FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF - ---------- THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF - ---------- THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-11757 J.B. HUNT TRANSPORT SERVICES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ARKANSAS 71-0335111 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR IDENTIFICATION NO.) ORGANIZATION) 615 J.B. HUNT CORPORATE DRIVE, LOWELL, ARKANSAS 72745 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, AND ZIP CODE) (501) 820-0000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO THE FILING REQUIREMENTS FOR AT LEAST THE PAST 90 DAYS. YES X NO ----- ----- THE NUMBER OF SHARES OF THE COMPANY'S $.01 PAR VALUE COMMON STOCK OUTSTANDING ON JUNE 30, 1998 WAS 35,574,104.
PART 1 FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The interim condensed consolidated financial statements contained herein reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition, results of operations and cash flows for the periods presented. They have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the three and six month periods ended June 30, 1998 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 1998. The interim condensed consolidated financial statements have been reviewed by KPMG Peat Marwick LLP, independent public accountants. These interim condensed consolidated financial statements should be read in conjunction with the Company's latest annual report and Form 10-K for the year ended December 31, 1997. INDEX Condensed Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 1998 and 1997......................... Page 3 Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31,1997.............................. Page 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997......................... Page 5 Notes to Condensed Consolidated Financial Statements as of June 30, 1998............................................. Page 6 Review Report of KPMG Peat Marwick LLP............................... Page 8 ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.............................. Page 9 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk......Not Applicable 2
J.B. HUNT TRANSPORT SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (in thousands, except per share data) (unaudited) <TABLE> - -------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 - -------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Operating revenues $ 460,985 $ 385,198 $ 874,451 $ 750,599 Operating expenses Salaries, wages and employee benefits 158,851 133,288 304,839 254,732 Purchased transportation 155,085 124,181 292,392 240,962 Fuel and fuel taxes 33,942 36,039 67,358 74,096 Depreciation 33,048 33,228 65,478 66,478 Operating supplies and expenses 23,994 23,680 45,341 45,825 Insurance and claims 6,632 9,920 14,604 20,113 Operating taxes and licenses 6,634 6,349 12,010 12,427 General and administrative expenses 6,570 5,244 10,270 11,206 Communication and utilities 4,616 4,015 8,888 8,186 - -------------------------------------------------------------------------------------------------------------- Total operating expenses 429,372 375,944 821,180 734,025 - -------------------------------------------------------------------------------------------------------------- Operating income 31,613 9,254 53,271 16,574 Interest expense 7,200 6,246 13,806 12,650 - -------------------------------------------------------------------------------------------------------------- Earnings before income taxes 24,413 3,008 39,465 3,924 Income taxes 8,789 1,143 14,358 1,491 - -------------------------------------------------------------------------------------------------------------- Net earnings $ 15,624 $ 1,865 $ 25,107 $ 2,433 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Average common shares outstanding 35,511 36,456 35,562 36,602 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.44 $ 0.05 $ 0.71 $ 0.07 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Average diluted shares outstanding 36,970 36,483 36,818 36,621 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.42 $ 0.05 $ 0.68 $ 0.07 - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. </TABLE> 3
J.B. HUNT TRANSPORT SERVICES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited) <TABLE> - --------------------------------------------------------------------------------- JUNE 30, 1998 DECEMBER 31, 1997 - --------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 9,060 $ 3,701 Accounts receivable 180,791 169,198 Prepaid expenses 17,610 24,716 Deferred income taxes 2,337 2,337 - --------------------------------------------------------------------------------- Total current assets 209,798 199,952 - --------------------------------------------------------------------------------- Property and equipment 1,326,290 1,217,478 Less accumulated depreciation 441,519 420,671 - --------------------------------------------------------------------------------- Net property and equipment 884,771 796,807 - --------------------------------------------------------------------------------- Other assets 21,939 25,160 - --------------------------------------------------------------------------------- $1,116,508 $1,021,919 - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 97,350 $ 17,500 Trade accounts payable 135,731 138,509 Claims accruals 1,539 22,306 Accrued payroll 28,109 16,096 Other accrued expenses 17,053 10,677 - --------------------------------------------------------------------------------- Total current liabilities 279,782 205,088 - --------------------------------------------------------------------------------- Long-term debt 317,740 322,790 Claims accruals 15,253 15,168 Deferred income taxes 146,921 140,909 Stockholders' equity 356,812 337,964 - --------------------------------------------------------------------------------- $1,116,508 $1,021,919 - --------------------------------------------------------------------------------- - --------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. </TABLE> 4
J.B. HUNT TRANSPORT SERVICES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) <TABLE> - --------------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30 - --------------------------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------- <S> <C> <C> Cash flows from operating activities: Net earnings $ 25,107 $ 2,433 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 65,478 66,478 Deferred income taxes 6,012 581 Termination of restricted stock (23) 0 Tax benefit (expense) of stock options exercised 701 (36) Changes in assets and liabilities: Accounts receivable (11,593) 794 Prepaid expenses 7,106 17,036 Trade accounts payable (2,778) 10,659 Claims accruals (20,682) (2,875) Accrued payroll and other accrued expenses 18,389 5,291 - --------------------------------------------------------------------------------------------- Net cash provided by operating activities 87,717 100,361 - --------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property and equipment (184,504) (79,113) Proceeds from sale of equipment 31,062 36,317 Decrease in other assets 3,221 4,363 - --------------------------------------------------------------------------------------------- Net cash used in investing activities (150,221) (38,433) - --------------------------------------------------------------------------------------------- Cash flows from financing activities: Repayment of long-term debt (5,000) (5,000) Net borrowings (repayments) under commercial paper program 79,800 (41,250) Proceeds from sale of treasury stock 2,417 35 Repurchase of treasury stock (5,814) (10,481) Dividends paid (3,540) (3,683) - --------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 67,863 (60,379) - --------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 5,359 1,549 - --------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 3,701 3,786 - --------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 9,060 $ 5,335 - --------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid (refunded) during the period for: Interest $ 13,859 $ 12,599 Income taxes (1,602) (6,742) - --------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------- See accompanying notes to condensed consolidated financial statements. </TABLE> 5
J.B. HUNT TRANSPORT SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) LONG-TERM DEBT Long-term debt consists of (in thousands): <TABLE> 6/30/98 12/31/97 ------- -------- <S> <C> <C> Commercial paper $202,350 $132,500 Uncommitted line of credit 10,000 -- Senior notes payable, interest at 6.25% payable semiannually, due 9/1/03 98,260 98,260 Senior notes payable, interest at 7.84% payable semiannually 5,000 10,000 Senior notes payable, interest at 6.25% payable semiannually, due 11/17/00 25,000 25,000 Senior notes payable, interest at 6.00% payable semiannually, due 12/12/00 25,000 25,000 Senior subordinated notes, interest at 7.80% payable semiannually 50,000 50,000 -------- -------- 415,610 340,760 Less current maturities (97,350) (17,500) Unamortized discount (520) (470) -------- -------- $317,740 $322,790 -------- -------- -------- -------- </TABLE> The Company is authorized to issue up to $240 million in notes under its commercial paper note program. These notes are supported by two credit agreements with a group of banks. One agreement for $120 million expires March 12, 1999 and $120 million expires March 20, 2002. The uncommitted line of credit is due in August of 1998. The 6.25% senior notes were issued on September 1, 1993 and are due on September 1, 2003. The 7.84% senior notes were issued on March 31, 1992 and are payable in five equal annual installments on March 31. The 6.25% senior notes were issued on November 17, 1995 and are payable at maturity on November 17, 2000. The 6.00% senior notes were issued on December 12, 1995 and are payable at maturity on December 12, 2000. The 7.80% senior subordinated notes were issued on October 30, 1992 and are payable in five equal annual installments beginning October 30, 2000. 6
