5% for calendar year 2003.benefits associated with certain sale- and-leaseback transactions. In 1999, we entered into a series of transactions effecting a sale and leaseback of a portion of our Intermodal container and chassis fleet for a selling price of approximately $175 million. These transactions used a structure thatThis transaction was examined by the Internal Revenue Service (IRS) has recently indicated it intends to examine.IRS in an audit of our 1998 and 1999 income tax returns. We have voluntarily disclosedreceived an IRS Notice of Proposed Assessment, which disallows the tax benefits associated with these transactions, toand as a result, we have filed an appeal in the matter. We have not yet been contacted by the IRS andAppeals Division to schedule a hearing to resolve this issue. If a resolution of the matter cannot be reached in October of 2002,the appeals process, the IRS began their examinationwill forward a 90-day letter, also known as a Notice of Deficiency. A resolution of the specific facts of these transactions. As of September 30, 2003, no adverse findings have been asserted bydispute could occur at any point in the IRS.administrative process or could extend through a trial and court appeals. If the IRS challenges our transactions, we intend to vigorously defend them. As of September 30, 2003,are unsuccessful in defending this transaction, we had recognized approximately $31 million of income tax benefits from these transactions. The annual tax benefits recognized from these transactions can be computed from the table contained in Footnote (4), Income Taxes, of our Form 10-K for the years 2002could owe additional taxes and 2001, and by summing the amounts labeled as “sale/leaseback benefit” for the years 1999 through 2002. As of September 30, 2003, weinterest. We estimate our maximum potentialearnings exposure to be approximately $36.5$33 million, includingwhich represents the tax benefits realized through December 31, 2002, plus estimated accrued interest in the eventthough June 30, 2004. This exposure would result if the IRS successfully challenges allsucceeded in disallowing 100% of the tax benefits realized to date.from this transaction. As•On July 9, 2004, we announced that the Burlington Northern and Santa Fe railroad (BNSF) had previously announced, we signed an agreement during the fourth quarter of 2001 to sell our joint venture interest in Mexico to the majority owner. This sale closed during the first quarter of 2002. In accordance with the terms of the sale, we recorded a note receivable for $18.1 million. The original note carried an interest rate of 5%, four required annual principal payments and would have matured on June 30, 2005. The majority owner, GROUPO TMM, S.A. (formerly Transportacion Maritima Mexicana S.A. de C.V.) (TMM) announcednotified us that it was experiencing liquidity issuesexercising its right to arbitrate the fairness of the division of revenue as provided for in the Joint Service Agreement (JSA). BNSF provides a significant amount of rail transportation services to our Intermodal business segment. The JSA is an agreement between BNSF and J.B. Hunt Transport, Inc., which was signed in May1996. We have also notified BNSF that we intend to utilize the arbitration process to review the division of revenue, as well as to clarify other issues. On July 7, 2004, the same day that we received the request for arbitration from BNSF, we filed a complaint for declaratory judgment in an Arkansas court requesting that the court determine the status of the parties under the JSA. The division of revenue under arbitration pertains to revenue billed under the JSA subsequent to the arbitration process and does not affect financial results reported in prior periods.
•On July 16, 2004, the United States Court of Appeals for the District of Columbia issued a decision which vacated (threw out) the hours-of-service (HOS) rules which were newly effective in January 2004. The HOS rules were mandated by the Federal Motor Carrier Safety Administration (FMCSA), an administration within the Department of Transportation, and changed the regulations that govern driver hours of service. The new rules, which were announced in April 2003 missed payment on its outstanding bonds. Consequently, TMM requestedand effective in January 2004, generally allowed a driver to defer a scheduled principaldrive for 11 consecutive hours, rather than 10, but require 10 hours of off-duty time, rather than 8. In addition, more off-duty “sleeper berth” time is required before on-duty time is allowed. Under the court’s rules of procedure, the FMCSA has 45 days to review the decision and interest payment on our note receivable. On October 14, 2003, we agreeddecide whether to defer a principal paymentseek other legal remedies. During that was due on June 30, 2003. This payment is now due when TMM receives cash for certain operations-related transactions, or no later than June 30, 2006. The interest payment that was due on June 30, 2003 was deferred until October 31, 2003. All other terms and conditions45 day period of time the current HOS rules will remain in place. We have approximately $13.5 million (net) in principal and interest receivable on our balance sheet. We believe TMM’s refinancing plan will provide sufficient liquidity to meet its renegotiated obligation to us. If TMM cannot complete the refinancing or generates insufficient cash to meet its obligations, including ours, our note receivable may become uncollectible.effect. 2021
Impact of Recently Issued Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. On October 9, 2003, the FASB staff issued FASB Staff Position (FSP) Financial Interpretation No. 46-6, which deferred the effective date for applying the provisions until March 31, 2004. The adoption of Interpretation No. 46 is not expected to have a material effect on our financial statements.
