J.B. HUNT TRANSPORT SERVICES, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OFOPERATIONS

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, 2022, as you read the following discussion. We may make statements in this report that reflect our current expectation regarding future results of operations, performance, and achievements. These are “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995 and are based on our belief or interpretation of information currently available. When we use words like “may,” “plan,” “contemplate,” “anticipate,” “believe,” “intend,” “continue,” “expect,” “project,” “goals,” “strategy,” “future,” “predict,” “seek,” “estimate,” “likely,” “could,” “should,” “would,” and similar expressions, you should consider them as identifying forward-looking statements, although we may use other phrasing. Forward-looking statements are inherently uncertain, subject to risks, and should be viewed with caution. These statements are based on our belief or interpretation of information currently available. Stockholders and prospective investors are cautioned that actual results and future events may differ materially from these forward-looking statements as a result of many factors. Some of the factors and events that are not within our control and that could have a material impact on future operating results include the following: general economic and business conditions; potential business or operational disruptions resulting from the effects of a national or international health pandemic; competition and competitive rate fluctuations; excess capacity in the intermodal or trucking industries; a loss of one or more major customers; cost and availability of diesel fuel; interference with or termination of our relationships with certain railroads; rail service delays; disruptions to U.S. port-of-call activity; ability to attract and retain qualified drivers, delivery personnel, independent contractors, and third-party carriers; retention of key employees; insurance costs and availability; litigation and claims expense; determination that independent contractors are employees; new or different environmental or other laws and regulations; volatile financial credit markets or interest rates; terrorist attacks or actions; acts of war; adverse weather conditions; disruption or failure of information systems; inability to keep pace with technological advances affecting our information technology platforms; operational disruption or adverse effects of business acquisitions; increased costs for and availability of new revenue equipment; increased tariffs assessed on or disruptions in the procurement of imported revenue equipment; decreases in the value of used equipment; and the ability of revenue equipment manufacturers to perform in accordance with agreements for guaranteed equipment trade-in values. Additionally, our business is somewhat seasonal with slightly higher freight volumes typically experienced during August through early November in our full-load transportation business. You should also refer to Part I, Item 1A of our Annual Report (Form 10-K) for the year ended December 31, 2022, for additional information on risk factors and other events that are not within our control. Our future financial and operating results may fluctuate as a result of these and other risk factors as described from time to time in our filings with the SEC. We assume no obligation to update any forward-looking statement to the extent we become aware that it will not be achieved for any reason.

GENERAL

We are one of the largest surface transportation, delivery, and logistics companies in North America. We operate five distinct, but complementary, business segments and provide a wide range of reliable transportation, brokerage, and delivery services to a diverse group of customers and consumers throughout the continental United States, Canada, and Mexico. Our service offerings include transportation of full-truckload containerized freight, which we directly transport utilizing our company-controlled revenue equipment and company drivers, independent contractors, or third-party carriers. We have arrangements with most of the major North American rail carriers to transport freight in containers or trailers, while we perform the majority of the pickup and delivery services. We also provide customized freight movement, revenue equipment, labor, systems, and delivery services that are tailored to meet individual customers’ requirements and typically involve long-term contracts. These arrangements are generally referred to as dedicated services and may include multiple pickups and drops, freight handling, specialized equipment, and freight network design. In addition, we provide or arrange for local and home delivery services, generally referred to as last-mile delivery services, to customers through a network of cross-dock and other delivery system locations throughout the continental United States. Utilizing thousands of reliable third-party carriers, we also provide comprehensive freight transportation brokerage and logistics services. In addition to dry-van, full-load operations, we also arrange for these unrelated outside carriers to provide flatbed, refrigerated, less-than-truckload (LTL), and other specialized equipment, drivers, and services. Also, we utilize a combination of company-owned and contracted power units to provide traditional over-the-road full truckload delivery services. Our customers, who include many Fortune 500 companies, have extremely diverse businesses. Many of them are served by J.B. Hunt 360°®, an online platform that offers shippers and carriers greater access, visibility and transparency of the supply chain. We account for our business on a calendar year basis, with our full year ending on December 31 and our quarterly reporting periods ending on March 31, June 30, and September 30. The operation of each of our five business segments is described in Note 11, Business Segments, in our Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and in Note 13, Segment Information, of our Annual Report (Form 10-K) for the year ended December 31, 2022.

