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

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

Arkansas		71-0335111
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)
615 J.B. Hunt Corporate Drive Lowell, Arkansas		72745
(Address of principal executive offices)		(Zip code)

 

Registrant’s telephone number, including area code:

(479) 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 Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to the filing requirements for at least the past 90 days. Yes ý    No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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.  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).     Yes ý   No o

 

The aggregate market value of 54,917,894 shares of the registrant’s $.01 par value common stock held by non-affiliates of the registrant as of January 31, 2005, was $2.423 billion (based upon $44.12 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 January 31, 2005:   81,029,821.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain portions of the Notice and Proxy Statement for the Annual Meeting of the Stockholders, to be held April 21, 2005, are incorporated by reference into Part III of this Form 10-K.

 

 

J.B. HUNT TRANSPORT SERVICES, INC.

 

Form 10-K

For The Calendar Year Ended December 31, 2004

 

Table of Contents

 

 

PART I
Item 1.	Business
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
	Executive Officers of the Registrant
PART II
Item 5.	Market for Registrant’s Common Stock and Related Security Holder Matters
Item 6.	Selected Financial Data
Item 7.	Management’s Discussion and Analysis of Results of Operations and Financial Condition
Item 7a.	Quantitative and Qualitative Disclosures About Market Risk
Item 8.	Financial Statements and Supplementary Data
Item 9.	Change in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.	Controls and Procedures
Item 9B.	Other Information
PART III
Item 10.	Directors and Executive Officers of Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Security Holder Matters
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accountant Fees and Services
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K

 

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FORWARD-LOOKING STATEMENTS

 

This report, including documents which are incorporated by reference, and other documents which we file periodically with the Securities and Exchange Commission (SEC), contains statements that may be considered to be “forward-looking statements.”  Such statements relate to our predictions concerning future events or operations and are within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended.   Forward-looking statements are inherently uncertain, subject to risks, and should be viewed with caution.  These statements are based on our belief or interpretation of information currently available.  Stockholders and prospective investors are cautioned that actual results and future events may differ materially from the forward-looking statements as a result of many factors.  Some of the factors and events that are not within our control and that could have a material impact on future operating results include:  general economic and business conditions, competition and competitive rate fluctuations, cost and availability of diesel fuel, ability to attract and retain qualified drivers, a loss of one or more major customers, interference with or termination of our relationships with certain railroads, insurance costs and availability, claims expense, retention of key employees, terrorist attacks or actions, acts of war, adverse weather conditions, new or different environmental or other laws and regulations, increased costs for new revenue equipment or decreases in the value of used equipment and the ability of revenue equipment manufacturers to perform in accordance with agreements for guaranteed equipment trade-in values.  Current and future changes in fuel prices could result in significant fluctuations of quarterly earnings.

 

You should understand that many important factors, in addition to those listed above, could impact us financially.  Our operating results may fluctuate as a result of these and other risk factors or events as described in our filings with the SEC.  Some important factors that could cause our actual results to differ from estimates or projections contained in the forward-looking statements are described under “Risk Factors” in Item 7.  We assume no obligation to update any forward-looking statement to the extent we become aware that it will not be achieved for any reason.

 

PART I

 

ITEM 1.   BUSINESS

 

Overview

 

We are one of the largest surface transportation companies in North America.  J.B. Hunt Transport Services, Inc. (JBHT) is a publicly held holding company, which together with our wholly owned subsidiaries and associated companies provides a wide range of transportation services to a diverse group of customers throughout the continental United States, Canada and Mexico.  We were incorporated in Arkansas on August 10, 1961, and have been a publicly held company since our initial public offering in 1983.  Our service offerings include transportation of full truck-load containerizable freight, which we directly transport utilizing our company-controlled revenue equipment and company drivers or independent contractors.  We also manage and provide tailored, technology-driven freight services which may employ equipment and transportation services provided by all major North American rail carriers, an associated logistics company or by unrelated third parties in the industry.

 

Our business operations are primarily organized through three distinct, but complementary, business segments.  These segments include full truck-load dry-van (JBT), intermodal (JBI) and dedicated contract services (DCS).  In addition, we operated a logistics business segment from 1992 until mid-2000.  Effective July 1, 2000, we, along with five other publicly held transportation companies, contributed our logistics business to a new, commonly owned company, Transplace, Inc.  For the calendar year ended December 31, 2004, our consolidated revenue totaled $2.8 billion.  Of this total, $1.12 billion, or 40%, was generated by our JBI business segment.  Our JBT segment generated $928 million, or 33%, of total revenue and DCS represented $760 million, or 27%.

 

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Additional general information about us is available from our Internet website at www.jbhunt.com. We make a number of reports and other information available free of charge on our website including our annual report on Form 10-K, our quarterly reports on Form 10-Q, as well as earnings releases.  Our website also contains corporate governance guidelines, codes of conduct, our whistleblower policy, committee charters for our board of directors and officer certifications of our filings with the SEC.

 

Business Strategy

 

We seek to add value to each of our customer’s supply chain by providing superior service at competitive rates while controlling or minimizing our customers’ costs through network density, transportation mode conversion and dedicated fleets.  We believe that our operating strategy can add value to customers and increase our profits and returns to stockholders.

