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FORM 10-Q

 

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 June 30, 2002

 

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

 

71-0335111

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

615 J.B. Hunt Corporate Drive, Lowell, Arkansas  72745

(Address of principal executive offices, and Zip Code)

 

 

 

(479) 820-0000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant  (1)  has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.

 

Yes  ý    No  o

 

The number of shares of the registrant’s $.01 par value common stock outstanding on June 30, 2002 was 39,199,017.

 

 



 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Form 10-Q

For The Quarter Ended June 30, 2002

Index

 

Part I.

Financial Information

 

 

Item. 1.

Consolidated Financial Statements

 

 

 

Condensed Consolidated Statements of Earnings for the Three And Six Months Ended June 30, 2002 and 2001

 

 

Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001

 

 

Notes to Condensed Consolidated Financial Statements as of June 30, 2002

 

 

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..

 

 

 

Part II.

Other Information

 

 

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
June 30

 

Six Months Ended
June 30

 

 

 

2002

 

2001

 

2002

 

2001

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

557,328

 

$

521,489

 

$

1,067,549

 

$

1,016,909

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Salaries, wages and employee benefits

 

202,833

 

197,008

 

398,528

 

393,693

 

Rents and purchased transportation

 

169,591

 

144,933

 

325,645

 

276,723

 

Fuel and fuel taxes

 

50,982

 

58,835

 

97,962

 

121,114

 

Depreciation and amortization

 

35,920

 

35,337

 

71,904

 

70,850

 

Operating supplies and expenses

 

33,299

 

35,904

 

65,146

 

70,166

 

Insurance and claims

 

13,704

 

12,249

 

24,663

 

24,467

 

Operating taxes and licenses

 

8,339

 

8,321

 

16,327

 

16,393

 

General and administrative expenses, net of gains

 

8,153

 

6,611

 

12,965

 

6,239

 

Communication and utilities

 

5,998

 

6,473

 

12,269

 

13,079

 

Total operating expenses

 

528,819

 

505,671

 

1,025,409

 

992,724

 

Operating income

 

28,509

 

15,818

 

42,140

 

24,185

 

Interest expense

 

(6,913

)

(5,917

)

(13,749

)

(12,182

)

Equity in earnings (loss) of associated companies

 

(830

)

(155

)

(1,280

)

12

 

Earnings before income taxes

 

20,766

 

9,746

 

27,111

 

12,015

 

Income taxes

 

5,287

 

1,178

 

6,778

 

1,802

 

Net earnings

 

$

15,479

 

$

8,568

 

$

20,333

 

$

10,213

 

 

 

 

 

 

 

 

 

 

 

Average basic shares outstanding

 

37,107

 

35,312

 

36,688

 

35,292

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.42

 

$

0.24

 

$

0.55

 

$

0.29

 

 

 

 

 

 

 

 

 

 

 

Average diluted shares outstanding

 

38,302

 

35,811

 

37,788

 

35,734

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.40

 

$

0.24

 

$

0.54

 

$

0.29

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Condensed Consolidated Balance Sheets

(in thousands)

 

 

 

June 30, 2002

 

December 31, 2001

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

80,324

 

$

49,245

 

Accounts receivable

 

246,818

 

233,246

 

Prepaid expenses and other

 

79,666

 

102,308

 

Total current assets

 

406,808

 

384,799

 

Property and equipment

 

1,266,023

 

1,263,969

 

Less accumulated depreciation

 

429,376

 

432,258

 

Net property and equipment

 

836,647

 

831,711

 

Other assets

 

46,452

 

43,788

 

 

 

$

1,289,907

 

$

1,260,298

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt

 

$

10,000

 

$

10,000

 

Current installments of obligations under capital leases

 

29,355

 

28,426

 

Trade accounts payable

 

120,531

 

163,291

 

Claims accruals

 

18,052

 

18,003

 

Accrued payroll

 

39,620

 

30,251

 

Other accrued expenses

 

13,295

 

12,713

 

Deferred income taxes

 

 

3,150

 

Total current liabilities

 

230,853

 

265,834

 

Long-term debt, excluding current maturities

 

202,763

 

212,950

 

Obligations under capital leases, excluding current installments

 

126,212

 

140,657

 

Claims accruals and other liabilities

 

1,970

 

5,275

 

Deferred income taxes

 

171,373

 

177,265

 

Stockholders’ equity

 

556,736

 

458,317

 

 

 

$

1,289,907

 

