FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

Commission file number 0-11757

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, 2003 was 80,029,990.

Shares outstanding on September 30, 2003, reflect a two for one stock split which was paid on August 29, 2003.

J.B. HUNT TRANSPORT SERVICES, INC.

Form 10-Q

For The Quarter Ended September 30, 2003

Table of Contents

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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.

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J.B. HUNT TRANSPORT SERVICES, INC.

Condensed Consolidated Balance Sheets

(in thousands)

See accompanying notes to condensed consolidated financial statements.

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J.B. Hunt Transport Services, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

See accompanying notes to condensed consolidated financial statements.

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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, 2002 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, 2002.

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, 2003.

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 Employeesand 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.

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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.             Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143).  SFAS No. 143 required us to record the fair value of an asset retirement obligation as a liability in the period in which we incur a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets.  We adopted SFAS No. 143 effective January 1, 2003.  The adoption of SFAS No. 143 did not have a material effect on our financial statements.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.  This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation.  The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003.  On October 9, 2003, the FASB staff issued FASB Staff Position (FSP) Financial Interpretation No. 46-6, which deferred the effective date for applying the provisions until March 31, 2004.  The adoption of Interpretation No. 46 is not expected to have a material effect on our financial statements.

4.         Long-Term Debt

Long-term debt consists of (in thousands):

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5.             Capital Stock

We have a stock option plan (Management Incentive Plan) that provides for the awarding of our common stock and stock options to key employees.  A summary of the restricted and non-statutory options to purchase our common stock follows:

We announced on July 17, 2003 that our Board of Directors had declared a two for one stock split on our common stock, which was payable August 29, 2003, to stockholders of record on July 31, 2003.  All common stock related amounts in this Form 10-Q have been adjusted to reflect this stock split.

6.             Earnings Per Share

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

We had some options to purchase shares of common stock which were outstanding during the periods shown, but were excluded from the computation of diluted earnings per share because the option price was greater than the average market price of the common shares.  A summary of those options follows:

7.             Comprehensive Income

Comprehensive income consists of net earnings and foreign currency translation adjustments.  During

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the three and nine months ended September 30, 2003 and 2002, comprehensive income was equal to:  (in thousands):

8.             Income Taxes

The effective income tax rates for the three and nine months ended September 30, 2003 and 2002, were 38.5% and 25.0%, respectively.  The increase in the 2003 effective income tax rates was partly a result of the new accountable expense reimbursement plan (driver per diem plan).  This new plan, which was implemented in February of 2003, benefits most of our eligible drivers and reduces certain costs which are classified in the salary, wages and employee benefits expense category.  The lower benefit costs of the driver per diem plan are partly offset by higher effective income tax rates.

In 1999, we entered into a series of transactions effecting a sale and leaseback of a portion of our Intermodal container and chassis fleet for a selling price of approximately $175 million.  These transactions used a structure that the Internal Revenue Service (IRS) has indicated it intends to examine.  We have voluntarily disclosed these transactions to the IRS and in October of 2002, the IRS began their examination of the specific facts of these transactions.  As of September 30, 2003, no adverse findings have been asserted by the IRS.  If the IRS challenges our transactions, we intend to vigorously defend them.  As of September 30, 2003, we had recognized approximately $31 million of income tax benefits from these transactions.  The annual tax benefits recognized from these transactions can be computed from the table contained in Footnote (4), Income Taxes, of our Form 10-K for the years 2002 and 2001, and by summing the amounts labeled as “sale/leaseback benefit” for the years 1999 through 2002.  As of September 30, 2003, we estimate our maximum potential exposure to be approximately $36.5 million, including interest, in the event the IRS successfully challenges all of the tax benefits realized to date.

9.             Business Segments

We operated three distinct business segments during the nine months ended September 30, 2003 and 2002.  These segments included:  Truck (JBT), Intermodal (JBI) and Dedicated Contract Services (DCS).  The operation of each of these businesses is described in footnote (10) of our annual report (Form 10-K) for the year ended December 31, 2002.  A summary of certain segment information is presented below (in millions):

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10.          Reclassifications

We have reclassified certain amounts from our 2002 financial statements so they will be consistent with the way we have classified amounts in 2003.

