-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UcDxD8ziO4vrui67qKnAnTvxfstHOiTi2GcE58Gjj/3RKr+LbBBnA15OsuiBWawz YkGr2mYplo26VbHUDD2dNA== 0001047469-99-008309.txt : 19990304 0001047469-99-008309.hdr.sgml : 19990304 ACCESSION NUMBER: 0001047469-99-008309 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990303 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUNT J B TRANSPORT SERVICES INC CENTRAL INDEX KEY: 0000728535 STANDARD INDUSTRIAL CLASSIFICATION: TRUCKING (NO LOCAL) [4213] IRS NUMBER: 710335111 STATE OF INCORPORATION: AR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11757 FILM NUMBER: 99556523 BUSINESS ADDRESS: STREET 1: 615 JB HUNT CORPORATE DR CITY: LOWELL STATE: AR ZIP: 72745 BUSINESS PHONE: 5018200000 10-K 1 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER DECEMBER 31, 1998 0-11757 J.B. HUNT TRANSPORT SERVICES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ARKANSAS 71-0335111 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 615 J.B. HUNT CORPORATE DRIVE 72745 LOWELL, ARKANSAS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (501) 820-0000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO THE FILING REQUIREMENTS FOR AT LEAST THE PAST 90 DAYS. YES /X/ NO / / INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K (SECTION 229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] THE AGGREGATE MARKET VALUE OF 17,511,121 SHARES OF THE REGISTRANT'S $.01 PAR VALUE COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF FEBRUARY 26, 1999 WAS $411,511,344 (BASED UPON $23.50 PER SHARE BEING THE CLOSING SALE PRICE ON THAT DATE, AS REPORTED BY NASDAQ). IN MAKING THIS CALCULATION, THE ISSUER HAS ASSUMED, WITHOUT ADMITTING FOR ANY PURPOSE, THAT ALL EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT, AND NO OTHER PERSONS, ARE AFFILIATES. THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF FEBRUARY 26, 1999: 35,618,707. DOCUMENTS INCORPORATED BY REFERENCE CERTAIN PORTIONS OF THE NOTICE AND PROXY STATEMENT FOR THE ANNUAL MEETING OF THE STOCKHOLDERS TO BE HELD APRIL 15, 1999 PART II. PART I ITEM 1. BUSINESS GENERAL J.B. Hunt Transport Services, Inc., together with its wholly-owned subsidiaries ("JBH" or the "Company"), is a diversified transportation services and logistics company operating under the jurisdiction of the U.S. Department of Transportation (DOT) and various state regulatory agencies. JBH is an Arkansas holding company incorporated on August 10, 1961. Through its subsidiaries JBH provides a wide range of logistics and transportation services to a diverse group of customers. The Company directly manages or provides tailored, technology-driven solutions to a growing list of Fortune 500 companies. These customers may request specifically targeted transportation service or outsource their entire logistics function to JBH. The Company also directly transports full-load containerizable freight throughout the continental United States and portions of Canada and Mexico. Transportation services may utilize JBH equipment and employees, or may employ equipment and services provided by unrelated third parties in the transportation industry. The Company presently has three distinct operating segments: Van/Intermodal ("VAN"); J.B. Hunt Logistics ("JBHL"); and Dedicated Contract Services ("DCS"). See Note (9) Segment Information of the Notes to Consolidated Financial Statements. VAN Primary transportation service offerings classified in this segment include full truck-load, dry-van, containerizable freight which is typically transported utilizing company-owned revenue equipment. Freight is picked up at the dock or specified location of the shipper and transported directly to the location of the consignee. The load may be transported entirely by company-owned and controlled power equipment or a portion of the movement may be handled by a third-party motor carrier or a railroad. Approximately 45% of VAN revenue in 1998 was transported by a railroad for a portion of the movement. If any portion of a movement is handled by a railroad, the entire amount billed to the customer is considered to be intermodal revenue. Typically, the charges for the entire movement are billed to the customer by the Company and the Company, in turn, pays the railroad or third-party for their portion of the transportation services provided. In 1993, rail operations were expanded to utilize newly-designed high-cube containers which can be separated from the chassis and double-stacked on rail cars to provide improved productivity. Freight may be transported by rail utilizing traditional trailer-on-flatcar (TOFC) medium for a portion of the line-haul, or containers separated from the chassis, double-stacked on railcars and moved as container-on-flatcar (COFC). The Company has agreements with nine different railroads and substantially all of the freight carried under these rail arrangements receives priority space on trains and preferential loading and unloading service at rail facilities. JBH VAN has certain Canadian authorities which were initially granted in 1988 and may transport freight to and from all points in the continental United States to Quebec, British Columbia and Ontario. The Company has authorization to operate directly in all the Canadian provinces, but to date has served limited points in Canada, primarily through interchange operations with Canadian motor carriers. The Company has provided transportation services to and from Mexico since 1989, primarily through interchange operations with various Mexican motor carriers. A joint venture agreement with Transportacion Maritima Mexicana, one of the largest transportation companies in Mexico, was signed in 1992. At December 31, 1998, VAN operated approximately 6,700 tractors and 32,420 trailers/containers. VAN gross operating revenues were $1,379 million in 1998, an increase of 19% over 1997. JBHL The Company formally began offering transportation logistics services in 1992. JBHL services typically refer to an arrangement whereby a shipper may outsource a substantial portion of or their entire distribution and transportation process to one organization. JBHL provides a wide range of comprehensive transportation and management services including experienced professional managers, information and optimization technology, and the actual design or redesign of system solutions. A new JBHL customer or arrangement may require a significant amount of up-front analysis and design time while alternatives are considered and custom systems and software are developed. Once a logistics arrangement is in place, JBHL may utilize VAN and/or DCS owned and controlled transportation equipment, unrelated third-party equipment and employees, or a combination to meet the customer's service requirements. JBHL gross operating revenues were $317 million in 1998, an increase of 25% over 1997. 2 DCS The Company began formally offering dedicated contract services in 1992. DCS operations typically include company-owned revenue equipment and employee drivers that are assigned to a specific customer, traffic lane or service. The service is engineered and customized for the specific customer and is typically in accordance with a written, long-term agreement. Frequently DCS operations provide service to customers that wish to augment or outsource their private fleet. It is common for one customer's dedicated service requirements to relate to limited traffic lanes or freight moving in only one direction. As a result, DCS operations frequently utilize VAN freight to provide backhauls which allow equipment to be repositioned for the DCS customer's next movement. The DCS and VAN segments also frequently share facilities such as terminals, maintenance shops, bulk fuel locations and trailer pools. At December 31, 1998, DCS operated approximately 2,200 tractors and 2,950 trailers. DCS gross operating revenues were $212 million in 1998, an increase of 41% over 1997. OTHER Prior to 1996, the Company had operated additional businesses including a flatbed division, a business that transported small parcels, and a division that specialized in the transportation of hazardous commodities. In early 1996, the Company embarked upon a strategy to concentrate its efforts on VAN, JBHL and DCS. In accordance with that strategy, assets and operations of other service offerings were subsequently sold. The small parcel and hazardous commodities businesses were sold in 1996 and the flatbed business was sold in 1997. MARKETING AND OPERATIONS JBH transports a wide range of products including automotive parts, department store merchandise, paper and wood products, food and beverages, plastics, chemicals and manufacturing materials and supplies. The Company's primary customers include many of the "Fortune 500" companies, but no single customer accounted for more than 7% of revenues during 1998. A broad geographic dispersion and a good balance in the type of freight transported allow JBH some protection from major seasonal fluctuations. However, consistent with the truckload industry in general, freight is typically stronger during the second half of the year, with peak volume occurring in August through mid November. Revenue and earnings are also affected by bad weather, holidays, fuel prices and railroad service levels. The Company generally markets all three of its service offerings through a nationwide marketing network. All transportation services offered are typically billed directly to the customer by JBH and all inquiries, claims and other customer contacts are handled by the Company. Certain marketing, sales, engineering and design functions are assigned to each operating segment. However, marketing strategy, pricing and national account service coordination is managed at the corporate level. PERSONNEL At December 31, 1998, JBH employed approximately 14,250 people, including 10,500 drivers. Historically the truckload transportation industry and the Company have experienced shortages of qualified drivers. In addition, driver turnover rates for truckload motor carriers frequently exceed 100%. In September of 1996, J.B. Hunt announced a new compensation program for the approximate 3,500 over-the-road VAN drivers. This comprehensive package, which was effective February 25, 1997, included an average 33% increase in wages for this group of employees. This program was designed to attract and retain a professional and experienced work force capable of delivering a high level of customer service. As anticipated, this increase in driver wages and benefits was partially offset by lower driver recruiting and training expense, reduced accident costs and better equipment utilization. The average driver turnover in the VAN business was 46% in 1998 and 45% in 1997, down from 86% in 1996. Drivers are frequently designated as local, regional, regular route or dedicated and over-the-road and typically compensated on a rate-per-mile basis, a rate per week basis or a combination of factors. JBH also employed approximately 2,550 office personnel and 1,200 mechanics at December 31, 1998. No employees are represented by collective bargaining agreements and management believes that its relationship with its employees is excellent. 