FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

(Mark One)

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

Arkansas		0-11757		71-0335111
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION		Commission File Number		(IRS EMPLOYER IDENTIFICATION NO.)
615 J.B. Hunt Corporate Drive Lowell, Arkansas		72745		(479) 820-0000
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		(ZIP CODE)		(Registrant’s telephone number)

 

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

 

Yes         ý            No           o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes         ý            No           o

 

The number of shares of the registrant’s $.01 par value common stock outstanding on September 30, 2004 was 81,231,539.

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Form 10-Q

For The Quarter Ended September 30, 2004

Table of Contents

 

Part I. Financial Information
Item 1.	Consolidated Financial Statements
	Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2004 and 2003
	Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
	Notes to Condensed Consolidated Financial Statements as of September 30, 2004
	Report of Independent Registered Public Accounting Firm
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II. Other Information
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
Exhibits
Signatures

 

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J.B. HUNT TRANSPORT SERVICES, INC.

 

Condensed Consolidated Statements of Earnings

(in thousands, except per share data)

(unaudited)

 

		Three Months Ended September 30						Nine Months Ended September 30
		2004			2003			2004			2003
Operating revenues		$	718,614		$	621,644		$	2,015,349		$	1,792,723
Operating expenses
Salaries, wages and employee benefits		214,760			197,618			612,211			584,255
Rents and purchased transportation		236,656			205,905			662,006			584,004
Fuel and fuel taxes		74,529			55,161			205,010			174,853
Depreciation and amortization		37,458			38,197			111,233			113,006
Operating supplies and expenses		32,760			31,212			92,560			90,942
Insurance and claims		14,956			13,946			43,348			49,137
Operating taxes and licenses		9,088			8,219			26,576			24,621
General and administrative expenses, net of gains and losses		9,902			7,996			24,950			26,208
Communication and utilities		5,837			5,815			17,395			17,822
Total operating expenses		635,946			564,069			1,795,289			1,664,848
Operating income		82,668			57,575			220,060			127,875
Interest expense		(1,558		)	(4,445		)	(5,468		)	(15,132		)
Equity in loss of associated company		(647		)	(23		)	(2,030		)	(600		)
Earnings before income taxes		80,463			53,107			212,562			112,143
Income taxes		32,588			20,446			86,088			43,175
Net earnings		$	47,875		$	32,661		$	126,474		$	68,968
Average basic shares outstanding		81,066			79,802			80,578			79,174
Basic earnings per share		$	0.59		$	0.41		$	1.57		$	0.87
Average diluted shares outstanding		83,678			82,558			83,285			81,487
Diluted earnings per share		$	0.57		$	0.40		$	1.52		$	0.85

 

See accompanying notes to condensed consolidated financial statements.

 

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J.B. HUNT TRANSPORT SERVICES, INC.

 

Condensed Consolidated Balance Sheets

(in thousands)

 

		September 30, 2004
		(unaudited)			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents		$	41,819		$	61,229
Accounts receivable		309,201			256,032
Prepaid expenses and other		57,755			105,743
Total current assets		408,775			423,004
Property and equipment		1,379,162			1,345,521
Less accumulated depreciation		410,749			460,556
Net property and equipment		968,413			884,965
Other assets		28,597			39,102
		$	1,405,785		$	1,347,071
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	50,000		$	104,933
Current installments of obligations under capital leases		—			66,844
Trade accounts payable		139,595			158,886
Claims accruals		6,544			7,775
Accrued payroll		60,025			51,235
Other accrued expenses		13,964			12,478
Deferred income taxes		34,332			23,499
Total current liabilities		304,460			425,650
Other long-term liabilities		6,923			4,291
Deferred income taxes		256,413			213,994
Stockholders’ equity		837,989			703,136
		$	1,405,785		$	1,347,071

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

J.B. Hunt Transport Services, Inc.