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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, 2003, and the related condensed consolidated statements of earnings for the three and nine month periods ended September 30, 2003 and 2002, and the condensed consolidated statements of cash flows for the nine month periods ended September 30, 2003 and 2002.  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, 2002, 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, 2003, 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, 2002, is fairly presented, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

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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, 2002 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.  You should also refer to Item 7 of our annual report (Form 10-K) for the year ended December 31, 2002, 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

Certain amounts included in or affecting our financial statements and related disclosures must be estimated, requiring certain assumptions with respect to values or conditions that cannot be known with certainty at the time the financial statements are prepared.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect:

•      the amounts reported for assets and liabilities;

•      the disclosure of contingent assets and liabilities at the date of the financial statements; and

•      the amounts reported for revenues and expenses during the reporting period.

Therefore, the reported amounts of assets and liabilities, revenues and expenses and associated disclosures with respect to contingent assets and obligations are necessarily affected by these estimates.  We evaluate these estimates on an ongoing basis, utilizing historical experience, consulting with experts and using other methods considered reasonable in the particular circumstances.  Nevertheless, actual results may differ significantly from estimates.  Any effects on business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

In preparing financial statements and related disclosures, we also must use estimates in determining the economic useful lives of assets, provisions for uncollectible accounts receivable, exposures under self insurance plans and various other recorded or disclosed amounts.  However, we believe that certain

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accounting policies are of more significance in the financial statement preparation process than others and are discussed below.  To the extent that actual outcomes differ from our estimates, or additional facts and circumstances cause us to revise estimates, earnings will be affected.

Workers’ Compensation and Accident Costs

We purchase insurance coverage for a portion of expenses related to employee injuries (workers’ compensation), vehicular collisions and accidents and cargo claims.  Most insurance arrangements include a level of self insurance (deductible) coverage applicable to each claim, but provide an umbrella policy to limit our exposure to catastrophic claim costs that are completely insured.  The amounts of self insurance change from time to time based on certain measurement dates and policy expiration dates.  Our current insurance coverage specifies that the self-insured limit on the majority of our claims is $1.5 million, which is prefunded with our insurance carrier.  Our claims accrual policy for all self-insurance is to recognize the expense when the event occurs and the costs of such events are probable and reasonably estimable.  We apply loss development factors to our accident and workers’ compensation claims history, as a part of our process of recording the expense of losses which are Incurred But Not Reported (IBNR).  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.  Our safety and claims personnel work directly with representatives from the insurance companies to continually update the estimated ultimate cost of each claim.  At September 30, 2003, we had approximately $28 million of estimated net claims payable.  In addition, we are required to pay certain advanced deposits and monthly premiums.  At September 30, 2003, we had a prepaid insurance asset of approximately $17 million.

Revenue Equipment

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

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

Revenue Recognition

We recognize revenue based on the relative transit time of the freight transported.  Accordingly, a portion of the total revenue which will be billed to our customer once a load is delivered is recognized in each reporting period based on the percentage of the freight pickup and delivery service that has been completed at the end of the reporting period.

SEGMENTS

We operated three segments during the nine months ended September 30, 2003 and 2002.  These segments included:  Truck (JBT), Intermodal (JBI) and Dedicated Contract Services (DCS).  The operation of each of these businesses is described in footnote (10) of our annual report (Form 10-K) for the year ended December 31, 2002.

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RESULTS OF OPERATIONS

Comparison of Third Quarter 2003 to Third Quarter 2002

Summary of Operating Segments Results

For The Three Months Ended September 30

(dollars in millions)

Overview

Our total consolidated operating revenue for the third quarter of 2003 was $622 million, an increase of approximately 7% over the $583 million in the third quarter of 2002.  Fuel surcharge revenue has an impact on this comparison.  The amount of fuel surcharge revenue billed in the current quarter was $8.6 million more than the amount billed in the third quarter of 2002.  Excluding fuel surcharges, total operating revenue during the current quarter increased 5% over the comparable period of 2002.