2) CAPITAL STOCK The Company maintains a Management Incentive Plan that provides various vehicles to compensate key employees with Company common stock. A summary of the restricted and non-statutory options to purchase Company common stock follows: <TABLE> Weighted average Number of Number of exercise price shares shares per share exercisable ------ --------- ----------- <S> <C> <C> <C> Outstanding at December 31, 1997 3,039,925 $16.70 274,225 ------- ------- Granted 144,500 28.13 Exercised (138,310) 17.36 Terminated (169,950) 16.88 --------- ------ Outstanding at June 30 1998 2,876,165 $17.42 361,840 --------- ------ ------- --------- ------ ------- </TABLE> On July 16, 1998, the Company's Board of Directors declared a regular quarterly cash dividend of $.05 per share payable on August 21, 1998 to stockholders of record on August 3, 1998. 3) NEW ACCOUNTING PRONOUNCEMENTS The Company adopted Financial Accounting Standards Board Statement No. 128, Earnings Per Share (SFAS 128), as of December 31, 1997. Accordingly, earnings per share amounts for the three and six months ended June 30, 1998 and 1997 have been computed based on the following: <TABLE> (in thousands, except per share data) ------------------------------------- Three Months Ended Six Months Ended June 30 June 30 ------- ------- 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Numerator (net earnings) $15,624 $1,865 $25,107 $2,433 Denominator - Basic earnings per share Weighted average shares outstanding 35,511 36,456 35,562 36,602 ------- ------ ------- ------ ------- ------ ------- ------ Basic earnings per share $.44 $.05 $.71 $.07 ------- ------ ------- ------ ------- ------ ------- ------ Denominator - Diluted earnings per share Weighted average share outstanding 35,511 36,456 35,562 36,602 Effect of common stock options 1,459 27 1,256 19 ------- ------ ------- ------ Weighted average shares assuming dilution 36,970 36,483 36,818 36,621 ------- ------ ------- ------ ------- ------ ------- ------ Diluted earnings per share $.42 $.05 $.68 $.07 ------- ------ ------- ------ ------- ------ ------- ------ </TABLE> Options to purchase shares of common stock which were outstanding during the periods indicated above, but were not included in the computation of diluted earnings per share because the option price was greater than the average market price of the common shares, are shown below. <TABLE> Three Months Ended Six Months Ended June 30 June 30 ------- ------- 1997 1998 1997 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Number of shares under option -- 4,756,000 134,500 4,795,000 Range of exercise price -- $15.00-$24.63 $28.13-$30.00 $14.67-$24.63 </TABLE> 7
The Company adopted Financial Accounting Standards Board Statement No. 130, Reporting Comprehensive Income (SFAS 130), as of January 1, 1998. SFAS 130 establishes standards for reporting and displaying comprehensive income and its components in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 also requires the accumulated balance of other comprehensive income to be displayed separately in the equity section of the consolidated balance sheet. The accumulated balance of other comprehensive income of each of June 30, 1998 and December 31, 1997 was $5.6 million. The adoption of this Statement had no material impact on net earnings or stockholders' equity. Comprehensive income was equal to net earnings during the three and six months ended June 30, 1998 and 1997. 4) RECLASSIFICATIONS Certain amounts for 1997 have been reclassified to conform to the 1998 classifications. INDEPENDENT ACCOUNTANT'S REVIEW REPORT The Board of Directors J.B. Hunt Transport Services, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of J.B. Hunt Transport Services, Inc. and subsidiaries as of June 30, 1998, and the related condensed consolidated statements of earnings for the three-month and six-month periods ended June 30, 1998 and 1997 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 1998 and 1997. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of J.B. Hunt Transport Services, Inc. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 30, 1998, 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, 1997, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG Peat Marwick LLP Little Rock, Arkansas July 15, 1998 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion should be read in conjunction with the attached interim condensed consolidated financial statements and notes thereto, and with the Company's audited consolidated financial statements and notes thereto for the calendar year ended December 31, 1997. RESULTS OF OPERATIONS COMPARISON OF SECOND QUARTER 1998 TO SECOND QUARTER 1997 The following table sets forth items in the Condensed Consolidated Statements of Earnings as a percentage of operating revenues and the percentage increase or decrease of those items as compared with the prior period. <TABLE> Three Months Ended June 30 Percentage of Percentage Change Operating Revenues Between Quarters ------------------ ----------------- 1998 1997 1998 vs. 1997 ------------------ ------------- <S> <C> <C> <C> Operating revenues 100.0% 100.0% 19.7% Operating expenses Salaries, wages and employee benefits 34.5% 34.6% 19.2% Purchased transportation 33.6% 32.2% 24.9% Fuel and fuel taxes 7.4% 9.4% (5.8%) Depreciation 7.2% 8.6% (.5%) Operating supplies and expenses 