 

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

		Nine Months Ended September 30
		2004			2003
Cash flows from operating activities:
Net earnings		$	126,474		$	68,968
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		111,233			113,006
(Gain) loss on sale of revenue equipment		(149		)	1,168
Deferred income taxes		53,252			26,481
Equity in loss of associated company		2,030			600
Tax benefit of stock options exercised		13,602			6,610
Amortization of discount, net		67			94
Changes in operating assets and liabilities:
Trade accounts receivable		(53,169		)	(28,932		)
Other assets		44,520			57,847
Trade accounts payable		(19,291		)	(8,183		)
Claims accruals		(1,231		)	13,031
Accrued payroll and other accrued expenses		12,908			418
Net cash provided by operating activities		290,246			251,108
Cash flows from investing activities:
Additions to property and revenue equipment		(343,599		)	(187,222		)
Proceeds from sale of revenue equipment		149,067			76,486
Decrease in other assets		11,943			1,026
Net cash used in investing activities		(182,589		)	(109,710		)
Cash flows from financing activities:
Repayments of long-term debt		(55,000		)	(87,010		)
Principal payments under capital lease obligations		(66,844		)	(51,471		)
Re-issuance (acquisition) of treasury stock		(376		)	9,624
Dividends paid		(4,847		)	—
Net cash used in financing activities		(127,067		)	(128,857		)
Net change in cash and cash equivalents		(19,410		)	12,541
Cash and cash equivalents at beginning of period		61,229			80,628
Cash and cash equivalents at end of period		$	41,819		$	93,169
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	7,192		$	18,213
Income taxes		19,234			8,156

 

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, 2003 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, 2003.

 

We believe that all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented have been made.  The results of operations for the interim periods presented in this report are not necessarily indicative of the results to be expected for the full calendar year ending December 31, 2004.

 

2.             Stock-based Compensation

 

We have adopted the intrinsic value-based method of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for compensation costs for our stock option plans.  Accordingly, compensation expense is recognized on the date of grant only if the current market price of the underlying common stock at date of grant exceeds the exercise price.

 

Had we determined compensation cost based on the fair value at the grant date for our stock options under Statement of Financial Accounting Standard No. 123, Accounting for Stock-based Compensation (SFAS No. 123), our net earnings would have been reduced to the pro forma amounts indicated below.  All amounts in the chart, except per share amounts, are in thousands.

 

6

 

		Three Months Ended September 30						Nine Months Ended September 30
		2004			2003			2004			2003
Net earnings as reported (in thousands)		$	47,875		$	32,661		$	126,474		$	68,968
Total stock-based compensation expense determined under fair value based methods for all awards, net of taxes		1,221			1,196			3,664			3,504
Pro forma		$	46,654		$	31,465		$	122,810		$	65,464
Basic earnings per share
As reported		$	0.59		$	0.41		$	1.57		$	0.87
Pro forma		$	0.58		$	0.39		$	1.52		$	0.83
Diluted earnings per share
As reported		$	0.57		$	0.40		$	1.52		$	0.85
Pro forma		$	0.56		$	0.38		$	1.47		$	0.80

 

Pro forma net earnings reflects only options granted since December 31, 1995.  Therefore, the full impact of calculating compensation costs for stock options under SFAS No. 123 is not reflected in the pro forma net earnings amounts presented above because compensation cost is reflected over the options’ vesting periods of 5 to 10 years and compensation cost for options granted prior to January 1, 1996 is not considered.

 

3.             Long-Term Debt

 

Long-term debt consists of (in thousands):

 

		September 30, 2004			December 31, 2003
Senior revolving credit facility		$	40,000		$	—
Senior notes payable, due September 15, 2004, interest at 7.00% payable semiannually		—			95,000
Senior subordinated notes, due October 30, 2004, interest at 7.80% payable semiannually		10,000			10,000
		50,000			105,000
Less current maturities		(50,000		)	(104,933		)
Unamortized discount		—			(67		)
		$	—		$	—

 

7

 

4.             Capital Stock

 

We have a stock option plan (Management Incentive Plan) that provides for the awarding of our common stock and stock options to key employees.  A summary of the 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, 2003		7,885,557		$	10.67		711,358
Granted		87,500		29.34
Exercised		(1,529,060	)	8.74
Terminated		(44,850	)	16.56
Outstanding at September 30, 2004		6,399,147		$	11.35		627,325

 

We announced on April 22, 2004 that our Board of Directors had re-initiated a quarterly cash dividend. We had not paid a dividend since February 2000.  The re-initiation of a quarterly dividend was based on our lower debt levels and improved net earnings.  On October 21, 2004, our Board of Directors declared a quarterly cash dividend of $.03 per common share, payable on November 22, 2004 to stockholders of record as of November 5, 2004.