 

Recent Focus

 

During the past four years, we have taken significant steps to re-establish a primary focus on the profitability of our three business segments.  In each segment we have implemented capacity management decision-making processes that result in the deployment of our assets where we believe they will generate more profit.  We continually seek to replace less-profitable freight with higher-margin freight and lanes.  Selective pricing actions and ensuring that we properly charge for all services provided have also been areas of major focus.  We have also worked to ingrain safety into our corporate culture, which has reduced our accident and injury costs during 2003 and 2004.

 

JBT Segment

 

Our primary transportation service offerings classified in this segment include full truck-load, dry-van freight which is predominantly transported utilizing company-controlled tractors.  We pick up our freight at the dock or specified location of the shipper and transport the load directly to the location of the consignee.  Most of our loads are transported entirely by our company-owned tractors and employee drivers, or by independent contractors (ICs) who agree to transport freight in our trailers.  We also assign freight to be handled by third-party motor carriers other than ICs.  Typically, in these cases, the charges for the entire movement are billed to the customer by us, and we, in turn, pay the third party for their portion of the transportation services provided.

 

We operate utilizing certain Canadian authorities, allowing us to transport freight to and from all points in the continental United States to Quebec, British Columbia and Ontario.  We have authorization to operate directly in all the Canadian provinces, but to date we have served limited points in Canada, primarily through interchange operations with Canadian motor carriers.  We operated our JBT and JBI segments in combined fashion in periods prior to January 1, 2000.  This combined operation was reported as Van/Intermodal (“Van”) in prior periods.  In late 2000, we began utilizing ICs in the JBT segment and at December 31, 2004, we had 1,113 ICs operating in the JBT segment.  JBT gross revenue for calendar year 2004 was $928 million, compared with $841 million in 2003.  At December 31, 2004, the JBT segment operated 4,280 company-controlled tractors and employed 5,846 people, 4,866 of whom were drivers.

 

JBI Segment

 

The transportation service offerings of our JBI segment utilize agreements with most major North American rail carriers to provide intermodal freight solutions for our customers throughout the continental United States, Canada and Mexico.  Our JBI segment began operations in 1989 with a unique partnership with the former Santa Fe Railway (now the Burlington Northern Santa Fe), a watershed event in the industry and the first agreement that linked major rail and truck-load carriers in a joint marketing environment.  Essentially, JBI draws on the intermodal (also known as “container on flatcar”) services of rail carriers for the underlying linehaul movement of its equipment and performs the pickups and deliveries (“drayage”) for customers at the origin and destination rail terminal locations. We may directly provide the drayage service at either the origin or destination rail ramp utilizing our company-controlled tractors, or we purchase these services from third parties.  JBI provides

 

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seamless coordination of the rail and over-the-road transport movements for our customers and delivers single billing for the complete door-to-door service.

 

Our intermodal program has grown from 20 loads in late 1989 to nearly 582,000 in 2004.  JBI operates more than 22,000 company-controlled containers system wide.  The entire fleet is comprised of 53-foot, high-cube containers and is designed to take advantage of intermodal double-stack economics and superior ride quality.  JBI also manages a fleet of 1,192 tractors and 1,535 drivers in support of intermodal operations.  At December 31, 2004, the total JBI employee count was 1,759, including 1,535 drivers.  Gross revenue for the JBI segment in calendar year 2004 was $1.12 billion, compared with $936 million in 2003.  As we have previously reported, we are engaged in an arbitration process with Burlington Northern Santa Fe Railroad to clarify certain terms of our Joint Service Agreement.  See  “Risk Factors” in Item 7 of this Form 10-K.

 

DCS Segment

 

Since 1992, we have offered dedicated contract carriage as a service option.  DCS segment operations specialize in the design, development, and execution of customer specific fleet solutions.  Capitalizing on advanced systems and technologies, DCS offers transportation engineering solutions that support private fleet conversion, dedicated fleet creation and transportation system augmentation.  DCS operations typically provide customized services that are governed by long-term contracts and currently include dry-van, flatbed, temperature-controlled and local operations.

 

DCS operations focus on reducing costs and enhancing customer value through leveraging the JBHT network for backhaul repositioning freight.  Network freight may be used to reposition equipment near outbound domiciles, thereby reducing inefficient empty miles and system cost.  DCS also frequently finds synergy in shared resources with the JBT and JBI segments, including terminals, drivers, maintenance shops, bulk fuel locations, and trailer pools providing further economies of scale.  DCS gross revenue for calendar year 2004 was $760 million, compared with $671 million in 2003.  In early 2004, we began utilizing ICs in the DCS segment and at December 31, 2004, we had 188 ICs operating in the DCS segment.  At December 31, 2004, the DCS segment operated 4,679 company-controlled and 178 customer-owned tractors, and employed 5,733 people,  5,082 of whom were drivers.