ITEM 3.3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our earnings are affected by changes in short-term interest rates as a result of our use of short-term revolving lines of credit. From time to time we utilize interest rate swaps to mitigate the effects of interest rate changes; none were outstanding at SeptemberJune 30, 2003.2004. Risk can be estimated by measuring the impact of a near-term adverse movement of 10% in short-term market interest rates. If short-term market interest rates average 10% more during the next twelve months, there would be no material adverse impact on our results of operations based on variable rate debt outstanding at SeptemberJune 30, 2003.2004. At SeptemberJune 30, 2003,2004, the fair value of our fixed rate long-term obligations approximated carrying value. Although we conduct business in foreign countries, international operations are not material to our consolidated financial position, results of operations or cash flows. Additionally, foreign currency transaction gains and losses were not material to our results of operations for the three and ninesix months ended SeptemberJune 30, 2003.2004. 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 its 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 fluctuation in foreign currency exchange rates. ITEM 4.4. CONTROLS AND PROCEDURES Within 90 days prior to filing
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 internal controls and disclosure controls. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures arewere effective as of June 30, 2004, in alerting them on a timely basis to material information required to be disclosed by us in our periodic reports to the Securities and Exchange Commission. Since our most recent review of internal controls systems and procedures, there have been no significant changes in internal controls or in other factors that could significantly affect these controls. 2122
PART II OTHER INFORMATION Item 1. |
| Legal Proceedings | | | None applicable. | | | | Item 2. |
| Changes in Securities | | | None applicable. | | | | Item 3. |
| Defaults Upon Senior Securities | | | None applicable. | | | | Item 4. |
| Submission of Matters to a Vote of Security Holders | | | None applicable. | | | | Item 5. |
| Other informationInformation | | | We announced on July 17, 2003 thatMay 3, 2004 the election of Coleman H. Peterson as a Director to our Board of Directors had declared a two for one stock split on our common stock, which was payable August 29, 2003, to stockholders of record on July 31, 2003. All common stock related amounts in this Form 10-Q have been adjusted to reflect this stock split.Directors. | | | | We announced on July 9, 2004 that BNSF railroad had notified us that it was electing its right to arbitrate the division of revenue as provided for in the JSA. | | Item 6. |
| Exhibits and Reports on Form 8-K | | | a) | Exhibits | | | | 15 | Awareness letter related to Independent Accountants’ Review Report | | | | | | | 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | b) | Reports on Form 8-K | | | | | | | On October 23, 2003,July 19, 2004 we filed a current report on Form 8-K announcing our financial results for the thirdsecond quarter ended SeptemberJune 30, 2003.2004. |
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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the city of Lowell, Arkansas, on the 31st29th day of October, 2003.July, 2004.
| J.B. HUNT TRANSPORT SERVICES, INC. | | (Registrant) | | | | | | | BY: | /s/ Kirk Thompson | | | | Kirk Thompson | | | President and Chief Executive Officer | | | | | | | | BY: | /s/ Jerry W. Walton | | | | Jerry W. Walton | | | Executive Vice President, Finance and
| | | Administration,
| | | Chief Financial Officer | | | | | | | | BY: | /s/ Donald G. Cope | | | | Donald G. Cope | | | Senior Vice President, Controller,
| | | Chief Accounting Officer | | | | | | |
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INDEX TO EXHIBITS J.B Hunt Transport Services, Inc. Exhibit Number |
| Exhibit | | | | | | 15 | | Awareness letter related to Independent Accountants’ Review Report | | | | | | 31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | 31.2 | | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | 32 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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