 

5.             Earnings Per Share

 

We compute basic earnings per share by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding for the reporting period.  Diluted earnings per share reflects the potential dilution that could occur if holders of options to issue common stock options exercised or converted their holdings into common stock.  Outstanding stock options represent the only dilutive effects on weighted average shares.  The chart below presents a reconciliation between basic and diluted weighted average shares outstanding and the related earnings per share.  All amounts in the chart, except per share amounts, are expressed in thousands.

 

		Three Months Ended September 30						Nine Months Ended September 30
		2004			2003			2004			2003
Net earnings		$	47,875		$	32,661		$	126,474		$	68,968
Basic weighted average shares outstanding		81,066			79,802			80,578			79,174
Dilutive effect of stock options		2,612			2,756			2,707			2,313
Diluted weighted average shares outstanding		83,678			82,558			83,285			81,487
Basic earnings per share		$	0.59		$	0.41		$	1.57		$	0.87
Diluted earnings per share		$	0.57		$	0.40		$	1.52		$	0.85

 

We had 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:

 

8

 

		Three Months Ended September 30				Nine Months Ended September 30
		2004		2003		2004		2003
Number of shares under option		5,000		20,000		18,000		55,000
Range of exercise price		$37.00		$26.19		$33.62 - $37.00		$18.45 - $26.19

 

6.             Comprehensive Income

 

Comprehensive income consists of net earnings and foreign currency translation adjustments.  During the three and nine months ended September 30, 2004 and 2003, comprehensive income was equal to net earnings.

 

7.             Income Taxes

 

The effective income tax rate for the three and nine month periods ended September 30, 2004, was 40.5%.  The effective income tax rate was 38.5% for the three and nine month periods ending September 30, 2003.  The increase in the 2004 effective income tax rate was partly a result of the new accountable expense reimbursement plan (driver per diem plan), which was implemented in February of 2003.  The driver per diem plan, while reducing certain costs classified in salary, wages and employee benefits, increases our non-deductible meal allowances, resulting in a higher effective tax rate.  The increase in the 2004 effective income tax rate was also due to our increased level of earnings and the suspension, during the fourth quarter of 2003, of recording certain non-cash tax benefits associated with the sale and leaseback transactions as discussed below.

 

In 1999, we entered into a series of transactions effecting a sale and leaseback of a portion of our Intermodal container and chassis fleet for a selling price of approximately $175 million.  This transaction was examined by the IRS in an audit of our 1998 and 1999 income tax returns.  We have received an IRS Notice of Proposed Assessment, which disallows the tax benefits associated with these transactions, and as a result, we have filed an appeal in the matter.  We have been notified by the IRS Appeals Division that they intend to have the examining agent request more information from us and develop certain technical arguments we raised in defending our position.  The examining agent has not yet contacted us and no specific timeframe has been given for the completion of this additional information request.  If a resolution of the matter cannot be reached in the appeals process, the IRS will forward a 90-day letter, also known as a Notice of Deficiency.  A resolution of the dispute could occur at any point in the administrative process or could extend through a trial and court appeals.  If we are unsuccessful in defending this transaction, we could owe additional taxes and interest.  We estimate our maximum earnings exposure to be $34 million, which represents the tax benefits realized through December 31, 2002, plus estimated accrued interest through September 30, 2004.  This exposure would result if the IRS succeeded in disallowing 100% of the tax benefits from this transaction.

 

8.             Business Segments

 

We operated three distinct business segments during the nine months ended September 30, 2004 and 2003.  These segments included:  Truck (JBT), Intermodal (JBI) and Dedicated Contract Services (DCS).  The operation of each of these businesses is described in footnote (11) of our annual report (Form 10-K) for the year ended December 31, 2003.  A summary of certain segment information is presented below (in millions):

 

9

 

		Assets As of September 30
		2004			2003
JBT		$	744		$	773
JBI		450			315
DCS		342			268
Other (includes corporate)		(130		)	(59		)
Total		$	1,406		$	1,297

 

		Operating Revenues
		Three Months Ended September 30						Nine months Ended September 30
		2004			2003			2004			2003
JBT		$	238		$	214		$	680		$	621
JBI		284			241			789			682
DCS		201			170			558			501
Subtotal		723			625			2,027			1,804
Inter-segment eliminations		(4		)	(3		)	(12		)	(11		)
Total		$	719		$	622		$	2,015		$	1,793