JBT segment revenue totaled $214 million for the third quarter of 2003, essentially equal to the $215 million in the third quarter of 2002.  If the amount of fuel surcharge revenue was excluded from both the 2003 and 2002 periods, segment revenue would have decreased approximately 2% in 2003.  This 2% decline in revenue was primarily a result of an approximate 5% increase in revenue per loaded mile, exclusive of fuel surcharges, offset by a 1% decrease in the size of the tractor fleet and 5% lower miles per tractor.  The average number of total tractors operated in the JBT fleet declined by 24 during the third quarter of 2003, compared with the third quarter of 2002.  The percentage of empty miles increased to 10.2% in 2003, from 9.0% in 2002, although some of our customers paid us for running certain empty miles at their request.  The increase in revenue per loaded mile, excluding fuel surcharges 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 initiatives launched in late 2001.  In addition, we implemented an accountable expense reimbursement plan (driver per diem plan) in February of 2003.  This new plan benefits most of our eligible drivers and also favorably impacted our net earnings during the third quarter of 2003.  JBT operating income for the third quarter of 2003 was $17.9 million, compared with $10.1 million in 2002.  The operating ratio of the JBT segment was 91.6% in 2003 and 95.3% in 2002.

JBI segment revenue increased 16%, to $241 million during the third quarter of 2003, compared with $207 million in 2002.  If the amount of fuel surcharge revenue was excluded from both the 2003 and 2002 periods, the increase in JBI revenue would have been 15%.  The increase in revenue was primarily due to an approximate 13% increase in load volume and a 2% increase in revenue per load.  The higher revenue per load resulted from changes in freight mix which generated longer average length of haul and an approximate 0.6% increase in revenue per loaded mile, excluding fuel surcharges.  Operating income of the JBI segment was $25.1 million in the third quarter of 2003, compared with $13.2 million in 2002.  The operating ratio of the JBI segment was 89.6% in 2003 and 93.6% in 2002.  In addition to higher revenue per load, 2003 operating income was enhanced by lower maintenance costs and improved utilization of revenue equipment.

DCS segment revenue rose 4%, to $170 million in 2003, from $164 million in 2002.  If fuel surcharge

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revenue was excluded from both of the 2003 and 2002 periods, the increase in DCS revenue would have been 2%.  This increase in DCS segment revenue was driven by an 8% increase in net revenue per tractor, excluding fuel surcharge, partly offset by a 6% decrease in the average size of the tractor fleet.  Operating income of our DCS segment climbed to $14.6 million in 2003, from $4.1 million in 2002.  The DCS operating ratio was 91.4% in 2003 and 97.5% in 2002.  Improvements in operating income were driven by better tractor utilization, improved productivity and pricing, expense controls 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.

Consolidated Operating Expenses

Total operating expenses during the third quarter of 2003 increased 1.7% over the comparable period of 2002.  Salaries, wages and employee benefits expense declined 7.5% in 2003 and decreased to 31.8% of operating revenues in 2003 from 36.7% in 2002.  A portion of this decline in salaries and wages was a result of our implementation of an accountable expense reimbursement plan (driver per diem plan) for certain drivers during the first quarter of 2003.  This plan reduces certain costs which are classified in the salary, wages and employee benefits expense category, but is partly offset by higher effective income tax rates.  Lower workers’ compensation expense and a reduction in the number of mechanics employed during 2003 also impacted this comparison.  Rents and purchased transportation costs rose 13.3% in 2003, primarily related to additional funds paid to railroads and drayage companies, related to our JBI business growth, and to the expansion of our independent contractor fleet.

The 0.6% increase in fuel and fuel taxes was due to higher fuel costs and slightly lower miles per gallon in 2003, substantially offset by lower miles driven by company-operated tractors.  During the third quarter of 2003, our fuel cost per gallon averaged approximately 8% higher than the comparable period of 2002.  These higher fuel costs were substantially offset by additional fuel surcharges billed to customers which are included in operating revenues.  After a 38% rise in fuel cost per gallon during the first quarter of

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2003, the lower rate of fuel cost increase during the second and third quarters of 2003 allowed fuel surcharge revenues to substantially recover first quarter losses.  Operating supplies and expenses declined 3.9%, partly due to the reduced amount of outsourced tractor and trailing equipment maintenance work.  The 4.0% rise in insurance and claims costs reflects escalating liability insurance premiums, which have been experienced throughout the industry and slightly higher accident costs, partly off set by lower cargo claims expense.  The 7.5% increase in general and administrative expenses was primarily a result of higher bad debt expense and increased driver recruiting costs.  Our net interest expense declined in 2003, partly due to the approximate $68 million of capital we raised through a secondary public offering of common stock in mid 2002.  We increased our effective income tax rate to 38.5% in 2003, from 25.0% in 2002, primarily due to the new driver per diem plan and our increased level of earnings.

