FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

ý

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

For the Quarter Ended September 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

J.B. HUNT TRANSPORT SERVICES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Arkansas

0-11757

71-0335111

(Exact name of registrant as specified in its charter)STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION

Commission File Number

(IRS EMPLOYER
IDENTIFICATION NO.)

 

 

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

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(ZIP CODE)

(Registrant’s telephone number, including area code)number)

 

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 September 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, 2003.81,231,539.

 

 



 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Form 10-Q

For The Quarter Ended September 30, 20032004

Table of Contents

 

Part I.

Financial Information

Part I. Financial Information

 

Item 1.

Consolidated Financial Statements

 

 

 

 

Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 20032004 and 20022003

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 20032004 and December 31, 20022003

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20032004 and 20022003

 

 

 

 

Notes to Condensed Consolidated Financial Statements as of September 30, 20032004

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

Review Report of KPMG LLP

 

 

 

Item 2.

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

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

Part II. Other Information

 

 

 

Part II.Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

 

Exhibits

 

Signatures

 

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
September 30

 

Nine Months Ended
September 30

 

 

2003

 

2002

 

2003

 

2002

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

621,644

 

$

582,671

 

$

1,792,723

 

$

1,650,221

 

 

$

718,614

 

$

621,644

 

$

2,015,349

 

$

1,792,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and employee benefits

 

197,618

 

213,625

 

584,255

 

612,152

 

 

214,760

 

197,618

 

612,211

 

584,255

 

Rents and purchased transportation

 

205,905

 

181,756

 

584,004

 

507,400

 

 

236,656

 

205,905

 

662,006

 

584,004

 

Fuel and fuel taxes

 

55,161

 

54,828

 

174,853

 

152,790

 

 

74,529

 

55,161

 

205,010

 

174,853

 

Depreciation and amortization

 

38,197

 

36,449

 

113,006

 

108,353

 

 

37,458

 

38,197

 

111,233

 

113,006

 

Operating supplies and expenses

 

31,212

 

32,465

 

90,942

 

97,612

 

 

32,760

 

31,212

 

92,560

 

90,942

 

Insurance and claims

 

13,946

 

13,415

 

49,137

 

38,079

 

 

14,956

 

13,946

 

43,348

 

49,137

 

Operating taxes and licenses

 

8,219

 

8,710

 

24,621

 

25,037

 

 

9,088

 

8,219

 

26,576

 

24,621

 

General and administrative expenses, net of gains

 

7,996

 

7,436

 

26,208

 

20,402

 

General and administrative expenses, net of gains and losses

 

9,902

 

7,996

 

24,950

 

26,208

 

Communication and utilities

 

5,815

 

5,961

 

17,822

 

18,230

 

 

5,837

 

5,815

 

17,395

 

17,822

 

Total operating expenses

 

564,069

 

554,645

 

1,664,848

 

1,580,055

 

 

635,946

 

564,069

 

1,795,289

 

1,664,848

 

Operating income

 

57,575

 

28,026

 

127,875

 

70,166

 

 

82,668

 

57,575

 

220,060

 

127,875

 

Interest expense

 

(4,445

)

(5,541

)

(15,132

)

(19,290

)

 

(1,558

)

(4,445

)

(5,468

)

(15,132

)

Equity in loss of associated company

 

(23

)

(144

)

(600

)

(1,424

)

 

(647

)

(23

)

(2,030

)

(600

)

Earnings before income taxes

 

53,107

 

22,341

 

112,143

 

49,452

 

 

80,463

 

53,107

 

212,562

 

112,143

 

Income taxes

 

20,446

 

5,585

 

43,175

 

12,363

 

 

32,588

 

20,446

 

86,088

 

43,175

 

Net earnings

 

$

32,661

 

$

16,756

 

$

68,968

 

$

37,089

 

 

$

47,875

 

$

32,661

 

$

126,474

 

$

68,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average basic shares outstanding

 

79,802

 

78,453

 

79,174

 

75,087

 

 

81,066

 

79,802

 

80,578

 

79,174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.41

 

$

0.21

 

$

0.87

 

$

0.49

 

 

$

0.59

 

$

0.41

 

$

1.57

 

$

0.87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average diluted shares outstanding

 

82,558

 

80,490

 

81,487

 

77,232

 

 

83,678

 

82,558

 

83,285

 

81,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.40

 

$

0.21

 

$

0.85

 

$

0.48

 

 

$

0.57

 

$

0.40

 

$

1.52

 

$

0.85

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Condensed Consolidated Balance Sheets

(in thousands)

 

 

September 30, 2004

 

 

 

 

September 30, 2003
(unaudited)

 

December 31, 2002

 

 

(unaudited)

 

December 31, 2003

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

93,169

 

$

80,628

 

 

$

41,819

 

$

61,229

 

Accounts receivable

 

266,088

 

237,156

 

 

309,201

 

256,032

 

Prepaid expenses and other

 

57,550

 

115,397

 

 

57,755

 

105,743

 

Total current assets

 

416,807

 

433,181

 

 

408,775

 

423,004

 

Property and equipment

 

1,314,031

 

1,305,653

 

 

1,379,162

 

1,345,521

 

Less accumulated depreciation

 

472,907

 

461,091

 

 

410,749

 

460,556

 

Net property and equipment

 

841,124

 

844,562

 

 

968,413

 

884,965

 

Other assets

 

39,359

 

40,985

 

 

28,597

 

39,102

 

 

$

1,297,290

 

$

1,318,728

 

 

$

1,405,785

 

$

1,347,071

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt

 

$

105,000

 

$

97,010

 

 

$

50,000

 

$

104,933

 

Current installments of obligations under capital leases

 

89,819

 

27,138

 

 

 

66,844

 

Trade accounts payable

 

109,748

 

117,931

 

 

139,595

 

158,886

 

Claims accruals

 

27,737

 

14,706

 

 

6,544

 

7,775

 