5.2% 6.1% 1.3% Insurance and claims 1.4% 2.6% (33.1%) Operating taxes and licenses 1.4% 1.7% 4.5% General and administrative expenses 1.4% 1.4% 25.3% Communication and utilities 1.0% 1.0% 15.0% ---------------------------------- Total operating expenses 93.1% 97.6% 14.2% ---------------------------------- Operating income 6.9% 2.4% 241.6% Interest expense 1.6% 1.6% 15.3% ---------------------------------- Earnings before income taxes 5.3% .8% 711.6% Income taxes 1.9% .3% 668.9% ---------------------------------- Net earnings 3.4% .5% 737.7% ---------------------------------- ---------------------------------- </TABLE> Operating revenues for the second quarter of 1998 increased approximately 20%, to $461.0 million from $385.2 million in the second quarter of 1997. Revenues from core operations grew 26% compared to the second quarter of 1997, net of the flatbed business that was sold in July of 1997. Revenues in the dry-van business, which includes intermodal, grew 22% during the second quarter, while revenues in the logistics business, which includes dedicated contract services, increased 40%. The growth of dry-van revenues was primarily due to an 18% increase in the size of the tractor fleet and a 5% increase in tractor utilization. Dry-van truck rates rose approximately 2%, compared with the second quarter of 1997, while intermodal rates declined approximately 2%. The 9
growth of logistics revenue was driven by strong demand from existing customers and contracts, and new business generated during the current quarter. Total operating expenses for the second quarter of 1998 increased approximately 14% over the comparable period of 1997. Total operating expenses expressed as a percentage of operating revenues (operating ratio) were 93.1% for the second quarter of 1998, as compared with 97.6% in 1997. Salaries, wages and employee benefits increased approximately 19%, which was in relative perspective with revenue growth. The 33% pay increase awarded to certain over-the-road van drivers in February of 1997 does not impact the quarter to quarter comparison. The increase in purchased transportation expense was consistent with trends in recent periods and reflects payments to railroads and third-party providers of truck line-haul transportation services. The decrease of fuel and fuel taxes was primarily due to a 12% decrease in fuel cost per gallon. This decrease of fuel expense was partly offset by lower fuel surcharge revenue. Depreciation expense declined slightly in terms of dollar amount between the second quarter of 1998 and 1997, but decreased from 8.6% of revenue in 1997 to 7.2% in 1998. This decline in percentage rate was primarily due to the amount of revenue growth that was non-asset related, such as logistics and intermodal, and higher gains on asset dispositions recognized during the current quarter. Gains on asset dispositions reduce depreciation expense and totaled $1.4 million in 1998, compared with a loss of $76,000 in 1997. The 1998 gain amount included approximately $.5 million recognized on the sale of Lake City Express, a small subsidiary which was sold in June of 1998. Operating supplies and expenses increased approximately 1%, but declined from 6.1% of revenue in 1997 to 5.2% in 1998. This decrease in percentage rate was also primarily due to the amount of logistics and intermodal growth, with no corresponding increase in operating supplies and expenses, which costs tend to be driver and tractor related. The significant decrease in insurance and claims costs was a result of fewer vehicle collisions during the second quarter of 1998. The driver compensation package has been successful in attracting and retaining experienced, professional drivers that are involved in fewer vehicle collisions and lower accident costs. Although general and administrative expenses remained at the same percentage of revenue between the two comparable quarters, the dollar amount of expense increased approximately 25%. This increase was due in part to expenditures for professional services including contracted computer programmers. Interest expense increased approximately 15% primarily due to higher debt levels. The effective income tax rate was 36% during the current quarter, compared with 38% in 1997. The reduction in the effective income tax rate related, in part, to taxes applicable to the Company's Mexican operations. As a result of the above, net earnings for the second quarter of 1998 increased to $15.6 million, or diluted earnings per share of 42 cents, compared with 1997 second quarter net earnings of $1.9 million, or 5 cents per diluted share. The decrease in the number of weighted average shares outstanding (before the effect of dilutive stock options) was primarily due to the Company's acquisition of treasury shares. The increase in weighted average shares assuming full dilution results from the increased effect of dilutive stock options caused by the increase in the Company's price of common stock. 10
