UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission file number 0-11757

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)

(479) 820-0000

(Registrant’s telephone number, including area code)

www.jbhunt.com

(Registrant’s web site)

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   x                  No   o 

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

Large accelerated filer x                Accelerated filer o            Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

                Yes   o                  No   x

The number of shares of the registrant’s $0.01 par value common stock outstanding on September 30, 2007 was 126,879,445.

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.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.              General

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. We believe such statements include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of our financial position, results of operations and cash flows at the dates and for the periods indicated. Pursuant to the requirements of the Securities and Exchange Commission (SEC) applicable to quarterly reports on Form 10-Q, the accompanying financial statements do not include all disclosures required by GAAP for annual financial statements. While we believe the disclosures presented are adequate to make the information not misleading, these unaudited interim condensed financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2006. Operating results for the periods presented in this report are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2007, or any other interim period. Our business is somewhat seasonal with slightly higher freight volumes typically experienced during the months of August through early November.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements(SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007.  We are currently assessing the impact of SFAS 157 on our financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159). SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact of SFAS 159 on our financial statements.

2.              Earnings Per Share

We compute basic earnings per share by dividing net earnings available to common shareholders by the actual 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 unvested restricted share units exercised or converted their holdings into common stock. The dilutive effect of stock options and restricted share units was 3.1 million shares during the third quarter 2007, compared to 3.4 million shares during third quarter 2006. During the nine months ended September 30, 2007 and September 30, 2006, the dilutive effect of stock options and restricted share units was 3.4 million shares and 3.9 million shares, respectively.

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

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3.         Share-Based Compensation

            We maintain a Management Incentive Plan (the “Plan”) that provides various share-based financial vehicles to compensate our key employees with shares of our common stock or common stock equivalents. Under the Plan, as amended, we have, from time to time, utilized restricted share unit awards, restricted options and nonstatutory stock options to compensate our employees and directors. We currently are utilizing restricted share units and nonstatutory stock options. The following table summarizes the components of our share-based compensation program expense (in thousands):

Stock Options

While we have not granted nonstatutory stock options since calendar year 2005, we have stock options outstanding from previous grants. Our nonstatutory stock options may be granted to key employees for the purchase of our common stock for 100% of the fair market value of the common stock at the grant date as awarded by the Compensation Committee of our Board of Directors. These options generally vest over a 10-year period, with accelerated vesting if there is a change in control, as defined by the plan, and are forfeited if the employee terminates for any reason other than death, disability or retirement after age 55. An employee is allowed to surrender shares of common stock that the employee has owned for at least six months in full or partial payment of the option price of an option being exercised and/or to satisfy tax withholding obligations incident to the exercise of an option. The following table summarizes the changes in our outstanding stock options:

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Restricted Share Units

            We began awarding restricted share units in 2005. Through September 30, 2007, we have awarded 1.3 million units. Restricted share units have various vesting schedules ranging from five to ten years. These restricted share units do not contain rights to vote or receive dividends until the vesting date. Unvested restricted share units are forfeited if the employee terminates for any reason other than death, disability, or special circumstances as determined by the Compensation Committee of our Board of Directors. The following table summarizes changes in unvested share units:

            As of September 30, 2007, we had $15.2 million and $20.8 million of total unrecognized compensation expense related to nonstatutory stock options and restricted share units, respectively, which is expected to be recognized over the remaining weighted-average period of approximately 2.21 years for stock options and 2.97 years for restricted share units.

4.         Debt

            Long-term debt consists of the following (in millions):

Revolving Lines of Credit

At September 30, 2007, we were authorized to borrow up to a total of $575 million under two different revolving lines of credit. The first line of credit is supported by a credit agreement with a group of banks for a total amount of $350 million. Effective March 29, 2007, we entered into a new senior revolving credit facility agreement, which replaced our previous senior revolving credit facility dated April 27, 2005. This new credit facility has a five year term expiring March 29, 2012. In June 2007, we exercised a feature of the agreement which allowed us to increase our total commitment amount from $250 million to $350 million. The applicable interest rate under this agreement is based on either the prime rate or LIBOR, depending upon the specific type of borrowing, plus a margin based on the level of borrowings and our credit rating. At September 30, 2007, we had $151.2 million outstanding at an average interest rate of 6.21% under this agreement.

Our second line of credit is an Accounts Receivable Securitization program. In June 2007, we increased our total commitment to $225 million from the original $200 million.  We renewed this facility at maturity on July 30, 2007, for a one-year term maturing on July 28, 2008. The applicable interest rate under this agreement is the prevailing A1/P1 commercial paper rate in the market. At September 30, 2007, we had $220.0 million outstanding at an average interest rate of 5.72% under this agreement.