 

Logistics Business and Associated Company

 

We officially began offering transportation logistics services in 1992 through a wholly owned subsidiary, J.B. Hunt Logistics (JBL).  JBL services frequently included an arrangement whereby a shipper might outsource a substantial portion of its entire distribution and transportation process to one organization.  The JBL segment business included 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 logistics customer or service arrangement frequently required a significant amount of up-front analysis and design time, during which alternatives were considered and custom systems and software were developed.  Effective July 1, 2000, we contributed substantially all of our JBL segment business, all related intangible assets and $5 million of cash to a newly formed company, Transplace, Inc. (TPI).

 

TPI is an Internet-based global transportation logistics company.  TPI commenced operations in July 2000 and initially included substantially all of the logistics business of JBHT, Covenant Transport, Inc., Swift Transportation Co., Inc., U.S. Xpress Enterprises, Inc., and Werner Enterprises, Inc.  TPI gross revenue for calendar year 2004 was $705 million, compared with $655 million in 2003.  We initially had an approximate 27% ownership interest in TPI.  In November 2002, we agreed to purchase a portion of Werner Enterprises, Inc.’s (Werner) ownership interest in TPI.  Effective January 1, 2003, our interest in TPI increased from 27% to 37% and Werner’s interest declined from 15% to 5%.  The financial results of TPI are included on a one-line, non-operating item included on our Consolidated Statements of Earnings entitled “Equity in loss of associated companies.”

 

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Operations in Mexico

 

We have provided transportation services to and from Mexico since 1989.  These services frequently involve equipment interchange operations with various Mexican motor carriers.  In addition, a joint venture agreement with Transportacion Maritima Mexicana (TMM), one of the largest transportation companies in Mexico, was signed in 1992.  The joint venture, Comercializadora Internacional de Carga S.A. de C.V. and its subsidiaries, originated and completed northbound and southbound international truck movements between the United States and Mexico.  The joint venture also provided Mexican domestic irregular route truck service, refrigerated freight services, Mexican dedicated contract business and short-haul drayage to and from the Mexican maritime ports and rail heads.

 

As previously reported, we sold our joint venture interest in Mexico to TMM during the first quarter of 2002 in exchange for $22.5 million, including a $18.1 million note receivable.  We have received approximately $18.0 million of principal and interest related to this note.  At December 31, 2004, we have a $1.7 million account receivable from TMM and expect to receive these remaining funds during the first quarter of 2005.  These transactions have had no net impact on our earnings.  We still provide transportation services to and from Mexico primarily by utilizing the services of a variety of Mexican carriers.

 

Marketing and Operations

 

We transport, or arrange for the transportation of, a wide range of freight, including forest and paper products, building materials, general merchandise, food and beverages, chemicals and automotive parts.  Our customer base is extremely diverse and includes a growing list of Fortune 500 companies.  Our ability to offer multiple services, utilizing our three business segments and a full complement of logistics services through third parties, represents a competitive advantage.  We have been reasonably successful providing a broad range of transportation services to larger shippers that seek to use a limited number of “core” carriers.  Our largest customer in 2004 was Wal-Mart Stores, Inc., which accounted for approximately 15% of our total revenue.

 

We generally market all of our service offerings through a nationwide sales and marketing network.  We do have some sales and marketing functions managed at the business unit level, particularly for our DCS segment.  In accordance with our typical arrangements, we bill the customer for all services and we, in turn, pay all third parties for their portion of transportation services provided.  In recent years, we have re-established a primary focus on improving the profitability of each of our business segments and charging a fair price for all services provided.

 

People

 

We believe that one of the factors differentiating us from our competitors is our service-oriented people.  As of December 31, 2004, we had approximately 15,850 employees, including 11,483 company drivers.  We also had arrangements with 1,301 ICs to transport freight in our trailing equipment.  In addition, we employed 1,072 mechanics and 3,295 office personnel at the end of 2004.  None of our employees are represented by unions or covered by collective bargaining agreements.

 

Our industry has periodically had a difficult time attracting and retaining enough qualified truck drivers.  It is also common for the driver turnover rate of individual carriers to exceed 100%.  It has been our practice during the past few years to compensate our drivers at an above-average level in order to attract a high caliber of experience and minimize turnover.  During 2004, we increased company driver and IC compensation in order to attract and retain an adequate supply of qualified drivers.  While we have, to date, not experienced significant operational disruptions due to driver shortages, we expect costs to recruit, train and retain company drivers and ICs will continue to rise in the foreseeable future.

 

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Revenue Equipment

 

As of December 31, 2004, we operated 10,151 company-controlled tractors.  In addition, our 1,301 contracted ICs operate their own tractors, but transport freight in our trailing equipment.  We operate with standardized tractors in as many fleets as possible, particularly in our JBT and JBI fleets.  Based on customer preference and the actual business application, our DCS fleet is more diversified.  We believe operating with relatively newer revenue equipment provides better customer service, attracts quality drivers and lowers maintenance expense.  At December 31, 2004, the average age of our combined tractor fleet was 2.0 years, our trailers were 4.1 years old and our containers were 6.4 years old.  We perform routine servicing and preventative maintenance of our equipment at most of our regional terminal facilities.