$

1,260,298

 

 

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

 

 

 

2002

 

2001

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

20,333

 

$

10,213

 

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

 

 

 

 

 

Depreciation and amortization

 

71,904

 

70,850

 

(Gain) loss on sale of revenue equipment

 

333

 

(4,918

)

Deferred income taxes

 

(13,723

)

381

 

Equity in loss (earnings) of associated companies

 

1,280

 

(12

)

Tax benefit of stock options exercised

 

5,285

 

256

 

Amortization of discount, net

 

63

 

192

 

Changes in operating assets and liabilities:

 

 

 

 

 

Trade accounts receivable

 

(13,572

)

(3,210

)

Other assets

 

36,744

 

18,379

 

Trade accounts payable

 

(42,760

)

(30,366

)

Claims accruals

 

(3,256

)

1,789

 

Accrued payroll and other accrued expenses

 

9,951

 

4,844

 

Net cash provided by operating activities

 

72,582

 

68,398

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property and equipment

 

(136,463

)

(27,723

)

Proceeds from sale of equipment

 

60,492

 

57,166

 

Increase (decrease) in other assets

 

(7,490

)

2,479

 

Net cash provided by (used in) investing activities

 

(83,461

)

31,922

 

Cash flows from financing activities:

 

 

 

 

 

Net repayments under commercial paper program and revolving credit agreements

 

 

(74,400

)

Repayments of long-term debt

 

(10,250

)

 

Principal payments under capital lease obligations

 

(13,557

)

(10,063

)

Proceeds from sale of common stock

 

68,106

 

 

Issuance (acquisition) of treasury stock

 

(2,341

)

1,263

 

Net cash provided by (used in) financing activities

 

41,958

 

(83,200

)

Net change in cash and cash equivalents

 

31,079

 

17,120

 

Cash and cash equivalents at beginning of period

 

49,245

 

5,370

 

Cash and cash equivalents at end of period

 

$

80,324

 

$

22,490

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

13,920

 

$

12,255

 

Income taxes

 

20,501

 

531

 

Non-cash activities:

 

 

 

 

 

Capital lease obligations for revenue equipment

 

$

41

 

$

61,007

 

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, 2001 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, 2001.

 

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, 2002.

 

2.                          Long-Term Debt

 

Long-term debt consists of (in thousands):

 

 

 

6/30/2002

 

12/31/2001

 

 

 

 

 

 

 

Senior notes payable, interest at 6.25% payable semiannually, due 9/1/2003

 

$

88,010

 

$

98,260

 

 

 

 

 

 

 

Senior notes payable, interest at 7.00% payable semiannually, due 9/15/2004

 

95,000

 

95,000

 

 

 

 

 

 

 

Senior subordinated notes, interest at 7.80% payable semiannually, due 10/30/2004

 

30,000

 

30,000

 

 

 

213,010

 

223,260

 

 

 

 

 

 

 

Less current maturities

 

(10,000

)

(10,000

)

 

 

 

 

 

 

Unamortized discount

 

(247

)

(310

)

 

 

$

202,763

 

$

212,950

 

 

We have a revolving line of credit with a number of banks.  This agreement allows us to borrow up to $165 million to meet short term cash requirements.  This agreement expires on November 13, 2002.  As of June 30, 2002, we had no balances outstanding on this line of credit.

 

6



 

3.         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

 

Outstanding at December 31, 2001

 

4,037,144

 

$

15.57

 

488,620

 

 

 

 

 

 

 

 

 

Granted

 

302,500

 

23.16

 

 

 

Exercised

 

(316,180

)

14.70

 

 

 

Terminated

 

(93,050

)

14.82

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2002

 

3,930,414

 

$

16.15

 

609,127

 

 

We revised our Management Incentive Plan in January of 2002.  The amendments included changes in vesting provisions and changes in the process of granting options to certain employees.

 

We closed on an offering of approximately 5.9 million shares of common stock in late May and June of 2002.  We issued and sold approximately 2.8 million shares and 3.1 million shares were sold by a shareholder.  The selling price of the stock was $26 per share before underwriters’ discounts and other expenses.

