FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
--- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
OR
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 71-0335111
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NO.)
ORGANIZATION)
615 J.B. HUNT CORPORATE DRIVE, LOWELL, ARKANSAS 72745
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, AND ZIP CODE)
(501) 820-0000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO THE
FILING REQUIREMENTS FOR AT LEAST THE PAST 90 DAYS.
YES X NO
----- -----
THE NUMBER OF SHARES OF THE COMPANY'S $.01 PAR VALUE COMMON STOCK
OUTSTANDING ON JUNE 30, 1999 WAS 35,625,849
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim condensed consolidated financial statements contained
herein reflect all adjustments which, in the opinion of management, are
necessary for a fair statement of financial condition, results of operations and
cash flows for the periods presented. They have been prepared in accordance with
Rule 10-01 of Regulation S-X and do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Operating results for the three and six month periods
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the entire year ending December 31, 1999.
The interim condensed consolidated financial statements have been
reviewed by KPMG LLP, independent public accountants.
These interim condensed consolidated financial statements should be
read in conjunction with the Company's latest annual report and Form 10-K for
the year ended December 31, 1998.
INDEX
-----
Condensed Consolidated Statements of Earnings for the
Three and Six Months Ended June 30, 1999 and 1998..........................Page 3
Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31,1998.........................................Page 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998....................................Page 5
Notes to Condensed Consolidated Financial Statements
as of June 30, 1999........................................................Page 6
Review Report of KPMG LLP.........................................................Page 9
ITEM 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition..................................................Page 10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...............Page 16
2
J.B. HUNT TRANSPORT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
- -----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
- -----------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
Operating revenues $497,554 $460,985 $967,798 $874,451
Operating expenses
Salaries, wages and employee benefits 176,175 158,851 348,863 304,839
Purchased transportation 161,283 155,085 305,632 292,392
Fuel and fuel taxes 39,211 33,942 75,920 67,358
Depreciation 38,524 33,048 76,434 65,478
Operating supplies and expenses 30,693 23,994 58,243 45,341
Insurance and claims 8,214 6,632 17,995 14,604
Operating taxes and licenses 7,064 6,634 13,566 12,010
General and administrative expenses 7,042 6,570 12,069 10,270
Communication and utilities 5,109 4,616 10,662 8,888
- ----------------------------------------------------------------------------------------------------------
Total operating expenses 473,315 429,372 919,384 821,180
- ----------------------------------------------------------------------------------------------------------
Operating income 24,239 31,613 48,414 53,271
Interest expense 7,255 7,200 14,760 13,806
- ----------------------------------------------------------------------------------------------------------
Earnings before income taxes 16,984 24,413 33,654 39,465
Income taxes 6,199 8,789 12,284 14,358
- ----------------------------------------------------------------------------------------------------------
Net earnings $ 10,785 $ 15,624 $ 21,370 $ 25,107
==========================================================================================================
Average basic shares outstanding 35,625 35,511 35,620 35,562
==========================================================================================================
Basic earnings per share $ 0.30 $ 0.44 $ 0.60 $ 0.71
==========================================================================================================
Average diluted shares outstanding 35,847 36,970 36,226 36,818
==========================================================================================================
Diluted earnings per share $ 0.30 $ 0.42 $ 0.59 $ 0.68
==========================================================================================================
See accompanying notes to condensed consolidated financial statements.