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that impact the amounts reported in our Condensed Consolidated Financial Statements and accompanying notes. Therefore, the reported amounts of assets, liabilities, revenues, expenses, and associated disclosures of contingent liabilities are affected by these estimates. We evaluate these estimates on an ongoing basis, utilizing historical experience, consultation with experts, and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates. Any effects on our business, financial position, or results of operations resulting from revisions to these estimates are recognized in the accounting period in which the facts that give rise to the revision become known.

Information regarding our Critical Accounting Policies and Estimates can be found in our Annual Report (Form 10-K). The critical accounting policies that we believe require us to make more significant judgments and estimates when we prepare our financial statements include those relating to self-insurance accruals, revenue equipment, revenue recognition and income taxes. We have discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors. In addition, Note 2, Summary of Significant Accounting Policies, to the financial statements in our Annual Report (Form 10-K) for the year ended December 31, 2022, contains a summary of our critical accounting policies. There have been no material changes to the methodology we apply for critical accounting estimates as previously disclosed in our Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Comparison of Three Months Ended September 30, 2023 to Three Months Ended September 30, 2022

Total consolidated operating revenues decreased to $3.16 billion for the third quarter 2023, an 18% decrease from $3.84 billion in the third quarter 2022. This decrease was primarily the result of decreased revenue per load in JBI and JBT, lower volumes in ICS, a decline in stop count in FMS, and a reduction in DCS average revenue producing trucks when compared to the third quarter 2022. These items were partially offset by increased volumes in JBI and JBT in the current quarter. Total consolidated operating revenue, excluding fuel surcharge revenue, decreased 15%.

JBI segment revenue decreased 15% to $1.56 billion during the third quarter 2023, compared with $1.84 billion in 2022. Load volumes during the third quarter 2023 increased 1% over the same period 2022. Transcontinental loads increased 4%, while eastern network load volume was down 3% when compared to the third quarter 2022. Revenue per load, which is determined by the combination of customer rates, fuel surcharges and freight mix, decreased 16% during the third quarter 2023. Revenue per load, excluding fuel surcharge revenue, decreased 14% compared to the third quarter 2022. JBI segment operating income decreased 41%, to $128.0 million in the third quarter 2023, from $217.0 million in 2022. The decrease is primarily due to the decrease in revenue and higher driver and non-driver wages and increased equipment-related and maintenance costs as a percentage of gross revenue. The current quarter ended with approximately 117,400 units of trailing capacity and 6,400 power units assigned to the dray fleet.

DCS segment revenue decreased 4% to $892 million in the third quarter 2023 from $931 million in 2022. Productivity, defined as revenue per truck per week, decreased 2% when compared to the third quarter 2022. Productivity excluding fuel surcharge revenue increased 2%, primarily due to contractual index-based rate increases. On a net basis, revenue-producing trucks in the fleet at the end of the third quarter 2023 decreased 370 compared to the prior year period. DCS segment operating income decreased 4% to $102.4 million in the third quarter 2023, from $107.2 million in 2022. The decrease is primarily due to increased equipment-related and maintenance costs, higher insurance and claims expense and an increase in loss on sale of equipment, partially offset by the maturing of new long-term customer contracts when compared to the third quarter 2022.