 

We typically operate newer revenue equipment in our JBT segment to minimize downtime and maximize utilization.  However, during 2003, the age of our JBT tractor fleet increased, primarily due to our decision to delay trades.  Our JBI segment utilizes high-cube containers, which can be separated from the chassis and double-stacked on rail cars.  We are currently in the process of expanding our container fleet and reconditioning our chassis fleet.  The composition of our DCS trailing fleet varies with specific customer requirements and may include dry-vans, flatbeds, temperature-controlled, curtain-side vans, or even straight trucks.

 

Effective October 1, 2002, the Environmental Protection Agency (EPA) required that most newly manufactured heavy-duty tractor engines comply with certain new emission standards.  In November 2002, we ordered approximately 2,100 new tractors, primarily for our JBI and DCS fleets, which were equipped with Mercedes engines.  These engines were exempt from the EPA’s October 1, 2002, rules.  Except for these new tractors, which were utilized primarily for local and regional operations, we limited our new tractor purchases while we tested a limited number of the new engines.  In late 2003, we commenced receiving new tractors with the 2002 EPA-compliant engines.  At December 31, 2004, approximately 4,870 of our company-controlled fleet consisted of tractors with these compliant engines.  In addition to higher initial purchase prices, these tractors also experience an approximate 3% to 5% reduction in fuel efficiency.  We are uncertain if future maintenance costs will be higher, on the average, for these tractors as they age.  We do anticipate continued increases in tractor ownership costs and fuel costs as regular replacements and additions increase the percentage of our fleet with these newer engines.  In addition higher worldwide steel prices have resulted in increased acquisition costs for new revenue equipment.  A new set of proposed fuel-emission standards mandated by the EPA is expected to become effective in 2007.  We are unable to predict the impact these proposed standards will have on our future operations and financial results.

 

Competition

 

According to the American Trucking Associations (ATA), all modes of domestic freight carriers in the United States generated approximately $610 billion of revenue in 2003.  Of this total, truck transportation represented about 87%, or $531 billion.  ATA also estimated that approximately 54% of the nation’s 2003 truck revenue related to for-hire carriers, while 46% related to private carriers.  As of July 2004, there were more than 573,000 private, for-hire, U.S. Mail and other U.S. interstate motor carriers on file with the Federal Motor Carrier Safety Administration (FMCSA).  The top ten for-hire truck-load carriers only generate about 3% of the total revenue in this segment, and we represent approximately 1% of this segment’s revenue.  The market in which we compete is frequently referred to as highly fragmented and includes thousands of carriers, many of which are very small.  While we compete with a number of smaller carriers on a regional basis, only a limited number of companies represent competition in all markets across the country.

 

Regulation

 

Our operations as a for-hire motor carrier are subject to regulation by the U.S. Department of Transportation (DOT), and certain business is also subject to state rules and regulations.  The DOT periodically conducts reviews and audits to ensure our compliance with all federal safety requirements, and we report certain accident and other information to the DOT.  Our operations into and out of Canada and Mexico are also subject to regulation by those countries.

 

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Effective January 4, 2004, the FMCSA, which is a separate administration within the DOT, changed the regulations that govern driver hours of service.  These new rules were the most significant changes to driver hours of service in more than 40 years.  In general, the new rules allow a driver to drive for up to 11 consecutive hours, instead of 10, but require 10 hours of off-duty time, rather than 8, and reduce the total number of driving hours to 14 in a 24-hour period, compared to 15 under the old rules.  In addition, more off-duty “sleeper berth” time is required before on-duty time is allowed.  In July 2004, the United States Court of Appeals for the District of Columbia rejected the new hours-of-service (HOS) rules, which had been newly effective in January 2004.  The Court’s rejection was based on concerns regarding driver’s health, as well as other issues such as driving time, rest periods and monitoring compliance.  In September 2004, the current HOS rules were extended for one year or the time at which FMCSA develops a set of new rules.  In February 2005, the Bush administration proposed legislation that would convert the current HOS regulations into statutory law, a move that would keep the current rules in effect despite the Court of Appeals action to overturn them.  We cannot predict the final resolution of this rules action.  However, if the current HOS rules remain in effect, we do not anticipate a significant adverse effect on our operations or earnings.

 

ITEM 2.   PROPERTIES

 

Our corporate headquarters are in Lowell, Arkansas.  We occupy a number of buildings in Lowell which we utilize for administrative support, data center, primary customer service and freight dispatch.  We maintain a backup data center for disaster recovery, maintenance shop and driver operations facility in Lowell.  In June 2004, we commenced construction of a new, approximate 110,000 square foot office building located adjacent to our existing corporate office in Lowell, Arkansas.  We anticipate occupying this new building during the third quarter of 2005.  We also own or lease other significant facilities where we perform maintenance on our equipment, provide bulk fuel and employ personnel to support operations.  In addition to our principal properties listed below, we lease a number of small offices and parking yards throughout the country which support our customers’ business needs.

