FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

J.B. HUNT TRANSPORT SERVICES, INC.

(Exact name of registrant as specified in its charter)

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     ý        No           o

                The number of shares of the Company's $.01 par value common stock outstanding on September 30, 2001 was 35,971,080.

Index

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 month and nine month periods ended September 30, 2001 are not necessarily indicative of December 31, 2001.

            The interim condensed consolidated financial statements have been reviewed by KPMG LLP, independent public accountants.

            These interim condensed consolidated financial statements should be read in conjunction with the Company's latest annual report and Form 10-K for the year ended December 31, 2000.

J.B. HUNT TRANSPORT SERVICES, INC.

Condensed Consolidated Statements of Earnings

(in thousands, except per share data)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

J.B. HUNT TRANSPORT SERVICES, INC.

Condensed Consolidated Balance Sheets

(in thousands)

See accompanying notes to condensed consolidated financial statements.

J.B. Hunt Transport Services, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

J.B. HUNT TRANSPORT SERVICES, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1)        The interim condensed consolidated financial statements at September 30, 2001 and for the three and nine months ended September 30, 2001 and 2000 are unaudited and include all adjustments, consisting only of normal recurring accruals, which the Company considers necessary for a fair presentation of financial position and operating results.  The unaudited consolidated financial statements have been prepared in accordance with Rule 10-01 of Regulation S-X and, therefore, do not contain all information and footnotes normally contained in annual financial statements.  Accordingly, they should be read in conjunction with the financial statements and notes thereto appearing in the annual report on Form 10-K of the Company for the year ended December 31, 2000.

2)        The results of operations for the three and nine month periods ended September 30, 2001 are not necessarily indicative of those to be expected for the calendar year ending December 31, 2001.

3)        Long-Term Debt

            Long-term debt consists of (in thousands):

            The 7.80% senior subordinated notes are payable in five equal installments beginning October 30, 2000.  The Company is authorized to borrow up to $150 million under its current revolving lines of credit.  These lines of credit are supported by a credit agreement with a number of banks, which expires December 14, 2001.  No balances were outstanding under these lines of credit at September 30, 2001.

4)        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:

            The Company announced in February of 2000, a decision to discontinue paying dividends and an intent to use those funds to repurchase up to 500,000 shares of its common stock.  These shares were repurchased during the first six months of 2000.

5)        Earnings Per Share

         A reconciliation of the numerator and denominator of basic and diluted earnings per share is shown below:

            Options which were outstanding to purchase shares of common stock during the periods indicated above, but were excluded from the computation of diluted earnings per share because the option price was greater than the average market price of the common shares were:

6)        Comprehensive Income

            Comprehensive income consists of net earnings and foreign currency translation adjustments.  During the three and six months ended September 30, 2001 and 2000, comprehensive income was equal to:  (in thousands):

7)        Income Taxes

            The effective income tax rates were approximately 15% for the three months and nine months ended September 30, 2001, compared with 4% for the three months and 15% for the nine months ended September 30, 2000.  These rates were based on the estimated annual combined effective rates for each calendar year.

8)        Business Segments

            The Company had three reportable business segments during the first nine months of 2001.  Segments included Truck (JBT), Intermodal (JBI) and Dedicated Contract Services (DCS).  JBT business includes full truck-load, dry-van freight which is typically transported utilizing company-owned or controlled revenue equipment.  This freight is typically transported over roads and highways and does not move by rail.  The JBI segment includes freight which is transported by rail over at least some portion of the movement and also includes certain repositioning truck freight moved by JBI equipment or third-party carriers, when such highway movement is intended to direct JBI equipment back toward intermodal operations.  DCS segment business typically includes company-owned revenue equipment and employee drivers which are assigned to a specific customer, traffic lane or service.  DCS operations usually include formal, written long-term agreements or contracts which govern services performed and applicable rates.

                In addition, the Company operated a logistics business segment during the first six months of 2000.  Effective July 1, 2000, substantially all of the logistics business and related assets were contributed to a newly-formed, commonly-owned company, Transplace (TPC).  The Company presently has an approximate 27% interest in TPC and the financial results of TPC are included on a one-line, non-operating item on the Consolidated Statements of Earnings entitled “equity in earnings (loss) of associated companies.”  A summary of certain segment information is presented below ( in millions):

9)      Derivative Instruments and Hedging Activities

            On January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (Statement 133), amended by Statement 138.  Statement 138 amended the accounting and reporting standards of Statement 133 for certain derivative instruments and hedging activities.  Statement 138 also amends Statement 133 for decisions made by the FASB relating to the Derivatives Implementation Group (DIG) process.  The FASB DIG is addressing Statement 133 implementation issues the ultimate resolution of which may impact the application of Statement 133.