Accrued payroll

 

45,807

 

46,511

 

 

60,025

 

51,235

 

Other accrued expenses

 

10,893

 

11,291

 

 

13,964

 

12,478

 

Deferred income taxes

 

10,495

 

10,742

 

 

34,332

 

23,499

 

Total current liabilities

 

399,499

 

325,329

 

 

304,460

 

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

 

 

6,923

 

4,291

 

Deferred income taxes

 

208,676

 

181,948

 

 

256,413

 

213,994

 

Stockholders’ equity

 

675,689

 

590,487

 

 

837,989

 

703,136

 

 

$

1,297,290

 

$

1,318,728

 

 

$

1,405,785

 

$

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

 

 

Nine Months Ended September 30

 

 

2003

 

2002

 

 

2004

 

2003

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

68,968

 

$

37,089

 

 

$

126,474

 

$

68,968

 

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

 

 

111,233

 

113,006

 

Loss on sale of revenue equipment

 

1,168

 

668

 

(Gain) loss on sale of revenue equipment

 

(149

)

1,168

 

Deferred income taxes

 

26,481

 

(8,851

)

 

53,252

 

26,481

 

Equity in loss of associated company

 

600

 

1,424

 

 

2,030

 

600

 

Tax benefit of stock options exercised

 

6,610

 

5,465

 

 

13,602

 

6,610

 

Amortization of discount, net

 

94

 

94

 

 

67

 

94

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

(28,932

)

(20,686

)

 

(53,169

)

(28,932

)

Prepaid expenses and other assets

 

57,847

 

40,029

 

Other assets

 

44,520

 

57,847

 

Trade accounts payable

 

(8,183

)

(44,009

)

 

(19,291

)

(8,183

)

Claims accruals

 

13,031

 

(13,937

)

 

(1,231

)

13,031

 

Accrued payroll and other accrued expenses

 

418

 

16,927

 

 

12,908

 

418

 

Net cash provided by operating activities

 

251,108

 

122,566

 

 

290,246

 

251,108

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Additions to property and revenue equipment

 

(187,222

)

(192,790

)

 

(343,599

)

(187,222

)

Proceeds from sale of revenue equipment

 

76,486

 

69,339

 

 

149,067

 

76,486

 

Decrease in other assets

 

1,026

 

1,629

 

 

11,943

 

1,026

 

Net cash used in investing activities

 

(109,710

)

(121,822

)

 

(182,589

)

(109,710

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Repayments of long-term debt

 

(87,010

)

(10,250

)

 

(55,000

)

(87,010

)

Principal payments under capital lease obligations

 

(51,471

)

(20,507

)

 

(66,844

)

(51,471

)

Proceeds from sale of common stock

 

––

 

68,096

 

Re-issuance (acquisition) of treasury stock

 

9,624

 

(1,567

)

 

(376

)

9,624

 

Net cash provided by (used in) financing activities

 

(128,857

)

35,772

 

Dividends paid

 

(4,847

)

 

Net cash used in financing activities

 

(127,067

)

(128,857

)

Net change in cash and cash equivalents

 

12,541

 

36,516

 

 

(19,410

)

12,541

 

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

 

 

$

41,819

 

$

93,169

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

18,213

 

$

21,842

 

 

$

7,192

 

$

18,213

 

Income taxes

 

8,156

 

21,213

 

 

19,234

 

8,156

 

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.

 

Notes to Condensed Consolidated Financial Statements

(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 basedvalue-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

 

6



 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Net earnings as reported (in thousands)

 

$

47,875

 

$

32,661

 

$

126,474

 

$

68,968

 

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense determined under fair value based methods for all awards, net of taxes

 

1,221

 

1,196

 

3,664

 

3,504

 

Pro forma

 

$

 46,654

 

$

 31,465

 

$

 122,810

 

$

 65,464

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

 0.59

 

$

 0.41

 

$

 1.57

 

$

 0.87

 

Pro forma

 

$

 0.58

 

$

 0.39

 

$

 1.52

 

$

 0.83

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

 0.57

 

$

 0.40

 

$

 1.52

 

$

 0.85

 

Pro forma

 

$

 0.56

 

$

 0.38

 

$

 1.47

 

$

 0.80

 

 

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

 

 

 

September 30, 2004

 

December 31, 2003

 

 

 

 

 

 

 

Senior revolving credit facility

 

$

40,000

 

$

 

 

 

 

 

 

 

Senior notes payable, due September 15, 2004, interest at 7.00% payable semiannually

 

 

95,000

 

 

 

 

 

 

 

Senior subordinated notes, due October 30, 2004, interest at 7.80% payable semiannually

 

10,000

 

10,000

 

 

 

50,000

 

105,000

 

 

 

 

 

 

 

Less current maturities

 

(50,000

)

(104,933

)

 

 

 

 

 

 

Unamortized discount

 

 

(67

)

 

 

$

 

$

 

 

7



 

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

 

 

 

 

87,500

 

29.34

 

 

 

Exercised

 

(1,587,178

)

8.26

 

 

 

 

(1,529,060

)

8.74

 

 

 

Terminated

 

(145,510

)

10.67

 

 

 

 

(44,850

)

16.56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at September 30, 2003

 

7,294,212

 

$

9.22

 

808,413

 

Outstanding at September 30, 2004

 

6,399,147

 

$

11.35

 

627,325

 

 

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 October 21, 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,November 22, 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 November 5, 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
September 30

 

Nine Months Ended
September 30

 

 

2003

 

2002

 

2003

 

2002

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

32,661

 

$

16,756

 

$

68,968

 

$

37,089

 

 

$

47,875

 

$

32,661

 

$

126,474

 

$

68,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

79,802

 

78,453

 

79,174

 

75,087

 

 

81,066

 

79,802

 

80,578

 

79,174

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options

 

2,756

 

2,037

 

2,313

 

2,145

 

 

2,612

 

2,756

 

2,707

 