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).  Effective January 1, 2003, we increased our interest in TPI to approximately 37% from 27%.

Comparison of Nine Months Ended September 30, 2003 to Nine Months Ended September 30, 2002

Summary of Operating Segments Results

For The Nine Months Ended September 30

(dollars in millions)

Overview

Our total consolidated operating revenue for the first nine months of 2003 was $1.793 billion, up 9% over the $1.650 billion for the first nine months of 2002.  Fuel surcharge revenue has an impact on this comparison.  The amount of fuel surcharge revenue billed for the nine months ended September 30, 2003 was $44.2 million more that the comparable period in 2002.  If the amount of fuel surcharge revenue was excluded from both of the 2003 and 2002 periods, revenue growth would have been 6 %.

JBT segment revenue increased 1%, to $621 million for the first nine months of 2003, compared with $614 million in 2002.  If the amount of fuel surcharge revenue was excluded from both the 2003 and 2002 periods, JBT revenue would have declined 2%.  This 2% decrease in revenue was primarily a result of an approximate 5% increase in revenue per loaded mile, excluding fuel surcharges, offset by a 3% decrease in the size of the average tractor fleet, 2% lower tractor miles and an increase in empty miles.  Part of the decline in miles per tractor was due to relatively soft freight levels during the first quarter and April.  The increase in revenue per loaded mile, excluding fuel surcharges, contributed to the improvement in operating income of the JBT segment.  Operating income for the first nine months of 2003 was $31.6 million, compared with $18.8 million in 2002.  The operating ratio of the JBT segment was 94.9% for the first nine months of 2003 and 96.9% for the first nine months of 2002.  In addition, the driver per diem plan, which was implemented in February of 2003, contributed to the improvement in operating income.

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JBI segment revenue increased 15%, to $682 million during the first nine months of 2003, compared with $591 million in 2002.  The increase in segment revenue would have been 13% if fuel surcharge revenue was excluded from both periods.  The increase in revenue was primarily due to an approximate 10% increase in load volume and a 2% increase in revenue per load.  The higher revenue per load resulted from changes in freight mix which generated a longer average length of haul and an approximate 0.8% increase in revenue per loaded mile, exclusive of fuel surcharges.  Operating income in the JBI segment totaled $65.8 million in 2003, compared with $35.0 million in 2002.  This increase was primarily due to higher revenue levels, lower maintenance costs and improved utilization of revenue equipment.  The JBI operating ratio was 90.3% for the first nine months of 2003 and 94.1% for the comparable period of 2002.

Revenue rose 9% in the DCS segment to $501 million during the first nine months of 2003, compared with $458 million in 2002.  This increase in DCS segment revenue would have been 7% if fuel surcharge revenue was excluded from both periods.  This increase in DCS revenue was driven by a 6% increase in net revenue per tractor, excluding fuel surcharge and a 1% increase in the size of the average tractor fleet.  Operating income rose to $30.5 million in 2003, from $16.2 million in 2002.  The DCS segment operating ratio for the first nine months of 2003 was 93.9%, compared to 96.5% for the first nine months of 2002.  This improvement in 2003 operating income was primarily due to better utilization of tractors in service, rate increases and efforts to reduce costs, including driver wages.

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

Consolidated Operating Expenses

Total operating expenses for the first nine months of 2003 were up 5.4% over the comparable period of 2002.  Salaries, wages and employee benefits expense declined 4.6% in 2003, and decreased to 32.6% of operating revenues in 2003, from 37.1% in 2002.  A portion of this decline in salaries and wages was a result of our driver per diem plan, which was implemented in February of 2003. Rents and purchased

