JBHT

Business Context and Reporting Period

This Form 10-Q covers J.B. Hunt Transport Services, Inc. for the quarter and six months ended June 30, 2001. The company operates three primary segments: Truck (JBT), Intermodal (JBI), and Dedicated Contract Services (DCS). A significant structural change occurred in July 2000 when the company contributed its non-asset-based logistics business to a joint venture, Transplace.com (TPC), in which J.B. Hunt holds approximately a 27% interest. Consequently, logistics revenue is no longer consolidated, though equity earnings from TPC are reported.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenue decreased 11% in Q2 and 9% for the six months compared to 2000. This is primarily due to the exclusion of the former logistics segment (JBL) revenue following the formation of Transplace.com. Excluding JBL, revenue growth was approximately 8% for Q2 and 9% for the six months.
• Segment Performance:
  • JBT (Truck): Revenue grew 3% in Q2. The segment returned to profitability with $2.9 million operating income in Q2, compared to a $3.3 million loss in Q2 2000.
  • JBI (Intermodal): Revenue increased 8% in Q2, driven by a 7% increase in loads. Operating income rose slightly to $10.1 million.
  • DCS (Dedicated): Revenue surged 14% in Q2, but operating income fell 49% to $4.9 million due to lower revenue per tractor and higher accident/equipment costs.
• Expense Trends: "Rents and purchased transportation" dropped significantly (32.7% in Q2) due to the logistics spin-off. Conversely, "Insurance and claims" rose 26.5% due to higher accident costs, and "Salaries and wages" increased 1.4% due to higher workers' compensation costs.
• Liquidity Improvement: Cash provided by operating activities increased 63% year-over-year for the six-month period. Working capital ratio improved to 1.37 from 1.02 at year-end 2000.

Outlook, Risks, and Management Commentary

• Capital Expenditures: The company intends to acquire or lease approximately $180 million of revenue and service equipment over the next 12 months. Funding will come from operations, existing credit facilities, and leasing arrangements.
• Debt Management: Total debt and lease obligations decreased by approximately $23 million since December 31, 2000. The company discontinued its commercial paper program in early 2001 but maintains $150 million in revolving credit lines expiring December 2001.
• Accounting Changes: The company adopted SFAS 133 (Derivatives) with no material impact. It is preparing for SFAS 141 and 142 (Business Combinations and Goodwill), effective Jan 1, 2002. The company expects to write off approximately $31.7 million in unamortized negative goodwill upon adoption, though the full impact is not yet estimable.
• Risks: Key risks include general economic conditions, diesel fuel price volatility, adverse weather, driver availability, and competitive rate fluctuations. Management notes that fuel costs are largely recovered through surcharges.

Investor Verification Checklist

• Logistics Spin-off Impact: Verify the sustainability of revenue growth excluding the former logistics segment, as consolidated revenue comparisons are distorted by the 2000 structural change.
• DCS Profitability: Monitor the Dedicated Contract Services segment closely; while revenue is growing, operating margins are compressing due to accident costs and lower revenue per tractor.
• Insurance Costs: Investigate the 26.5% increase in insurance and claims expenses to determine if this is a temporary anomaly or a structural cost increase.
• Debt Maturity: Confirm the renewal status of the $150 million revolving credit facility, which expires in December 2001.
• Goodwill Write-off: Assess the potential impact of the anticipated $31.7 million negative goodwill write-off under SFAS 142 in the first quarter of 2002.