2,313

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

82,558

 

80,490

 

81,487

 

77,232

 

 

83,678

 

82,558

 

83,285

 

81,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.41

 

$

0.21

 

$

0.87

 

$

0.49

 

 

$

0.59

 

$

0.41

 

$

1.57

 

$

0.87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.40

 

$

0.21

 

$

0.85

 

$

0.48

 

 

$

0.57

 

$

0.40

 

$

1.52

 

$

0.85

 

 

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

 

8



 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Number of shares under option

 

5,000

 

20,000

 

18,000

 

55,000

 

 

 

 

 

 

 

 

 

 

 

Range of exercise price

 

$37.00

 

$26.19

 

$33.62 - $37.00

 

$18.45 - $26.19

 

 

7.6.             Comprehensive Income

Comprehensive income consists of net earnings and foreign currency translation adjustments.  During

8



the three and nine months ended September 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 ratesrate for the three and nine monthsmonth periods ended September 30, 20032004, was 40.5%.  The effective income tax rate was 38.5% for the three and 2002, were 38.5% and 25.0%, respectively.nine month periods ending September 30, 2003.  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 reduces2003.  The driver per diem plan, while reducing certain costs which are classified in the salary, wages and employee benefits, expense category.increases our non-deductible meal allowances, resulting in a higher effective tax rate.  The lower benefit costs ofincrease in the driver per diem plan are partly offset by higher2004 effective income tax rates.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 been notified by the IRS Appeals Division that they intend to have the examining agent request more information from us and develop certain technical arguments we raised in Octoberdefending our position.  The examining agent has not yet contacted us and no specific timeframe has been given for the completion of 2002,this additional information request.  If a resolution of the matter cannot be reached in 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$34 million, includingwhich represents the tax benefits realized through December 31, 2002, plus estimated accrued interest in the eventthrough September 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 nine months ended September 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):

 

9



 

 

Assets
As of September 30

 

 

Assets
As of September 30

 

 

2004

 

2003

 

 

2003

 

2002

 

 

 

 

 

 

JBT

 

$

773

 

$

846

 

 

$

744

 

$

773

 

JBI

 

315

 

216

 

 

450

 

315

 

DCS

 

268

 

219

 

 

342

 

268

 

Other (includes corporate)

 

(59

)

18

 

 

(130

)

(59

)

Total

 

$

1,297

 

$

1,299

 

 

$

1,406

 

$

1,297

 

 

 

 

Operating Revenues

 

 

 

Three Months
Ended September 30

 

Nine months
Ended September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

JBT

 

$

238

 

$

214

 

$

680

 

$

621

 

JBI

 

284

 

241

 

789

 

682

 

DCS

 

201

 

170

 

558

 

501

 

Subtotal

 

723

 

625

 

2,027

 

1,804

 

Inter-segment eliminations

 

(4

)

(3

)

(12

)

(11

)

Total

 

$

719

 

$

622

 

$

2,015

 

$

1,793

 

 

 

Operating Income

 

 

Operating Revenues

 

 

Three Months
Ended September 30

 

Nine months
Ended September 30

 

 

Three Months
Ended September 30

 

Nine Months
Ended September 30

 

 

2004

 

2003

 

2004

 

2003

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

JBT

 

$

214

 

$

215

 

$

621

 

$

614

 

 

$

30.6

 

$

17.9

 

$

74.4

 

$

31.6

 

JBI

 

241

 

207

 

682

 

591

 

 

33.0

 

25.1

 

93.9

 

65.8

 

DCS

 

170

 

164

 

501

 

458

 

 

18.9

 

14.6

 

51.0

 

30.5

 

Subtotal

 

625

 

586

 

1,804

 

1,663

 

Inter-segment eliminations

 

(3

)

(3

)

(11

)

(13

)

Other (includes corporate)

 

0.2

 

 

0.8

 

 

Total

 

$

622

 

$

583

 

$

1,793

 

$

1,650

 

 

$

82.7

 

$

57.6

 

$

220.1

 

$

127.9

 

 

 

 

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 September 30

 

Nine months
Ended September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

JBT

 

$

14.7

 

$

17.2

 

$

45.3

 

$

50.8

 

JBI

 

5.7

 

5.1

 

16.7

 

15.0

 

DCS

 

14.3

 

12.9

 

41.1

 

38.5

 

Other (includes corporate)

 

2.8

 

3.0

 

8.1

 

8.7

 

Total

 

$

37.5

 

$

38.2

 

$

111.2

 

$

113.0

 

 

10



 

REPORT OF INDEPENDENT ACCOUNTANTS’ REVIEW REPORTREGISTERED PUBLIC ACCOUNTING FIRM

 

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 September 30, 2003,2004, and the related condensed consolidated statements of earnings for the threethree-month and nine monthnine-month periods ended September 30, 20032004 and 2002,2003, and the condensed consolidated statements of cash flows for the nine month periods ended September 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

 

October 15, 2004

October 13, 2003

 

11



 

ITEM 22..     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.Service (IRS).  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:

 

12



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 September 30, 2003,2004, we had approximately $28$7 million of estimated net claims payable.  In addition, we are required to pay certain advanced deposits and monthly premiums.  At September 30, 2003,2004, we had a prepaid insurance asset of approximately $17 million.$19 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 purchased all of our remaining revenue equipment under capital leases during the third quarter of 2004.

 

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.

 

SEGMENTS

We operated three segments during the nine months ended September 30, 2003 and 2002.  These segments included:  Truck (JBT), Intermodal (JBI) and Dedicated Contract Services (DCS).  The operation of each of these businesses is described in footnote (10) of our annual report (Form 10-K) for the year ended December 31, 2002.