 

4.         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 June 30

 

Six Months Ended June 30

 

 

 

2002

 

2001

 

2002

 

2001

 

Net earnings

 

$

15,479

 

$

8,568

 

$

20,333

 

$

10,213

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

37,107

 

35,312

 

36,688

 

35,292

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of stock options

 

1,195

 

499

 

1,100

 

442

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

38,302

 

35,811

 

37,788

 

35,734

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.42

 

$

0.24

 

$

0.55

 

$

0.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.40

 

$

0.24

 

$

0.54

 

$

0.29

 

 

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 June 30

 

Six Months Ended June 30

 

 

 

2002

 

2001

 

2002

 

2001

 

Number of shares under option

 

60,000

 

476,100

 

60,000

 

4,005,100

 

 

 

 

 

 

 

 

 

 

 

Range of exercise price

 

$

28.88 - $37.50

 

$

18.17 - $37.50

 

$

28.88 - $37.50

 

$

17.63 - $37.50

 

 

7



 

5.         Comprehensive Income

 

Comprehensive income consists of net earnings and foreign currency translation adjustments.  During the three and six months ended June 30, 2002 and 2001, comprehensive income was equal to:  (in thousands):

 

 

 

Three Months Ended June 30

 

Six Months Ended June 30

 

 

 

2002

 

2001

 

2002

 

2001

 

Net earnings

 

$

15,479

 

$

8,568

 

$

20,333

 

$

10,213

 

Foreign currency translation gain (loss)

 

 

2,935

 

7,037

 

2,465

 

Comprehensive income

 

$

15,479

 

$

11,503

 

$

27,370

 

$

12,678

 

 

6.         Income Taxes

 

The effective income tax rates for the three and six months ended June 30, 2002 and 2001, were based on estimated annual combined effective rates of 25.0% and 15.0%, respectively.

 

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 that the Internal Revenue Service (IRS) has recently indicated it intends to examine.  We have voluntarily disclosed these transactions to the IRS.  If the IRS challenges our transactions, we intend to vigorously defend them.  However, if the IRS successfully challenges these transactions, and is successful in disallowing some or all of the tax benefits that we realized, these actions could have a material adverse effect on our financial condition and operating results.

 

7.         Business Segments

 

We operated three distinct business segments during the six months ended June 30, 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, 2001.  A summary of certain segment information is presented below (in millions):

 

 

 

Assets

 

 

 

As of June 30

 

 

 

2002

 

2001

 

JBT

 

$

852

 

$

896

 

JBI

 

203

 

138

 

DCS

 

210

 

160

 

Other (includes corporate)

 

25

 

3

 

Total

 

$

1,290

 

$

1,197

 

 

 

 

Revenues

 

 

 

Three Months
Ended June 30

 

Six Months
Ended June 30

 

 

 

2002

 

2001

 

2002

 

2001

 

JBT

 

$

212

 

$

211

 

$

400

 

$

416

 

JBI

 

198

 

180

 

384

 

348

 

DCS

 

151

 

135

 

294

 

262

 

Subtotal

 

561

 

526

 

1,078

 

1,026

 

Inter-segment eliminations

 

(4

)

(5

)

(10

)

(9

)

Total

 

$

557

 

$

521

 

$

1,068

 

$

1,017

 

 

8



 

 

 

Operating Income (Loss)

 

 

 

Three Months
Ended June 30

 

Six Months
Ended June 30

 

 

 

2002

 

2001

 

2002

 

2001

 

JBT

 

$

10.9

 

$

2.9

 

$

8.7

 

$

(.4

)

JBI

 

11.3

 

10.1

 

21.8

 

17.4

 

DCS

 

6.7

 

4.9

 

12.1

 

9.2

 

Other (includes corporate)

 

(0.4

)

(2.1

)

(0.5

)

(2.0

)

Total

 

$

28.5

 

$

15.8

 

$

42.1

 

$

24.2

 

 

 

 

Depreciation Expense

 

 

 

Three Months
Ended June 30

 

Six Months
Ended June 30

 

 

 

2002

 

2001

 

2002

 

2001

 

JBT

 

$

17

 

$

18

 

$

35

 

$

35

 

JBI

 

5

 

5

 

10

 

11

 

DCS

 

12

 

10

 

23

 

21

 

Other (includes corporate)

 

2

 

2

 

4

 

4

 

Total

 

$

36

 

$

35

 

$

72

 

$

71

 

 

8.                          Reclassifications

 

We have reclassified certain amounts from our 2001 financial statements so they will be consistent with the way we have classified amounts in 2002.