 

A summary of our principal facilities follows:

 

Location		Acreage		Maintenance Shop (square feet)		Office Space (square feet)
Atlanta, Georgia		28		29,800		10,400
Cedar Rapids, Iowa		12		28,500		4,500
Chicago, Illinois		27		50,000		14,000
Columbus, Ohio		10		28,100		8,500
Concord, North Carolina		6		12,200		—
Dallas, Texas		14		24,000		7,800
East Brunswick, New Jersey		19		20,000		3,200
Houston, Texas		21		24,700		7,200
Kansas City, Missouri		10		31,000		6,700
Louisville, Kentucky		14		40,000		10,000
Little Rock, Arkansas		24		29,200		7,200
Lowell, Arkansas (corporate headquarters)		59		—		150,000
Lowell, Arkansas		42		50,200		14,000
Lowell, Arkansas (office and data center)		2		—		20,000
Lowell, Arkansas (office)		2		—		20,000
Memphis, Tennessee		10		26,700		8,000
Niles, Ohio		5		9,500		—
Phoenix, Arizona		15		15,200		5,300
Portland, Oregon		8		20,000		3,300
San Bernardino, California		9		18,300		9,300
South Gate, California		12		25,000		5,500
Stockton, California		7		10,600		3,500
Syracuse, New York		13		19,000		8,000

 

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ITEM 3.   LEGAL PROCEEDINGS

 

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

 

As mentioned above, we are currently engaged in an arbitration process with Burlington Northern Santa Fe Railroad to clarify certain terms of our Joint Service Agreement.  See “Risk Factors” in Item 7 of this Form 10-K.

 

The Internal Revenue Service (IRS) has proposed to disallow the tax benefits associated with certain sale-and-leaseback transactions.  See “Risk Factors” in Item 7 of this Form 10-K.

 

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

 

No matters were submitted during the fourth quarter of 2004 to a vote of security holders.

 

Executive Officers of the Registrant

 

Information with respect to our executive officers is set forth below:

 

Name		Age		Position with JBHT		Executive Officer Since
Wayne Garrison		52		Chairman of the Board; Director		1979
Johnelle D. Hunt		73		Secretary; Director		1972
Kirk Thompson		51		President and Chief Executive Officer; Director		1984
Paul R. Bergant		58		Executive Vice President, Marketing and Chief Marketing Officer		1985
Bob D. Ralston		58		Executive Vice President, Equipment and Properties		1989
Jerry W. Walton		58		Executive Vice President, Finance and Administration and Chief Financial Officer		1991
Craig Harper		47		Executive Vice President, Operations and Chief Operations Officer		1997
John N. Roberts III		40		Executive Vice President and President, Dedicated Contract Services		1997
Kay J. Palmer		41		Executive Vice President and Chief Information Officer		1999

 

On December 23, 2004, Mr. J.B. Hunt, founder and Senior Chairman of the Board, announced that he was stepping down as Senior Chairman and as a member of the Board of Directors effective December 31, 2004.  Mr. Hunt had been an executive officer since 1961.

 

On December 23, 2004, Mr. Gene George, who was an original investor and founding Director of the Company, also announced that he was retiring effective December 31, 2004.  Mr. George had been a Director for 43 years.

 

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PART II

 

ITEM 5.   MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

 

Price Range of Common Stock

 

Our 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 our common stock as reported by the National Association of Securities Dealers Automated Quotations National Market System (NASDAQ).  The following sales prices all reflect a two-for-one stock split paid on August 29, 2003.

 

		2004						2003
Period		High			Low			High			Low
1st Quarter		$	29.45		$	25.29		$	15.55		$	11.62
2nd Quarter		38.97			28.12			19.70			13.36
3rd Quarter		39.65			31.76			27.60			18.85
4th Quarter		45.30			35.84			28.74			23.75

 

On January 31, 2005, the high and low sales prices for our common stock as reported by the NASDAQ were $44.18 and $42.52, respectively. As of January 31, 2005, we had 1,324 stockholders of record.

 

From time to time, our Board of Directors authorizes the repurchase of our common stock.  We did not repurchase any of our common stock during the years 2002 through 2004.  As previously announced in December 2004, our Board authorized the purchase of up to $100 million of our common stock during the next year.  We commenced repurchases of our common stock in January 2005.

 

Dividend Policy

 

We paid quarterly dividends during calendar year 1999 and in a number of years prior to 1999.  In early 2000, we announced a decision to discontinue dividend payments.  In April 2004, we re-initiated a quarterly cash dividend of $.03 per share.  This re-initiation was based on our lower debt levels and improving cash flows.  We also paid a cash dividend of $.03 per share in July and October 2004.  In December 2004, we announced an increase in our quarterly cash dividend from $.03 to $.12.  Our first $.12 per share dividend was paid on February 18, 2005, to stockholders of record on January 31, 2005.  We currently intend to continue paying cash dividends on a quarterly basis.  However, no assurance can be given that future dividends will be paid, since such payments are dependent on earnings, cash flows and other factors.