Under Statement 133, entities are required to record all derivative instruments on the balance sheet at fair value.  The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it.  If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies.  If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged.  If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings.  Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately.

Adoption of  Statement 133, as of January 1, 2001, did not have an effect on results of operations or financial position of the Company, because the Company does not have any free standing derivatives or embedded derivatives that would be required to be separated from the host contract and accounted for under SFAS 133.

10)      Reclassifications

            Certain amounts for 2000 have been reclassified to conform to the 2001 classifications.

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 September 30, 2001, and the related condensed consolidated statements of earnings for the three and nine months ended September 30, 2001 and 2000, and the condensed consolidated statements of cash flows for the nine months ended September 30, 2001 and 2000.  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, 2000, 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 2, 2001, 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, 2000, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

                                                                                                                                       & #160;        /s/ KPMG LLP

Tulsa, Oklahoma

October 15, 2001

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, 2000 and Management’s Discussion and Analysis of Results of Operations and Financial Condition included in the 2000 Annual Report to Shareholders.

This report contains statements that may be considered as forward-looking or predictions concerning future operations.  Such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These statements are based on management’s belief or interpretation of information currently available.  Shareholders and prospective investors are cautioned that actual results and experience may differ materially from the forward-looking statements as a result of many factors.  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 and availability of drivers.  Current and future changes in fuel prices could result in significant fluctuations of quarterly earnings.  Financial and operating results of the Company may fluctuate as a result of these and other risk factors as detailed from time to time in Company filings with the Securities and Exchange Commission.

RESULTS OF OPERATIONS

Comparison of Third Quarter 2001 to Third Quarter 2000

SUMMARY

            Consolidated operating revenues for the third quarter of 2001 were $537 million, compared with $509 million during the third quarter of 2000.  The Company contributed all of its non-asset based logistics business to a jointly owned logistics company, Transplace (TPC), effective July 1, 2000.  While the Company’s results of operations include approximately 27% of TPC’s net results of operations, all logistics revenue has been excluded from the Company’s financial statements subsequent to June 30, 2000.

            JBT segment revenue grew 1% during the third quarter of 2001, to $210 million, compared with $208 million in 2000.  The JBT tractor fleet was 36 units larger at September 30, 2001, compared with September 30, 2000.  This increase included independent contractor tractors which the Company began utilizing in late 2000.  Revenue per loaded mile in the JBT segment, excluding fuel surcharges, rose 3.4% in the current quarter, compared with the third quarter of 2000.  The  JBT segment generated operating income of  $4.8 million during the third quarter of 2001, compared with a loss of $1.9 million in 2000.  The current quarter results represent the second quarter of positive operating income since the Company began reporting the Truck segment separately from Intermodal.  The improvement in JBT operating income during the current quarter was partly due to higher revenue per mile, strong September load volume and cost reduction initiatives, such as reduced empty miles per load.

            Revenue in the JBI segment rose 9% to $194 million in 2001, compared with $178 million in 2000.  Revenue per mile, excluding fuel surcharges, increased 1.1% in 2001, compared with the third quarter of 2000.  Operating income in the JBI segment was $11.4 million in 2001, compared with $10.3 million in 2000.

            DCS segment revenue increased 8% to $138 million in 2001 from $128 million in 2000.  Operating income declined to $1.7 million in 2001 from $8.0 million in 2000.  The decrease in operating income during the current quarter was primarily due to lower revenue per tractor, associated with the weak economy, and higher accident, equipment and personnel costs.

Summary of Operating Segments Results

For Three Months Ended September 30

(dollars in millions)

            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.

            Total operating expenses for the third quarter of 2001 increased 6.4% from the comparable period of 2000.  The Company’s operating ratio was 97.8% for the third quarter of 2001 and 96.9% in the comparable quarter of 2000.   Salaries, wages and employee benefits expenses increased 5.1% during the current quarter, in relative proportion to the rate of revenue growth.  Rents and purchased transportation increased 13.4% and rose as a percentage of revenue, partly due to the use of independent contractors, trailer rental charges, the growth of intermodal business and freight outsourced to TPC.  Fuel and fuel taxes declined 7.5% and decreased as a percentage of revenue, primarily due to lower diesel fuel prices in 2001.  While fuel prices were somewhat lower during the third quarter of 2001, cost per gallon was still well above levels of the past few years.  The Company has fuel revenue adjustment arrangements in place with most of its customers.  These programs allow the Company to recover substantially all of its increased  fuel costs and also results in lower fuel surcharges when fuel expense declines.