3 REVENUE EQUIPMENT At December 31, 1998, JBH owned approximately 8,900 tractors and operated 12,980 trailers and 22,390 containers. JBH believes that modern, late-model, clean equipment differentiates quality customer service, increases equipment utilization and reduces maintenance costs and downtime. Accordingly, the average age of the VAN tractor and trailing fleet was approximately two years and four years, respectively, at December 31, 1998. In 1993, the Company commenced receiving a newly-designed container and chassis combination that could be transported over the road by truck and also be moved by rail or ship. The container and chassis may be transported as a single unit by rail (TOFC) or the container can be separated from the chassis and double-stacked (COFC) on rail cars or ships for improved productivity. Containers comprised approximately 70% of the VAN trailing fleet at December 31, 1998. The composition of the dedicated contract fleet varies with specific customer service requirements. All JBH revenue equipment is maintained in accordance with a specific maintenance program primarily based on age and miles traveled. The JBHL business is non-asset based, since the revenue equipment is provided by VAN, DCS and third parties. COMPETITION JBH is the largest publicly held truckload carrier in the United States. It competes primarily with other irregular route, truckload common carriers. Less-than-truckload common carriers and private carriers generally provide limited competition for truckload carriers. JBH is one of a few carriers offering nationwide logistics management and dedicated revenue equipment services. Although a number of carriers may provide competition on a regional basis, only a limited number of companies represent competition in all markets. The extensive rail network developed in conjunction with the various railroads also allows the Company the opportunity to differentiate its services in the marketplace. REGULATION Prior to December of 1995, the Company's operations in interstate commerce were regulated by the Interstate Commerce Commission ("ICC"). Commencing in January of 1996, the Interstate Commerce Commission Termination Act closed the ICC and transferred all remaining regulatory responsibilities to a new Surface Transportation Board and to the Federal Highway Administration. Motor carrier operations are subject to safety requirements prescribed by the United States DOT governing interstate operation. Such matters as weight and dimension of equipment and commercial driver's licensing are also subject to federal and state regulations. A federal requirement that all drivers obtain a commercial driver's license became effective in April 1992. The federal Motor Carrier Act of 1980 was the start of a program to increase competition among motor carriers and limit the level of regulation in the industry (sometimes referred to as "deregulation"). The Motor Carrier Act of 1980 enabled applicants to obtain operating authority more easily and allowed interstate motor carriers, such as the Company, to change their rates by a certain percentage per year without approval. The new law also allowed for the removal of many route and commodity restrictions regarding the transportation of freight. As a result of the Motor Carrier Act of 1980, the Company was able to obtain unlimited authority to carry general commodities throughout the 48 contiguous states. Effective January 1, 1995, the federal government issued guidelines which allow motor carriers more flexibility in intrastate operations. Although this reduced level of state regulation increased the level of competition in some regions, the Company believes it has ultimately benefited from this legislation. ITEM 2. PROPERTIES The Company's corporate headquarters are in Lowell, Arkansas. A 150,000-square-foot building was constructed and occupied in September 1990. In addition to the corporate headquarters, the Company owns a separate 40-acre tract in Lowell, Arkansas with three separate buildings totaling 18,000 square feet of office space and 80,000 square feet of maintenance and warehouse space. These buildings serve as the Lowell operations terminal, tractor and trailer maintenance facilities and additional administrative offices. A new terminal and maintenance facility was constructed and occupied in Chicago, Illinois during 1996. A new terminal and maintenance facility was also constructed and occupied in Kansas City, Missouri during early 1999. 4 A summary of the Company's principal facilities follows:
Maintenance Shop Office Space Location Acreage (square feet) (square feet) - ---------------------------------------------------------------------------------------------------------------------- Atlanta, Georgia 30 29,800 10,400 Chicago, Illinois 27 50,000 14,000 Dallas, Texas 14 24,000 7,800 Detroit, Michigan 27 44,300 10,800 East Brunswick, New Jersey 20 20,000 7,800 Houston, Texas 13 24,700 7,200 Kansas City, Missouri 10 31,000 6,700 Little Rock, Arkansas 24 29,200 7,200 Louisville, Kentucky 14 40,000 10,000 Lowell, Arkansas (corporate headquarters) 50 -- 150,000 Lowell, Arkansas 40 50,200 14,000 Lowell, Arkansas (trailer facilities) 14 29,800 4,000 San Bernardino, California 8 14,000 4,000 South Gate, California 12 12,000 5,500
In addition to the above facilities, the Company leases numerous small offices and trailer parking yards in various locations throughout the country. 5 ITEM 3. LEGAL PROCEEDINGS The Company is 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, management believes the resolution of claims and pending litigation will not have a material adverse effect on the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1998 to a vote of security holders. EXECUTIVE OFFICERS OF THE COMPANY Information with respect to the executive officers of the Company is set forth below:
Executive Name Age Position with Company Officer Since - ---- --- --------------------- ------------- J.B. Hunt 72 Senior Chairman of the Board; Director 1961 Wayne Garrison 46 Chairman of the Board; Director 1979 Johnelle Hunt 67 Secretary; Director 1972 Kirk Thompson 45 President and Chief Executive Officer; Director 1984 Paul R. Bergant 52 Executive Vice President, Marketing 1985 Bob D. Ralston 52 Executive Vice President, Equipment and Properties 1989 Jerry W. Walton 52 Executive Vice President, Finance and Chief Financial Officer 1991 Robert E. Logan 60 Chief Information Officer 1997 A. Craig Harper 41 Executive Vice President, Operations 1997 Dr. Jun-Sheng Li (1) 40 President J.B. Hunt Logistics and Executive Vice President, Integrated Solutions 1998 John N. Roberts III (2) 34 President, Dedicated Contract Services 1997
(1) Dr. Jun-Sheng Li joined the Company in 1994 as Senior Vice President of J.B. Hunt Logistics. In June of 1995, he was named President of J.B. Hunt Logistics and in June of 1998, he was appointed to the additional post of Executive Vice President, Integrated Solutions. (2) Mr. Roberts joined the Company in 1989 as a management trainee. In December of 1990, he became a Regional Marketing Manager. In February of 1996, he was named Vice President, Marketing Strategy and was appointed President, Dedicated Contract Services, in July of 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS PRICE RANGE OF COMMON STOCK The Company's common stock is traded in the over-the-counter market under the symbol "JBHT." The following table sets forth, for the calendar years indicated, the range of high and low sales prices for the Company's common stock as reported by the National Association of Securities Dealers Automated Quotations National Market System ("NASDAQ").
1998 1997 ----------------- ----------------- Period High Low High Low - ------------------------------------------------------------------------------ 1st Quarter $30.63 $17.38 $15.00 $13.38 2nd Quarter 36.13 27.50 16.13 13.63 3rd Quarter 38.88 14.00 18.50 14.50 4th Quarter 23.00 12.31 19.25 15.00
6 On February 26, 1999, the high and low sales prices for the Company's common stock as reported by the NASDAQ were $23.50 and $22.875, respectively. As of February 26, 1999, the Company had 1,693 stockholders of record. DIVIDEND POLICY On January 28, 1999, the Board of Directors declared a quarterly dividend of $.05 per share, payable on February 24, 1999 to shareholders of record on February 10, 1999. Although it is the present intention of the Board of Directors to continue quarterly dividends, payment of future dividends will depend upon the Company's financial condition, results of operations and other factors deemed relevant by the Board of Directors. The Company declared and paid cash dividends of $.20 per share in 1998 and 1997. 7 ITEM 6. SELECTED FINANCIAL DATA (Dollars in millions, except per share amounts)
Years Ended December 31 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- Operating revenues $1,841.6 $1,554.3 $1,486.7 $1,352.2 $1,207.6 Operating income 103.0 42.9 60.4 21.3 84.9 Earnings (loss) before cumulative effect of changes in accounting methods 46.8 11.4 22.1 (2.2) 40.4 Basic earnings (loss) per share before cumulative effect of changes in accounting methods 1.32 .31 .58 (.06) 1.05 Cash dividends per share .20 .20 .20 .20 .20 Total assets 1,171.5 1,021.9 1,043.4 1,016.8 993.7 Long-term debt 417.0 322.8 332.6 339.0 299.2 Stockholders' equity 375.7 338.0 357.3 356.9 377.9 Years Ended December 31 1993 1992 1991 1990 1989 - -------------------------------------------------------------------------------------------------- Operating revenues $1,020.9 $912.0 $733.3 $579.8 $509.3 Operating income 78.6 69.1 59.4 56.9 61.8 Earnings (loss) before cumulative effect of changes in accounting methods 38.2 36.9 29.5 30.0 30.6 Basic earnings (loss) per share before cumulative effect of changes in accounting methods 1.00 1.03 .85 .85 .87 Cash dividends per share .20 .20 .19 .16 .16 Total assets 862.4 715.7 520.1 452.7 384.7 Long-term debt 303.5 216.3 156.9 137.6 105.0 Stockholders' equity 344.0 308.6 215.8 191.1 175.5 Diluted earnings per share were $1.28, $.31 and $.58, for the years 1998, 1997 and 1996, respectively. Percentage of Operating Revenue Years Ended December 31 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------ Operating revenues 100.0% 100.0% 100.0 %100.0% 100.0% Operating expenses: Salaries, wages and employee benefits 34.9 34.4 32.6 33.8 33.5 Purchased transportation 30.7 30.6 27.2 25.4 23.9 Fuel and fuel taxes 7.5 9.1 10.8 10.6 10.9 Depreciation 7.4 8.4 8.4 9.6 9.2 Operating supplies and expenses 8.2 8.4 8.0 8.4 6.9 Insurance and claims 1.8 2.4 3.9 3.8 3.1 Operating taxes and licenses 1.3 1.6 1.9 2.0 2.2 General and administrative expenses 1.6 1.2 1.9 2.4 2.2 Communication and utilities 1.0 1.1 1.2 1.1 1.1 Special charges -- -- -- 1.3 -- ------ ------ ------ ------ ------ Total operating expenses 94.4 97.2 95.9 98.4 93.0 ------ ------ ------ ------ ------ Operating income 5.6 2.8 4.1 1.6 7.0 Interest expense 1.6 1.6 1.7 1.8 1.6 Income taxes 1.5 .5 .9 -- 2.1 Cumulative effect of changes in accounting methods -- -- -- -- -- ------ ------ ------ ------ ------ Net earnings (loss) 2.5% .7% 1.5% (.2%) 3.3% ====== ====== ====== ====== ====== Years Ended December 31 1993 1992 1991 1990 1989 - ------------------------------------------------------------------------------------------ Operating revenues 100.0% 100.0% 100.0% 100.0% 100.0% Operating expenses: Salaries, wages and employee benefits 36.4 38.2 40.0 41.4 42.1 Purchased transportation 18.4 12.2 7.0 0.7 0.7 Fuel and fuel taxes 12.4 14.2 16.3 17.3 15.7 Depreciation 8.2 9.5 9.4 9.7 9.5 Operating supplies and expenses 7.2 7.4 8.0 8.8 8.5 Insurance and claims 4.0 4.8 4.7 5.4 4.5 Operating taxes and licenses 2.8 2.8 3.0 3.2 3.5 General and administrative expenses 1.9 2.0 2.1 2.3 1.7 Communication and utilities 1.0 1.3 1.4 1.4 1.7 Special charges -- -- -- -- -- ------ ------ ------ ------ ------ Total operating expenses 92.3 92.4 91.9 90.2 87.9 ------ ------ ------ ------ ------ Operating income 7.7 7.6 8.1 9.8 12.1 Interest expense 1.4 1.2 1.5 1.2 1.8 Income taxes 2.6 2.3 2.6 3.4 4.3 Cumulative effect of changes in accounting methods -- .2 (.2) -- -- ------ ------ ------ ------ ------ Net earnings (loss) 3.7% 4.3% 3.8% 5.2% 6.0% ====== ====== ====== ====== ======
The following table sets forth certain operating data of the Company.