 

Equity Compensation Plan Information

 

Plan Category		Number of Securities To Be Issued Upon Exercise of Outstanding Options, Warrants and Rights		Weighted-average Exercise Price of Outstanding Options, Warrants and Rights			Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (A)
		(A)		(B)			(C)
Equity compensation plans approved by security holders		6,920,084		$	14.31		1,046,944
Equity compensation plans not approved by security holders		—		—			—
Total		6,920,084		$	14.31		1,046,944

 

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ITEM 6.   SELECTED FINANCIAL DATA

(Dollars in millions, except per share amounts)

 

Years Ended December 31		2004			2003			2002			2001			2000
Operating revenues		$	2,786.2		$	2,433.5		$	2,247.9		$	2,100.3		$	2,160.4
Operating income		310.2			185.6			101.0			72.2			63.4
Net earnings (1)		146.3			95.5			51.8			32.9			36.1
Basic earnings per share (1)		1.81			1.20			.68			.46			.51
Diluted earnings per share (1)		1.75			1.17			.66			.46			.51
Cash dividends per share		.09			—			—			—			.03
Total assets		1,491.7			1,356.2			1,322.7			1,261.2			1,237.8
Long-term debt and lease obligations		—			—			219.0			353.6			300.4
Stockholders’ equity		860.9			703.1			590.5			458.3			417.8

 

(1)  Reflects $33.6 million reserve, including accrued interest expense in 2004, and $7.7 million reversal of non-cash tax benefit in 2003.  See “Risk Factors” in Item 7.

 

Percentage of Operating Revenue

 

Years Ended December 31		2004		2003		2002		2001		2000
Operating revenues		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Operating expenses:
Salaries, wages and employee benefits		29.8		32.5		36.4		37.6		35.6
Rents and purchased transportation		33.5		32.8		31.1		28.8		32.1
Fuel and fuel taxes		10.4		9.6		9.4		10.8		11.3
Depreciation and amortization		5.4		6.2		6.5		6.8		6.2
Operating supplies and expenses		4.5		4.9		5.8		6.9		6.1
Insurance and claims		2.0		2.6		2.5		2.0		1.8
Operating taxes and licenses		1.3		1.4		1.4		1.6		1.5
General and administrative expenses, net of gains		1.4		1.4		1.3		0.9		1.3
Communication and utilities		0.8		1.0		1.1		1.2		1.2
Total operating expenses		88.9		92.4		95.5		96.6		97.1
Operating income		11.1		7.6		4.5		3.4		2.9
Interest income		0.1		0.1		0.1		0.1		—
Interest expense		0.3		0.8		1.2		1.4		1.1
Equity in loss (earnings) of associated companies		0.1		—		0.1		—		(0.2	)
Earnings before income taxes		10.8		6.9		3.3		2.1		2.0
Income taxes (1)		5.5		3.0		1.0		0.5		0.3
Net earnings		5.3	%	3.9	%	2.3	%	1.6	%	1.7	%

 

(1)  Reflects $33.6 million reserve, including accrued interest expense in 2004, and $7.7 million reversal of non-cash tax benefit in 2003.  See “Risk Factors” in Item 7.

 

The following table sets forth certain operating data.

 

Years Ended December 31		2004		2003		2002		2001		2000
Total loads		2,883,504		2,857,176		2,847,377		2,565,915		2,697,582
Average number of company-operated tractors during the year		10,042		10,293		10,712		10,710		10,055
Company tractors operated (at year end)		10,151		9,932		10,653		10,770		10,649
Independent contractors (at year end)		1,301		994		679		336		16
Trailers/containers (at year end)		48,317		46,747		45,759		44,318		44,330
Company tractor miles (in thousands)		943,064		943,054		981,818		1,022,677		1,000,127

 

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ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

The following discussion of our results of operations and financial condition should be read in conjunction with our financial statements and related notes in Item 8.  This discussion contains forward-looking statements.  Please see “Forward-looking Statements” and “Risk Factors” for a discussion of items, uncertainties, assumptions and risks associated with these statements.

 

YEAR IN REVIEW

 

Our financial results for calendar year 2004 represented the third consecutive year of record revenues and earnings driven by strong performance from each of our segments.  Our 2004 net earnings of $146.3 million, or $1.75 per diluted share, were up 53% over the $95.4 million, or $1.17 per diluted share, earned in 2003.  While each of our three business segments contributed to our higher levels of profitability, the increase in operating income in the JBT segment was most evident.  A significant part of the increased JBT operating income in 2004 was a result of our continued focus on capacity management.  Capacity management is a continuous process of reviewing our freight to determine whether business which is generating low or negative margins can be replaced by different business with better margins.  We also are continuing to analyze our business to ensure we are charging for all services provided.  Primarily due to our capacity management actions and rate increases required to offset certain non-fuel cost increases, our 2004 JBT segment revenue per loaded mile, excluding fuel surcharges (FSC), rose 8.7% over 2003.

 

During 2004, we also focused on revenue per load, revenue per mile and revenue per tractor per day in our JBI and DCS business segments.  Primarily due to our focus on rate increases and capacity management, we were able to increase 2004 revenue per loaded mile, excluding FSC, by 3.4% in our JBI segment and net revenue per tractor per week by 6.0% in our DCS segment.  These increases significantly contributed to our higher net earnings in 2004.

 

Our increase in consolidated 2004 net earnings was also a result of significantly lower insurance, claims and workers’ compensation costs.  We have continued to ingrain safety into our company culture and ask each of our drivers and other employees to make safety a daily priority.  Our 2004 combined insurance claims and workers’ compensation expense declined approximately $23 million from 2003 and increased our current year earnings per diluted share by approximately $.13.