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Senior Notes

                On March 29, 2007, we sold $200 million of 5.31% Senior Notes (2011 Notes), which are due March 29, 2011, to various purchasers through a private placement offering pursuant to our Note Purchase Agreement dated March 15, 2007. The proceeds were used for the purchase of trailing equipment off operating leases and for general working capital. The 2011 Notes were issued at par value. Interest payments are due semi-annually, in March and September of each year.

                On July 26, 2007, we sold $200 million of 6.08% Senior Notes (2014 Notes), which mature July 26, 2014, to various purchasers through a private placement offering pursuant to our Note Purchase Agreement dated July 15, 2007.  Proceeds from these notes have been utilized to purchase shares of our common stock, pay down existing debt on our revolving credit facilities and finance capital expenditures for revenue equipment. The 2014 Notes were issued at par value. Principal payments in the amount of $50.0 million are due July 26, 2012 and July 26, 2013, with the remainder due upon maturity. Interest payments are due semi-annually, with the first payment due January 26, 2008. The Note Purchase Agreements for both issuances describe the terms and conditions of the Notes, which include requirements to maintain certain covenants and financial ratios.

Term Loan

On September 29, 2006, we entered into a $100 million term loan and credit agreement arranged by SunTrust Bank, in connection with our purchase of used, dry-van trailers. This $100 million facility is collateralized by a security interest in the trailing equipment and matures on September 29, 2009. We are required to make minimum quarterly principal payments in the amount of $3.5 million, through June 29, 2009. Stated interest on this facility is a 3-month LIBOR variable rate. Concurrent with the loan and credit agreement, we entered into an interest rate swap agreement to effectively convert this floating rate debt to a fixed rate basis of 5.85%. The swap expires September 29, 2009, when the related term loan is due. At September 30, 2007, we had $86.0 million outstanding under this agreement.

Our revolving lines of credit and debt facilities require us to maintain certain covenants and financial ratios.  We were in compliance with all covenants and financial ratios at September 30, 2007.

5.         Capital Stock

            On July 19, 2007, we announced that our Board of Directors declared a regular quarterly dividend of $0.09 per common share, payable on August 17, 2007, to stockholders of record on August 2, 2007. At December 31, 2006, $103.4 million was remaining to purchase our common stock as part of a plan previously authorized by our Board of Directors. Purchases under that authorization were completed in March 2007. On May 2, 2007, our Board authorized up to $500 million in additional purchases of our common stock over the next twelve months. During the nine months ended September 30, 2007, we purchased approximately 19.3 million shares for $541.6 million, under the two authorizations. At September 30, 2007, we had $61.8 million remaining under the May 2, 2007 authorization.

6.         Comprehensive Income

            Comprehensive income includes changes in the fair value of the interest rate swap, which qualifies for hedge accounting. A reconciliation of Net Earnings and Comprehensive Income follows (in thousands):

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7.         Income Taxes

            Our effective income tax rate was 39.1% and 34.1% for the three and nine month periods ended September 30, 2007, respectively, compared with 39.0% for the three and nine month periods ended September 30, 2006.  The decrease in our effective tax rate for the nine month period ended September 30, 2007 was due to our settlement with the Internal Revenue Service (IRS) on a sale-and-leaseback transaction in June 2007 as described below.  In determining our provision for income taxes, we use an estimated annual effective tax rate, which is based on our expected annual income, statutory tax rates and best estimate of non-deductible and non-taxable items of income and expense and the ultimate outcome of tax audits.  We expect our effective income tax rate to approximate 35.4% for the full calendar year 2007.

            In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109 (FIN 48).  We were required to adopt the provisions of FIN 48, effective January 1, 2007.  As a result of this adoption, we recognized additional tax liabilities of $7.5 million with a corresponding reduction to beginning retained earnings as of January 1, 2007.  At adoption, we had a total of $81.0 million in gross unrecognized tax benefits.  Of this amount, $57.3 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate.  The total amount of accrued interest and penalties for such unrecognized tax benefits was $18.6 million at adoption.  As of January 1, 2007, the federal statute of limitations remained open for years 1999 and forward, while tax years 1996 and forward were subject to audit by state tax authorities in major jurisdictions.

            In June 2007, we completed a Post Appeals Mediation with the IRS, whereby we agreed to a settlement of a sale-and-leaseback transaction and other uncertain tax positions related to the IRS audits for tax years 1998-2003.  As a result of this settlement, we made a cash payment to the IRS for previous tax liabilities including interest, in the amount of $49.5 million.  No penalties have been proposed or paid on these deficiencies.  We adjusted the amount of the accrued liability in excess of the net settlement amount in June 2007, which resulted in a decrease in income tax expense of approximately $12.1 million.