3
J.B. HUNT TRANSPORT SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
- ----------------------------------------------------------------------------------------
JUNE 30, 1999 DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,248 $ 9,227
Accounts receivable 198,230 184,367
Prepaid expenses 22,614 30,402
Deferred income taxes 1,275 1,275
- ----------------------------------------------------------------------------------------
Total current assets 225,367 225,271
- ----------------------------------------------------------------------------------------
Property and equipment 1,473,074 1,418,033
Less accumulated depreciation 559,992 492,633
- ----------------------------------------------------------------------------------------
Net property and equipment 913,082 925,400
- ----------------------------------------------------------------------------------------
Other assets 30,448 20,808
- ----------------------------------------------------------------------------------------
$1,168,897 $1,171,479
========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 11,300 $ 16,350
Trade accounts payable 122,109 147,967
Claims accruals 1,280 6,131
Accrued payroll 31,315 23,684
Other accrued expenses 12,018 11,909
- ----------------------------------------------------------------------------------------
Total current liabilities 178,022 206,041
- ----------------------------------------------------------------------------------------
Long-term debt 417,475 417,045
Claims accruals 4,192 7,166
Deferred income taxes 175,326 165,570
Stockholders' equity 393,882 375,657
- ----------------------------------------------------------------------------------------
$1,168,897 $1,171,479
========================================================================================
See accompanying notes to condensed consolidated financial statements.
4
J.B. HUNT TRANSPORT SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
- --------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30
- --------------------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 21,370 $ 25,107
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 76,434 65,478
Provision for noncurrent deferred income taxes 9,756 6,012
Tax benefit of stock options exercised 69 701
Termination of restricted stock (18) (23)
Amortization of discount, net 430 (50)
Changes in assets and liabilities:
Trade accounts receivable (13,863) (11,593)
Prepaid expenses 7,788 7,106
Trade accounts payable (25,858) (2,778)
Claims accruals (7,825) (20,682)
Accrued payroll and other accrued expenses 7,740 18,389
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 76,023 87,667
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (68,840) (184,504)
Proceeds from sale of equipment 4,724 31,062
Decrease (increase) in other assets (9,695) 3,221
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (73,811) (150,221)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under commercial paper program (50) 79,850
Net payments of long-term debt (5,000) (5,000)
Repurchase of treasury stock 0 (5,814)
Proceeds from sale of treasury stock 422 2,417
Dividends paid (3,563) (3,540)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided (used in) by financing activities (8,191) 67,913
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,979) 5,359
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 9,227 3,701
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,248 $ 9,060
====================================================================================================================
Supplemental disclosure of cash flow information: Cash paid (refunded) during
the period for:
Interest $ 15,031 $ 13,859
Income taxes 300 (1,602)
====================================================================================================================
See accompanying notes to condensed consolidated financial statements.
5
J.B. HUNT TRANSPORT SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) LONG-TERM DEBT
Long-term debt consists of (in thousands):
6/31/99 12/31/98
--------- ---------
Commercial paper $ 131,300 $ 131,350
Senior notes payable, interest at 7.84%
payable semiannually -- 5,000
Senior notes payable, interest at 6.25%
payable semiannually, due 11/17/2000 25,000 25,000
Senior notes payable, interest at 6.00%
payable semiannually, due 12/12/2000 25,000 25,000
Senior notes payable, interest at 6.25%
payable semiannually, due 9/1/2003 98,260 98,260
Senior notes payable, interest at 7.00%
payable semiannually, due 9/15/2004 100,000 100,000
Senior subordinated notes, interest at 7.80%
payable semiannually 50,000 50,000
--------- ---------
429,560 434,610
Less current maturities (11,300) (16,350)
Unamortized discount (785) (1,215)
--------- ---------
$ 417,475 $ 417,045
========= =========
Under its commercial paper note program, the Company is authorized to
issue up to $240 million in notes. These notes are supported by two credit
agreements, which aggregate $240 million, with a group of banks, of which $120
million expires March 7, 2000 and $120 million expires March 20, 2002.
The 7.80% senior subordinated notes were issued on October 30, 1992 and
are payable in five equal annual installments beginning October 30, 2000.
6
2) CAPITAL STOCK
The Company maintains a Management Incentive Plan that provides various
vehicles to compensate key employees with Company common stock. A summary of the
restricted and non-statutory options to purchase Company common stock follows:
Weighted average Number of
Number of exercise price shares
shares per share exercisable
--------- --------- -----------
Outstanding at December 31, 1998 3,349,890 $16.98 323,390
===========
Granted 57,000 21.53
Exercised (19,500) 12.63
Terminated (31,200) 13.99
--------- ---------
Outstanding at June 30, 1999 3,356,190 $17.11 558,815
========= ========= ===========
On July 15, 1999, the Company's Board of Directors declared a regular
quarterly cash dividend of $.05 per share payable on August 20, 1999 to
stockholders of record on August 2, 1999.