 

		Operating Income
		Three Months Ended September 30						Nine months Ended September 30
		2004			2003			2004			2003
JBT		$	30.6		$	17.9		$	74.4		$	31.6
JBI		33.0			25.1			93.9			65.8
DCS		18.9			14.6			51.0			30.5
Other (includes corporate)		0.2			—			0.8			—
Total		$	82.7		$	57.6		$	220.1		$	127.9

 

		Depreciation and Amortization Expense
		Three Months Ended September 30						Nine months Ended September 30
		2004			2003			2004			2003
JBT		$	14.7		$	17.2		$	45.3		$	50.8
JBI		5.7			5.1			16.7			15.0
DCS		14.3			12.9			41.1			38.5
Other (includes corporate)		2.8			3.0			8.1			8.7
Total		$	37.5		$	38.2		$	111.2		$	113.0

 

10

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

The Board of Directors

J.B. Hunt Transport Services, Inc.:

 

We have reviewed the accompanying condensed consolidated balance sheet of J.B. Hunt Transport Services, Inc. and subsidiaries as of September 30, 2004, and the related condensed consolidated statements of earnings for the three-month and nine-month periods ended September 30, 2004 and 2003, and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2004 and 2003.  These condensed consolidated financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

 

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

 

We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of J.B. Hunt Transport Services, Inc. and subsidiaries as of December 31, 2003, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated January 30, 2004, we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

	/s/ KPMG LLP
Tulsa, Oklahoma
October 15, 2004

 

11

 

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, 2003 as you read the following discussion.  We may make statements in this report, and in documents we incorporate by reference, that reflect our current expectation regarding future results of operations, performance and achievements.  These are “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995, and are based on our belief or interpretation of information currently available.  You should realize there are many risks and uncertainties that could cause actual results to differ materially from those described.  Some of the factors and events that are not within our control and could have a significant impact on future operating results are general economic conditions, cost and availability of diesel fuel, adverse weather conditions, competitive rate fluctuations, availability of drivers, and audits or tax assessments of various federal, state or local taxing authorities, including the Internal Revenue Service (IRS).  You should also refer to Item 7 of our annual report (Form 10-K) for the year ended December 31, 2003, for additional information on risk factors and other events that are not within our control.  Current and future changes in fuel prices could result in significant fluctuations of quarterly earnings.  Our future financial and operating results may fluctuate as a result of these and other risk factors as described from time to time in our filings with the Securities and Exchange Commission.

 

GENERAL

 

We are one of the largest full-load transportation companies in North America.  We operate three distinct, but complementary, business segments and provide a wide range of general and specifically tailored freight and logistics services to our customers.  We generate revenues primarily from the actual movement of freight from shippers to consignees and from serving as a logistics provider by offering, or arranging for others to provide the transportation service.  We account for our business on a calendar year basis with our full year ending on December 31 and our quarterly reporting periods ending on March 31, June 30 and September 30.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

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

 

We consider our critical accounting policies and estimates to be those that require us to make more significant judgments and estimates when we prepare our financial statements and include the following:

 

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

 

12

 

change from time to time based on certain measurement dates and policy expiration dates.  During 2003, we were self-insured for a portion of our claims exposure resulting from cargo loss, personal injury, property damage, workers’ compensation and health claims for amounts up to the first $1.5 million of each claim.  In January 2004, we changed our level of self-insurance to $2 million for auto accidents and $1 million for workers’ compensation.

 

Our claims accrual policy for all self-insured claims is to recognize a liability at the time of the incident based on:  (i) our analysis of the nature and severity of the claims,  (ii) analyses provided by third-party claims administrators and (iii) economic and regulatory factors.  Our safety and claims personnel work directly with representatives from the insurance companies to continually update the estimated cost of each claim.  The ultimate cost of a claim develops over time as additional information regarding the nature, timing and extent of damages claimed becomes available.  Accordingly, we use an actuarial method to develop current claim information to derive an estimate of our ultimate claim liability.  This process involves the use of loss-development factors based on our historical claims experience.  In doing so, the recorded ultimate liability considers future claims growth and provides an allowance for incurred-but-not-reported claims.  We do not discount our estimated losses.  We are also substantially self-insured for loss of and damage to our owned and leased revenue equipment.  At September 30, 2004, we had approximately $7 million of estimated net claims payable.  In addition, we are required to pay certain advanced deposits and monthly premiums.  At September 30, 2004, we had a prepaid insurance asset of approximately $19 million, which represented pre-funded claims and premiums.