Years Ended December 31 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------- Total loads 2,243,856 1,802,006 1,605,546 1,361,251 1,187,815 Average number of tractors in the fleet during the year 8,207 7,629 7,728 7,559 7,094 Tractors operated (at year end) 8,906 7,508 7,750 7,706 7,412 Trailers/containers (at year end) 35,366 30,391 27,773 24,618 22,687 Tractor miles (in thousands) 922,560 790,018 810,450 772,199 740,626 Years Ended December 31 1993 1992 1991 1990 1989 - --------------------------------------------------------------------------------------------- Total loads 1,081,013 960,031 796,929 596,574 536,448 Average number of tractors in the fleet during the year 6,890 6,424 5,286 4,413 3,616 Tractors operated (at year end) 6,775 7,004 5,843 4,729 4,096 Trailers/containers (at year end) 19,089 17,391 12,389 10,563 9,339 Tractor miles (in thousands) 718,767 733,700 638,926 551,175 495,377
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements of the Company and related footnotes appearing in this annual report. SUMMARY OF 1998 J.B. Hunt's 1998 financial and operating results reflected a number of positive trends when compared with 1997. For the first time since 1996, the Company experienced a net increase in the tractor fleet. A 9% increase in VAN tractor count and a 17% increase in the VAN driver force during 1998 contributed to a 19% increase in VAN segment revenue. Intermodal revenue, which is included in the VAN segment, increased 12% during 1998 and also helped support revenue growth. VAN truck only revenue per loaded mile increased nearly 2% during 1998, while intermodal rates declined nearly 3%. The significant increase in the VAN driver to tractor ratio also helped improve tractor utilization to 2,645 miles per week in 1998 from 2,555 in 1997. This approximate $225 million increase in VAN revenue and higher tractor utilization contributed to the significant increase in 1998 VAN operating income. VAN earnings were also favorably impacted in 1998 by lower fuel prices and lower insurance and claims costs. The 25% increase in the JBHL segment revenue during 1998 was due to new logistics agreements with new customers and growth of business levels with existing customers. The increase in 1998 JBHL operating income was primarily related to the higher revenue levels, as JBHL margins remained relatively constant. DCS segment revenue increased 41% to $211.9 million in 1998 from $150.7 million in 1997. This increase in DCS revenue was driven by both new customer contracts and additional projects or fleet additions to existing contracts. The higher level of DCS operating income during 1998 was primarily due to the growth of segment revenue and cost reduction actions in certain projects. Lower fuel costs also contributed to higher operating income in the DCS segment. Other revenue in 1997 included the flatbed business which was sold in 1997. RESULTS OF OPERATIONS 1998 COMPARED WITH 1997
Operating Segments For Years Ended December 31 (in millions of dollars) Gross Revenue Operating Income ---------------------------------------------- ------------------------ 1998 1997 % Change 1998 1997 ---- ---- -------- ---- ---- Van/Intermodal $1,378.4 $1,153.5 19% $ 81.1 $28.2 JBHL 317.3 254.1 25 7.5 6.1 DCS 211.9 150.7 41 17.0 10.9 Other 8.0 59.8 (87) (2.6) (2.3) -------- -------- ---- ----- ----- Subtotal 1,915.6 1,618.1 18 103.0 42.9 Inter-segment eliminations (74.0) (63.8) -- -- -- -------- -------- ---- ----- ----- Total $1,841.6 $1,554.3 18% $103.0 $42.9 ======== ======== ==== ====== =====
9 The following table sets forth items in the Consolidated Statements of Earnings as a percentage of operating revenues and the percentage increase or decrease of those items as compared with the prior year.
Percentage of Percentage Operating Revenue Change --------------------- ------------- 1998 1997 1998 vs. 1997 ---- ---- ------------- Operating revenues 100.0% 100.0% 18.5% Operating expenses: Salaries, wages and employee benefits 34.9% 34.4% 20.3% Purchased transportation 30.7 30.6 18.9 Fuel and fuel taxes 7.5 9.1 (3.0) Depreciation 7.4 8.4 4.3 Operating supplies and expenses 8.2 8.4 16.6 Insurance and claims 1.8 2.4 (13.8) Operating taxes and licenses 1.3 1.6 (2.3) General and administrative expenses 1.6 1.2 49.0 Communication and utilities 1.0 1.1 13.2 ----- ---- ----- Total operating expenses 94.4 97.2 15.0 ---- ---- ----- Operating income 5.6 2.8 140.1 Interest expense 1.6 1.6 16.8 ----- ---- ----- Earnings before income taxes 4.0 1.2 305.5 Income taxes 1.5 .5 294.9 ----- ---- ----- Net earnings 2.5% .7% 312.1% ===== ===== =====
OPERATING EXPENSES Total operating expenses in 1998 increased 15% over 1997, while total operating revenues increased nearly 19% during the same period. Operating expenses expressed as a percentage of operating revenues (operating ratio) were 94.4% in 1998, compared with 97.2% in 1997. Salaries, wages and employee benefits increased 20% during 1998 and rose to 34.9% of revenue in 1998 from 34.4% in 1997. This increase was primarily due to an increase in driver wages as a percentage of revenue, driven by the mix change of more experienced, higher paid drivers, partly offset by lower worker's compensation claims costs. The increase in purchased transportation expense was related to the growth of intermodal and JBHL business, which results in higher payments to railroads and third-party motor carriers for purchased transportation services. Significantly lower fuel costs per gallon and slightly higher fuel miles per gallon performance helped drive fuel and fuel tax expense down in 1998. Depreciation expense increased approximately 4% during 1998, but declined to 7.4% of revenue in 1998 from 8.4% in 1997. The amount of revenue equipment depreciation expense increased in relative proportion to the size of the fleet. However, depreciation was reduced by gains on the sale of certain assets. Gains on asset dispositions reduce depreciation expense and totaled $4.1 million in 1998, compared with $.7 million in 1997. Gains were recognized during 1998 on the sale of land in Lowell, Arkansas, a small subsidiary company and certain tractors and trailing equipment. Operating supplies and expenses include maintenance on revenue equipment and tires and increased in relative proportion to the fleet size. The decline in operating supplies and expenses as a percentage of revenue was due primarily to the growth of non-asset based revenue. The significant decrease in insurance and claims expense was the result of fewer vehicle collisions during 1998 and a decline in the cost per collision. The Company was successful in attracting and retaining experienced professional drivers that have been involved in fewer vehicle collisions and reduced accident costs. The decline in operating taxes and licenses was due, in part, to refunds received from certain state taxing authorities. The increase in general and administrative expenses was partly due to higher levels of spending for computer rental and maintenance. This spending was related to the decision to lease rather than purchase certain computer equipment and also for Year 2000 compliance work. Communications and utilities increased in relative proportion to revenue growth. Interest expense increased 17%, primarily due to higher debt levels. The effective income tax rate was 37% in 1998 and 38% in 1997. As a result of the above, net earnings for 1998 increased to $46.8 million, or diluted earnings per share of $1.28, compared with $11.4 million in 1997, or $.31 per diluted share. A decrease in the number of weighted average shares outstanding (before the effect of dilutive stock options), was primarily due to the Company's acquisition of treasury shares. An increase in weighted average shares assuming dilution resulted from the increased effect of dilutive stock options caused by the increase in the Company's average market price of common stock during 1998. 10 SUMMARY OF 1997 J.B. Hunt's 1997 financial and operating results reflect some significant management actions which were implemented during 1997 and late 1996. In early 1996, a decision was made to concentrate Company resources on the three operating segments of VAN, JBHL and DCS. Assets and businesses which did not relate to these segments were sold. Businesses which transported small parcels and specialized in hazardous commodities were sold during 1996 and a flatbed operation was sold in 1997. In September of 1996, a new VAN over-the-road driver compensation package was announced, which became effective in February of 1997. This new pay and benefit package, which increased annual pay by approximately 33% for certain VAN drivers, was successful in attracting and retaining experienced and professional drivers. Driver turnover in the VAN business declined to 45% in 1997 from 86% in 1996. The increased cost of the new pay and benefit package was partly offset, as anticipated, by closing the two company-owned driver training schools, lower driver recruiting expense, reduced vehicle collisions and higher tractor utilization. The ability to add drivers and a strong demand for transportation services during late 1997 combined to produce revenue growth during the fourth quarter of 1997. Consolidated operating revenues increased 4.5% in 1997, to $1,554.3 million from $1,486.7 million in 1996. Operating revenue in the VAN segment increased 7%, to $1,153.5 million in 1997 from $1,082.8 million in 1996. This increase was primarily due to a 9% increase in the size of the tractor fleet, offset by approximately 2% reductions in both truck only and intermodal rates. JBHL revenues increased 46% to $254.1 million in 1997 from $173.6 million in 1996. This increase in JBHL revenue was primarily due to new business and contracts executed with significant "Fortune 500" customers. DCS revenue increased 19%, to $150.7 million in 1997 from $126.9 million in 1996. This increase in DCS revenue was driven by both new customer contracts and additional projects or fleet additions to existing contracts. The DCS tractor count increased by 18% in 1997. Other revenue in 1997 and 1996 included the parcel management and special commodities operations which were sold in 1996 and a flatbed division which was sold in 1997. 1997 COMPARED WITH 1996
Operating Segments For Years Ended December 31 (in millions of dollars) Gross Revenue Operating Income --------------------------------------------- ------------------------ 1997 1996 % Change 1997 1996 ---- ---- -------- ---- ---- Van/Intermodal $1,153.5 $1,082.8 7% $28.2 $43.4 JBHL 254.1 173.6 46 6.1 5.1 DCS 150.7 126.9 19 10.9 10.0 Other 59.8 150.5 (60) (2.3) 1.9 ------- ------- ---- ----- ----- Subtotal 1,618.1 1,533.8 5 42.9 60.4 Inter-segment eliminations (63.8) (47.1) -- -- -- --------- -------- ---- ----- ----- Total $1,554.3 $1,486.7 5% $42.9 $60.4 ======== ======== ==== ===== =====
11 The following table sets forth items in the Consolidated Statements of Earnings as a percentage of operating revenues and the percentage increase or decrease of those items as compared with the prior year.