13



 

RESULTS OF OPERATIONS

 

Comparison of Third Quarter 20032004 to Third Quarter 20022003

 

Summary of Operating Segments Results

For The Three Months Ended September 30

(dollars in millions)

 

 

Operating Revenue

 

Operating Income

 

 

Operating Revenue

 

Operating Income

 

 

2004

 

2003

 

% Change

 

2004

 

2003

 

 

2003

 

2002

 

% Change

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

 

JBT

 

$

214

 

$

215

 

0

%

$

17.9

 

$

10.1

 

 

$

238

 

$

214

 

11

%

$

30.6

 

$

17.9

 

JBI

 

241

 

207

 

16

 

25.1

 

13.2

 

 

284

 

241

 

18

 

33.0

 

25.1

 

DCS

 

170

 

164

 

4

 

14.6

 

4.1

 

 

201

 

170

 

18

 

18.9

 

14.6

 

Other

 

 

 

 

 

.6

 

 

 

 

 

0.2

 

 

Subtotal

 

625

 

586

 

7

%

57.6

 

28.0

 

 

723

 

625

 

16

%

82.7

 

57.6

 

Inter-segment eliminations

 

(3

)

(3

)

 

 

 

 

(4

)

(3

)

 

 

 

Total

 

$

622

 

$

583

 

7

%

$

57.6

 

$

28.0

 

 

$

719

 

$

622

 

16

%

$

82.7

 

$

57.6

 

 

Overview

Our total consolidated operating revenue for the third quarter of 20032004 was $622$719 million, an increase of approximately 7%16% over the $583$622 million in the third 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$23.2 million more than the amount billed induring the third quarter of 2002.2003.  Excluding fuel surcharges, total operating revenue during the current quarter increased 5%12% over the comparable period of 2002.2003.

 

JBT segment revenue totaled $214$238 million for the third quarter of 2003, essentially equal to2004, an increase of 11% over the $215$214 million in the third 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 8%.  This 2% decline8% increase in revenue was primarily a result of an approximate 5%9.3% increase in revenue per loaded mile, exclusive of fuel surcharges, partly 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.fleet.  The increase in revenue per loaded mile, excluding fuel surcharges, also 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 and rate increases.  In addition, we implemented an accountable expense reimbursement plan (driver per diem plan)significantly lower accident and workers’ compensation 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 third quarter of 20032004 was $17.9$30.6 million, compared with $10.1$17.9 million in 2002.2003.  The operating ratio of the JBT segment was 87.1% in 2004 and 91.6% in 2003 and 95.3% in 2002.2003.

 

JBI segment revenue increased 16%18%, to $241$284 million during the third quarter of 2003,2004, compared with $207$241 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%TheThis increase in revenue was primarily due to an approximate 13%7% increase in load volume and a 2% increase in revenue per load.  The higher revenue per load resulted from changes in freight mix which generated longer average length of haul and an approximate 0.6%4.6% increase in revenue per loaded mile, excluding fuel surcharges.  Operating revenue per load in 2004 increased about 5.1% over the comparable period of 2003.  Operating income of the JBI segment was $25.1rose to $33.0 million in the third quarter of 2003,2004, compared with $13.2$25.1 million in 2002.2003.  The operating ratio of the JBI segment was 88.4% in 2004 and 89.6% in 2003 and 93.6% in 2002.2003.  In addition to higher revenue per load, 2003volumes and rate increases, 2004 operating income was enhanced by lower maintenance costs and improved utilization of revenue equipment.lower equipment ownership costs, partly offset by higher purchased transportation costs.

 

DCS segment revenue rose 4%grew 18%, to $201 million in 2004, from $170 million in 2003, from $164 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%15%.  This increase in DCS segment revenue was driven by an 8%a 6% increase in net revenue per

14



tractor, excluding fuel surcharge, partly offset bysurcharges and a 6% decrease10% increase in the average size of the tractor fleet.  Operating income of our DCS segment climbed to $18.9 million in 2004, from $14.6 million in 2003, from $4.1 million in 2002.2003.  The DCS operating ratio was 90.6% in 2004 and 91.4% in 2003 and 97.5% in 2002.2003.  Improvements in operating income were driven by better tractor utilization, improved productivity and pricing, reduced workers’ compensation expenses and lower start-up costs associated with new business, partly offset by higher accident and revenue equipment rental costs.

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

 

 

 

Percentage of
Operating Revenues

 

Percentage Change
Between Quarters

 

 

 

2004

 

2003

 

2004 vs. 2003

 

 

 

 

 

 

 

 

 

Operating revenues

 

100.0%

 

100.0%

 

15.6%

 

Operating expenses

 

 

 

 

 

 

 

Salaries, wages and employee benefits

 

29.9%

 

31.8%

 

8.7%

 

Rents and purchased transportation

 

32.9

 

33.1

 

14.9

 

Fuel and fuel taxes

 

10.4

 

8.9

 

35.1

 

Depreciation and amortization

 

5.2

 

6.1

 

(1.9)

 

Operating supplies and expenses

 

4.5

 

5.0

 

5.0

 

Insurance and claims

 

2.1

 

2.2

 

7.2

 

Operating taxes and licenses

 

1.3

 

1.3

 

10.6

 

General and administrative expenses, net of gains

 

1.4

 

1.3

 

23.8

 

Communication and utilities

 

0.8

 

1.0

 

0.4

 

Total operating expenses

 

88.5

 

90.7

 

12.7

 

Operating income

 

11.5

 

9.3

 

43.6

 

Interest expense

 

(0.2)

 

(0.8)

 

(64.9)

 

Equity in loss of associated companies

 

(0.1)

 

 

 

Earnings before income taxes

 

11.2

 

8.5

 

51.5

 

Income taxes

 

4.5

 

3.2

 

59.4

 

Net earnings

 

6.7%

 

5.3%

 

46.6%

 

Consolidated Operating Expenses

Total operating expenses during the third quarter of 2004 increased 12.7% over the comparable period of 2003.  The total cost of salaries, wages and employee benefits increased 8.7% in 2004.  However, this expense controlscategory declined to 29.9% of operating revenues in 2004, from 31.8% in 2003.  While we experienced some increases in certain salary, wage and benefit costs during the current quarter, the primary reasons for this expense category decline as a percentage of revenue were higher revenue per loaded mile, continued growth of Intermodal volume and growth of our independent contractor (IC) fleet.  We implemented a new driver pay scale in September 2004.  The ultimate cost of this pay increase is expected to be approximately $.02 per mile.  A rate increase intended to fund the higher driver compensation levels was proposed to our customers, effective October 1, 2004.  Based upon rate increases, which have been agreed upon and implemented to date, we are confident most, if not all, of this driver pay increase will be recovered by the end of 2004.  Rents and purchased transportation costs rose 14.9% in 2004, primarily due to additional funds paid to railroads and drayage companies, related to JBI business growth, and to the continued expansion of our IC fleet.