            For the nine months ended September 30, 2007, we have made adjustments to the balance of unrecognized tax benefits that is a component of other long term liabilities on our balance sheet as follows:

            Included in the additions for the third quarter is an accrual of $0.4 million for interest expense for uncertain state tax positions.  At September 30, 2007, we had a total of $20.7 million in gross unrecognized tax benefits.  Of this amount, $9.8 million represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate.  The total amount of accrued interest and penalties for such unrecognized tax benefits was $5.6 million at September 30, 2007.  Interest and penalties related to income taxes are classified as interest expense in our financial statements.  Future changes to unrecognized tax benefits will be recognized as income tax expense and interest expense, as appropriate.  As a result of the settlement, we believe only tax years 2004 and forward remain subject to examination by federal tax jurisdictions.

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amount of $350 million.  Effective March 29, 2007, we entered into a new senior revolving credit facility agreement, which replaced our previous senior revolving credit facility dated April 27, 2005.  This new credit facility has a five year term expiring March 29, 2012.  In June 2007, we exercised a feature of the agreement which allowed us to increase our total commitment amount from $250 million to $350 million. The applicable interest rate under this agreement is based on either the prime rate or LIBOR, depending upon the specific type of borrowing, plus a margin based on the level of borrowings and our credit rating. At September 30, 2007, we had $151.2 million outstanding at an average interest rate of 6.21% under this agreement.

Our second line of credit is an Accounts Receivable Securitization program.  In June 2007, we increased our total commitment to $225 million from the original $200 million.  We renewed this facility at maturity on July 30, 2007, for a one-year term maturing on July 28, 2008.  The applicable interest rate under this agreement is the prevailing A1/P1 commercial paper rate in the market.  At September 30, 2007, we had $220.0 million outstanding at an average interest rate of 5.72% under this agreement.

On March 29, 2007, we sold $200 million of 5.31% Senior Notes (2011 Notes), which are due March 29, 2011, to various purchasers through a private placement offering pursuant to our Note Purchase Agreement dated March 15, 2007.  The proceeds were used for the purchase of trailing equipment off operating leases and for general working capital purposes.  The 2011 Notes were issued at par value.  Interest payments are due semi-annually, in March and September of each year.

On July 26, 2007, we sold $200 million of 6.08% Senior Notes (2014 Notes), which mature July 26, 2014, to various purchasers through a private placement offering pursuant to our Note Purchase Agreement dated July 15, 2007.  Proceeds from these notes have been utilized to purchase shares of our common stock, pay down existing debt on our revolving credit facilities and finance capital expenditures for revenue equipment.  The 2014 Notes were issued at par value.  Principal payments in the amount of $50.0 million are due July 26, 2012 and July 26, 2013, with the remainder due upon maturity.  Interest payments are due semi-annually, with the first payment due January 26, 2008.  The Note Purchase Agreements for both issuances describe the terms and conditions of the Notes, which include requirements to maintain certain covenants and financial ratios.

On September 29, 2006, we entered into a $100 million term loan and credit agreement arranged by SunTrust Bank, in connection with our purchase of used, dry-van trailers.  This $100 million facility is collateralized by a security interest in the trailing equipment and matures on September 29, 2009.  We are required to make minimum quarterly principal payments in the amount of $3.5 million, through June 29, 2009.  Stated interest on this facility is a 3-month LIBOR variable rate.  Concurrent with the loan and credit agreement, we entered into an interest rate swap agreement to effectively convert this floating rate debt to a fixed rate basis of 5.85%.  The swap expires September 29, 2009, when the related term loan is due.  At September 30, 2007, we had $86.0 million outstanding under this agreement.

Our revolving lines of credit and debt facilities require us to maintain certain covenants and financial ratios.  We were in compliance with all covenants and financial ratios at September 30, 2007.

We believe that our liquid assets, cash generated from operations and revolving lines of credit will provide sufficient funds for our operating and capital requirements for the foreseeable future.  Decreases in our working capital ratio were primarily driven by increases in debt issuances to purchase revenue equipment and our common stock.