Percentage of Percentage Operating Revenues Change --------------------- ------------- 1997 1996 1997 vs. 1996 ---- ---- ------------- Operating revenues 100.0% 100.0% 4.5% Operating expenses: Salaries, wages and employee benefits 34.4% 32.6% 10.3% Purchased transportation 30.6 27.2 17.7 Fuel and fuel taxes 9.1 10.8 (11.5) Depreciation 8.4 8.4 4.6 Operating supplies and expenses 8.4 8.0 8.8 Insurance and claims 2.4 3.9 (35.1) Operating taxes and licenses 1.6 1.9 (10.3) General and administrative expenses 1.2 1.9 (32.5) Communication and utilities 1.1 1.2 (8.0) ------- ------ ------ Total operating expenses 97.2 95.9 6.0 ------- ------ ------ Operating income 2.8 4.1 (28.9) Interest expense 1.6 1.7 (.5) ------ ----- ------ Earnings before income taxes 1.2 2.4 (48.6) Income taxes .5 .9 (48.6) ------ ----- ------ Net earnings .7% 1.5% (48.6%) ====== ===== ======
OPERATING EXPENSES Total operating expenses in 1997 increased 6% over 1996, while operating revenues increased 4.5% over the same period. Operating expenses expressed as a percentage of operating revenues (operating ratio) were 97.2% in 1997, compared with 95.9% in 1996. The increase in salaries, wages and employee benefits was primarily due to the new driver compensation package, which was effective in February of 1997. The significant increase in purchased transportation was consistent with trends in recent years and reflects payments to railroads and other third-party companies that provided transportation services to the Company. Fuel and fuel taxes expense declined, primarily due to lower fuel cost per gallon and improved miles per gallon performance. The increase in operating supplies and expenses was primarily due to higher trailing equipment lease and rental costs. The decline in insurance and claims expense was a result of lower collision frequency, primarily related to a decision to limit the speed of the tractor fleet to 59 miles per hour and the more experienced driver force attracted by the new compensation package. A related reduction in general and administrative expenses was primarily due to reduced driver recruiting and training costs. Reduced insurance related costs and lower driver hiring expenses were two primary sources for funding the new driver compensation program. As a result of the above, net earnings for 1997 declined to $11.4 million, or diluted earnings per share of $.31, from $22.1 million, or $.58 per diluted share in 1996. A decrease in the number of weighted average shares outstanding (before the effect of dilutive stock options), was primarily due to the Company's acquisition of treasury shares. LIQUIDITY AND CAPITAL RESOURCES The Company generates significant amounts of cash from operating activities. Net cash provided by operating activities was $183 million in 1998, $161 million in 1997 and $141 million in 1996. During the three year period ended December 31, 1998, primary operating cash requirements were applied to increases in accounts receivable, other current assets (inventories, licenses and permits) and to pay claims. Primary sources of cash included net earnings, depreciation, trade accounts payable and deferred income taxes. Net cash used in investing activities was $261 million in 1998, $90 million in 1997 and $131 million in 1996. The primary use of funds for investing activities was the acquisition of new revenue equipment. New tractor purchases were approximately 2,900 in 1998, 2,400 in 1997 and 2,000 in 1996. The level of investment spending for trailing equipment varied significantly during the three year period ended December 31, 1998. The total number of trailing pieces of equipment purchased was approximately 4,700 in 1998, 490 in 1997 and 1,900 in 1996. The Company leased trailing equipment in 1998 and 1997 to supplement its owned fleet. 12 Financing activities generated $83 million in 1998 and consumed $71 million in 1997 and $10 million in 1996. The Company sold $100 million of 7.00% senior notes in September of 1998, which will mature in September of 2004. Financing activities also included the purchase of treasury stock totaling $5.8 million in 1998, $22.0 million in 1997 and $17.8 million in 1996. Funds were also used for repayments of debt and to pay dividends.
SELECTED BALANCE SHEET DATA As of December 31 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- Working capital ratio 1.09 .97 1.03 Current maturities of long-term debt (millions) $ 16.4 $ 17.5 $ 49.8 Total debt (millions) $ 433 $ 340 $ 382 Total debt to equity 1.15 1.01 1.07 Total debt as a percentage of total capital .54 .50 .52
The Company is authorized to issue up to $240 million in notes under a commercial paper note program, of which $131 million was outstanding at December 31, 1998. In addition, the Company has approximately $95 million of uncommitted lines of credit, none of which were outstanding at December 31, 1998. From time to time the Board of Directors authorizes the repurchase of Company common stock. Purchases of Company stock were:
1998 1997 1996 ----------------------------------------------------------------------------------------- Number of shares acquired 225,000 1,468,000 1,159,000 Price range of shares $17.69 - $27.94 $13.50 - $17.00 $14.13 - $16.63
At December 31, 1998, the Company had committed to purchase approximately $110 million of revenue and service equipment net of expected proceeds from sale or trade-in allowances. Additional capital spending for new revenue equipment is anticipated during 1999, however, funding for such expenditures is expected to come from cash generated from operations and existing borrowing facilities. YEAR 2000 The Company utilizes and is dependent upon a wide variety of complex information technologies (IT) to conduct daily business operations. Some of the Company's older computer software programs and equipment use two digit fields rather than four digit fields to define the applicable year. As a result, some of the time or date-sensitive functions of these programs and equipment could result in equipment shutdowns, miscalculations, inability to process data and/or disruption of operations as the Year 2000 approaches. It is possible that some problems may develop during 1999 (e.g. applications that utilize future or projected data), well before January 1, 2000. The Company recognized the importance of Year 2000 issues and developed an action plan in 1996. The plan includes systematic reviews of all internal hardware, software and functions to either verify that the system is Year 2000 compliant or modify/replace the software or system as required. The process includes the use of a software testing tool which simulates the transition to the Year 2000. The original plan contemplated all conversion efforts to be completed by the end of 1998. As of December 31, 1998, the majority of application programs (i.e. software that interacts with users through computer terminals and produces reports) had been modified or replaced. These programs have been unit tested by IT staff members, but still require detail testing by users and Year 2000 simulation. A number of the primary financial systems utilized to pay vendors, track customer accounts receivable and produce regular financial reports have been converted or are in the final stages of conversion to be Year 2000 compliant. The additional modifications, installations and unit testing of the Company's internal computer and IT applications are currently expected to be completed by July 1, 1999. In addition to the issues and risks associated with the Company's internal IT systems and equipment, the Company has relationships and is dependent upon a number of third parties that include customers and suppliers of goods and services. Daily business operations include the electronic data interchange of information (EDI) with customers and providers of transportation services such as railroads and motor freight carriers. Other third party providers of critical services such as voice and data communications, natural gas and electricity, and diesel fuel are also an integral part of daily business operations. If significant numbers or certain critical customers or suppliers 13 experience failures in their computer systems or equipment due to Year 2000 non-compliance, it could adversely affect the Company's normal business activities. While some of these risks are not controllable by the Company, a number of actions and procedures have been implemented to assess and/or reduce this risk. Formal communications have been initiated with certain significant customers and suppliers. Depending upon the circumstances, formal certifications of Year 2000 compliance have been requested and received. The Company has not received enough formal responses to date to make an accurate assessment of the Year 2000 readiness of its primary customers and suppliers. Since 1996, the Company has spent approximately $1.3 million on Year 2000 compliance. Estimated future expense to complete testing and related compliance work is $200,000 for a total cost of $1.5 million. These costs are being charged to operations as incurred. This cost estimate excludes certain new system acquisitions, development and implementation expenses that relate to on-going business activity, normal upgrades and enhancements. The Company has also spent approximately $4.4 million of acquisition and implementation costs for primary financial systems upgrades. These costs are being capitalized and amortized over the estimated useful life of the software since these new systems were acquired for business reasons and not to remediate Year 2000 problems, if any, in the former systems. Current estimated future costs for such financial systems upgrades are $3.0 million. The Company presently believes that its internal computer systems and equipment will not pose significant operational problems relative to the Year 2000 issue. There can be no assurance that the Company will properly identify all Year 2000 issues or that certain external customers or suppliers will not experience disruption of IT functions or actual services provided. Even short-term disruption of telecommunications service, for example, could have a material adverse impact on the Company's business. In order to reduce the risks associated with the Year 2000 problem, the Company is developing a contingency plan which is expected to be completed by June 30, 1999. RECENT PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new accounting and reporting standards for derivative financial instruments and for hedging activities. SFAS 133 requires an entity to measure all derivatives at fair value and to recognize them in the balance sheet as an asset or liability, depending on the entity's rights or obligations under the applicable derivative contract. The recognition of changes in fair value of a derivative that affect the income statement will depend on the intended use of the derivative. If the derivative does not qualify as a hedging instrument, the gain or loss on the derivative will be recognized currently in earnings. If the derivative qualifies for special hedge accounting, the gain or loss on the derivative will either (1) be recognized in income along with an offsetting adjustment to the basis of the item being hedged or (2) be deferred in other comprehensive income and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. SFAS 133 will be effective for the Company no later than the quarter ending March 31, 2000, SFAS 133 may not be applied retroactively to financial statements of prior periods. The Company has not determined the impact that Statement 133 will have on its financial statements and believes that such determination will not be meaningful until closer to the date of initial adoption. FORWARD-LOOKING STATEMENTS This report contains statements that may be considered as forward-looking or predictions concerning future operations. Such statements are based on management's belief or interpretation of information currently available. These statements and assumptions involve certain risks and uncertainties and management can give no assurance that such expectations will be realized. Among all the factors and events that are not within the Company's control and could have a material impact on future operating results are general economic conditions, cost and availability of diesel fuel, adverse weather conditions and competitive rate fluctuations. Future 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. 14 ITEM 7a. 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 issuance of short-term commercial paper. However, due to its selective utilization of interest rate swaps, the effects of interest rate changes are mitigated. 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 in 1999 than in 1998, there would be no material adverse impact on the Company's results of operations. At December 31, 1998, the Company's interest rate swap agreements had a fair value of $1.6 million (net liability position). The Company has no material future earnings or cash flow expenses from changes in interest rates related to its long-term debt obligations as all of the Company's long-term debt obligations have fixed rates. At December 31, 1998, 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 translation gains and losses were not material to the Company's results of operations for the year ended December 31, 1998. 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 it's 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 fluctuations in foreign currency exchange rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE - ------------------------------------------------------------------------------------------------------------------- Independent Auditors' Report 16 Consolidated Balance Sheets as of December 31, 1998 and 1997 17 Consolidated Statements of Earnings for years ended December 31, 1998, 1997 and 1996 19 Consolidated Statements of Stockholders' Equity for years ended December 31, 1998, 1997 and 1996 20 Consolidated Statements of Cash Flows for years ended December 31, 1998, 1997 and 1996 22 Notes to Consolidated Financial Statements 24