 

9



 

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

 

The Board of Directors

J.B. Hunt Transport Services, Inc.:

 

We have reviewed the accompanying condensed consolidated balance sheet of J.B. Hunt Transport Services, Inc. and subsidiaries as of June 30, 2002, and the related condensed consolidated statements of earnings for the three and six month periods ended June 30, 2002 and 2001, and the condensed consolidated statements of cash flows for the six month periods ended June 30, 2002 and 2001.  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 auditing standards generally accepted in the United States of America, 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 in the United States of America, the consolidated balance sheet of J.B. Hunt Transport Services, Inc. and subsidiaries as of December 31, 2001, 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 1, 2002, 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, 2001, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived.  Our report dated February 1, 2002, contains an explanatory paragraph that refers to a restatement of retained earnings to reflect an increase in insurance claims payable.

 

 

/s/ KPMG LLP

 

 

Tulsa, Oklahoma

July 15, 2002

 

10



 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

You should refer to the attached interim condensed consolidated financial statements and related notes and also to our annual report (Form 10-K) for the year ended December 31, 2001 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 “forward-looking” statements 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.  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 financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect:

                  the amounts reported for assets 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.

 

Therefore, the reported amounts of assets and liabilities, revenues and expenses and associated disclosures with respect to contingent assets and obligations are necessarily 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 estimates.  Any effects on business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

 

In preparing financial statements and related disclosures, we also must use estimates in determining 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 certain 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.

 

11



 

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 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 change from time to time based on certain measurement dates and policy expiration dates.  Our current insurance coverage specifies that the first $5,000 of any claim is self insured and the self insured limit on certain claims is $1.5 million, which is prefunded with our insurance carrier.  We are 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 June 30, 2002, we had approximately $18 million of estimated net claims payable.  In addition, we are required to pay certain advanced deposits and monthly premiums.  At June 30, 2002, we had a prepaid insurance asset of approximately $20 million.

 

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.  In addition, we may rent revenue equipment from third parties and various railroads under short-term rental arrangements.  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, which ever is shorter.

 

We have an arrangement with our primary tractor supplier for fixed residual or trade-in values for certain new equipment acquired since 1999.  We have utilized these values in accounting for purchased and leased tractors.  If the supplier is unable to perform under the terms of such agreements, it could have a material 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 our 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 six months ended June 30, 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, 2001.

 

12



 

RESULTS OF OPERATIONS

 

Comparison of Second Quarter 2002 to Second Quarter 2001

 

Summary of Operating Segments Results

 

For The Three Months Ended June 30

(dollars in millions)

 

 

 

Operating Revenue

 

Operating Income (loss)

 

 

 

2002

 

2001

 

% Change

 

2002

 

2001

 

JBT

 

$

212

 

$

211

 

 

$

10.9

 

$

2.9

 

JBI

 

198

 

180

 

10

%

11.3

 

10.1

 

DCS

 

151

 

135

 

12

 

6.7

 

4.9

 

Other

 

 

 

 

(0.4

)

(2.1

)

Subtotal

 

561

 

526

 

7

 

28.5

 

15.8

 

Inter-segment eliminations

 

(4

)

(5

)

 

 

 

Total

 

$

557

 

$

521

 

7

%

$

28.5

 

$

15.8

 

 

Overview

 

Our total consolidated operating revenue for the second quarter of 2002 was $557 million, up 7% over the $521 million in the second quarter of 2001.  Compared to the previous year, the current quarter’s revenue was reduced by a $9.2 million decrease in fuel surcharge revenue due to lower fuel prices.  Excluding this reduction in fuel surcharges, total revenue increased 9%.

 

JBT segment revenue totaled $212 million for the second quarter of 2002, essentially equal to the second quarter of 2001.  If the amount of fuel surcharge revenue was excluded from both the 2002 and 2001 periods, segment revenue would have increased approximately 3% in 2002.  This 3% increase in revenue was primarily a result of an approximate 4% increase in revenue per loaded mile, exclusive of fuel surcharges, offset by a decline in miles per tractor and a small decline in the size of the tractor fleet.  Part of the decline in miles per tractor was due to the reduction of empty miles to 9% in the current quarter from 12% in the comparable period of 2001.  The increase in revenue per loaded mile, excluding fuel surcharges, and the decrease in empty miles helped contribute to the significant improvement in earnings of the JBT segment.  Operating income for the second quarter of 2002 was $10.9 million, compared with $2.9 million in 2001.  The operating ratio of the JBT segment was 94.8% in 2002 and 98.6% in 2001.  The higher revenue per mile and lower empty miles were a result of our yield management initiatives launched in late 2001.  A decline in driver pay as a cost per mile in 2002 also enhanced operating income.