 

Our 2004 consolidated operating ratio (operating expenses divided by total operating revenues) was 88.9%, compared with 92.4% in 2003 and 95.5% in 2002.  The current year was the first time in over ten years that we have achieved an operating ratio for a full year below 90%.  We also paid off all of our remaining balance sheet debt and capital lease obligations in 2004.  We re-initiated paying a quarterly cash dividend in early 2004 and in December 2004, increased our quarterly dividend from $.03 to $.12 per share and announced plans to repurchase up to $100 million of our common stock.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that impact the amounts reported in our consolidated financial statements and accompanying notes.  Therefore, the reported amounts of assets, liabilities, revenues, expenses and associated disclosures of contingent assets and liabilities are affected by these estimates.  We evaluate these estimates on an ongoing basis, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances.  Nevertheless, actual results may differ significantly from our estimates.  Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recognized in the accounting period in which the facts that give rise to the revision become known.

 

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We consider our critical accounting policies and estimates to be those that require us to make more significant judgments and estimates when we prepare our financial statements and include the following:

 

Workers’ Compensation and Accident Costs

 

We purchase insurance coverage for a portion of expenses related to employee injuries (workers’ compensation), vehicular collisions and accidents and cargo claims.  Most insurance arrangements include a level of self-insurance (deductible) coverage applicable to each claim, but provide an umbrella policy to limit our exposure to catastrophic claim costs that are completely insured.  The amounts of self-insurance change from time to time based on certain measurement dates and policy expiration dates.  During 2004, we were self-insured for a portion of our claims exposure resulting from cargo loss, personal injury, property damage, workers’ compensation and health claims for amounts up to the first $2 million for auto accidents and $1 million for workers’ compensation claims.  These same levels of self-insurance are in effect for 2005.

 

Our claims accrual policy for all self-insured claims is to recognize a liability at the time of the incident based on our analysis of the nature and severity of the claims, analyses provided by third-party claims administrators, as well as legal, economic and regulatory factors.  Our safety and claims personnel work directly with representatives from the insurance companies to continually update the estimated cost of each claim.  The ultimate cost of a claim develops over time as additional information regarding the nature, timing and extent of damages claimed becomes available.  Accordingly, we use an actuarial method to develop current claim information to derive an estimate of our ultimate claim liability.  This process involves the use of loss- development factors based on our historical claims experience.  In doing so, the recorded ultimate liability considers future claims growth and provides an allowance for incurred-but-not-reported claims.  We do not discount our estimated losses.  At December 31, 2004, we had approximately $19 million of estimated net claims payable.  In addition, we are required to pay certain advanced deposits and monthly premiums.  At December 31, 2004, we had a prepaid insurance asset of approximately $58 million, which represented pre-funded claims and premiums.  We are also substantially self-insured for loss of and damage to our owned and leased revenue equipment.

 

Revenue Equipment

 

We operate a significant number of tractors, trailers and containers in connection with our business.  This equipment may be purchased or acquired under capital or operating lease agreements.  In addition, we may rent revenue equipment from third parties and various railroads under short-term rental arrangements.  Revenue equipment which is purchased is depreciated on the straight-line method over the estimated useful life down to an estimated salvage or trade-in value.  Equipment acquired under capital leases is initially recorded at the net present value of the minimum lease payments and amortized on the straight-line method over the lease term or the estimated useful life, whichever is shorter.  We had no revenue equipment under capital lease arrangements at December 31, 2004.

 

We have an agreement with our primary tractor supplier for guaranteed residual or trade-in values for certain new equipment acquired since 1999.  During the fourth quarter of 2003, we reviewed the useful lives and salvage values of our tractor fleet.  We have utilized the guaranteed trade-in values as well as other operational information, such as anticipated annual miles, in accounting for purchased and leased tractors.  If our tractor supplier was unable to perform under the terms of our agreement for guaranteed trade-in values, it could have a materially negative impact on our financial results.  We periodically review the useful lives and salvage values of our revenue equipment and evaluate our long-lived assets for impairment.  We have not identified any impairments to our existing assets.

 

Revenue Recognition

 

We recognize revenue based on the relative transit time of the freight transported.  Accordingly, a portion of the total revenue which will be billed to the customer once a load is delivered is recognized in each reporting

 

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period based on the percentage of the freight pickup and delivery service that has been completed at the end of the reporting period.

 

Segments

 

We operated three segments during calendar year 2004.  The operation of each of these businesses is described in footnote (11).  The following tables summarize financial and operating data by segment.