3) EARNINGS PER SHARE
A reconciliation of the numerator and denominator of basic and diluted
earnings per share is shown below:
(in thousands, except per share data)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
------- ------- ------- -------
Numerator (net earnings) $10,785 $15,624 $21,370 $25,107
Denominator - Basic earnings per share
Weighted average shares outstanding 35,625 35,511 35,620 35,562
======= ======= ======= =======
Basic earnings per share $ .30 $ .44 $ .60 $ .71
======= ======= ======= =======
Denominator - Diluted earnings per share
Weighted average share outstanding 35,625 35,511 35,620 35,562
Effect of common stock options 222 1,459 606 1,256
------- ------- ------- -------
Weighted average shares assuming dilution 35,847 36,970 36,226 36,818
======= ======= ======= =======
Diluted earnings per share $ .30 $ .42 $ .59 $ .68
======= ======= ======= =======
Options which were outstanding to purchase shares of common stock
during the periods indicated above, 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 were:
Three Months Ended Six Months Ended
June 30 June 30
--------------------- --------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Number of shares under option 682,525 -- 387,675 134,500
Range of exercise price $18.00-$37.50 -- $20.38-$37.50 $28.13-$30.00
7
4) COMPREHENSIVE INCOME
Comprehensive income consists of net earnings and foreign currency
translation adjustments. During the three and six month periods ended June
30,1999, comprehensive income was equal to (in thousands):
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------------ -----------------
Net earnings $10,785 $21,370
Foreign currency
translation (loss) gain 79 (56)
------- -------
Comprehensive income $10,864 $21,314
======= =======
During 1998, comprehensive income and net earnings were the same.
5) SEGMENTS
A summary of segment information is presented below (in millions):
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
Revenues 1999 1998 1999 1998
-------- ---- ---- ---- ----
Van/Intermodal $353 $346 $ 689 $663
Logistics 88 79 169 145
Dedicated Contract Services 77 50 147 93
Other -- 4 -- 8
---- ---- ----- ----
Subtotal 518 479 1,005 909
Inter-segment eliminations (20) (18) (37) (34)
---- ---- ----- ----
Total $498 $461 $ 968 $875
==== ==== ===== ====
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
Operating Income 1999 1998 1999 1998
---------------- ---- ---- ---- ----
Van/Intermodal $ 17 $ 24 $ 32 $ 40
Logistics 1 3 4 4
Dedicated Contract Services 6 5 11 8
Other -- -- 1 1
---- ---- ---- ----
Total $ 24 $ 32 $ 48 $ 53
==== ==== ==== ====
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
Net Depreciation Expense 1999 1998 1999 1998
------------------------ ---- ---- ---- ----
Van/Intermodal $ 30 $ 29 $ 62 $ 57
Logistics 1 -- 1 --
Dedicated Contract Services 7 4 13 8
---- ---- ---- ----
Total $ 38 $ 33 $ 76 $ 65
==== ==== ==== ====
8
6) PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement requires the
recognition of all derivatives in the statement of financial position as either
assets or liabilities and their measurement at fair value. Statement No. 133, as
amended, is effective for fiscal years beginning after June 15, 2000. The
Company has not determined what impact, if any, Statement No. 133 will have on
its financial statements.
7) RECLASSIFICATIONS
Certain amounts for 1998 have been reclassified to conform to the 1999
classifications.
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
The Board of Directors
J.B. Hunt Transport Services, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of J.B.
Hunt Transport Services, Inc. and subsidiaries as of June 30, 1999, and the
related condensed consolidated statements of earnings for the three-month and
six-month periods ended June 30, 1999 and 1998, and the condensed consolidated
statements of cash flows for the six-month periods ended June 30, 1999 and 1998.
These condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. 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 in accordance with
generally accepted auditing standards, 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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of J.B. Hunt Transport Services, Inc.
and subsidiaries as of December 31, 1998, 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 February 5, 1999, 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, 1998, is fairly presented, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
/s/ KPMG LLP
-------------------
Little Rock, Arkansas
July 14, 1999
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the attached
interim condensed consolidated financial statements and notes thereto, and with
the Company's audited consolidated financial statements and notes thereto for
the calendar year ended December 31, 1998.
RESULTS OF OPERATIONS
COMPARISON OF SECOND QUARTER 1999 TO SECOND QUARTER 1998
SUMMARY
Operating revenues for the second quarter of 1999 increased approximately
8%, to $497.6 million, from $461.0 million in the comparable period of 1998.
Revenue in the Van segment grew 2%, with truck revenue up 5% and intermodal
revenue down 2%. As announced in May of 1999, intermodal loads and revenue
continue to be below expectations. Logistics segment (JBHL) revenues increased
12% during the second quarter of 1999, while Dedicated Contract Services segment
(DCS) revenue grew 53%. The increase in Van revenue was primarily due to a 2%
growth of the road tractor fleet. Overall truck revenue per mile in 1999 was up
.6%, while intermodal revenue per mile was down approximately 1.8%, when
compared with the second quarter of 1998. The increase in JBHL revenue was
primarily due to growth with existing customers. The significant growth of DCS
revenue was driven by a 42% increase in the tractor fleet, a portion of which
was transferred from Van, new contract arrangements and growth with existing
customers. Other revenue in 1998 was generated by a small subsidiary, Lake City
Express, which was sold in June of 1998.
Operating income in the Van segment declined during the second quarter of
1999 to $16.5 million, from $24.0 million in the second quarter of 1998. This
decline was due, in part, to higher costs for tractor and trailing equipment
maintenance, office salaries and wages, driver compensation, trailer rental and
fuel. The decrease in JBHL operating income was primarily due to higher
purchased transportation expense. The increase of DCS operating income was
primarily due to revenue growth.
Operating Segments
For Three Months Ended June 30
(dollars in millions)
Gross Revenue Operating Income
---------------------------------- --------------------
1999 1998 % Change 1999 1998
---- ---- -------- ---- ----
Van /Intermodal $352.3 $345.4 2% $ 16.5 $ 24.0
Logistics 88.3 78.8 12% .9 2.9
Dedicated Contract Services 77.0 50.3 53% 6.6 5.2
Other -- 4.1 -- .2 (0.5)
------ ------ ------- ------ ------
Subtotal 517.6 478.6 8% 24.2 31.6
Inter-segment eliminations (20.0) (17.6) -- -- --
------ ------ ------- ------ ------
Total $497.6 $461.0 8% $ 24.2 $ 31.6
====== ====== ======= ====== ======
10
The following table sets forth items in the 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 June 30
----------------------------------------------
Percentage of Percentage Change
Operating Revenues Between Quarters
-------------------- -----------------
1999 1998 1999 vs. 1998
-------------------- -----------------
Operating revenues 100.0% 100.0% 7.9%
Operating expenses
Salaries, wages and employee benefits 35.4% 34.5% 10.9%
Purchased transportation 32.4% 33.6% 4.0%
Fuel and fuel taxes 7.9% 7.4% 15.5%
Depreciation 7.7% 7.2% 16.6%
Operating supplies and expenses 6.2% 5.2% 27.9%
Insurance and claims 1.7% 1.4% 23.9%
Operating taxes and licenses 1.4% 1.4% 6.5%
General and administrative expenses 1.4% 1.4% 7.2%
Communication and utilities 1.0% 1.0% 10.7%
-------------------- -----------------
Total operating expenses 95.1% 93.1% 10.2%
-------------------- -----------------
Operating income 4.9% 6.9% (23.3%)
Interest expense 1.5% 1.6% 0.8%
-------------------- -----------------
Earnings before income taxes 3.4% 5.3% (30.4%)
Income taxes 1.2% 1.9% (29.5%)
-------------------- -----------------
Net earnings 2.2% 3.4% (31.0%)
==================== =================
Total operating expenses for the second quarter of 1999 increased
approximately 10%, while operating revenues increased nearly 8%, compared with
the same period of 1998. Total operating expenses expressed as a percentage of
operating revenues (operating ratio) were 95.1% for the second quarter of 1999,
compared with 93.1% in 1998. Salaries, wages and employee benefits increased
nearly 11%, primarily due to higher driver compensation, office salaries and
wage costs, and higher health insurance and other benefit expenses. Purchased
transportation expense increased 4% from 1998 and declined as a percentage of
revenue primarily due to a slight decline in intermodal volume and the 1998 sale
of Lake City Express, which compensated its drivers as independent contractors.