15 INDEPENDENT AUDITORS' REPORT The Board of Directors J.B. Hunt Transport Services, Inc.: We have audited the accompanying consolidated balance sheets of J.B. Hunt Transport Services, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of J.B. Hunt Transport Services, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Little Rock, Arkansas February 5, 1999 16 J. B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997 (Dollars in thousands, except per share amounts)
ASSETS 1998 1997 ------------ ------------ Current assets: Cash and cash equivalents $ 9,227 3,701 Trade accounts receivable 184,367 169,198 Refundable income taxes (note 4) 937 2,711 Inventories 6,917 6,339 Prepaid licenses and permits 14,887 10,476 Other current assets 7,661 5,190 Deferred income taxes (note 4) 1,275 2,337 ------------ ------------ Total current assets 225,271 199,952 ------------ ------------ Property and equipment, at cost: Revenue and service equipment 1,235,824 1,045,069 Land 20,337 19,109 Structures and improvements 67,937 59,446 Furniture and office equipment 93,935 93,854 ------------ ------------ Total property and equipment 1,418,033 1,217,478 Less accumulated depreciation 492,633 420,671 ------------ ------------ Net property and equipment 925,400 796,807 ------------ ------------ Other assets (note 7) 20,808 25,160 ------------ ------------ ------------ ------------ $ 1,171,479 1,021,919 ------------ ------------ ------------ ------------
17 (Continued) J. B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997 (Dollars in thousands, except per share amounts)
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 ------------ ------------ Current liabilities: Current maturities of long-term debt (note 2) $ 16,350 17,500 Trade accounts payable 147,967 138,509 Claims accruals 6,131 22,306 Accrued payroll 23,684 16,096 Other accrued expenses 11,909 10,677 ------------- ------------ Total current liabilities 206,041 205,088 ------------- ------------ Long-term debt, excluding current maturities (note 2) 417,045 322,790 Claims accruals 7,166 15,168 Deferred income taxes (note 4) 165,570 140,909 ------------- ------------ Total liabilities 795,822 683,955 ------------- ------------ Stockholders' equity (notes 2 and 3): Preferred stock, par value $100. Authorized 10,000,000 shares; none outstanding - - Common stock, par value $.01 per share. Authorized 100,000,000 shares; issued 39,009,858 shares 390 390 Additional paid-in capital 106,985 105,682 Retained earnings 326,145 286,409 Accumulated other comprehensive loss (5,621) (5,621) ------------- ------------ 427,899 386,860 Treasury stock, at cost (3,401,501 shares in 1998 and 3,346,550 shares in 1997) 52,242 48,896 ------------- ------------ Total stockholders' equity 375,657 337,964 Commitments and contingencies (notes 2, 3, 5 and 8) ------------- ------------ $ 1,171,479 1,021,919 ------------- ------------ ------------- ------------
See accompanying notes to consolidated financial statements. 18 J. B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Years ended December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share amounts)
1998 1997 1996 ------------ ------------ ------------ Operating revenues $ 1,841,628 1,554,292 1,486,748 Operating expenses: Salaries, wages and employee benefits (note 5) 642,946 534,415 484,702 Purchased transportation 565,575 475,768 404,140 Fuel and fuel taxes 137,561 141,770 160,265 Depreciation 136,304 130,661 124,931 Operating supplies and expenses 151,622 130,065 119,581 Insurance and claims 32,674 37,904 58,387 Operating taxes and licenses 24,029 24,588 27,422 General and administrative expenses 28,636 19,225 28,501 Communication and utilities 19,237 16,986 18,456 ------------ ------------ ------------ Total operating expenses 1,738,584 1,511,382 1,426,385 ------------ ------------ ------------ Operating income 103,044 42,910 60,363 Interest expense 28,700 24,578 24,694 ------------ ------------ ------------ Earnings before income taxes 74,344 18,332 35,669 Income taxes (note 4) 27,507 6,966 13,554 ------------ ------------ ------------ Net earnings $ 46,837 11,366 22,115 ------------ ------------ ------------ ------------ ------------ ------------ Basic earnings per share $ 1.32 .31 .58 ------------ ------------ ------------ ------------ ------------ ------------ Diluted earnings per share $ 1.28 .31 .58 ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 19 J. B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share amounts)
ADDITIONAL COMMON PAID-IN STOCK CAPITAL ------------ ------------ Balances at December 31, 1995 $ 390 105,577 Tax benefit of stock options exercised -- 325 Sale of treasury stock to employees -- (5) Repurchase of treasury stock -- -- Cash dividends paid ($.20 per share) -- -- Comprehensive income: Net earnings -- -- Foreign currency translation -- -- ------------ ------------ Total comprehensive income Balances at December 31, 1996 390 105,897 Tax benefit (expense) of stock options exercised -- (54) Sale of treasury stock to employees -- 146 Forfeiture of restricted stock -- (307) Repurchase of treasury stock -- -- Cash dividends paid ($.20 per share) -- -- Comprehensive income - net earnings -- -- ------------ ------------ Balances at December 31, 1997 390 105,682 Tax benefit of stock options exercised -- 925 Sale of treasury stock to employees -- 382 Forfeiture of restricted stock -- (4) Repurchase of treasury stock -- -- Cash dividends paid ($.20 per share) -- -- Comprehensive income - net earnings -- -- ------------ ------------ Balances at December 31, 1998 $ 390 106,985 ------------ ------------ ------------ ------------ See accompanying notes to consolidated financial statements. 20 (Continued) ACCUMULATED TOTAL OTHER STOCKHOLDERS' COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY EQUITY INCOME EARNINGS LOSS STOCK (NOTES 2 AND 3) ------------- ------------ ------------- ------------ --------------- Balances at December 31, 1995 267,823 (6,739) (10,112) 356,939 Tax benefit of stock options exercised - - - 325 Sale of treasury stock to employees - - 2,114 2,109 Repurchase of treasury stock - - (17,777) (17,777) Cash dividends paid ($.20 per share) (7,574) - - (7,574) Comprehensive income: Net earnings $ 22,115 22,115 - - 22,115 Foreign currency translation 1,118 - 1,118 - 1,118 ------------ ------------ ------------ ------------ ------------ Total comprehensive income $ 23,233 ------------ ------------ Balances at December 31, 1996 282,364 (5,621) (25,775) 357,255 Tax benefit (expense) of stock options exercised - - - (54) ------------ ------------ ------------ ------------ ------------ Sale of treasury stock to employees - - 182 328 Forfeiture of restricted stock - - (1,269) (1,576) Repurchase of treasury stock - - (22,034) (22,034) Cash dividends paid ($.20 per share) (7,321) - - (7,321) Comprehensive income - net earnings $ 11,366 11,366 - - 11,366 ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1997 286,409 (5,621) (48,896) 337,964 Tax benefit of stock options exercised - - - 925 Sale of treasury stock to employees - - 2,486 2,868 Forfeiture of restricted stock - - (18) (22) Repurchase of treasury stock - - (5,814) (5,814) Cash dividends paid ($.20 per share) (7,101) - - (7,101) Comprehensive income - net earnings $ 46,837 46,837 - - 46,837 ------------ ------------ ------------ ------------ ------------ ------------ Balances at December 31, 1998 326,145 (5,621) (52,242) 375,657 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
21 J. B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996 (Dollars in thousands)
1998 1997 1996 ------------ ------------ ------------ Cash flows from operating activities: Net earnings $ 46,837 11,366 22,115 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 136,304 130,661 124,931 Provision for noncurrent deferred income taxes 24,661 (1,250) 19,430 Tax benefit (expense) of stock options exercised 925 (54) 325 Termination of restricted stock (22) (1,576) (277) Amortization of discount, net (145) 219 296 Changes in operating assets and liabilities: Trade accounts receivable (15,169) (15,327) (8,734) Other current assets (5,686) 11,248 (6,319) Deferred income taxes 1,062 8,663 (829) Trade accounts payable 9,458 22,165 (9,291) Claims accruals (24,177) (9,019) (5,021) Accrued payroll and other accrued expenses 8,820 3,640 4,035 ------------ ------------ ------------ Net cash provided by operating activities 182,868 160,736 140,661 ------------ ------------ ------------ Cash flows from investing activities: Additions to property and equipment (306,128) (174,141) (190,377) Proceeds from sale of equipment 41,231 84,192 63,260 Decrease (increase) in other assets 4,352 405 (3,753) ------------ ------------ ------------ Net cash used in investing activities (260,545) (89,544) (130,870) ------------ ------------ ------------
22 (Continued) J. B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997 and 1996 (Dollars in thousands)
1998 1997 1996 ------------ ------------ ------------ Cash flows from financing activities: Net borrowings (repayments) on short-term obligations $ (1,150) (37,250) 24,440 Proceeds from long-term debt 99,400 - - Repayments of long-term debt (5,000) (5,000) (11,740) Proceeds from sale of treasury stock 2,868 328 2,386 Repurchase of treasury stock (5,814) (22,034) (17,777) Dividends paid (7,101) (7,321) (7,574) ------------ ------------ ------------ Net cash provided by (used in) financing activities 83,203 (71,277) (10,265) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 5,526 (85) (474) Cash and cash equivalents at beginning of year 3,701 3,786 4,260 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 9,227 3,701 3,786 ------------ ------------ ------------ ------------ ------------ ------------ Supplemental disclosure of cash flow information: Cash paid (received) during the year for: Interest $ 26,387 24,634 25,258 Income taxes 11 (6,162) (2,602) ------------ ------------ ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 23 J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) DESCRIPTION OF BUSINESS J.B. Hunt Transport Services, Inc., together with its wholly-owned subsidiaries ("Company"), is a diversified transportation services and logistics company operating under the jurisdiction of the U.S. Department of Transportation and various state regulatory agencies. The Company presently has three distinct operating segments: Van/Intermodal: Logistics; and Dedicated Contract Services. (b) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. (c) CASH AND CASH EQUIVALENTS For purposes of the statements of cash flows, the Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. (d) TIRES IN SERVICE The Company capitalizes tires placed in service on new revenue equipment as a part of the equipment cost. Replacement tires and costs for recapping tires are expensed at the time the tires are placed in service. (e) PROPERTY AND EQUIPMENT Depreciation of property and equipment is calculated on the straight-line method over the estimated useful lives of 5 - 10 years for revenue and service equipment, 10 to 40 years for structures and improvements, and 3 to 10 years for furniture and office equipment. Gains on dispositions of revenue and other equipment, which are included in depreciation expense, were approximately $4,051,000, $664,000 and $7,949,000 for the years ended December 31, 1998, 1997 and 1996, respectively. (f) REVENUE RECOGNITION The Company recognizes revenue based on relative transit time in each reporting period with expenses recognized as incurred. 24 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (g) INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) EARNINGS PER SHARE A reconciliation of the numerator and denominator of basic and diluted earnings per share is shown below:
FOR THE YEARS ENDED DECEMBER 31 ------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Basic earnings per share: Numerator (net earnings) $ 46,837,000 11,366,000 22,115,000 ------------ ------------ ------------ ------------ ------------ ------------ Denominator (weighted average shares outstanding) 35,581,579 36,404,932 37,913,331 ------------ ------------ ------------ ------------ ------------ ------------ Earnings per share $ 1.32 .31 .58 ------------ ------------ ------------ ------------ ------------ ------------ Diluted earnings per share: Numerator (net earnings) $ 46,837,000 11,366,000 22,115,000 ------------ ------------ ------------ ------------ ------------ ------------ Denominator: Weighted average shares outstanding 35,581,579 36,404,932 37,913,331 Effect of common stock options 1,019,624 43,510 61,482 ------------ ------------ ------------ 36,601,203 36,448,442 37,974,813 ------------ ------------ ------------ ------------ ------------ ------------ Earnings per share $ 1.28 .31 .58 ------------ ------------ ------------ ------------ ------------ ------------
25 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 Options to purchase shares of common stock that were outstanding during each year but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the common shares are shown in the table below.
1998 1997 1996 ----------------- ----------------- ---------------- Number of shares under option 162,000 4,420,000 613,800 Range of exercise prices $ 26.00 - 37.50 $ 15.63 - 24.63 $ 17.81 - 24.63
(i) CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the Company's large number of customers and the diverse range of industries which they represent. As of December 31, 1998 and 1997, the Company had no significant concentrations of credit risk. (j) DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate swaps to hedge the effects of fluctuations in interest rates. The differential paid or received on interest rate swap agreements is accrued as interest rates change and is charged or credited to interest expense over the life of the agreements. Any gains or losses realized upon the termination of an interest rate swap agreement are deferred and amortized over the remaining life of the original term as a charge or credit to interest expense. (k) FOREIGN CURRENCY TRANSLATION Local currencies are generally considered the functional currencies outside the United States. Assets and liabilities are translated at year-end exchange rates for operations in local currency environments. Income and expense items are translated at average rates of exchange prevailing during the year. Prior to January 1, 1997, foreign currency translation adjustments, which reflect foreign currency exchange rate changes applicable to the net assets of the Mexican operations have been recorded as a separate item of accumulated other comprehensive loss in stockholders' equity. As of January 1, 1997, Mexico is considered a highly inflationary economy as defined by Statement of Financial Accounting Standards ("SFAS") No. 52, FOREIGN CURRENCY TRANSLATION. Accordingly, the more stable currency of the reporting parent (the Company) has been used, and the effect of exchange rates resulting in translation adjustments have been recorded as a component of net earnings for the years ended December 31, 1998 and 1997, respectively. Management of the Company expects foreign currency translation adjustments in 1999 to be included as accumulated other comprehensive loss. 26 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (l) STOCK BASED COMPENSATION The Company has adopted the disclosure requirements of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION and, as permitted under SFAS No. 123, applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for compensation costs for its 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. (m) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF The Company continually evaluates the carrying value of its assets for events or changes in circumstances which indicate that the carrying value may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (n) USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (o) COMPREHENSIVE INCOME On January 1, 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net earnings and foreign currency translation adjustments and is presented in the consolidated statements of stockholders' equity. The Statement requires only additional disclosures in the consolidated financial statements; it does not affect the Company's financial position or results of operations. Prior year consolidated financial statements have been reclassified to conform to the requirements of SFAS No. 130. During 1998 and 1997, comprehensive income and net earnings were the same (see note 1k). 27 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (2) LONG-TERM DEBT Long-term debt consists of (in thousands):
1998 1997 ------------ ------------ Commercial paper $ 131,350 132,500 Senior notes payable, interest at 7.84% payable semiannually 5,000 10,000 Senior notes payable, due 11/17/00, interest at 6.25% payable semiannually 25,000 25,000 Senior notes payable, due 12/12/00, interest at 6.00% payable semiannually 25,000 25,000 Senior notes payable, due 9/1/03, interest at 6.25% payable semiannually 98,260 98,260 Senior notes payable, due 9/15/04, interest at 7.00% payable semiannually 100,000 - Senior subordinated notes, interest at 7.80% payable semiannually 50,000 50,000 ------------ ------------ 434,610 340,760 Less current maturities (16,350) (17,500) Unamortized discount (1,215) (470) ------------ ------------ $ 417,045 322,790 ------------ ------------ ------------ ------------
Under its commercial paper note program, the Company is authorized to issue up to $240 million in notes. These notes are supported by two credit agreements, which aggregate $240 million, with a group of banks, of which $120 million expires March 12, 1999 and $120 million expires March 20, 2002. The effective rate on the commercial note program was 5.70% and 5.69% for the years ended December 31, 1998 and 1997, respectively. The 7.84% senior notes are payable in annual installments of $5,000,000 on March 31 and the 7.80% senior subordinated notes are payable in five equal annual installments beginning October 30, 2000. Under the terms of the credit agreements and the note agreements, the Company is required to maintain certain financial covenants including leverage tests, minimum tangible net worth levels and other financial ratios. The Company was in compliance with all of the financial covenants at December 31, 1998. 28 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 The Company has approximately $95 million of uncommitted lines of credit, none of which were outstanding at December 31, 1998. These lines are with various domestic and international banks and are due on demand. Interest on borrowings is generally tied to the banks' prevailing base rates or other alternative market rates. No commitment or facility fees are paid on these lines of credit and the obligations are typically evidenced by unsecured demand notes. Current maturities of long-term debt at December 31, 1998 consist of outstanding commercial paper associated with the revolving credit agreement which expires March 12, 1999 and the remaining installment of the 7.84% senior notes. The aggregate annual maturities of long-term debt for each of the five years ending December 31 are as follows (in thousands): 1999, $16,350; 2000, $60,000; 2001, $10,000; 2002, $130,000; and 2003, $108,260. (3) CAPITAL STOCK The Company maintains a Management Incentive Plan ("Plan") that provides various vehicles to compensate key employees with Company common stock. Under the original Plan, the Company was authorized to award, in aggregate, not more than 5,000,000 shares. During 1998, the stockholders of the Company amended the Plan whereby the Company is now authorized to award, in aggregate, not more than 6,500,000 shares. At December 31, 1998 there were approximately 1,019,000 shares available for grant under the Plan. The Company has utilized three such vehicles to award stock or grant options to purchase the Company's common stock: restricted stock awards, restricted options and nonstatutory stock options. Restricted stock awards are granted to key employees subject to restrictions regarding transferability and assignment. Shares of Company common stock are issued to the key employees and held by the Company until each employee becomes vested in the award. Vesting of the awards generally occurs over a four year period of time from the award date. Termination of the employee for any reason other than death, disability or certain cases of retirement causes the unvested portion of the award to be forfeited. Prior to 1994, key employees were granted restricted options to purchase stock. Vesting of the award generally occurred over a four year period beginning on the grant date. Failure to exercise a vested option within 210 days after vesting or termination of the employee for any reason other than death or disability resulted in forfeiture. The Plan provides that nonstatutory stock options may be granted to key employees for the purchase of Company common stock for 100% of the fair market value of the common stock at the grant date. The options generally vest over a ten year period and are forfeited if the employee terminates for any reason. Compensation expense (benefit) under the Plan is charged to earnings over the vesting period and amounted to approximately $20,000, $(78,000) and $628,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 29 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 A summary of the restricted and nonstatutory options to purchase Company common stock follows:
WEIGHTED AVERAGE NUMBER NUMBER EXERCISE PRICE OF SHARES OF SHARES PER SHARE EXERCISABLE ---------------- ---------------- ---------------- Outstanding at December 31, 1995 2,725,731 $ 17.16 415,606 Granted 493,000 17.34 Exercised (192,956) 13.39 Terminated (284,850) 17.32 ---------------- Outstanding at December 31, 1996 2,740,925 17.45 294,950 Granted 800,000 14.73 Exercised (57,650) 16.81 Terminated (443,350) 17.81 ---------------- Outstanding at December 31, 1997 3,039,925 16.70 274,225 Granted 602,000 18.12 Exercised (176,760) 16.66 Terminated (115,275) 16.81 ---------------- Outstanding at December 31, 1998 3,349,890 16.98 323,390 ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
During 1995, the Board of Directors established a nonqualified stock option plan to provide performance based compensation to the Chairman of the Board. The plan allows the Chairman the option to purchase up to 2.5 million shares of the Company's common stock at a price of $17.63 per share. These options vest after five years, except for special circumstances in which the options vest earlier. The options must be exercised within one year of vesting and all unexercised options will terminate. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated below.