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 TO SIX MONTHS ENDED JUNE 30, 1997 The following table sets forth items in the Condensed Consolidated Statements of Earnings as a percentage of operating revenues and the percentage increase or decrease of those items as compared with the prior period. <TABLE> Six Months Ended June 30 Percentage of Percentage Change Operating Revenues Between Quarters ------------------ ----------------- 1998 1997 1998 vs. 1997 -------- -------- ----------------- <S> <C> <C> <C> Operating revenues 100.0% 100.0% 16.5% Operating expenses Salaries, wages and employee benefits 34.9% 33.9% 19.7% Purchased transportation 33.4% 32.1% 21.3% Fuel and fuel taxes 7.7% 9.9% (9.1%) Depreciation 7.5% 8.8% (1.5%) Operating supplies and expenses 5.2% 6.1% (1.1%) Insurance and claims 1.6% 2.7% (27.4%) Operating taxes and licenses 1.4% 1.7% (3.4%) General and administrative expenses 1.2% 1.5% (8.4%) Communication and utilities 1.0% 1.1% 8.6% ---------------- ------- Total operating expenses 93.9% 97.8% 11.9% ---------------- ------- Operating income 6.1% 2.2% 221.4% Interest expense 1.6% 1.7% 9.1% ---------------- ------- Earnings before income taxes 4.5% .5% 905.7% Income taxes 1.6% .2% 863.0% ---------------- ------- Net earnings 2.9% .3% 931.9% ---------------- ------- ---------------- ------- </TABLE> Operating revenues for the six month period ended June 30, 1998 increased approximately 17% to $874.5 million from $750.6 million in 1997. The increase in revenue would have been 23%, adjusted for the sale of the flatbed business in July of 1997. Revenues in the dry-van business, which includes intermodal, grew 19% during the first six months of 1998, while revenues in the logistics business, which includes dedicated contract services, increased 33%. The increase in dry-van revenue was primarily due to an 18% increase in the size of the tractor fleet and a 6% increase in tractor utilization. Dry-van truck rates rose approximately 2.4% during the first six months of 1998, while intermodal rates declined nearly 3%. The growth of logistics revenue was driven by strong demand from existing customers and contracts, and new business generated during 1998. Total operating expenses for the first six months of 1998 increased approximately 12% over the comparable period of 1997. Total operating expenses expressed as a percentage of operating revenues (operating ratio) were 93.9% for the six months ended June 30, 1998, compared with 97.8% in 1997. Salaries, wages and employee benefits increased 19.7%, primarily due to an approximate 33% pay increase for certain over-the-road van drivers which was effective February 28, 1997. The increase in purchased transportation expense was consistent with trends in recent periods and reflects payments to railroads and third-party providers of truck line-haul services. The decrease in fuel and fuel taxes was primarily due to a nearly 14% decrease in fuel cost per gallon during 1998. 11
This decline in fuel expense was partly offset by a decrease in fuel surcharge revenue during the same period. Depreciation expense declined slightly in terms of dollar amount between the two comparable six month periods and also declined as a percentage of revenue. This decrease was due to the amount of revenue growth in 1998 that was non-asset related, such as logistics and intermodal, and also higher gains on asset dispositions recognized in 1998. Gains on asset dispositions reduce depreciation expense and totaled $2.1 million in 1998, compared with $83,000 in 1997. The 1998 gain included approximately $.5 million recognized on the sale of Lake City Express, a small subsidiary, which was sold in June of 1998. The additional gains were related to sales and dispositions of revenue equipment in the normal course of business. Operating supplies and expenses decreased slightly in dollar amount and declined from 6.1% of revenue in 1997 to 5.2% in 1998. This decrease was partly due to lower tractor maintenance expenditures associated with a newer age of fleet, and also growth of logistics and intermodal revenue with no corresponding increase in operating supplies and expenses, which tend to be driver and tractor related. The significant decline in insurance and claims expense was due to fewer vehicle collisions and the more experienced driver force. The lower level of general and administrative expenses was due primarily to reduced driver advertising expense, and earnings recognized from the Company's operations in Mexico, which were recorded as an offset to general and administrative expenses. The effective income tax rate was approximately 36% for the six months ended June 30, 1998 and 38% for the comparable period of 1997. The reduction in the effective income tax rate related, in part, to taxes applicable to the Company's Mexican operations. As a result of the above, net earnings for the six months ended June 30, 1998 were $25.1 million, or diluted earnings per share of 68 cents, compared with $2.4 million, or 7 cents per diluted share in 1997. The decrease in the number of weighted average shares outstanding (before the effect of dilutive stock options) was primarily due to the acquisition of treasury shares. The increase in weighted average shares assuming