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            Our net capital expenditures were approximately $268 million during the nine months ended September 30, 2007, compared to $334 million for the same period in 2006.  As previously mentioned, the capital expenditures in 2007 were primarily for additional intermodal containers, chassis and the purchase of certain trailing equipment off operating leases.  We are currently committed to spend approximately $78.7 million, net of proceeds from equipment dispositions, during the remainder of 2007 on revenue equipment.  We expect to spend approximately $347 million, net of proceeds for equipment dispositions, for total capital expenditures during calendar year 2007.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements relate to operating leases for trailing equipment and various data processing equipment and facilities.  As of September 30, 2007, we had approximately 303 trailers and 1,013 containers/chassis that were subject to operating leases, and we had approximately $2.1 million of obligations remaining under these leases.

Risk Factors

            You should refer to Item 1A of our Annual Report (Form 10-K) for the year ended December 31, 2006, under the caption “Risk Factors” for specific details on the following factors and events that are not within our control and could affect our financial results.

•                  Our business is subject to general economic and business factors that are largely out of our control, any of which could have a material adverse effect on our results of operations.

•                  We operate in a competitive and somewhat fragmented industry.  Numerous factors could impair our ability to maintain our current profitability and to compete with other carriers and private fleets.

•                  We derive a significant portion of our revenue from a few major customers, the loss of one or more of which could have a material adverse effect on our business.

•                  We depend on third parties in the operation of our business.

•                  Difficulty in attracting and retaining drivers could affect our profitability and ability to grow.

•                  Ongoing insurance and claims expenses could significantly reduce our earnings.

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•                  Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.

•                  We operate in a regulated industry, and increased direct and indirect costs of compliance with, or liability for violation of, existing or future regulations could have a material adverse effect on our business.

•                  Rapid changes in fuel costs can impact our periodic financial results.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157).  SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.   We are currently assessing the impact of SFAS 157 on our financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).  SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value.  Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  We are currently assessing the impact of SFAS 159 on our financial statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

            We had $857.2 million of debt outstanding at September 30, 2007, including our revolving lines of credit, term loan credit facility, and senior notes issuances.  The variable interest rates applicable to these arrangements are based on either the prime rate or LIBOR plus an applicable margin.  Our earnings would be affected by changes in these short-term interest rates.  Risk can be quantified by measuring the financial impact of a near-term adverse increase in short-term interest rates.  At our current level of borrowing, a one percent increase in our applicable rate would reduce annual pretax earnings by $3.7 million.  We currently have an interest rate swap agreement which effectively converts the $100 million variable rate term loan credit facility to a fixed rate basis.  Additionally, our senior notes have a fixed interest rate of 5.31% (2011 Notes) and 6.08% (2014 Notes).  These fixed-rate facilities reduce the impact of changes to market interest rates on future interest expense.

            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 nine months ended September 30, 2007.  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 our foreign investment.  As of September 30, 2007, we had no foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates.

            The price and availability of diesel fuel are subject to fluctuations due to changes in the level of global oil production, seasonality, weather and other market factors.  Historically, we have been able to recover a majority of fuel price increases from our customers in the form of fuel surcharges.  We cannot predict the extent to which high fuel price levels will continue in the future or the extent to which fuel surcharges could be collected to offset such increases.  As of September 30, 2007, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

ITEM 4.  CONTROLS AND PROCEDURES

            As of the end of the period covered by 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

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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 were effective as of September 30, 2007, 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.

            In addition, there were no changes in our internal control over financial reporting during the nine months ended September 30, 2007 that have materially affected, or are reasonably likely to materially effect, our internal control over financial reporting.

Part II.    Other Information

ITEM 1.        LEGAL PROCEEDINGS

            We are involved in certain claims and pending litigation arising from the normal conduct of business.  Based on the present knowledge of the facts and, in certain cases, opinions of outside counsel, we believe the resolution of these claims and pending litigation will not have a material adverse effect on our financial condition, our results of operations or liquidity.

ITEM 1A.     RISK FACTORS

            Information regarding risk factors appears in Part I, Item 2, Management’s Discussion and Analysis of Results of Operations and Financial Condition of this report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 2.        CHANGES IN SECURITIES

Purchases of Equity Securities

The following table summarizes purchases of our common stock during the three months ended September 30, 2007:

(1)                      On May 2, 2007 our Board of Directors authorized the purchase of up to $500 million of our common stock over the next twelve months.  At September 30, 2007, we had $61,753,208 remaining under the authorization.

ITEM 3.        DEFAULTS UPON SENIOR SECURITIES

            Not applicable.

ITEM 4.        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

            Not applicable.

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ITEM 5.        OTHER INFORMATION

            Not applicable.

ITEM 6.        EXHIBITS AND REPORTS ON FORM 8-K

            a)       Exhibits

            See Index to Exhibits

            b)      Reports on Form 8-K

•                  On October 11, 2007, we filed a current report on Form 8-K announcing our financial results for the third quarter ended September 30, 2007.

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