ICS segment revenue decreased 48% to $298 million in the third quarter 2023, from $575 million in 2022. Overall volumes decreased 38% compared to the third quarter 2022, while revenue per load decreased 17%, primarily due to lower contractual and spot rates as well as changes in customer freight mix. Contractual business represented approximately 68% of total load volume and 67% of total revenue in the third quarter 2023, compared to 49% and 52%, respectively, in 2022. Approximately $169 million of third quarter 2023 ICS revenue was executed through the Marketplace for J.B. Hunt 360 compared to $391 million in the third quarter 2022. ICS segment had an operating loss of $9.4 million in the third quarter 2023, compared to operating income of $13.4 million in 2022. The decrease is primarily due to lower revenue and a 53% decrease in gross profit, partially offset by lower personnel salary and wages expense and decreased technology cost. Gross profit margin decreased to 12.8% in the third quarter 2023, compared to 14.2% in 2022. ICS’s carrier base decreased 17% compared to third quarter 2022, primarily due to changes in carrier qualification requirements.

FMS segment revenue decreased 15% to $226 million in the third quarter 2023 from $265 million in 2022, primarily due to decreased customer demand and the effects of internal efforts to improve revenue quality across certain accounts, partially offset by the addition of multiple new customer contracts implemented over the past year and improved revenue quality at underperforming accounts. FMS segment operating income increased to $13.0 million in the third quarter of 2023 compared to $9.8 million in 2022. This increase was primarily due to improvements in revenue quality and overall cost management, partially offset by higher equipment-related and maintenance expenses, increased technology costs, and inflationary increases in facility rental expenses compared to the third quarter 2022.

JBT segment revenue totaled $196 million for the third quarter 2023, a decrease of 17% from $237 million in third quarter 2022. Revenue excluding fuel surcharge decreased 18% primarily due to a 22% decrease in revenue per load excluding fuel surcharge revenue, partially offset by a 6% increase in load volume compared to third quarter 2022. Load volume growth was primarily related to the expansion of J.B. Hunt 360box®, which leverages the J.B. Hunt 360 platform to provide customers access to drop-trailer capacity across our transportation network. JBT average effective trailer count increased to 12,869 in the third quarter 2023, compared to 10,938 in 2022. At the end of the third quarter 2023, the JBT power fleet consisted of 1,989 tractors, predominantly independent contractors, compared to 2,140 tractors at September 30, 2022. Trailer turns in the third quarter of 2023 decreased 9% compared to third quarter 2022 due to freight mix and the decrease in freight demand. JBT segment operating income decreased to $7.7 million in 2023, compared with $14.9 million during third quarter 2022. The decrease is primarily due to the decrease in revenue and higher network, technology, insurance, and equipment-related costs as a percentage of gross revenue.

Consolidated Operating Expenses

The following table sets forth items in our Condensed Consolidated Statements of Earnings as a percentage of operating revenues and the percentage increase or decrease of those items as compared with the prior period.

Total operating expenses decreased 15.9%, while operating revenues decreased 17.6% during the third quarter 2023, from the comparable period 2022. Operating income decreased to $241.7 million during the third quarter 2023 from $362.2 million in 2022.

Rents and purchased transportation costs decreased 23.7% in the third quarter 2023. This decrease was primarily the result of a decrease in rail and truck carrier purchased transportation rates within JBI, ICS and JBT segments and decreased ICS load volume, which decreased services provided by third-party truck carriers during the third quarter 2023 compared to 2022.

Salaries, wages and employee benefits costs decreased 9.5% during the third quarter 2023, compared with 2022. This decrease was primarily driven by a decrease in employee headcounts and lower incentive compensation.

Fuel costs decreased 19.2% in the third quarter 2023, compared with 2022, due primarily to a decrease in the price of fuel and decreased road miles. Depreciation and amortization expense increased 12.7% in third quarter 2023, primarily due to equipment purchases related to new DCS long-term customer contracts, the addition of trailing equipment within our JBI and JBT segments, and increased truck and tractor trades.

Operating supplies and expenses decreased 5.4%, driven primarily by lower equipment maintenance costs and lower travel and entertainment expenses. Insurance and claims expenses increased 4.1% in 2023 compared with 2022, primarily due to increased cost per claim and higher insurance policy premium expense. General and administrative expenses increased 10.5% for the current quarter from the comparable period in 2022, primarily due to a decrease in net gains from sale or disposal of assets and an increase in building and yard rentals, partially offset by lower advertising costs and professional service expenses. Net loss from sale or disposal of assets was $7.7 million in 2023, compared to a net gain from sale or disposal of assets of $0.3 million in 2022.