            Depreciation and amortization expense increased 5.4%, but remained the same percentage of revenue in 2001 and 2000.  This increase in spending was primarily due to an approximate 5% growth of the consolidated tractor fleet.  The Company commenced a tractor leasing program in July of 2000 and has acquired the majority of its new tractors through September 30, 2001 utilizing capital leases.  Operating supplies and expenses rose 8.9%, reflecting increased spending for tires and maintenance of revenue equipment.  Insurance and claims expense was up 36.1% during the current quarter due, in part, to increases in accident frequency and severity.  The 8.8% increase in general and administrative expenses was partly a result of higher bad debt costs in the third quarter of 2001.  The 23.4% decline in communications and utilities expense was primarily due to certain vendor credits and lower communication rates in effect during the current quarter.  The effective income tax rates were approximately 15% in 2001 and 4% in 2000.  The effective income tax rate in the third quarter of 2000 was reduced by two sale and leaseback transactions and a change in the expected tax rate for the full year 2000.

            As a result of the above, net earnings for the three months ended September 30, 2001 were $4.5 million, or earnings per diluted share of $0.12, compared with $9.1 million, or earnings per diluted share of $0.26, in 2000.

Comparison of Nine Months Ended September 30, 2001 to Nine Months Ended September 30, 2000

SUMMARY

            Consolidated operating revenue for the nine months ended September 30, 2001 was $1.554 billion, compared with $1.626 billion during the first nine months of 2000.  Operating revenue reflects the contribution of all the Company’s non-asset based logistics business to the jointly owned logistics company, Transplace (TPC).  The Company’s revenue growth for 2001 was approximately 11%, excluding the former logistics segment.  While the Company’s results of operations include approximately 27% of TPC’s net results of operations, all logistics revenue has been excluded from the Company’s financial statements subsequent to June 30, 2000.

            For the current nine months, JBT segment revenue grew 2% to $625 million, compared with $615 million in 2000.  The JBT tractor fleet averaged 5% larger in  2001, including independent contractors, which the Company began utilizing in late 2000.  Revenue per loaded mile in the Truck segment, excluding fuel surcharges, rose 2.5% during the first nine months of 2001, compared with 2000.  The JBT segment generated operating income of $4.4 million in 2001, compared with a loss of $5.4 million in 2000.  The improvement in JBT operating income during 2001 was partly due to a $4.1 million gain on the sale of trailers, which closed in March.  In addition, the increase in revenue per mile (excluding fuel surcharges) and focus on operating efficiencies, such as reducing empty miles per load, enhanced operating income.

            Revenue in the JBI segment rose 9% to $542 million in 2001, from $495 million in 2000.  Loads in the Intermodal segment grew about 5% for the first nine months of 2001.  Revenue per mile, excluding fuel surcharges increased .4% in 2001 over 2000.  Operating income in the JBI segment was $28.8 million for the first nine months of 2001, up from $27.5 million in 2000.

            DCS segment revenue was $400 million during the first nine months of 2001, up 16% from $344 million in 2000.  Operating income in 2001 totaled $10.9 million, compared with $21.7 million in 2000.  Current year operating income included a $1.3 million gain on the sale of certain trailers, which closed in March.  The decline in 2001 operating income was primarily due to reduced freight demand associated with the slowing U.S. economy, and higher accident, equipment and personnel costs.

Summary of Operating Segments Results

For Nine Months Ended September 30

(dollars in millions)

            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.

            Total operating expenses for the first nine months of 2001 decreased 4.0% from the comparable period of 2000.  This decrease was impacted by the contribution of  the logistics business to TPC, effective July 1, 2000.  The Company’s operating ratio was 97.7% for the first nine months of  2001 and 97.2% in the comparable period of 2000.  Salaries, wages and employee benefits increased 4.1% during the current year due, in part, to higher workers’ compensation expenses.  The contribution of the logistics business to TPC also significantly decreased 2001 revenue, resulting in an increase of this cost category as a percentage of revenue.  Rents and purchased transportation decreased 19.9% and declined significantly as a percentage of revenue, primarily due to the contribution of the logistics business to TPC.  Fuel and fuel taxes increased .9%, primarily due to an increase in tractor miles, partly offset by a slight decrease in fuel cost per gallon during 2001.

            Depreciation and amortization expense increased 7.6% during the current year, due primarily to an approximate 5% increase in the Company owned tractor fleet.  The Company commenced a tractor leasing program in July of 2000 and has acquired the majority of its new tractors since that time utilizing capital leases.  Operating supplies and expenses increased 12.4%, primarily due to a 4% increase in tractor miles and higher tractor and trailing equipment maintenance and tire costs.  A portion of the higher tractor repair costs was due to more work being outsourced to outside vendors and was partly offset by lower mechanic wage expense.  Insurance and claims costs rose 30.2%, primarily due to higher accident and collision expenses.  General and administrative expenses declined 36.8%, partly due to an approximate $5.5 million gain on the sale of a group of trailers which closed during March of 2001.  This expense category was also reduced in 2001 by charges to TPC for computer system and support work and other administrative services.  The effective income tax rates were 15% in 2001 and 2000, which were the rates expected for the full year 2001 and 2000, respectively.