 

JBI segment revenue increased 10%, to $198 million during the second quarter of 2002, compared with $180 in 2001.  If the amount of fuel surcharge revenue was excluded from both the 2002 and 2001 periods, the increase in JBI revenue would have been 12%.  The increase in revenue was primarily due to an approximate 7% increase in load volume and a nearly 2% increase in revenue per load including fuel surcharge.  The higher revenue per load was a result of changes in freight mix which generated a longer average length of haul and a 0.5% increase in revenue per loaded mile, excluding fuel surcharges.  Operating income of the JBI segment was $11.3 million in the second quarter of 2002, compared with $10.1 million in 2001.  The operating ratio of the JBI segment was 94.3% in 2002 and 94.4% in 2001.  In addition to higher revenue per load, operating income was enhanced by lower dray cost per load.

 

13



 

DCS segment revenue rose 12%, to $151 million in 2002, from $135 million in 2001.  If fuel surcharge revenue was excluded from both of the 2002 and 2001 periods, the increase in DCS revenue would have been 14%.  This increase in DCS segment revenue was driven by an approximate 6% increase in the average size of the tractor fleet and a 7% increase in net revenue per tractor, excluding fuel surcharge.  Primarily a result of new project start-ups, idle tractors declined from 228 at March 31, 2002 to 70 at June 30, 2002.  Operating income rose to $6.7 million in the second quarter of 2002 from $4.9 million in 2001.  The operating ratio of the DCS segment was 95.5% in 2002 and 96.3% in 2001.  The improvement in 2002 operating income was primarily due to better utilization of tractors in service 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.

 

 

 

Three Months Ended June 30

 

 

 

Percentage of
Operating Revenues

 

Percentage Change
Between Quarters

 

 

 

2002

 

2001

 

2002 vs. 2001

 

Operating revenues

 

100.0

%

100.0

%

6.9

%

Operating expenses

 

 

 

 

 

 

 

Salaries, wages and employee benefits

 

36.4

%

37.8

%

3.0

%

Rents and purchased transportation

 

30.4

 

27.8

 

17.0

 

Fuel and fuel taxes

 

9.1

 

11.3

 

(13.3

)

Depreciation and amortization

 

6.4

 

6.8

 

1.6

 

Operating supplies and expenses

 

6.0

 

6.9

 

(7.3

)

Insurance and claims

 

2.5

 

2.3

 

11.9

 

Operating taxes and licenses

 

1.5

 

1.6

 

0.2

 

General and administrative expenses, net of gains

 

1.5

 

1.3

 

23.3

 

Communication and utilities

 

1.1

 

1.2

 

(7.3

)

Total operating expenses

 

94.9

 

97.0

 

4.6

 

Operating income

 

5.1

 

3.0

 

80.2

 

Interest expense

 

(1.3

)

(1.1

)

16.8

 

Equity in earnings (loss) of associated companies

 

(0.1

)

0.0

 

(435.5

)

Earnings before income taxes

 

3.7

 

1.9

 

113.1

 

Income taxes

 

0.9

 

0.2

 

348.8

 

Net earnings

 

2.8

%

1.6

%

80.7

%

 

Consolidated Operating Expenses

 

Total operating expenses during the second quarter of 2002 increased 4.6% over the comparable period in 2001.  Rents and purchased transportation increased 17.0%, primarily due to the increase in our JBI business and the resulting larger payments to railroads.  In addition, payments to Transplace, Inc. (TPI) increased in 2002, as more freight was outsourced to our related logistics partner.  Payments to Independent Contractors have also increased as we grow this fleet.  The 13.3% decrease in fuel and fuel taxes was due to significantly lower fuel cost per gallon in 2002.  As we noted earlier, this lower fuel cost resulted in corresponding decreases in fuel surcharge revenue.  The 7.3% decline in operating supplies and expenses was primarily due to lower levels of spending for outside vendor maintenance services.  We are moving more of our maintenance and revenue equipment repair work to our own facilities.  Insurance and claims costs increased 11.9%, primarily related to higher accident frequency and incurred costs.  General and administrative expenses increased 23.3%, partly due to higher spending in 2002 for driver advertising and bad debt reserves.  Interest expense increased 16.8%, partly due to changes we made in our short-term financing programs and higher interest expense on capitalized leases.