Net interest expense decreased 7.2% in the third quarter 2023 primarily due to the interest component of a discrete income tax benefit recognized in the current quarter, partially offset by an increase in our average debt balance and effective interest rates on our debt compared to third quarter 2022. Income tax expense decreased 47.4% in the third quarter 2023, compared with 2022, primarily due to lower taxable earnings and the recording of a discrete benefit in the current quarter. Our effective income tax rate was 18.2% for the third quarter of 2023, compared to 22.7% in 2022. Our annual tax rate for 2023 is expected to be between 22.0% and 23.0%. In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate, adjusted for discrete items.  This rate is based on our expected annual income, statutory tax rates, best estimate of nontaxable and nondeductible items of income and expense, and the ultimate outcome of tax audits.

Comparison of Nine Months Ended September 30, 2023 to Nine Months Ended September 30, 2022

Total consolidated operating revenues decreased to $9.53 billion for the first nine months of 2023, a 15% decrease from $11.16 billion for the comparable period 2022. Fuel surcharge revenue decreased to $1.39 billion during the first nine months of 2023, compared with $1.80 billion in 2022. Total consolidated operating revenue, excluding fuel surcharge revenue, decreased 13% for the first nine months of 2023 compared to the prior year period.

JBI segment revenue decreased 13% to $4.58 billion during the first nine months of 2023, compared with $5.27 billion in 2022. Load volume during the first nine months of 2023 decreased 4% and revenue per load decreased 10%, which is determined by the combination of changes in freight mix, customer rate changes, and fuel surcharge revenue, compared to a year ago. Revenue per load, excluding fuel surcharge revenue, decreased 7% compared to the first nine months of 2022. JBI segment operating income decreased 29% to $439.5 million in the first nine months of 2023, from $620.5 million in 2022. The decrease is primarily due to decreased revenue and lower net gains from the sale of equipment, together with higher driver and non-driver wages and increased network and equipment-related costs as a percentage of gross revenue during the first nine months of 2023, partially offset by lower rail and third-party dray purchased transportation expense.

DCS segment revenue increased 2%, to $2.66 billion during the first nine months of 2023, from $2.61 billion in 2022. Productivity, defined as revenue per truck per week decreased 1% compared to the first nine months of 2023. Productivity excluding fuel surcharge revenue for the first nine months of 2023 increased 3% from a year ago. The increase in productivity was primarily due to contractual index-based rate increases and improved utilization of equipment during the current period. Operating income of our DCS segment increased to $318.6 million in the first nine months of 2023, from $281.0 million in 2022. The increase is primarily due to increased revenue and the maturing of new long-term customer contracts, partially offset by higher driver and non-driver wages and benefits, increased equipment-related and maintenance costs, higher insurance and claims expense and an increase in loss on sale of equipment, when compared to the first nine months of 2022.

ICS revenue decreased 44% to $1.03 billion during the first nine months of 2023, from $1.84 billion in 2022. Overall volumes decreased 30%, while revenue per load decreased 21% primarily due to lower contractual and spot rates as well as changes in customer freight mix compared to 2022. Approximately $644 million of ICS revenue for the first nine months of 2023 was executed through the Marketplace for J.B. Hunt 360 compared to $1.21 billion in 2022. Gross profit margin decreased to 13.1% in the current period compared to 14.3% in 2022. The ICS segment had an operating loss of $19.2 million in the first nine months of 2023 compared to operating income of $60.8 million in 2022, primarily due to decreased revenue and lower gross profit margins, partially offset by lower personnel costs, decreased technology cost, and lower insurance and claims expenses during the first nine months of 2023.