1998 1997 1996 ------------ ------------ ----------- Net earnings As reported $ 46,837 11,366 22,115 Pro forma 42,881 7,800 19,180 Basic earnings per share As reported 1.32 .31 .58 Pro forma 1.21 .21 .51 Diluted earnings per share As reported 1.28 .31 .58 Pro forma 1.17 .21 .51
30 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 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. The per share weighted-average fair value of stock options granted during 1998, 1997 and 1996 was $13.23, $6.86 and $7.88, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1998 - expected dividend yield .9%, volatility of 65.5%, risk-free interest rate of 4.7%, and an expected life of 7.7 years; 1997 - expected dividend yield 1.1%, volatility of 34.1%, risk-free interest rate of 5.8%, and an expected life of 7.7 years; 1996 - expected dividend yield 1.4%, volatility of 34.8%, risk-free interest rate of 6.2%, and an expected life of 5.6 years. The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE REMAINING EXERCISE EXERCISE OF EXERCISE OPTIONS CONTRACTUAL PRICE OPTIONS PRICE PRICES OUTSTANDING LIFE (IN YEARS) PER SHARE EXERCISABLE PER SHARE ---------------- -------------- --------------- -------------- -------------- ------------- $11.58 - 15.00 1,078,275 7.9 $ 13.65 183,250 $ 13.60 15.01 - 18.75 4,224,440 4.5 17.42 67,540 17.39 18.76 - 22.50 313,000 7.4 20.09 36,875 20.40 22.51 - 26.25 89,675 6.4 23.59 35,725 22.94 26.26 - 30.00 134,500 10.4 28.92 - - 30.01 - 37.50 10,000 10.5 37.50 - - ---------------- -------------- --------------- -------------- -------------- ------------- $11.58 - 37.50 5,849,890 5.5 $ 17.26 323,390 $ 16.20 ---------------- -------------- --------------- -------------- -------------- ------------- ---------------- -------------- --------------- -------------- -------------- -------------
On January 28, 1999, the Company's Board of Directors declared a cash dividend of $.05 per share payable on February 24, 1999 to shareholders of record on February 10, 1999. (4) INCOME TAXES Total income tax expense for the years ended December 31, 1998, 1997 and 1996 was allocated as follows (in thousands):
1998 1997 1996 ------------- ------------- ------------- Earnings before income taxes $ 27,507 6,966 13,554 Stockholders' equity, for tax benefit (expense) of stock options exercised 925 (54) 325 ------------- ------------- ------------- $ 26,582 7,020 13,229 ------------- ------------- ------------- ------------- ------------- -------------
31 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 Income tax expense (benefit) attributable to earnings before income taxes consists of (in thousands):
1998 1997 1996 ------------ ------------ ------------- Current expense (benefit): Federal $ 1,410 (715) (5,830) State and local 375 268 783 ------------ ------------ ------------- 1,785 (447) (5,047) ------------ ------------ ------------- Deferred expense (benefit): Federal 21,354 7,096 20,366 State and local 4,368 317 (1,765) ------------ ------------ ------------- 25,722 7,413 18,601 ------------ ------------ ------------- Total tax expense $ 27,507 6,966 13,554 ------------ ------------ ------------- ------------ ------------ -------------
The following is a reconciliation between the effective income tax rate and the applicable statutory Federal income tax rate for each of the three fiscal years in the period ended December 31, 1998:
1998 1997 1996 ------------ ------------ ------------- Income tax - statutory rate 35.00% 35.00 35.00 State tax, net of Federal benefit 4.15 2.07 (1.79) Tax credits - - (0.87) Other, net (2.15) 0.93 3.92 ------------ ------------ ------------- Effective income tax rate 37.00% 38.00 38.00 ------------ ------------ ------------- ------------ ------------ -------------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below (in thousands):
1998 1997 ------------- ------------- Deferred tax assets: Claims accruals, principally due to accrual for financial reporting purposes $ 8,020 12,449 Tax credit carryforwards 7,321 7,321 Accounts receivable, principally due to allowance for doubtful accounts 3,972 1,770 Other 3,892 3,518 ------------- ------------- Total gross deferred tax assets 23,205 25,058 ------------- -------------
32 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996
1998 1997 -------------- -------------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation and capitalized interest $ 174,570 149,093 Prepaid permits and insurance, principally due to expensing for income tax purposes 7,943 4,846 Other 4,987 9,691 -------------- -------------- Total gross deferred tax liabilities 187,500 163,630 -------------- -------------- Net deferred tax liability $ 164,295 138,572 -------------- -------------- -------------- --------------
The Company believes its history of profitability and taxable income and its utilization of tax planning sufficiently supports the carrying amount of the deferred tax assets. Accordingly, the Company has not recorded a valuation allowance as all deferred tax benefits are more likely than not to be realized. At December 31, 1998, the Company had general business tax credit carryforwards of approximately $2,621,000 expiring from the year 2007 to 2009, and alternative minimum tax credit carryforwards with no expiration of approximately $4,700,000. (5) EMPLOYEE BENEFIT PLANS The Company maintains a defined contribution employee retirement plan, which includes a 401(k) option, under which all employees are eligible to participate. The Company matches a specified percentage of employee contributions, subject to certain limitations. For the years ended December 31, 1998, 1997 and 1996, total Company contributions to the plan, including matching 401(k) contributions, were $6,533,000, $4,951,000 and $3,450,000, respectively. (6) FAIR VALUE OF FINANCIAL INSTRUMENTS CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, AND TRADE ACCOUNTS PAYABLE The carrying amount approximates fair value because of the short maturity of these instruments. LONG-TERM DEBT The carrying amount of the commercial paper debt approximates the fair value because of the short maturity of the commercial paper instruments. The fair value of the fixed rate debt is presented as the present value of future cash flows discounted using the Company's current borrowing rate for notes of comparable maturity. The calculation arrives at a theoretical amount the Company would pay a creditworthy third party to assume its fixed rate obligations and not the termination value of these obligations. Consistent with market practices, such termination values may include various prepayment and termination fees that the Company would contractually be required to pay if it retired the debt early. 33 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 INTEREST RATE SWAP AGREEMENTS The fair values of interest rate swap agreements are obtained from dealer quotes. These values represent the estimated amount the Company would pay to terminate such agreements, taking into consideration current interest rates and the creditworthiness of the counterparties. The estimated fair values of the Company's financial instruments are summarized as follows (in thousands):
AT DECEMBER 31, 1998 AT DECEMBER 31, 1997 ------------------------------- ------------------------------ CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------------- ------------- ------------- ------------- Cash and cash equivalents $ 9,227 9,227 3,701 3,701 Accounts receivable 184,367 184,367 169,198 169,198 Trade accounts payable 147,967 147,967 138,509 138,509 Other assets 20,808 (a) 25,160 (a) Long-term debt: Commercial paper 131,350 131,350 132,500 132,500 Fixed rate obligations 303,260 302,131 207,790 204,889 Interest rate swap agreements - (1,622) - (198) ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
(a) The fair value for these assets either approximated carrying value because of the nature of these instruments, or was impracticable to determine. (7) RELATED PARTY TRANSACTIONS The Company advances premiums on life insurance policies on the lives of the Company's principal stockholder and his wife. All premiums paid by the Company, along with accrued interest thereon, are reimbursable from a trust which is the owner and beneficiary of the policy. The Company has a guarantee from the stockholder for the amount of premiums paid by the Company together with interest at the rate of 5% per annum. The amounts reimbursable to the Company amount to approximately $6,068,000 and $5,408,000 at December 31, 1998 and 1997, respectively. These amounts are included in other assets in the accompanying consolidated balance sheets. (8) COMMITMENTS AND CONTINGENCIES The Company is 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, management believes the resolution of claims and pending litigation will not have a material adverse effect on the financial condition or results of operations of the Company. 34 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (9) SEGMENT INFORMATION Van/Intermodal services include full truck-load, dry-van, container-sizable freight which is typically transported utilizing company-owned revenue equipment. The load may be transported entirely by company-owned and controlled equipment or a portion of the movement may be handled by a third-party motor carrier or a railroad. Logistics provides a wide range of comprehensive transportation and management services including experienced professional managers, information and optimization technology and the actual design or redesign of system solutions. Logistics may utilize van/intermodal and/or dedicated contract owned and controlled equipment, unrelated third-party equipment and employees, or a combination to meet the customer's service requirements. Dedicated Contract Services typically include company-owned revenue equipment and employee drivers that are assigned to a specific customer, traffic lane or service. The dedicated service is engineered and customized for the specific customer and is typically in accordance with a written, long-term agreement. Substantially all of the Company's revenues are from domestic customers. Intersegment revenues primarily consist of van/intermodal services provided to logistics. Such services are priced at approximately the same basis as services to external customers. Certain administrative and other costs are allocated among the segments utilizing various allocation factors which include revenues, equipment usage and maintenance, accounts receivable and other estimates. Substantially all of the Company's capital expenditures are made by the van/intermodal division with assets transferred to the dedicated contract division as needed. A summary of other segment information is presented below (in millions):