The 35.1% increase in fuel and fuel taxes was primarily a result of fuel prices averaging about 30% higher in 2004 and an approximate 2% lower miles per gallon.  The higher fuel costs in 2004 were

15



substantially recovered through additional fuel surcharges billed to our customers.  While rapid changes in fuel cost per gallon may 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 per gallon.   The net impact of increased fuel costs, offset by higher fuel surcharge revenue, decreased earnings per share by about $.01 during the current quarter.  The 7.2% increase in insurance and claims expense reflects two serious accidents during the current quarter.

The 10.6% increase in operating taxes and licenses reflects a slight increase in the size of the tractor fleet and higher state licensing fees.  The significant increase in general and administrative expenses was substantially due to driver advertising and recruiting costs, higher bad debt expense and additional spending on professional fees.  Net gains or losses on asset dispositions are included in the general and administrative expense category.  We generated a net $400,000 gain during the current quarter, compared with a net $127,000 loss in 2003.   Net interest expense declined significantly 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 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).

Comparison of Nine Months Ended September 30, 2004 to Nine Months Ended September 30, 2003

Summary of Operating Segments Results

For The Nine Months Ended September 30

(dollars in millions)

 

 

Operating Revenue

 

Operating Income

 

 

 

2004

 

2003

 

% Change

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

JBT

 

$

680

 

$

621

 

10

%

$

74.4

 

$

31.6

 

JBI

 

789

 

682

 

16

 

93.9

 

65.8

 

DCS

 

558

 

501

 

11

 

51.0

 

30.5

 

Other

 

 

 

 

0.8

 

 

Subtotal

 

2,027

 

1,804

 

12

%

220.1

 

127.9

 

Inter-segment eliminations

 

(12

)

(11

)

 

 

 

Total

 

$

2,015

 

$

1,793

 

12

%

$

220.1

 

$

127.9

 

Overview

Our total consolidated operating revenue for the nine months ended September 30, 2004 was $2,015 million, an increase of approximately 12% over the $1,793 million in the comparable period of 2003.  Fuel surcharge revenue had an impact on this comparison.  The amount of fuel surcharge revenue billed during the nine month period ended September 30, 2004, was $37.9 million more than the amount billed during the comparable period in 2003.  Excluding fuel surcharges, total operating revenue during the nine months ended September 30, 2004 increased 11% over 2003.

JBT segment revenue totaled $680 million for the nine months ended September 30, 2004, an increase of 10% over the $621 million in the comparable period of 2003.  If the amount of fuel surcharge revenue was excluded from both the 2004 and 2003 periods, segment revenue would have increased 8%.  This 8% increase in revenue was primarily a result of an approximate 7.8% increase in revenue per loaded mile, exclusive of fuel surcharges and a 2% increase in company tractor utilization, partly offset by a 3% decrease in the size of the tractor fleet.  The increase in revenue per loaded mile, excluding fuel surcharges, also

16



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 activities and rate increases.  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 nine months ended September 30, 2004 was $74.4 million, compared with $31.6 million in 2003.  The operating ratio of the JBT segment was 89.1% in 2004 and 94.9% in 2003.

JBI segment revenue increased 16%, to $789 million during the nine months ended September 30, 2004, compared with $682 million in 2003.  If the amount of fuel surcharge revenue was excluded from both the 2004 and 2003 periods, the increase in JBI revenue would have been 14%.  This increase in revenue was primarily due to an approximate 11% increase in load volume and a 1.9% increase in revenue per loaded mile, excluding fuel surcharges.  Operating revenue per load in 2004 increased about 2.9% over the comparable period of 2003.  Operating income of the JBI segment rose to $93.9 million in the nine months ended September 30, 2004, compared with $65.8 million in 2003.  The operating ratio of the JBI segment was 88.1% in 2004 and 90.3% in 2003.  In addition to higher volumes and rate increases, 2004 operating income was enhanced by lower maintenance and equipment ownerships costs.

DCS segment revenue grew 11%, to $558 million in 2004, from $501 million in 2003.  If fuel surcharge revenue was excluded from both the 2004 and 2003 periods, the increase in DCS revenue would have been 10%.  This increase in DCS segment revenue was driven by a 6% increase in net revenue per tractor, excluding fuel surcharges and a 3% increase in the size of the average tractor fleet.  Operating income of our DCS segment climbed to $51.0 million in 2004, from $30.5 million in 2003.  The DCS operating ratio was 90.9% in 2004 and 93.9% in 2003.  Improvements in operating income were driven by better tractor utilization, improved productivity and pricing, reduced workers’ compensation and maintenance 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.