 

14



 

Equity in earnings of associated companies reflects our share of the operating results for Transplace, Inc. (TPI) and for our Mexican joint venture.  Equity in earnings (loss) amounts include the following:

 

 

 

Three Months Ended June 30
(000)

 

 

 

2002

 

2001

 

TPI

 

$

(830

)

$

(465

)

Mexican joint venture

 

 

310

 

Total

 

$

(830

)

$

(155

)

 

Comparison of Six Months Ended June 30, 2002 to Six Months Ended June 30, 2001

 

Summary of Operating Segments Results

 

For The Six Months Ended June 30

(dollars in millions)

 

 

 

Operating Revenue

 

Operating Income (loss)

 

 

 

2002

 

2001

 

% Change

 

2002

 

2001

 

JBT

 

$

400

 

$

416

 

(4

)%

$

8.7

 

$

(.4

)

JBI

 

384

 

348

 

10

 

21.8

 

17.4

 

DCS

 

294

 

262

 

12

 

12.1

 

9.2

 

Other

 

 

 

 

(0.5

)

(2.0

)

Subtotal

 

1,078

 

1,026

 

5

 

42.1

 

24.2

 

Inter-segment eliminations

 

(10

)

(9

)

 

 

 

Total

 

$

1,068

 

$

1,017

 

5

%

$

42.1

 

$

24.2

 

 

Overview

 

Our total consolidated operating revenue for the first six months of 2002 was $1.068 billion, up 5% over the $1.017 billion for the first six months of 2001.  Compared to the previous year, the current year’s revenue was reduced by a $27.6 million decrease in fuel surcharge revenue related to lower fuel cost per gallon.  If the amount of fuel surcharge revenue was excluded from both 2002 and 2001 periods, revenue growth would have been 8%.

 

JBT segment revenue declined 4%, to $400 million for the first six months of 2002, compared with $416 million in 2001.  If the amount of fuel surcharge revenue was excluded from both the 2002 and 2001 periods, the decline in JBT revenue would have been 1%.  This 1% decrease in revenue was primarily a result of an approximate 6% decrease in miles per tractor, partly offset by an approximate 3.7% increase in revenue per loaded mile, exclusive of fuel surcharges.  The lower miles per tractor was partly due to relatively soft freight levels during January and February and lower empty miles.  The average size of the tractor fleet also declined about 2% during the first six months of 2002.  The increase in revenue per loaded mile, excluding fuel surcharges, and the decline in empty miles run contributed to the significant improvement in earnings of the JBT segment.  Operating income for the first six months of 2002 was $8.7 million, compared with a loss of $.4 million 2001.  The operating ratio of the JBT segment was 97.8% for the first six months of 2002 and 100.1% for the first six months of 2001.  The loss in 2001 was also reduced by a $4.1 million gain on the sale of trailers, which closed in March.

 

15



 

JBI segment revenue increased 10%, to $384 million during the first six months of 2002, compared with $348 million in 2001.  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 6% 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 a 1% increase in revenue per loaded mile, exclusive of fuel surcharges.  Operating income in the JBI segment totaled $21.8 million in 2002, compared with $17.4 million in 2001.  This increase was primarily due to higher revenue levels and reduced dray cost per load.  The JBI operating ratio was 94.3% for the first six months of 2002 and 95.0% for the comparable period of 2001.

 

Revenue rose 12% in the DCS segment to $294 million during the first six months of 2002, compared with $262 million in 2001.  This increase in DCS segment revenue would have been 15% if fuel surcharge revenue was excluded from both periods.  This increase in DCS revenue was driven by a 10% increase in the size of the average tractor fleet and a 6% increase in net revenue per tractor, excluding fuel surcharge.  Operating income rose to $12.1 million in 2002, from $9.2 million in 2001.  The DCS segment operating ratio for the first six months of 2002 was 95.9%, compared to 96.5% for the first 6 months of 2001.  This improvement in 2002 operating income was primarily due to better utilization of tractors in service 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.