Fuel and fuel taxes increased 15.5% and rose slightly as a percentage of
revenue, reflecting approximately 3% higher fuel costs and 3% lower miles per
gallon.
Depreciation expense increased 16.6%, reflecting the growth of the Van
and DCS tractor and trailing equipment fleets. The increase in depreciation was
also due to differences in gain or loss on asset dispositions. A net loss of
$439,000 was recognized on asset dispositions during the second quarter of 1999,
which increased depreciation expense, compared with a gain of $1.4 million,
which reduced depreciation in 1998. Operating supplies and expenses increased
nearly 28% during 1999, primarily due to higher levels of spending for tractor
and trailer maintenance and tires. These higher maintenance costs were due to an
approximate 40% increase in the average age of the Van tractor fleet and a $2
million cost to repair a group of leased trailers that were returned to the
lessor in 1999.
11
While the frequency of vehicle collisions declined slightly during the
second quarter of 1999, the severity, or cost per collision, was up
significantly and resulted in a nearly 24% higher insurance and claims expense.
Operating taxes and licenses and general and administrative expense increased in
relative proportion to revenue. The increase in communication and utilities
expense was primarily a result of expanded data and telecommunication networks
and higher satellite communication costs. The effective income tax rate was
36.5% in 1999 and 36% in 1998.
As a result of the above, net earnings for the second quarter of 1999
were $10.8 million, or diluted earnings per share of $.30, compared with $15.6
million in 1998, or $.42 per diluted share.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 TO SIX MONTHS ENDED JUNE 30, 1998
SUMMARY
Operating revenues for the six month period ended June 30, 1999 increased
11%, to $967.8 million, from $874.5 million in 1998. For the current six month
period Van segment revenue was up 4%, JBHL revenue grew 16% and DCS revenue
increased 59%. The increase in Van revenue was primarily due to a 2% growth of
the road tractor fleet and a 2% growth of intermodal revenue. Overall truck
revenue per mile in 1999 was up .3%, while intermodal revenue per mile declined
1.5%, when compared with the first six months of 1998. The increase in JBHL
revenue was due to the addition of new accounts and growth with existing
customers. The significant increase in DCS revenue was driven by a 52% increase
in the tractor fleet, a portion of which was transferred from Van, new contract
arrangements and growth with existing customers. Other revenue in 1998 was
generated by a small subsidiary, Lake City Express, which was sold in June of
1998.
Operating income in the Van segment declined during the first six months
of 1999 to $31.8 million, from $40.5 million in 1998. This decline was due, in
part, to higher costs for office salaries and wages, tractor and trailing
equipment maintenance, driver compensation and fringe benefits. JBHL operating
income was essentially flat between 1999 and 1998, primarily due to higher
purchased transportation expense. The increase of DCS operating income was
primarily due to revenue growth.