 

Revenue Equipment

 

We operate a significant number of tractors, trailers and containers in connection with our business.  This equipment may be purchased or acquired under capital or operating lease agreements.  In addition, we may rent revenue equipment from third parties and various railroads under short-term rental arrangements.  Purchased revenue equipment is depreciated on the straight-line method over the estimated useful life down to an estimated salvage or trade-in value.  Equipment acquired under capital leases is initially recorded at the net present value of the minimum lease payments and amortized on the straight-line method over the lease term or the estimated useful life, whichever is shorter.  We purchased all of our remaining revenue equipment under capital leases during the third quarter of 2004.

 

We have an agreement with our primary tractor supplier for guaranteed residual or trade-in values for certain new equipment acquired since 1999.  During the fourth quarter of 2003, we reviewed the useful lives and salvage values of our tractor fleet.  We have utilized the guaranteed trade-in values as well as other operational information, such as anticipated annual miles, in accounting for purchased tractors.  If our tractor supplier was unable to perform under the terms of our agreement for guaranteed trade-in values, it could have a materially 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 the 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.

 

13

 

RESULTS OF OPERATIONS

 

Comparison of Third Quarter 2004 to Third Quarter 2003

 

Summary of Operating Segments Results

For The Three Months Ended September 30

(dollars in millions)

 

		Operating Revenue								Operating Income
		2004			2003			% Change		2004			2003
JBT		$	238		$	214		11	%	$	30.6		$	17.9
JBI		284			241			18		33.0			25.1
DCS		201			170			18		18.9			14.6
Other		—			—			—		0.2			—
Subtotal		723			625			16	%	82.7			57.6
Inter-segment eliminations		(4		)	(3		)	—		—			—
Total		$	719		$	622		16	%	$	82.7		$	57.6

 

Overview

 

Our total consolidated operating revenue for the third quarter of 2004 was $719 million, an increase of approximately 16% over the $622 million in the third quarter of 2003.  Fuel surcharge revenue had an impact on this comparison.  The amount of fuel surcharge revenue billed in the current quarter was $23.2 million more than the amount billed during the third quarter of 2003.  Excluding fuel surcharges, total operating revenue during the current quarter increased 12% over the comparable period of 2003.

 

JBT segment revenue totaled $238 million for the third quarter of 2004, an increase of 11% over the $214 million in the third quarter of 2003.  If the amount of fuel surcharge revenue was excluded from both the 2004 and 2003 periods, segment revenue would have increased 8%.  This 8% increase in revenue was primarily a result of an approximate 9.3% increase in revenue per loaded mile, exclusive of fuel surcharges, partly offset by a decrease in the size of the tractor fleet.  The increase in revenue per loaded mile, excluding fuel surcharges, also significantly contributed to the improvement in operating income of the JBT segment.  The higher revenue per mile was primarily a result of our yield management activities and rate increases.  In addition, significantly lower accident and workers’ compensation costs in 2004 contributed to the improvement in segment operating income.  JBT operating income for the third quarter of 2004 was $30.6 million, compared with $17.9 million in 2003.  The operating ratio of the JBT segment was 87.1% in 2004 and 91.6% in 2003.

 

JBI segment revenue increased 18%, to $284 million during the third quarter of 2004, compared with $241 million in 2003.  If the amount of fuel surcharge revenue was excluded from both the 2004 and 2003 periods, the increase in JBI revenue would have been 14%.  This increase in revenue was primarily due to an approximate 7% increase in load volume and a 4.6% increase in revenue per loaded mile, excluding fuel surcharges.  Operating revenue per load in 2004 increased about 5.1% over the comparable period of 2003.  Operating income of the JBI segment rose to $33.0 million in the third quarter of 2004, compared with $25.1 million in 2003.  The operating ratio of the JBI segment was 88.4% in 2004 and 89.6% in 2003.  In addition to higher volumes and rate increases, 2004 operating income was enhanced by lower maintenance costs and lower equipment ownership costs, partly offset by higher purchased transportation costs.