 

 

 

Six Months Ended June 30

 

 

 

Percentage of
Operating Revenues

 

Percentage Change
Between Quarters

 

 

 

2002

 

2001

 

2002 vs. 2001

 

Operating revenues

 

100.0

%

100.0

%

5.0

%

Operating expenses

 

 

 

 

 

 

 

Salaries, wages and employee benefits

 

37.3

%

38.7

%

1.2

%

Rents and purchased transportation

 

30.5

 

27.2

 

17.7

 

Fuel and fuel taxes

 

9.2

 

11.9

 

(19.1

)

Depreciation and amortization

 

6.8

 

7.0

 

1.5

 

Operating supplies and expenses

 

6.1

 

6.9

 

(7.2

)

Insurance and claims

 

2.3

 

2.4

 

0.8

 

Operating taxes and licenses

 

1.5

 

1.6

 

(0.4

)

General and administrative expenses, net of gains

 

1.2

 

0.6

 

107.8

 

Communication and utilities

 

1.2

 

1.3

 

(6.2

)

Total operating expenses

 

96.1

 

97.6

 

3.3

 

Operating income

 

3.9

 

2.4

 

74.2

 

Interest expense

 

(1.3

)

(1.2

)

12.9

 

Equity in earnings (loss) of associated companies

 

(0.1

)

 

 

Earnings before income taxes

 

2.5

 

1.2

 

125.6

 

Income taxes

 

0.6

 

0.2

 

276.1

 

Net earnings

 

1.9

%

1.0

%

99.1

%

 

16



 

Consolidated Operating Expenses

 

Total operating expenses for the first six months of 2002 were up 3.3% over the comparable period of 2001.  Rents and purchased transportation expense increased 17.7%, primarily due to the increase in JBI business, which resulted in larger payments to railroads.  In addition, payments to TPI increased in 2002, as more freight was outsourced to our logistics partner, and payments to Independent Contractors increased as we grow this fleet.  The 19.1% decrease in fuel and fuel taxes was due to significantly lower fuel cost per gallon in 2002.  As we mentioned above, this lower fuel expense resulted in corresponding decreases in fuel surcharge revenue.  The 7.2% decline in operating supplies and expenses was primarily due to lower equipment maintenance costs at outside vendor repair locations.  We are moving more of our maintenance and revenue equipment repair work to our own shops.  The significant increase in general and administrative expenses was due, in part, to a $5.5 million gain on the sale of a group of trailers which was closed during March of 2001.  This expense category also increased in 2002 reflecting higher driver advertising expenses and increased bad debt reserves.  Interest expense increased 12.9%, partly due to changes we made in our short-term financing programs and higher interest expense on our capitalized leases.

 

Equity in earnings of associated companies reflects our share of the operating results for Transplace, Inc. (TPI) and for our Mexican joint venture.  Equity in earnings (loss) amounts include the following:

 

 

 

Six Months Ended June 30
(000)

 

 

 

2002

 

2001

 

TPI

 

$

(1,280

)

$

(738

)

Mexican joint venture

 

 

750

 

Total

 

$

(1,280

)

$

12

 

 

As we had previously announced, we signed an agreement during the fourth quarter of 2001 to sell our joint venture interest in Mexico to the majority owner.  This sale was closed during the first quarter of 2002 under the expected terms and conditions.  In accordance with the terms of the sale, we recorded an $18.1 million dollar note receivable.  The note carries an interest rate of 5%, requires annual principal payments and matures on June 30, 2005.  We do not expect any future significant impact on earnings related to this sale.

 

Liquidity and Capital Resources

 

Cash Flow

 

We typically generate significant amounts of cash from operating activities.  Net cash provided by operating activities totaled $72.6 million during the first six months of 2002, compared with $68.4 million for the same period of 2001.  Operating activities which significantly increased cash in 2002, relative to 2001, included net earnings, a reduction in other assets and lower accrued payroll and other expenses.  Cash was consumed by changes in deferred income taxes, increases in accounts receivable and a decrease in trade accounts payable.  Cash was also used in 2002 for payments totaling $37.4 million in connection with our insurance coverage.  Net cash used in investing activities was $83.5 million in 2002, compared with $31.9 million of net cash provided in 2001.  The primary reasons for this category netting to positive cash provided in 2001, were the sale of some older trailers and a decision we made to utilize capital and operating leases to acquire new revenue equipment.  During 2002, we have been, once again, purchasing new tractors and containers, which results in additional cash used in investing activities.  Net cash provided from financing activities totaled nearly $42 million in 2002, while it netted to a use of $83.2 million in 2001.  This change was primarily a result of a sale of common stock during the second quarter of 2002.  We closed on an offering of approximately 5.9 million shares of common stock in late May and June of 2002.  We issued and sold approximately 2.8 million shares and 3.1 million shares were sold by a shareholder.  The selling price of the stock was $26 per share, before underwriters’ discounts and other expenses.  We did not receive any of the proceeds from the sale of the shareholder’s stock.  We used a portion of the proceeds from the stock sale to reduce long-term debt.  The remaining proceeds will be utilized to further reduce debt and for future capital expenditures.