FMS revenue decreased 13% to $675 million during the first nine months of 2023, from $775 million in 2022, primarily due to decreased customer demand and the effects of internal efforts to improve revenue quality across certain accounts, partially offset by the full period operations of Zenith Freight Lines, LLC acquired in 2022 and the addition of multiple new customer contracts implemented over the past year. FMS segment had operating income of $34.4 million in the first nine months of 2023 compared to $23.6 million in 2022. This increase was primarily due to improvements in revenue quality and overall cost management, partially offset by higher equipment-related and maintenance expenses, increased technology costs, and inflationary increases in facility rental expenses compared to the first nine months of 2023.

JBT segment revenue decreased 14% to $594 million for the first nine months of 2023, from $694 million in 2022. Revenue excluding fuel surcharge revenue decreased 16%, primarily due to a 21% decrease in revenue per load excluding fuel surcharge revenue, partially offset by a 7% increase in load volume compared to the first nine months of 2022. Operating income of our JBT segment decreased to $16.5 million in the first nine months of 2023, from $63.9 million in 2022. The decrease in operating income was driven primarily by the decrease in revenue and higher network, technology, and equipment-related costs as a percentage of gross revenue.

Consolidated Operating Expenses

The following table sets forth items in our Condensed Consolidated Statements of Earnings as a percentage of operating revenues and the percentage increase or decrease of those items as compared with the prior period.

Total operating expenses decreased 13.6%, while operating revenues decreased 14.7%, during the first nine months of 2023, from the comparable period of 2022. Operating income decreased to $789.9 million during the first nine months of 2023, from $1.05 billion in 2022.

Rents and purchased transportation costs decreased 23.6% in 2023. This decrease was primarily the result of a decrease in rail and truck carrier purchased transportation rates within JBI, ICS and JBT segments and decreased JBI and ICS load volume, which decreased services provided by third-party rail and truck carriers during the current period.

Salaries, wages and employee benefits costs decreased 1.7% in 2023 from 2022. This decrease was primarily related to a decrease in employee headcounts and lower incentive compensation, partially offset by increased base driver pay and office personnel compensation in 2023. In addition, an $11.6 million workers’ compensation insurance return of premium benefit was present in the prior year period.

Fuel costs decreased 19.2% in 2023, compared with 2022, due primarily to a decrease in the price of fuel. Depreciation and amortization expense increased 14.9% in 2023 primarily due to equipment purchases related to new DCS long-term customer contracts, the addition of trailing equipment within our JBI and JBT segments, and increased truck and tractor trades.

Operating supplies and expenses increased 4.5% primarily due to higher equipment maintenance costs, increased tire expense, increased towing costs, and higher tolls expense. Insurance and claims expense increased 1.7% in 2023 compared with 2022, primarily due to increased cost per claim and higher insurance policy premium expense, partially offset by lower claim volume in the current period and the inclusion of a $30 million expense in 2022 for additional reserves of claims subject to insurance coverage layer specific aggregated limits. General and administrative expenses increased 19.5% from the comparable period in 2022, primarily due to a decrease in net gains from sale or disposal of assets and an increase in building and yard rentals, partially offset by lower advertising costs and professional service expenses. Net loss from sale or disposal of assets was $17.2 million in 2023, compared to a net gain from sale or disposal of assets of $21.0 million in 2022.

Net interest expense increased 7.7% in 2023, due primarily to an increase in our average debt balance and higher effective interest rates on our debt. Income tax expense decreased 28.6% during the first nine months of 2023, compared with 2022, primarily due to decreased taxable earnings in the first nine months of 2023. Our effective income tax rate was 23.2% for the first nine months of 2023, compared to 24.0% in 2022. Our annual tax rate for 2023 is expected to be between 22.0% and 23.0%. In determining our quarterly provision for income taxes, we use an estimated annual effective tax rate, adjusted for discrete items. This rate is based on our expected annual income, statutory tax rates, best estimate of nontaxable and nondeductible items of income and expense, and the ultimate outcome of tax audits.