 

DCS segment revenue grew 18%, to $201 million in 2004, from $170 million in 2003.  If fuel surcharge revenue was excluded from both the 2004 and 2003 periods, the increase in DCS revenue would have been 15%.  This increase in DCS segment revenue was driven by a 6% increase in net revenue per

 

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tractor, excluding fuel surcharges and a 10% increase in the average size of the tractor fleet.  Operating income of our DCS segment climbed to $18.9 million in 2004, from $14.6 million in 2003.  The DCS operating ratio was 90.6% in 2004 and 91.4% in 2003.  Improvements in operating income were driven by better tractor utilization, improved productivity and pricing, reduced workers’ compensation expenses and lower start-up costs associated with new business, partly offset by higher accident and revenue equipment rental costs.

 

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

 

 

Consolidated Operating Expenses

 

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

 

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

 

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substantially recovered through additional fuel surcharges billed to our customers.  While rapid changes in fuel cost per gallon may result in certain timing differences of fuel costs and fuel surcharges between accounting periods, we have been able to recover the majority of our higher 2004 fuel cost per gallon.   The net impact of increased fuel costs, offset by higher fuel surcharge revenue, decreased earnings per share by about $.01 during the current quarter.  The 7.2% increase in insurance and claims expense reflects two serious accidents during the current quarter.

 

The 10.6% increase in operating taxes and licenses reflects a slight increase in the size of the tractor fleet and higher state licensing fees.  The significant increase in general and administrative expenses was substantially due to driver advertising and recruiting costs, higher bad debt expense and additional spending on professional fees.  Net gains or losses on asset dispositions are included in the general and administrative expense category.  We generated a net $400,000 gain during the current quarter, compared with a net $127,000 loss in 2003.   Net interest expense declined significantly in 2004 due to lower debt levels.  We increased our effective income tax rate to 40.5% in 2004, from 38.5% in 2003, primarily due to our higher level of earnings and the suspension during the fourth quarter of 2003, of recording certain non-cash tax benefits associated with the sale and leaseback transactions.

 

The equity in loss of associated company item on our consolidated statement of earnings reflects our share of the operating results for Transplace, Inc. (TPI).

 

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

 

Summary of Operating Segments Results

For The Nine Months Ended September 30

(dollars in millions)

 

		Operating Revenue								Operating Income
		2004			2003			% Change		2004			2003
JBT		$	680		$	621		10	%	$	74.4		$	31.6
JBI		789			682			16		93.9			65.8
DCS		558			501			11		51.0			30.5
Other		—			—			—		0.8			—
Subtotal		2,027			1,804			12	%	220.1			127.9
Inter-segment eliminations		(12		)	(11		)	—		—			—
Total		$	2,015		$	1,793		12	%	$	220.1		$	127.9

 

Overview

 

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

 

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

 

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significantly contributed to the improvement in operating income of the JBT segment.  The higher revenue per mile was primarily a result of our yield management activities and rate increases.  In addition, significantly lower accident, workers’ compensation, equipment ownership and bad debt costs in 2004 contributed to the improvement in segment operating income.  JBT operating income for the nine months ended September 30, 2004 was $74.4 million, compared with $31.6 million in 2003.  The operating ratio of the JBT segment was 89.1% in 2004 and 94.9% in 2003.

 

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

 

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

 

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

 

		Nine Months Ended September 30
		Percentage of Operating Revenues				Percentage Change Between Periods
		2004		2003		2004 vs. 2003
Operating revenues		100.0%		100.0%		12.4%
Operating expenses
Salaries, wages and employee benefits		30.4%		32.6%		4.8%
Rents and purchased transportation		32.8		32.6		13.4
Fuel and fuel taxes		10.2		9.7		17.3
Depreciation and amortization		5.5		6.3		(1.6)
Operating supplies and expenses		4.6		5.1		1.8
Insurance and claims		2.2		2.7		(11.8)
Operating taxes and licenses		1.3		1.4		7.9
General and administrative expenses, net of gains		1.2		1.5		(4.8)
Communication and utilities		0.9		1.0		(2.4)
Total operating expenses		89.1		92.9		7.8
Operating income		10.9		7.1		72.1
Interest expense		(0.3)		(0.8)		(63.9)
Equity in loss of associated companies		(0.1)		—		238.3
Earnings before income taxes		10.5		6.3		89.6
Income taxes		4.2		2.4		99.4
Net earnings		6.3%		3.9%		83.4%

 

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