            As a result of the above, net earnings for the nine months ended September 30, 2001 were $14.8 million, or earnings per diluted share of $0.41, compared with $25.2 million, or $0.71 per diluted share, in 2000.

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 $121.3 million for the nine months ended September 30, 2001, compared with $96.7 million during the comparable period of 2000.  This increase in cash provided was partly due to a significant decline in other current assets in 2001 and a significant amount of funds used for accounts payable in 2000.  The decrease in other current assets reflects the amortization in 2001 of an insurance premium which was paid in December of 2000.  Net cash of $25.6 million was generated from investing activities in 2001, compared with $103.6 million used in 2000.  This change was primarily a result of reduced purchases of trailing equipment and the sale of certain trailing equipment in March of 2001.  The majority of new trailing equipment additions since late 2000 have been under operating lease arrangements.  Current plans are to continue utilizing operating leases for future trailing equipment acquisitions.

Selected Balance Sheet Data

            The Company’s total debt level, including capitalized lease obligations, was $401 million at September 30, 2001, approximately the same level as of December 31, 2000.  However, cash and cash equivalents totaled $63 million at September 30, 2001, compared with $5 million at December 31, 2000.  As of September 30, 2001, the Company had intentions to acquire or lease approximately $140 million of revenue and service equipment during the next twelve month period.  Funding for future acquisitions of revenue equipment is expected to come from cash generated from operations, existing borrowing facilities and rental or leasing arrangements.  The Company discontinued its commercial paper program in early 2001.  The Company  is authorized to borrow up to $150 million under its current revolving lines of credit.  These lines of credit are supported by a credit agreement with a number of banks, which expires December 14, 2001.  The Company plans to renew these lines of credit during the fourth quarter of 2001.

Prospective Accounting Pronouncements

            In July 2001, the FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations” (Statement 141), Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (Statement 142), and Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (Statement 143).  In October, 2001 the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (Statement 144).

            Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001.  Statement 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142.  The Company is required to adopt the provisions of Statement 141 immediately, and Statement 142 effective January 1, 2002.  Goodwill acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142.  Statement 143  requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset.  Statement 143 is effective for fiscal years beginning after June 15, 2002.  The Company is currently assessing the impact of Statement 143 on its financial condition and results of operations.  Statement 144 retains the requirement to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale.  Statement 144 is effective for fiscal years beginning after December 15, 2001, and for interim periods within those fiscal years.

            The Company has no goodwill or intangible assets as of September 30, 2001 and, accordingly, does not believe the adoption of Statements 141 and 142 will impact the Company’s financial statements.

            Under the provisions of Statement 142 impairment of the Company’s equity method of investment will continue to be assessed under the provisions of APB 18.  The Company has no negative goodwill as contemplated under Statements 141 and 142 related to its equity method investments.

            Statement 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset.  Statement 143 is effective for fiscal years beginning after June 15, 2002.  Statement 144 retains the requirement to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale.  Statement 144 is effective for fiscal years beginning after December 15, 2001, and for interim periods within those fiscal years.  The Company is currently assessing the impact of Statements 143 and 144 on its financial condition and results of operations.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            The Company’s earnings are affected by changes in short-term interest rates as a result of its use of short-term revolving lines of credit.  The Company from time to time utilizes interest rate swaps to mitigate the effects of interest rate changes;  none were outstanding at September 30, 2001.  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 the Company’s results of operations based on variable rate debt outstanding at September 30, 2001.  At September 30, 2001, the fair value of the Company’s fixed rate long-term obligations approximated carrying value.

            Although the Company conducts business in foreign countries, international operations are not material to the Company’s consolidated financial position, results of operations or cash flows.  Additionally, foreign currency transaction gains and losses were not material to the Company’s results of operations for the three and nine months ended September 30, 2001.  Accordingly, the Company is not currently subject to material foreign currency exchange rate risks from the effects that exchange rate movements of foreign currencies would have on the Company’s future costs or on future cash flows it would receive from its foreign investment.  To date, the Company has not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuation in foreign currency exchange rates.

PART II

OTHER INFORMATION

Item 1.          Legal Proceedings

                      None applicable.

Item 2.          Changes in Securities

                      None applicable.

Item 3.          Defaults Upon Senior Securities

                      None applicable.

Item 4.          Submission of Matters to a Vote of Security Holders

                      None applicable.

Item 5.          Other information

                      None applicable.

Item 6.          Exhibits and Reports on Form 8-K

(a)     Exhibits

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

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.