 

 

Nine Months Ended September 30

 

 

Three Months Ended September 30

 

 

Percentage of
Operating Revenues

 

Percentage Change
Between Periods

 

 

Percentage of
Operating Revenues

 

Percentage Change
Between Quarters

 

 

2004

 

2003

 

2004 vs. 2003

 

 

2003

 

2002

 

2003 vs. 2002

 

 

 

 

 

 

 

 

Operating revenues

 

100.0

%

100.0

%

6.7

%

 

100.0%

 

100.0%

 

12.4%

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries, wages and employee benefits

 

31.8

%

36.7

%

(7.5

)%

 

30.4%

 

32.6%

 

4.8%

 

Rents and purchased transportation

 

33.1

 

31.2

 

13.3

 

 

32.8

 

32.6

 

13.4

 

Fuel and fuel taxes

 

8.9

 

9.4

 

0.6

 

 

10.2

 

9.7

 

17.3

 

Depreciation and amortization

 

6.1

 

6.2

 

4.8

 

 

5.5

 

6.3

 

(1.6)

 

Operating supplies and expenses

 

5.0

 

5.6

 

(3.9

)

 

4.6

 

5.1

 

1.8

 

Insurance and claims

 

2.2

 

2.3

 

4.0

 

 

2.2

 

2.7

 

(11.8)

 

Operating taxes and licenses

 

1.3

 

1.5

 

(5.6

)

 

1.3

 

1.4

 

7.9

 

General and administrative expenses, net of gains

 

1.3

 

1.3

 

7.5

 

 

1.2

 

1.5

 

(4.8)

 

Communication and utilities

 

1.0

 

1.0

 

(2.5

)

 

0.9

 

1.0

 

(2.4)

 

Total operating expenses

 

90.7

 

95.2

 

1.7

 

 

89.1

 

92.9

 

7.8

 

Operating income

 

9.3

 

4.8

 

105.4

 

 

10.9

 

7.1

 

72.1

 

Interest expense

 

(0.8

)

(1.0

)

(19.8

)

 

(0.3)

 

(0.8)

 

(63.9)

 

Equity in loss of associated companies

 

 

 

(84.0

)

 

(0.1)

 

 

238.3

 

Earnings before income taxes

 

8.5

 

3.8

 

137.7

 

 

10.5

 

6.3

 

89.6

 

Income taxes

 

3.2

 

0.9

 

266.1

 

 

4.2

 

2.4

 

99.4

 

Net earnings

 

5.3

%

2.9

%

94.9

%

 

6.3%

 

3.9%

 

83.4%

 

17



 

Consolidated Operating Expenses

Total operating expenses during the third quarter of 2003nine month period ended September 30, 2004 increased 1.7%7.8% over the comparable period of 2002.  Salaries,2003.  The total cost of salaries, wages and employee benefits increased 4.8% in 2004.  However, this expense category declined 7.5% in 2003 and decreased to 31.8%30.4% of operating revenues in 20032004, from 36.7%32.6% in 2002.  A portion of this decline2003.  While we experienced some increases in salaries and wages was a result 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 benefitsbenefit costs during the nine months ended September 30, 2004, the primary reasons for this expense category but is partly offset bydecline as a percentage of revenue were higher effective income tax rates.  Lower workers’ compensation expenserevenue per loaded mile, continued growth of Intermodal volume and a reduction in the numbergrowth of mechanics employed during 2003 also impacted this comparison.our IC fleet.  Rents and purchased transportation costs rose 13.3%13.4% 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%17.3% increase in fuel and fuel taxes was due toprimarily a result of fuel prices averaging about 15% higher in 2004 and an approximate 2% decline in 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 may 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 per gallon.  The net impact of increased fuel costs, offset by higher fuel surcharge revenue, decreased earnings per share by about $.02 during the first quarter ofnine months ended September 30, 2004.

 

15



2003,The 7.9% increase in operating taxes and licenses reflects a slight increase in the lower ratesize of fuel cost increase during the secondtractor fleet 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.higher state licensing fees.  The 4.0% rise in insurance and claims costs reflects escalating liability insurance premiums, which have been experienced throughout the industry and slightly higher accident costs, partly off set by lower cargo claims expense.  The 7.5% increase4.8% decline in general and administrative expensesexpense was primarily a result of higherpartly due to significantly lower bad debt expense in 2004, partly offset by higher driver advertising and increased driver recruiting costs.  Ourexpenses.  In addition, net gains and losses on asset dispositions are included in the general and administrative expense category.  We generated a net $149,000 gain during the nine months ended September 30, 2004, compared with a net $1.2 million loss in 2003.  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 40.5% in 2004, from 38.5% in 2003, from 25.0% in 2002, primarily due to our higher level of earnings, the newsuspension during the fourth quarter of 2003, of recording certain non-cash tax benefits associated with the sale and leaseback transactions, and the driver per diem plan and our increased level of earnings.plan.

 

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 Nine Months Ended September 30, 2003 to Nine Months Ended September 30, 2002

Summary of Operating Segments Results

For The Nine Months Ended September 30

(dollars in millions)

 

 

Operating Revenue

 

Operating Income

 

 

 

2003

 

2002

 

% Change

 

2003

 

2002

 

JBT

 

$

621

 

$

614

 

1

%

$

31.6

 

$

18.8

 

JBI

 

682

 

591

 

15

 

65.8

 

35.0

 

DCS

 

501

 

458

 

9

 

30.5

 

16.2

 

Other

 

 

 

 

 

0.2

 

Subtotal

 

1,804

 

1,663

 

8

%

127.9

 

70.2

 

Inter-segment eliminations

 

(11

)

(13

)

(14

)

 

 

Total

 

$

1,793

 

$

1,650

 

9

%

$

127.9

 

$

70.2

 

Overview

Our total consolidated operating revenue for the first nine months of 2003 was $1.793 billion, up 9% over the $1.650 billion for the first nine months of 2002.  Fuel surcharge revenue has an impact on this comparison.  The amount of fuel surcharge revenue billed for the nine months ended September 30, 2003 was $44.2 million more that the comparable period in 2002.  If the amount of fuel surcharge revenue was excluded from both of the 2003 and 2002 periods, revenue growth would have been 6 %.