Operating Segments
For Six Months Ended June 30
(dollars in millions)
Gross Revenue Operating Income
---------------------------- ----------------
1999 1998 % Change 1999 1998
---- ---- -------- ---- ----
Van /Intermodal $ 689.3 $662.1 4% $31.8 $40.5
Logistics 168.5 145.4 16% 3.7 3.8
Dedicated Contract Services 147.2 92.5 59% 11.3 8.2
Other -- 8.0 -- 1.6 0.8
------- ------ ---- ----- -----
Subtotal 1,005.0 908.0 11% 48.4 53.3
Inter-segment eliminations (37.2) (33.5) -- -- --
------- ------ ---- ----- -----
Total $ 967.8 $874.5 11% $48.4 $53.3
======= ====== ==== ===== =====
12
The following table sets forth items in the 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.
Six Months Ended June 30
----------------------------------------------
Percentage of Percentage Change
Operating Revenues Between Quarters
-------------------- -----------------
1999 1998 1999 vs. 1998
---- ---- ---- ----
Operating revenues 100.0% 100.0% 10.7%
Operating expenses
Salaries, wages and employee benefits 36.0% 34.9% 14.4%
Purchased transportation 31.6% 33.4% 4.5%
Fuel and fuel taxes 7.8% 7.7% 12.7%
Depreciation 7.9% 7.5% 16.7%
Operating supplies and expenses 6.0% 5.2% 28.5%
Insurance and claims 1.9% 1.7% 23.2%
Operating taxes and licenses 1.4% 1.4% 13.0%
General and administrative expenses 1.2% 1.2% 17.5%
Communication and utilities 1.1% 1.0% 20.0%
--------------------- -------------
Total operating expenses 95.0% 93.9% 12.0%
--------------------- -------------
Operating income 5.0% 6.1% (9.1%)
Interest expense 1.5% 1.6% 6.9%
--------------------- -------------
Earnings before income taxes 3.5% 4.5% (14.7%)
Income taxes 1.3% 1.6% (14.4%)
--------------------- -------------
Net earnings 2.2% 2.9% (14.9%)
===================== =============
Total operating expenses for the six months ended June 30, 1999 increased
12%, while operating revenues increased 10.7%, compared with the same period of
1998. Total operating expenses expressed as a percentage of operating revenues
(operating ratio) were 95.0% for the six months ended June 30, 1999, compared
with 93.9% in 1998. Salaries, wages and employee benefits increased 14.4%,
primarily due to higher driver compensation, office salaries and wage costs, and
higher health insurance and other benefit expenses. Purchased transportation
expense increased 4.5% over 1998 levels and declined as a percentage of revenue
primarily due to slower growth of intermodal volume and the 1998 sale of Lake
City Express, which compensated its drivers as independent contractors. Fuel and
fuel taxes increased 12.7% and rose slightly as a percentage of revenue,
primarily due to lower miles per gallon, partly offset by slightly lower fuel
cost per gallon in the current year.
Depreciation expense increased 16.7%, reflecting the growth of the Van
and DCS tractor and trailing equipment fleets. The increase in depreciation was
also due to differences in gain or loss on asset dispositions. A net loss of
$473,000 was recognized on asset dispositions during the first six months of
1999, which increased depreciation, compared with a gain of $2.1 million, which
reduced depreciation in 1998. Operating supplies and expenses increased 28.5%
during 1999, primarily due to higher spending levels for tractor and trailer
maintenance and tires. These higher maintenance costs were due to an approximate
27% increase in the average age of the Van tractor fleet and a $2 million cost
to repair a group of leased trailers that were returned to the lessor in 1999.
13
While the frequency of vehicle collisions declined slightly during the
first six months of 1999, the severity, or cost per collision, was up
significantly and resulted in a 23.2% increase in insurance and claims expense.
Operating taxes and licenses increased in relative proportion to revenue. The
17.5% increase in general and administrative expenses was primarily due to
higher levels of spending for computer hardware and software rental and
maintenance. The significant increase in communications and utilities expense
was primarily a result of expanded data and telecommunications networks and
higher satellite communications costs. The effective income tax rate was 36.5%
in 1999 and 36.4% in 1998.