full dilution results from the increased effect of dilutive stock options caused by the increase in the Company's price of common stock. LIQUIDITY AND CAPITAL RESOURCES This discussion of corporate liquidity and capital resources should be read in conjunction with information presented in the Condensed Consolidated Statements of Cash Flows and the Condensed Consolidated Balance Sheets. Net cash provided by operating activities was $87.7 million for the first six months of 1998, compared with $100.4 million in 1997. Net cash was generated during the first six months of 1998 primarily from net earnings, depreciation and increases in accrued payroll and other accrued expenses. Net cash was used primarily to pay claims accruals and to fund an increase in customer accounts receivable. Net cash used in investing activities was $150.2 million in 1998 and $38.4 million in 1997. This increase in investment spending was primarily to purchase revenue equipment. These purchases of revenue equipment were funded by cash from operating activities and an increase in debt. The Company also used $5.8 million of cash to purchase treasury stock during the first six months of 1998. 12
SELECTED BALANCE SHEET DATA <TABLE> As of -------------------------------------------------- June 30, 1998 December 31, 1997 June 30, 1997 ------------- ----------------- ------------- <S> <C> <C> <C> Working capital ratio .75 .97 1.07 Current maturities of long- term debt (millions) 97.4 $ 17.5 $ 13.3 Total debt (millions) 415.1 $ 340 $ 336.1 Total debt to equity 1.16 1.01 .97 Total debt as a percentage of total capital .54 .50 .49 </TABLE> The Company's debt levels increased during the first six months of 1998 primarily to fund capital expenditures for revenue equipment. The Company has commitments to purchase approximately $204 million of revenue and service equipment, net cost, after expected proceeds from sale or trade-in allowances of approximately $22 million. The Company borrowed $10 million on an uncommitted line-of-credit in May of 1998. This short-term line matures in August of 1998. A plan to issue up to $100 million of senior notes is currently anticipated and expected to close during the third quarter of 1998. Proceeds from such an offering would most likely be used to pay off the uncommitted line-of-credit, reduce commercial paper indebtedness and other general corporate purposes. YEAR 2000 The Company developed a plan during 1996 to deal with the Year 2000 problem. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's plan provides for the conversion efforts to be completed by the end of 1998. The total cost of the project is currently estimated to be $870,000 and is being funded through operating cash flows. The Company is expensing all costs associated with these systems changes as the costs are incurred. As of June 30, 1998, approximately $680,000 had been expensed since the project was initiated. FORWARD-LOOKING STATEMENTS This report may contain statements that may be considered as forward-looking or predictions concerning future operations. Such statements are based on management's belief or interpretation of information currently available. These statements and assumptions involve certain risks and uncertainties and management can give no assurance that such expectations will be realized. Among all the factors and events that are not within the Company's control and could have a material impact on future operating results are general economic conditions, cost and availability of diesel fuel, adverse weather conditions and competitive rate fluctuations. In addition, the ultimate net cost of the new driver compensation package will be dependent on the mix of experienced drivers attracted to the Company and on future accident, cargo and worker's compensation claims, as well as other factors. 13
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 On June 26, 1998 the Company announced that it had completed the sale of its subsidiary, Lake City Express (LXI). The sale was made to the then current president of LXI and a group of investors. This sale completed a previously announced plan to divest of business units not strategically aligned with its core transportation focus of truckload, including intermodal and logistics, including dedicated contract services. The Company currently plans to issue approximately $100 million of senior notes during the third quarter of 1998. Proceeds from such an offering would most likely be used to pay off an uncommitted line-of-credit, reduce commercial paper indebtedness and other general corporate purposes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule 27.2 1997 Restated Financial Data Schedule 14
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. J.B. HUNT TRANSPORT SERVICES, INC. DATE: August 6, 1998 BY: /s/ Kirk Thompson ------------------------------ ------------------------------ Kirk Thompson President and Chief Executive Officer DATE: August 6, 1998 BY: /s/ Jerry W. Walton ------------------------------ ------------------------------ Jerry W. Walton Executive Vice President, Finance and Chief Financial Officer 15