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transportation expense increased 15.1%, primarily due to the increase in JBI business, which resulted in larger payments to railroads and drayage companies.  In addition, payments to independent contractors increase as we grow this fleet.  The 14.4% increase in fuel and fuel taxes was due to significantly higher fuel cost per gallon in 2003, partly offset by lower miles run by company-operated tractors.  Our fuel cost per gallon during the first nine months of 2003 averaged 16.6% more than the comparable period of 2002.  The 6.8% decline in operating supplies and expenses was partly due to the reduced amount of outsourced tractor and trailing equipment maintenance work.  We are moving more of our maintenance and revenue equipment repair work to our own shops.  The 29.0% rise in insurance and claims cost reflects escalating liability insurance premiums, which have been experienced throughout the industry and higher accident costs.  The significant increase in general and administrative expenses was primarily a result of higher bad debt expense and increased driver recruiting costs.  Net interest expense declined 21.6%, partly due to the approximate $68.0 million of capital we raised through a secondary public offering of common stock in mid 2002.

The equity in loss of associated company line item on our consolidated statement of earnings reflects our share of the operating results for Transplace, Inc. (TPI).  Effective January 1, 2003, we increased our interest in TPI to approximately 37% from 27%.

Liquidity and Capital Resources

Cash Flow

We typically generate significant amounts of cash from operating activities.  Net cash provided by operating activities totaled $251 million during the first nine months of 2003, compared with $123 million for the same period of 2002.  Operating activities which significantly increased cash in 2003, relative to 2002, included net earnings, deferred income taxes and prepaid expenses.  Cash was consumed by increases in accounts receivable and a decrease in trade accounts payable.  Net cash used in investing activities was $110 million in 2003, compared with $122 million 2002.  Net cash of approximately $129 million was used in financing activities during the first nine months of 2003, compared with $36 million provided from financing activities in 2002.  Net cash provided from financing activities in 2002 reflected approximately $68.0 million of proceeds from the sale of a secondary stock offering, which closed during the second quarter.

Selected Balance Sheet Data

Our working capital ratio and current maturities of long-term debt and current installments of obligations under capital leases amounts shown in the above table as of September 30, 2003 were impacted by a reclassification.  As of December 31, 2002, we had planned to extend certain capital leases with initial terms coming due within the next year.  Partly due to favorable interest rates and cash flows, we elected to purchase some of this equipment as these initial lease terms came due.  While we have retained an option to extend certain capital leases, this change of intent resulted in the reclassification of approximately $82 million of capitalized lease debt from long-term to current.  This reclassification had no effect on total debt

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or earnings.  We began purchasing this equipment in July of 2003.

Liquidity

Our need for capital typically has resulted from the acquisition of revenue equipment to support growth and the replacement of older tractors and trailing equipment with new, late model equipment.  We are frequently able to accelerate or postpone some equipment replacements depending on market conditions.  In the past we have obtained capital through public stock offerings, debt financing, revolving lines of credit and cash generated from operations.  We have also utilized capital and operating leases, from time to time, to acquire revenue equipment.  Equipment acquired under capital leases is initially recorded at the net present value of the minimum lease payments.  We have an agreement with our primary tractor supplier for guaranteed residual or trade-in values for certain equipment on capitalized leases.  We have utilized these values in accounting for these capitalized leases.  To date, none of our operating leases contain any guaranteed residual value clauses.

Net capital expenditures were $140 million during the first nine months of 2003 compared with $123 million for the same period of 2002.  We currently anticipate spending in the range of $220 million, net of expected proceeds from sale or  trade-in allowances, on revenue equipment for the full calendar year of 2003.

We retired approximately $87 million of senior notes, as scheduled, on September 1, 2003, utilizing funds on hand.  We are authorized to borrow up to $150 million under our current revolving line of credit and had no balances outstanding on this line at September 30, 2003.  This line of credit expires on November 14, 2005.  We believe that our liquid assets, cash generated from our secondary stock offering described above, cash generated from operations and revolving line of credit will provide sufficient funds for our operating and capital requirements for the foreseeable future.

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Risk Factors

You should refer to Item 7 of our annual report (Form 10-K) for the year ended December 31, 2002, under the caption “Risk Factors” for additional information on factors and events that are not within our control and could affect our financial results.

Our effective income tax rates for the three and nine months ended September 30, 2003 and 2002, were 38.5% and 25.0%, respectively.  We implemented an accountable expense reimbursement plan (driver per diem plan) for a portion of our drivers in February of 2003.  While this plan will benefit both the majority of our drivers and our net earnings, it results in a higher effective income tax rate.  Partly as a result of this plan and anticipated higher earnings, we are currently estimating an effective income tax rate of 38.5% for calendar year 2003.