ASSETS -------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Van/Intermodal $ 1,025 931 940 Logistics 43 29 20 Dedicated Contract Services 62 42 27 Other (includes corporate) 41 20 56 ----------- ----------- ----------- Total $ 1,171 1,022 1,043 ----------- ----------- ----------- ----------- ----------- ----------- REVENUES -------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Van/Intermodal $ 1,379 1,153 1,083 Logistics 317 254 174 Dedicated Contract Services 212 151 127 Other 8 60 150 ----------- ----------- ----------- Subtotal 1,916 1,618 1,534 Inter-segment eliminations (74) (64) (47) ----------- ----------- ----------- Total $ 1,842 1,554 1,487 ----------- ----------- ----------- ----------- ----------- -----------
35 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996
OPERATING INCOME -------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Van/Intermodal $ 81 28 43 Logistics 8 6 5 Dedicated Contract Services 17 11 10 Other (3) (2) 2 ----------- ----------- ----------- Total $ 103 43 60 ----------- ----------- ----------- ----------- ----------- ----------- NET DEPRECIATION EXPENSE -------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Van/Intermodal $ 106 96 91 Logistics 1 1 (5)* Dedicated Contract Services 18 13 11 Other 11 21 28 ----------- ----------- ----------- Total $ 136 131 125 ----------- ----------- ----------- ----------- ----------- -----------
* Includes gain on sale of business of $5.7 million. (10) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Included in the fourth quarter 1997 results is a pre-tax charge of $4.3 million to adjust workers compensation reserves. The additional workers compensation expense was accrued as a result of an in-depth case by case analysis. Operating results by quarter for the years ended December 31, 1998 and 1997 are as follows (in thousands, except per share data):
QUARTER ----------------------------------------------------------------- FIRST SECOND THIRD FOURTH ------------ ------------- ------------ ------------ 1998: Operating revenues $ 413,466 460,985 473,388 493,789 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Operating income $ 21,658 31,613 24,424 25,349 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Net earnings $ 9,483 15,624 10,848 10,882 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Basic earnings per share $ .27 .44 .30 .31 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Diluted earnings per share $ .26 .42 .30 .30 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------
36 (Continued) J.B. HUNT TRANSPORT SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996
QUARTER ----------------------------------------------------------------- FIRST SECOND THIRD FOURTH ------------ ------------- ------------ ------------ 1997: Operating revenues $ 365,401 385,198 388,460 415,233 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Operating income $ 7,320 9,254 9,038 17,298 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Net earnings $ 568 1,865 1,922 7,011 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Basic earnings per share $ .02 .05 .05 .19 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------ Diluted earnings per share $ .02 .05 .05 .19 ------------ ------------- ------------ ------------ ------------ ------------- ------------ ------------
37 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No reports on Form 8-K have been filed within the twenty-four months prior to December 31, 1998 involving a change of accountants or disagreements on accounting and financial disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT DIRECTORS The schedule of directors is hereby incorporated by reference from the Notice and Proxy Statement For Annual Stockholder's Meeting of April 15, 1999 set forth under section entitled "Proposal One Election of Directors". EXECUTIVE OFFICERS Information with respect to executive officers of the Company is set forth in Item 4 of this Report under the caption "Executive Officers of the Company". ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required for Items 11 and 12 is hereby incorporated by reference from the Notice and Proxy Statement For Annual Stockholders' Meeting of April 15, 1999 set forth under sections entitled "Stock Ownership," "Executive Compensation and Other Information," "1999 Performance Based Compensation," and "Compensation Committee Interlocks and Insider Participation." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required for Item 13 is hereby incorporated by reference from Note (7) Related Party Transactions of the Notes to Consolidated Financial Statements and from the Notice and Proxy Statement For Annual Stockholders' Meeting of April 15, 1999 set forth under the section entitled "Compensation Committee Interlocks and Insider Participation." PART IV ITEM 14. EXHIBITS The following documents are filed as part of this report: (a) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report ("Exhibit Index"). 38 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant had duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lowell, Arkansas, on March 1, 1999. J.B. HUNT TRANSPORT SERVICES, INC. (Registrant) By: /s/ Kirk Thompson ------------------------------------------- Kirk Thompson President and Chief Executive Officer By: /s/ Jerry W. Walton ------------------------------------------- Jerry W. Walton Executive Vice President, Finance and Chief Financial Officer By: /s/ Donald G. Cope ------------------------------------------- Donald G. Cope Vice President, Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ John A. Cooper, Jr. Member of the Board March 1, 1999 - ----------------------------- of Directors John A. Cooper, Jr. /s/ Wayne Garrison Member of the Board March 1, 1999 - ---------------------------- of Directors (Chairman) Wayne Garrison /s/ Gene George Member of the Board March 1, 1999 - ---------------------------- of Directors Gene George /s/ Thomas L. Hardeman Member of the Board March 1, 1999 - ---------------------------- of Directors Thomas L. Hardeman /s/ J. Bryan Hunt, Jr. Member of the Board March 1, 1999 - ---------------------------- of Directors (Vice Chairman) J. Bryan Hunt, Jr. /s/ J.B. Hunt Member of the Board March 1, 1999 - ---------------------------- of Directors (Senior Chairman) J.B. Hunt /s/ Johnelle Hunt Member of the Board March 1, 1999 - ---------------------------- of Directors (Corporate Johnelle Hunt Secretary) /s/ Lloyd E. Peterson Member of the Board March 1, 1999 - ---------------------------- of Directors Lloyd E. Peterson /s/ Kirk Thompson Member of the Board March 1, 1999 - ---------------------------- of Directors (President and Kirk Thompson Chief Executive Officer) /s/ John A. White Member of the Board March 1, 1999 - ---------------------------- of Directors John A. White
39 EXHIBIT INDEX
Exhibit Number Description - ----------------------------------------------------------------------------------- 3A The Company's Amended and Restated Articles of Incorporation dated May 19, 1988 (incorporated by reference from Exhibit 4A of the Company's S-8 Registration Statement filed April 16, 1991; Registration Statement Number 33-40028). 3B The Company's Amended Bylaws dated September 19, 1983 (incorporated by reference from Exhibit 3C of the Company's S-1 Registration Statement filed February 7, 1985; Registration Number 2-95714). 10A Material Contracts of the Company (incorporated by reference from Exhibits 10A-10N of the Company's S-1 Registration Statement filed February 7, 1985; Registration Number 2-95714). 10B The Company has an Employee Stock Purchase Plan filed on Form S-8 on February 3, 1984 (Registration Number 2-93928), and a Management Incentive Plan filed on Form S-8 on April 16, 1991 (Registration Statement Number 33-40028). The Management Incentive Plan is incorporated herein by reference from Exhibit 4B of Registration Statement 33-40028. The Company amended and restated its Employee Retirement Plan on Form S-8 (Registration Statement Number 33-57127) filed December 30, 1994. The Employee Retirement Plan is incorporated herein by reference from Exhibit 99 of Registration Statement Number 33-57127. 21 Subsidiaries of J.B. Hunt Transport Services, Inc. - J.B. Hunt Transport, Inc., a Georgia corporation - L.A., Inc., an Arkansas corporation - J.B. Hunt Corp., a Delaware corporation - J.B. Hunt Logistics, Inc., an Arkansas corporation - Comercializadora Internacional de Cargo S.A. De C.V., a Mexican corporation - Hunt Mexicana, S.A. de C.V., a Mexican corporation - Servicios de Logistica de Mexico, S.A. de C.V., a Mexican corporation - Servicios Administratios de Logistica, S.A. de C.V., a Mexican corporation - Asesoria Administrativa de Logistica, S.A. de C.V., a Mexican corporation. - FIS, Inc., a Nevada corporation 23 Consent of KPMG LLP 27 Financial Data Schedule for the year ended December 31, 1998.
40 EX-23 2 EXHIBIT 23 The Board of Directors J.B. Hunt Transport Services, Inc.: We consent to incorporation by reference in the Registration Statements No. 2-93928, No. 33-57127 and No. 33-40028 on Form S-8 of J.B. Hunt Transport Services, Inc. of our report dated February 5, 1999 relating to the consolidated balance sheets of J.B. Hunt Transport Services, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which report is included in the December 31, 1998 annual report on Form 10-K of J.B. Hunt Transport Services, Inc. KPMG LLP Little Rock, Arkansas February 26, 1999 EXHIBIT 23 EX-27 3 EXHIBIT 27
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 9,227 0 184,367 0 0 225,271 1,418,033 492,633 1,171,479 206,041 0 0 0 390 0 1,171,479 1,841,628 1,841,628 0 1,738,584 0 0 28,700 74,344 27,507 46,837 0 0 0 46,837 1.32 1.28
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