How did JBHT's profitability change in 2003?

Net earnings rose to a record $95.5 million, or $1.17 per diluted share, from $51.8 million, or 66 cents, in 2002. The filing attributes the gain to yield management, which shifted freight toward higher-margin business and enabled selective pricing, and to the driver per diem plan introduced in February 2003, which reduced segment operating costs. Results were reduced by a higher effective tax rate of 43.1%, versus 30.8% in 2002.

What is the status of the IRS dispute and how much is at stake?

The IRS proposes to disallow tax benefits from a 1999 sale-and-leaseback transaction covering a portion of the intermodal container and chassis fleet, which had a selling price of approximately $175 million. The company received a revenue agent's report on December 15, 2003, filed an appeal after receiving the Notice of Proposed Assessment, and intends to defend its position. It reversed $7.7 million of 2003 expected tax benefits and estimates maximum earnings exposure at $31 million, including accrued interest through December 31, 2003.

How is the company's debt position after 2003?

Total debt and capitalized lease obligations fell to $172 million at December 31, 2003, from $343 million a year earlier. The $95 million of 7.00% notes due September 2004 and the $10 million of 7.80% subordinated notes due October 2004 are expected to be retired from cash, operating cash flow and unused revolving lines, which are authorized up to $150 million and expire November 14, 2005. The company was in compliance with all financial covenants at year-end.

What are the main risks to earnings identified in the filing?

The filing cites fuel price volatility, with no derivative hedges in place, though fuel surcharge programs historically recovered most increases; difficulty attracting and retaining qualified drivers; rising insurance and claims costs, with carriers having raised premiums and current coverage expiring July 31, 2004; customer concentration, with Wal-Mart at approximately 13% of revenue; and dependence on railroads, principally Burlington Northern Santa Fe and Norfolk Southern, for the intermodal segment. Regulatory changes to driver hours of service effective January 4, 2004 may also increase costs.

JBHT 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 4, 2004. Cited figures are marked; the original filing is the authoritative source.

J.B.

Hunt Transport Services, Inc. reported record 2003 results, with consolidated operating revenues of $2.43 billion^a (up 8.3% from $2.25 billion in 2002), operating income of $185.6 million (versus $101.0 million), and net earnings of $95.5 million, or $1.17 per diluted share, compared with $51.8 million and 66 cents in 2002. Management attributes the improvement to yield management, which replaced low-margin freight with better-margin business, along with the driver per diem plan introduced in February 2003. The operating ratio improved 310 basis points to 92.4%.

Results were also helped by a stronger JBI intermodal segment, where operating income rose to $91.2 million^b and the operating ratio improved to 90.3%, and by the DCS dedicated segment, where operating income increased 130% to $45.2 million. Balance sheet strength improved as total debt fell to $172 million from $343 million, and operating cash flow reached $333 million. Management expects to retire the $95 million of 7.00% notes due September 2004 and the remaining $10 million of 7.80% subordinated notes due October 2004 from cash and operations.

The effective tax rate rose to 43.1% from 30.8%, reflecting a $7.7 million^c reversal of non-cash tax benefits tied to an IRS proposal to disallow the tax benefits of a 1999 sale-and-leaseback transaction. The company estimates its maximum earnings exposure on that matter at $31 million and has suspended recognition of such benefits from January 1, 2004. Key risks include fuel price volatility (the company holds no fuel hedges), driver recruiting, insurance and claims costs (with self-insured retention changed to $2 million for auto accidents and $1 million for workers' compensation in January 2004), the IRS dispute, and customer concentration, since Wal-Mart Stores, Inc. accounted for approximately 13% of 2003 revenue.

02—Key points

Key Highlights

Record 2003 net earnings of $95.5 million, or $1.17 diluted EPS, after a $7.7 million reversal of non-cash tax benefits; 2002 net earnings were $51.8 million, or 66 cents per diluted share.
Operating revenues of $2.43 billion, up 8.3% from $2.25 billion; operating ratio improved 310 basis points to 92.4%.
JBI intermodal segment revenue rose to $936.2 million, with operating income of $91.2 million and an operating ratio of 90.3%, compared with 93.3% in 2002.
DCS dedicated contract services operating income increased 130% to $45.2 million; JBT truck segment operating income rose to $49.3 million from $26.6 million.
Total debt reduced to $172 million from $343 million at year-end 2002; no balances were outstanding under the $150 million revolving credit lines, and operating cash flow was $333 million.
IRS proposed disallowing tax benefits on a 1999 sale-and-leaseback transaction; the company estimates maximum earnings exposure of $31 million and is appealing.
Wal-Mart Stores, Inc. accounted for approximately 13% of 2003 revenue, and the top ten customers accounted for approximately 38%.

03—Questions

Frequently Asked Questions

How did JBHT's profitability change in 2003?
Net earnings rose to a record $95.5 million, or $1.17 per diluted share, from $51.8 million, or 66 cents, in 2002. The filing attributes the gain to yield management, which shifted freight toward higher-margin business and enabled selective pricing, and to the driver per diem plan introduced in February 2003, which reduced segment operating costs. Results were reduced by a higher effective tax rate of 43.1%, versus 30.8% in 2002.
What is the status of the IRS dispute and how much is at stake?
The IRS proposes to disallow tax benefits from a 1999 sale-and-leaseback transaction covering a portion of the intermodal container and chassis fleet, which had a selling price of approximately $175 million. The company received a revenue agent's report on December 15, 2003, filed an appeal after receiving the Notice of Proposed Assessment, and intends to defend its position. It reversed $7.7 million of 2003 expected tax benefits and estimates maximum earnings exposure at $31 million, including accrued interest through December 31, 2003.
How is the company's debt position after 2003?
Total debt and capitalized lease obligations fell to $172 million at December 31, 2003, from $343 million a year earlier. The $95 million of 7.00% notes due September 2004 and the $10 million of 7.80% subordinated notes due October 2004 are expected to be retired from cash, operating cash flow and unused revolving lines, which are authorized up to $150 million and expire November 14, 2005. The company was in compliance with all financial covenants at year-end.
What are the main risks to earnings identified in the filing?
The filing cites fuel price volatility, with no derivative hedges in place, though fuel surcharge programs historically recovered most increases; difficulty attracting and retaining qualified drivers; rising insurance and claims costs, with carriers having raised premiums and current coverage expiring July 31, 2004; customer concentration, with Wal-Mart at approximately 13% of revenue; and dependence on railroads, principally Burlington Northern Santa Fe and Norfolk Southern, for the intermodal segment. Regulatory changes to driver hours of service effective January 4, 2004 may also increase costs.

04—Continue

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