In 1999, we entered into a series of transactions effecting a sale and leaseback of a portion of our Intermodal container and chassis fleet for a selling price of approximately $175 million.  These transactions used a structure that the Internal Revenue Service (IRS) has recently indicated it intends to examine.  We have voluntarily disclosed these transactions to the IRS and in October of 2002, the IRS began their examination of the specific facts of these transactions.  As of September 30, 2003, no adverse findings have been asserted by the IRS.  If the IRS challenges our transactions, we intend to vigorously defend them.  As of September 30, 2003, we had recognized approximately $31 million of income tax benefits from these transactions.  The annual tax benefits recognized from these transactions can be computed from the table contained in Footnote (4), Income Taxes, of our Form 10-K for the years 2002 and 2001, and by summing the amounts labeled as “sale/leaseback benefit” for the years 1999 through 2002.  As of September 30, 2003, we estimate our maximum potential exposure to be approximately $36.5 million, including interest, in the event the IRS successfully challenges all of the tax benefits realized to date.

As we had previously announced, we signed an agreement during the fourth quarter of 2001 to sell our joint venture interest in Mexico to the majority owner.  This sale closed during the first quarter of 2002.  In accordance with the terms of the sale, we recorded a note receivable for $18.1 million.  The original note carried an interest rate of 5%, four required annual principal payments and would have matured on June 30, 2005.  The majority owner, GROUPO TMM, S.A. (formerly Transportacion Maritima Mexicana S.A. de C.V.)  (TMM) announced that it was experiencing liquidity issues and in May 2003 missed payment on its outstanding bonds.  Consequently, TMM requested to defer a scheduled principal and interest payment on our note receivable.  On October 14, 2003, we agreed to defer a principal payment that was due on June 30, 2003.  This payment is now due when TMM receives cash for certain operations-related transactions, or no later than June 30, 2006.  The interest payment that was due on June 30, 2003 was deferred until October 31, 2003.  All other terms and conditions remain in place.  We have approximately $13.5 million (net) in principal and interest receivable on our balance sheet.  We believe TMM’s refinancing plan will provide  sufficient liquidity to meet its renegotiated obligation to us.  If TMM cannot complete the refinancing or generates insufficient cash to meet its obligations, including ours, our note receivable may become uncollectible.

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Impact of Recently Issued Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.  This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation.  The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003.  On October 9, 2003, the FASB staff issued FASB Staff Position (FSP) Financial Interpretation No. 46-6, which deferred the effective date for applying the provisions until March 31, 2004.  The adoption of Interpretation No. 46 is not expected to have a material effect on our financial statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our earnings are affected by changes in short-term interest rates as a result of  our use of short-term revolving lines of credit.  From time to time we utilize interest rate swaps to mitigate the effects of interest rate changes;  none were outstanding at September 30, 2003.  Risk can be estimated by measuring the impact of a near-term adverse movement of 10% in short-term market interest rates.  If short-term market interest rates average 10% more during the next twelve months, there would be no material adverse impact on our results of operations based on variable rate debt outstanding at September 30, 2003.  At September 30, 2003, the fair value of our fixed rate long-term obligations approximated carrying value.

Although we conduct business in foreign countries, international operations are not material to our consolidated financial position, results of operations or cash flows.  Additionally, foreign currency transaction gains and losses were not material to our results of operations for the three and nine months ended September 30, 2003.  Accordingly, we are not currently subject to material foreign currency exchange rate risks from the effects that exchange rate movements of foreign currencies would have on our future costs or on future cash flows we would receive from its foreign investment.  To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuation in foreign currency exchange rates.

ITEM 4.  CONTROLS AND PROCEDURES

Within 90 days prior to filing this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our internal controls and disclosure controls.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting them on a timely basis to material information required to be disclosed by us in our periodic reports to the Securities and Exchange Commission.

Since our most recent review of internal controls systems and procedures, there have been no significant changes in internal controls or in other factors that could significantly affect these controls.

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PART II

OTHER INFORMATION

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the city of Lowell, Arkansas, on the 31st day of October, 2003.

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INDEX TO EXHIBITS

J.B Hunt Transport Services, Inc.

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