As a result of the above, net earnings for the six months ended June 30,
1999 were $21.4 million, or diluted earnings per share of $.59, compared with
$25.1 million in 1998, or $.68 per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
This discussion of corporate liquidity and capital resources should be
read in conjunction with information presented in the Condensed Consolidated
Statements of Cash Flows and the Condensed Consolidated Balance Sheets.
Net cash provided by operating activities was $76.0 million for the six
months ended June 30, 1999, compared with $87.7 million in 1998. Net cash was
generated during 1999 primarily from net earnings, depreciation, deferred income
taxes and increases in accrued payroll and other accrued expenses. Net cash was
used primarily to pay claims, trade accounts payable and fund an increase in
accounts receivable. Net cash used in investing activities was $73.8 million in
1999, compared with $150.2 million in 1998. This decline in investment spending
was primarily due to fewer additions and trades of new tractors and trailers in
the current year. The Company also used $8.2 million of cash in financing
activities, primarily to pay dividends and repay long-term debt.
SELECTED BALANCE SHEET DATA
As of
-------------------------------------------------------------
June 30, 1999 December 31, 1998 June 30, 1998
------------- ----------------- -------------
Working capital ratio 1.27 1.09 .75
Current maturities of long-
term debt (millions) $ 11.3 $ 16.4 $ 97.4
Total debt (millions) $428.8 $433.4 $415.1
Total debt to equity 1.09 1.15 1.16
Total debt as a percentage
of total capital .52 .54 .54
The Company's debt levels declined to approximately $429 million at June
30, 1999 from $433 million at December 31, 1998. Total debt increased
approximately $14 million from June of 1998 to June of 1999. However, debt to
equity and debt as a percentage of total capital both declined in 1999. The
Company commenced receiving new tractors in April of 1999, in connection with an
order of 1,750 new units, which was announced in May of 1998. The Company
generates significant cash from operating activities and has borrowing capacity
to meet its committed and contemplated cash requirements.
14
YEAR 2000
The Company utilizes and is significantly dependent upon a wide variety
of complex information technologies (IT) to conduct daily business operations.
Company IT systems are used by shippers to request freight services and track
order status, and by the Company to process and manage orders, communicate with
drivers, bill customers, authorize the purchase of fuel and other maintenance
services, general accounting, payroll and a number of other functions. The
Company recognized the importance of the Year 2000 (Y2K) issue and developed an
action plan in 1996. The plan included systematic reviews of all internal
hardware, software and functions to either verify that the system is Y2K
compliant or modify/replace the software or system as required.
STATE OF READINESS
The Company has focused significant resources during 1998 and 1999 on Y2K
with the goal of no material business or system disruption related to dates on
or after January 1, 2000. The Company established July 1, 1999 as a completion
date for all modifications, installations and testing of mission critical
internal computer and IT applications. The Company has modified or otherwise
corrected all mission critical internal Y2K issues and problems that have been
identified. Although some limited reviews and testing will continue through 1999
and early 2000, the Company believes that all internal IT systems, which have a
material impact on daily operations, have been modified and tested to eliminate
or minimize the Y2K problem.
In addition to the issues and risks associated with internal IT systems,
the Company has relationships and is dependent upon a number of third parties
such as customers, suppliers and utility service providers. Daily business
operations include the electronic data interchange of information (EDI) with
customers and providers of transportation services such as railroads and motor
freight carriers. Other third party providers of critical services such as voice
and data communications, natural gas, water, electricity and diesel fuel are
also an integral part of daily business operations. If significant numbers or
certain critical customers or suppliers experience failures in their computer
systems or equipment due to Y2K non-compliance it could affect the Company's
normal business activities. While some of these risks are not controllable by
the Company, a number of actions and procedures have been implemented to assess
and/or reduce this risk. Formal communications have been initiated with certain
significant customers and suppliers. Depending upon the circumstances, formal
certifications of Y2K compliance have been requested and received. The Company
has no knowledge of any primary or critical customer or supplier with potential
Y2K issues that might have a material adverse effect on the Company's
operations.