Liquidity and Capital Resources

Cash Flow

Net cash provided by operating activities totaled $1.53 billion during the first nine months of 2023, compared with $1.36 billion for the same period 2022. Operating cash flows increased primarily due to the timing of general working capital activities, partially offset by decreased earnings. Net cash used in investing activities totaled $1.40 billion in 2023, compared with $1.14 billion in 2022. The increase resulted from an increase in equipment purchases, net of proceeds from the sale of equipment, partially offset by a reduction in business acquisition expenditures in the current period. Net cash used in financing activities was $101.4 million in 2023, compared with $490.5 million in 2022. This decrease resulted primarily from a decrease in treasury stock purchased, partially offset by the net proceeds from our senior credit facility in 2023, which was the result of electing to draw funds available to us under the term portion of our credit facility.

Liquidity

Our need for capital has typically resulted from the acquisition of containers and chassis, trucks, tractors, and trailers required to support our growth and the replacement of older equipment as well as periodic business acquisitions and real estate transactions. We are frequently able to accelerate or postpone a portion of equipment replacements or other capital expenditures depending on market and overall economic conditions. In recent years, we have obtained capital through cash generated from operations, revolving lines of credit and long-term debt issuances. We have also periodically utilized operating leases to acquire revenue equipment. For our senior notes maturing in 2024, it is our intent to pay the entire outstanding balances in full, on or before the maturity dates, using our existing cash balance, revolving line of credit or other sources of long-term financing.

We believe our liquid assets, cash generated from operations, and revolving line of credit will provide sufficient funds for our operating and capital requirements for the foreseeable future. At September 30, 2023, we were authorized to borrow up to $1.5 billion through a revolving line of credit and committed term loans, which is supported by a credit agreement with a group of banks. The revolving line of credit authorizes us to borrow up to $1.0 billion under a five-year term expiring September 2027, and allows us to request an increase in the revolving line of credit total commitment by up to $300 million and to request two one-year extensions of the maturity date. The committed term loans authorized us to borrow up to an additional $500 million during the nine-month period beginning September 27, 2022, due September 2025, which we exercised in June 2023. The applicable interest rates under this agreement are based on either the Secured Overnight Financing Rate (SOFR), or a Base Rate, depending upon the specific type of borrowing, plus an applicable margin and other fees. At September 30, 2023, we had a cash balance of $75.2 million. Under our senior credit facility, we had no outstanding balance on our revolving line of credit and a $500.0 million outstanding balance of term loans at an average interest rate of 6.43%.

We continue to evaluate the possible effects of current economic conditions and reasonable and supportable economic forecasts on operational cash flows, including the risks of declines in the overall freight market and our customers' liquidity and ability to pay. We regularly monitor working capital and maintain frequent communication with our customers, suppliers and service providers. A large portion of our cost structure is variable. Purchased transportation expense represents more than half of our total costs but is heavily tied to load volumes. Our second largest cost item is salaries and wages, the largest portion of which is driver pay, which includes a large variable component.

Our financing arrangements require us to maintain certain covenants and financial ratios. At September 30, 2023, we were compliant with all covenants and financial ratios.

Our net capital expenditures were approximately $1.32 billion during the first nine months of 2023, compared with $1.02 billion for the same period 2022. Our net capital expenditures include net additions to revenue equipment and non-revenue producing assets that are necessary to contribute to and support the future growth of our various business segments. Capital expenditures in the third quarter 2023 were primarily for tractors, intermodal containers and chassis, and other trailing equipment. We are currently committed to spend approximately $1.2 billion during the years 2023 and 2024, as well as an additional $380 million thereafter. We expect to spend in the range of $1.5 billion to $1.7 billion for net capital expenditures during the calendar year 2023. These expenditures will relate primarily to the acquisition of tractors, containers, chassis, and other trailing equipment. At September 30, 2023, our aggregate future minimum lease payments under operating lease obligations which relate primarily to the rental of maintenance and support facilities, cross-dock and delivery system facilities, office space, parking yards, and equipment totaled $388.2 million.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements, other than our net purchase commitments of $1.6 billion, as of September 30, 2023.

Risk Factors

You should refer to Part I, Item 1A of our Annual Report (Form 10-K) for the year ended December 31, 2022, under the caption “Risk Factors” for specific details on the following factors and events that are not within our control and could affect our financial results.

Risks Related to Our Industry