 

17



 

Selected Balance Sheet Data

 

 

 

As of

 

 

 

June 30, 2002

 

December 31, 2001

 

June 30, 2001

 

Working  capital ratio

 

1.76

 

1.45

 

1.37

 

 

 

 

 

 

 

 

 

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

 

$

39

 

$

38

 

$

36

 

 

 

 

 

 

 

 

 

Total debt and obligations under capital leases (millions)

 

$

368

 

$

392

 

$

378

 

 

 

 

 

 

 

 

 

Total debt to equity

 

.66

 

.86

 

.85

 

 

 

 

 

 

 

 

 

Total debt as a percentage of total capital

 

.40

 

.46

 

.46

 

 

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 to acquire revenue equipment.

 

Net capital expenditures were $77.1 million during the first six months of 2002 compared with net cash proceeds of $29.4 million for the same period of 2001.  We made a decision to start purchasing new tractors and containers rather than utilize capital leases effective in October of 2001.  This change resulted in higher levels of capital expenditures in 2002.  We currently expect to spend in the range of $140 to $150 million, net of expected proceeds from sale or  trade-in allowances, on revenue equipment for the full calendar year of 2002.

 

We are authorized to borrow up to $165 million under our current revolving line of credit and had no balances outstanding on this line at June 30, 2002.  This line of credit expires in November of 2002.  We currently anticipate renewing this revolving line of credit later this year.  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 June 30, 2002
Amounts Due by Period
(dollars in millions)

 

 

 

Total

 

Less Than
One Year

 

One To
Three Years

 

Four To
Five Years

 

After
Five Years

 

Operating leases

 

$

288

 

$

62

 

$

104

 

$

79

 

$

43

 

Capital leases

 

169

 

44

 

125

 

 

 

Senior and subordinated notes payable

 

213

 

10

 

203

 

 

 

Subtotal

 

$

670

 

116

 

$

432

 

$

79

 

$

43

 

Commitments to acquire revenue equipment

 

74

 

74

 

 

 

 

Total

 

$

744

 

$

190

 

$

432

 

$

79

 

$

43

 

 

18



 

 

 

Financing Commitments Expiring By Period
As of June 30, 2002
(dollars in millions)

 

 

 

Total

 

Less Than
One Year

 

One To
Three Years

 

Four To
Five Years

 

After
Five Years

 

Revolving credit arrangements

 

$

165

 

$

165

 

 

 

 

Standby letters of credit

 

27

 

27

 

 

 

 

Total

 

$

192

 

$

192

 

 

 

 

 

Our umbrella policy expires on July 31, 2002.  In the current insurance market condition, we may experience significantly higher premium costs to retain our current level of insurance coverage.  In contrast, we may change our insurance coverages to retain more financial risk for accidents which would increase our exposure to higher claims costs.

 

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 that the Internal Revenue Service (IRS) has recently indicated it intends to examine.  We have voluntarily disclosed these transactions to the IRS.  If the IRS challenges our transactions, we intend to vigorously defend them.  However, if the IRS successfully challenges these transactions, and is successful in disallowing some or all of the tax benefits that we realized, these actions could have a material adverse effect on our financial condition and operating results.

 

ITEM 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 June 30, 2002.  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 June 30, 2002.  At June 30, 2002, 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 six months ended June 30, 2002.  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.

 

19



 

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

 

 

As discussed in Part 1, Item 2, we completed the issuance of 2.8 million shares of common stock in May and June of 2002.

 

 

 

Item 6.

 

Exhibits and Reports on Form 8-K

 

 

(a) Exhibits

 

 

Exhibit 15 - Awareness letter related to Independent Accountants’ Review Report.

 

20



 

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 29 day of July, 2002.

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

 

 

(Registrant)

 

 

 

 

 

 

 

 

BY:

 /s/ Kirk Thompson

 

 

 

Kirk Thompson

 

 

 

President and Chief Executive Officer

 

 

 

 

 

 

BY:

 /s/ Jerry W. Walton

 

 

 

Jerry W. Walton

 

 

 

Executive Vice President, Finance and

 

 

 

Administration,

 

 

 

Chief Financial Officer

 

 

 

 

 

 

BY:

 /s/ Donald G. Cope

 

 

 

Donald G. Cope

 

 

 

Senior Vice President, Controller,

 

 

 

Chief Accounting Officer

 

 

21