COSTS
Since 1996, the Company has spent approximately $1.6 million on Y2K
compliance. Estimated future expense to complete any remaining tests or
compliance work is $.2 million for an estimated total cost of $1.8 million.
These costs are being charged to operations as incurred. These costs exclude
certain new system acquisitions, development and implementation costs that
relate to on-going business activity, normal system upgrades and enhancements.
15
RISKS AND CONTINGENCY PLANS
The Company has no knowledge of any internal or external Y2K issues that
could materially affect business operations. However, there can be no assurance
that all internal IT issues have been identified or that no customers, suppliers
or utility service providers will experience Y2K disruptions. Accordingly, the
Company has developed a Y2K Business Continuity Plan which was completed on June
30, 1999. The purpose of the Plan is to identify the business critical processes
and functions, and to outline actions which will be taken to minimize the impact
of any Y2K related disruptions that might occur.
The Plan provides for the establishment of a Y2K Command Center which
will be activated on December 15, 1999. The Plan identifies certain critical
internal IT related systems as well as key external services such as
telecommunications, fuel distribution and utility services to terminals. The
Company is unable to determine or quantify the potential impact of the most
likely worst case scenario due to the number of variables and uncertainties.
Even short-term disruption of telecommunications service, for example, could
have a material adverse impact on the Company's business.
FORWARD-LOOKING STATEMENTS
This report contains statements that may be considered as forward-looking
or predictions concerning future operations. Such statements are based on
management's belief or interpretation of information currently available. These
statements and assumptions involve certain risks and uncertainties and
management can give no assurance that such expectations will be realized. Among
all the factors and events that are not within the Company's control and could
have a material impact on future operating results are general economic
conditions, cost and availability of diesel fuel, adverse weather conditions and
competitive rate fluctuations. The ultimate net cost of the new driver
compensation package will be dependent on the mix of experienced drivers
attracted to the Company and on rates and severity of future accidents, cargo
damage and worker's compensation claims, as well as other factors. In addition,
the Year 2000 issue is extremely complex and compliance failures on the part of
customers and/or suppliers that are outside the control of the Company could
have a material negative impact on future operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company's earnings are affected by changes in short-term interest
rates as a result of its issuance of short-term commercial paper. However, due
to its selective utilization of interest rate swaps at certain times, the
effects of interest rate changes can be mitigated. 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 in 1999
than in 1998, there would be no material adverse impact on the
16
Company's results of operations. At June 30, 1999, the Company had no
outstanding interest rate swap agreements. The Company has no material future
earnings or cash flow exposures from changes in interest rates related to its
long-term obligations as all of the Company's long-term debt obligations have
fixed rates. At June 30, 1999, the fair value of the Company's fixed rate
long-term obligations approximated carrying value.
Although the Company conducts business in foreign countries,
international operations are not material to the Company's consolidated
financial position, results of operations or cash flows. Additionally, foreign
currency transaction gains and losses were not material to the Company's results
of operations for the three and six months ended June 30, 1999. Accordingly, the
Company is not currently subject to material foreign currency exchange rate
risks from the effects that exchange rate movements of foreign currencies would
have on the Company's future costs or on future cash flows it would receive from
its foreign investment. To date, the Company has not entered into any foreign
currency forward exchange contracts or other derivative financial instruments to
hedge the effects of adverse fluctuations in foreign currency exchange rates.
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 INFORMATION
None applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
17
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.
J.B. HUNT TRANSPORT SERVICES, INC.
DATE: August 6, 1999 BY: /s/ Kirk Thompson
-------------------- -------------------------------------------
Kirk Thompson
President and
Chief Executive Officer
DATE: August 6, 1999 BY: /s/ Jerry W. Walton
-------------------- -------------------------------------------
Jerry W. Walton
Executive Vice President, Finance and
Administration
and Chief Financial Officer
DATE: August 6, 1999 BY: /s/ Donald G. Cope
-------------------- -------------------------------------------
Donald G. Cope
Vice President, Controller
and Chief Accounting Officer
18