JBT segment revenue increased 1%, to $621 million for the first nine months of 2003, compared with $614 million in 2002.  If the amount of fuel surcharge revenue was excluded from both the 2003 and 2002 periods, JBT revenue would have declined 2%.  This 2% decrease in revenue was primarily a result of an approximate 5% 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, contributed to the improvement in operating income of the JBT segment.  Operating income for the first nine months of 2003 was $31.6 million, compared with $18.8 million in 2002.  The operating ratio of the JBT segment was 94.9% for the first nine months of 2003 and 96.9% for the first nine months of 2002.  In addition, the driver per diem plan, which was implemented in February of 2003, contributed to the improvement in operating income.

16



JBI segment revenue increased 15%, to $682 million during the first nine months of 2003, compared with $591 million in 2002.  The increase in segment revenue would have been 13% if fuel surcharge revenue was excluded from both periods.  The increase in revenue was primarily due to an approximate 10% increase in load volume and a 2% increase in revenue per load.  The higher revenue per load resulted from changes in freight mix which generated a longer average length of haul and an approximate 0.8% increase in revenue per loaded mile, exclusive of fuel surcharges.  Operating income in the JBI segment totaled $65.8 million in 2003, compared with $35.0 million in 2002.  This increase was primarily due to higher revenue levels, lower maintenance 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% if fuel surcharge revenue was excluded from both periods.  This increase in DCS 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.  Operating income rose to $30.5 million in 2003, from $16.2 million in 2002.  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 improvement in 2003 operating income was primarily due to better utilization of tractors in service, rate increases and efforts to reduce costs, including driver wages.

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

 

 

 

Percentage of
Operating Revenues

 

Percentage Change
Between Periods

 

 

 

2003

 

2002

 

2003 vs. 2002

 

Operating revenues

 

100.0

%

100.0

%

8.6

%

Operating expenses

 

 

 

 

 

 

 

Salaries, wages and employee benefits

 

32.6

%

37.1

%

(4.6

)%

Rents and purchased transportation

 

32.6

 

30.7

 

15.1

 

Fuel and fuel taxes

 

9.7

 

9.3

 

14.4

 

Depreciation and amortization

 

6.3

 

6.6

 

4.3

 

Operating supplies and expenses

 

5.1

 

5.9

 

(6.8

)

Insurance and claims

 

2.7

 

2.3

 

29.0

 

Operating taxes and licenses

 

1.4

 

1.5

 

(1.7

)

General and administrative expenses, net of gains

 

1.5

 

1.2

 

28.5

 

Communication and utilities

 

1.0

 

1.1

 

(2.2

)

Total operating expenses

 

92.9

 

95.7

 

5.4

 

Operating income

 

7.1

 

4.3

 

82.3

 

Interest expense

 

(0.8

)

(1.2

)

(21.6

)

Equity in loss of associated companies

 

 

(0.1

)

(57.9

)

Earnings before income taxes

 

6.3

 

3.0

 

126.8

 

Income taxes

 

2.4

 

0.8

 

249.2

 

Net earnings

 

3.9

%

2.2

%

86.0

%

Consolidated Operating Expenses

Total operating expenses for the first nine months of 2003 were up 5.4% over the comparable period of 2002.  Salaries, wages and employee benefits expense declined 4.6% in 2003, and decreased to 32.6% of operating revenues in 2003, from 37.1% in 2002.  A portion of this decline in salaries and wages was a result of our driver per diem plan, which was implemented in February of 2003. Rents and purchased

17



transportation expense increased 15.1%, primarily due to the increase in JBI business, which resulted in larger payments to railroads and drayage companies.  In addition, payments to independent contractors increase as we grow this fleet.  The 14.4% increase in fuel and fuel taxes was due to significantly higher fuel cost per gallon in 2003, partly offset by lower miles run by company-operated tractors.  Our fuel cost per gallon during 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 more of our maintenance and revenue equipment repair work to our own shops.  The 29.0% rise in insurance and claims cost reflects escalating liability insurance premiums, which have been experienced throughout the industry and higher accident costs.  The significant increase in general and administrative expenses was primarily a result of higher bad debt expense and increased driver recruiting costs.  Net interest expense declined 21.6%, partly due to the approximate $68.0 million of capital we raised through a secondary public offering of common stock in mid 2002.

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$290.2 million during the first nine months of 2003,month period ended September 30, 2004, compared with $123$251.1 million for the same period of 2002.  Operating2003.

The significant increase in 2004 net cash provided by operating activities, which significantly increased cash in 2003, relative to 2002, included2003, resulted from substantially higher net earnings, deferred income taxes, tax benefits recognized from stock option transactions and prepaidsome timing differences in accrued payroll and other accrued expenses.  Cash was consumed by increasesAn increase in trade accounts receivable and a decreasedecline in trade accounts payable.  payable in 2004, relative to 2003, partly offset the increase in net cash provided.

Net cash used in 2004 investing activities was $110$182.6 million, compared with $109.7 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 $127.1

18



million was used in financing activities during the first nine months of 2003,2004, compared with $36$128.9 million provided from financing activities in 2002.  Net cash provided from financing activities in 2002 reflected approximately $68.02003.  Cash was used during the current period to reduce debt and to repurchase all of our tractors remaining on capital lease arrangements.  In addition, $4.8 million of proceeds from the salewas used to pay dividends.  We re-initiated payment of a secondary stock offering, which closed during the second quarter.quarterly dividend in May of 2004.

 

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

 

 

 

September 30, 2004

 

December 31, 2003

 

September 30, 2003

 

Working capital ratio

 

1.34

 

.99

 

1.04

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and
current installments of obligations
under capital leases (millions)

 

$

50

 

$

172

 

$

195

 

 

 

 

 

 

 

 

 

Total debt and obligations under
capital leases (millions)

 

$

50

 

$

172

 

$

205

 

 

 

 

 

 

 

 

 

Total debt to equity

 

.06

 

.24

 

.30

 

 

 

 

 

 

 

 

 

Total debt as a ratio to total capital

 

.06

 

.20

 

.23

 

 

Our current working capital ratio andreflects the fact that all of our debt is current maturities of long-term debt and current installments of obligations under capital leases amounts shown in the above table as of September 30, 2003 were impacted by a reclassification.  As2004.  We currently plan to pay off all of December 31, 2002, we had plannedour remaining debt obligations as they mature later 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$194.5 million during the first nine months of 20032004 compared with $123$110.7 million for the same period of 2002.2003.  We are currently anticipate spending in the range of $220committed to spend approximately $87 million to purchase revenue equipment and construct new facilities, net of $29 million expected proceeds from saleequipment sales or trade-in allowances, on revenue equipment for the full calendar year of 2003.allowances.

 

We retired approximately $87paid $95 million ofto retire senior notes payable, as scheduled, onin September 1, 2003, utilizing funds on hand.2004.  We are authorized to borrow up to $150 million under our current revolving line of credit and had no balances$40 million outstanding on this line at September 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

 

19



 

 

 

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 September 30, 2004

 

 

 

Amounts Due by Period

 

 

 

(dollars in millions)

 

 

 

 

 

One Year

 

One To

 

Four To

 

After

 

 

 

Total

 

Or Less

 

Three Years

 

Five Years

 

Five Years

 

Operating leases

 

$

181

 

$

72

 

$

82

 

$

23

 

$

4

 

Revolving credit facility

 

40

 

40

 

 

—-

 

 

Senior and subordinated notes payable

 

10

 

10

 

 

 

 

Subtotal

 

 

231

 

122

 

 

82

 

 

23

 

 

4

 

Commitments to acquire revenue equipment, net of $29 million of expected proceeds from sales or trade-in allowances

 

73

 

73

 

 

 

 

Facilities

 

14

 

14

 

 

 

 

Total

 

$

318

 

$

209

 

$

82

 

$

23

 

$

4

 

 

 

 

Financing Commitments Expiring By Period

 

 

 

As of September 30, 2004

 

 

 

(dollars in millions)

 

 

 

 

 

One Year

 

One To

 

Four To

 

After

 

 

 

Total

 

Or Less

 

Three Years

 

Five Years

 

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.

The truckload industry is currently experiencing a shortage of qualified drivers and independent contractors.  We have increased a number of our driver pay rates in order to attract and retain additional drivers.  If we are unable to attract and retain an adequate supply of drivers, we could

20



be required to pay significantly higher levels of compensation, limit our growth during certain time periods or allow trucks to sit idle.

Ongoing insurance and claims expenses could significantly reduce our earnings.

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

We operate in a highly 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.

As previously reported, we had a $13.6 million note receivable from Transportacion Maritima Mexicana (TMM) related to the sale of our share of a Mexican joint venture.  During the current quarter, we exchanged our TMM note for marketable securities, which we subsequently sold for cash in the open market.  These transactions had no net impact on our net earnings, it results in a higher effective incomeearnings.  At September 30, 2004, our remaining receivable balance from TMM is approximately $1.8 million.

The IRS has proposed to disallow the tax rate.  Partly as a result of this plan and anticipated higher earnings, we are currently estimating an effective income 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 been notified by the IRS Appeals Division that they intend to have the examining agent request more information from us and develop certain technical arguments we raised in Octoberdefending our position.  The examining agent has not yet contacted us and no specific timeframe has been given for the completion of 2002,this additional information request.  If a resolution of the matter cannot be reached in 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$34 million, includingwhich represents the tax benefits realized through December 31, 2002, plus estimated accrued interest in the eventthrough September 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 we had previously announced, we signedreported, the Burlington Northern Santa Fe (BNSF) railroad and J.B. Hunt are currently engaged in an arbitration process to clarify certain financial and operating terms in our Joint Service Agreement (JSA).  BNSF provides a significant amount of rail transportation services to our Intermodal business segment.  The JSA is an agreement during the fourth quarterbetween BNSF and us, which was signed in 1996, and defines a number of 2001financial and operating arrangements relative to sell our joint venture interest in MexicoIntermodal business.  According to the majority owner.  This sale closed duringJSA, any amounts due us or payable to BNSF, determined through the first quarterarbitration process, could be retroactive to July 7, 2004.  At this time, we are unable to reasonably predict the outcome of 2002.  In accordance withthis arbitration process and, as such, no gain or loss contingency can be determined or recorded.  Normal commercial business activity between the terms of the sale, we recordedparties, including load tendering, load tracing, billing and payments continues on 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) announced that it was experiencing liquidity issues and in May 2003 missed payment on its outstanding bonds.  Consequently, TMM requested to defer a scheduled principal and interest payment on our note receivable.  On October 14, 2003, we agreed to defer a principal payment 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 conditions 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.timely basis.

 

2021



 

ImpactAs previously discussed, the United States Court of Recently Issued Accounting Pronouncements

InAppeals for the District of Columbia issued a decision in July 2004, rejecting the new hours-of-service (HOS) rules, which were newly effective 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 adoptionnew HOS rules had been announced by the Federal Motor Carrier Safety Administration (FMSCA) in April 2004 and were effective in January 2004.  The Court’s rejection was based on concerns regarding driver’s health, as well as other issues such as driving time, rest periods and monitoring compliance.  On September 30, 2004, the current HOS rules were extended for one year or the time at which the FMCSA develops a set of Interpretation No. 46 is not expected to have a material effect on our financial statements.new rules.

 

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 September 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 September 30, 2003.2004.  At September 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 nine months ended September 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 September 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 that 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.None applicable.

 

 

Item 6.

Exhibits and Reports on Form 8-K

a)

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, 2003,18, 2004 we filed a current report on Form 8-K announcing our financial results for the third quarter ended September 30, 2003.2004.

 

2223



 

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.

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

 

 

Administration,

 

Chief Financial Officer

 

 

 

 

BY:

/s/ Donald G. Cope

 

 

 

Donald G. Cope

 

 

Senior Vice President, Controller,

Chief Accounting Officer

 

2324



 

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

 

2425