 

Operating Revenue by Segment

 

 

Operating Income by Segment

 

 

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Operating Data By Segment

 

		For Years Ended December 31
		2004			2003			2002
JBT
Operating ratio		88.9		%	94.1		%	96.8		%
Total loads		932,818			959,551			970,055
Revenue (excl. fuel surcharge) per tractor per week		$	2,999		$	2,739		$	2,678
Length of haul in miles		543			535			556
Revenue per loaded mile (excl. fuel surcharge)		$	1.659		$	1.526		$	1.443
Average number of tractors during the period		5,420			5,592			5,751
Tractors at end of period
Company owned		4,280			4,429			4,924
Independent contractor		1,113			994			679
Total tractors		5,393			5,423			5,603
Average effective trailing equipment usage *		14,852			14,979			15,591
JBI
Operating ratio		88.2		%	90.3		%	93.3		%
Total loads		581,849			527,404			473,856
Net change in revenue per loaded mile (excl. fuel surcharge)		3.4		%	0.7		%	0.6		%
Tractors at end of period		1,192			1,047			917
Average effective trailing equipment usage *		21,409			19,719			18,517
DCS
Operating ratio		90.2		%	93.3		%	96.9		%
Revenue (excl. fuel surch. & pur. trans.) per tractor per week		$	2,791		$	2,644		$	2,499
Average number of tractors during the period		4,892			4,669			4,732
Tractors at end of period		5,045			4,608			4,957
Average effective trailing equipment usage *		11,237			11,448			10,860

 

* Reflects average use of corporate-wide trailing equipment

 

RESULTS OF OPERATIONS

 

2004 Compared With 2003

 

Overview of 2004

 

Our consolidated net earnings for calendar year 2004 totaled a record $146 million. This compares with our previous record net earnings of $95 million in 2003.  Diluted earnings per share were $1.75 in 2004, also a record number, compared with $1.17 in 2003.  The average number of diluted shares outstanding in 2004 was approximately 2% higher than the comparable number in 2003.  Consolidated operating revenues were $2.79 billion in 2004, an increase of 14% over the $2.43 billion in 2003.

 

15

 

Each of our business segments contributed to our improved financial results in 2004.  While the overall economy and level of freight activity were not particularly strong during 2004, a number of factors contributed to our improved level of earnings.  We have continued our focus on capacity management, as well as individual load and lane profitability.  A number of new proprietary technology tools and increased management focus have allowed us to reduce the amount of unprofitable lanes and freight, and to properly charge for equipment and services provided to customers.  In addition, the levels of available capacity in the industry have been reduced by significant increases in insurance, fuel, equipment and driver compensation costs.  The availability of qualified drivers has also limited carriers’ ability to expand the size of their fleets.

 

JBT Segment

 

JBT segment gross revenue was $928 million in 2004, up 10% over the $841 million in 2003.  Higher fuel surcharge (FSC) revenue in 2004 impacted this comparison.  If the amount of FSC revenue was excluded from both years, 2004 JBT segment revenue rose 7.9% over 2003.  The average tractor count in 2004 declined 3.1% from 2003.  However, revenue per loaded mile, excluding FSC, was 8.7% above 2003, offsetting the decrease in the tractor fleet and enhancing operating income.  Current year revenue growth was also up approximately 2% from outsourced freight activity.

 

Operating income of the JBT segment rose to $103 million in 2004, from $49 million in 2003.  The significant increase in revenue per loaded mile, excluding FSC, accounted for the majority of this operating income improvement.  In addition, lower JBT accident and workers’ compensation costs positively impacted current year operating income.

 

JBI Segment

 

JBI segment gross revenue grew by 19%, to $1,115 million in 2004, from $936 million in 2003.  Higher FSC revenue in 2004 impacted this comparison.  If FSC revenue was excluded from both years, 2004 JBI segment revenue increased 15.8% over 2003.  A significant portion of this revenue growth was driven by a 10.3% increase in loads.  Revenue per loaded mile, excluding FSC, was 3.4% above 2003 levels.  The remaining portion of revenue growth was primarily a result of freight mix changes.

 

Operating income in the JBI segment increased to $131 million in 2004 from $91 million in 2003.  The increase in current year JBI operating income levels was partly a result of the higher revenue per loaded mile, excluding FSC, increased load volume and lower revenue equipment ownership costs, partly offset by higher rail and dray purchased transportation expenses.

 

DCS Segment

 

DCS segment revenue grew over 13% to $760 million in 2004 from $671 in 2003.  The higher level of FSC revenue in 2004 impacted this comparison.  If FSC revenue was excluded from both years, 2004 DCS segment revenue rose 10% over 2003.  The average number of trucks in the dedicated fleet increased nearly 5% in 2004.  The additional revenue growth in the current year was primarily a result of a 6% increase in net revenue per tractor.

 

Operating income increased 65% to $75 million in 2004 versus $45 million in 2003.  During 2004, we have conducted reviews of our underperforming dedicated accounts and identified opportunities to either improve margins or redeploy assets.  We have also implemented cost controls and raised rates as appropriate.  These efforts have improved our DCS segment operating ratio to 90.2% in 2004 from 93.3% in 2003.

 

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The following table sets forth items in our 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 Operating Revenue				Percentage Change Between Years
		2004		2003		2004 vs. 2003
Operating revenues		100.0	%	100.0	%	14.5	%
Operating expenses:
Salaries, wages and employee benefits		29.8	%	32.5	%	4.8	%
Rents and purchased transportation		33.5		32.8		16.6
Fuel and fuel taxes		10.4		9.6		24.2
Depreciation and amortization		5.4		6.2		(0.3	)
Operating supplies and expenses		4.5		4.9		4.1
Insurance and claims		2.0		2.6		(13.8	)
Operating taxes and licenses		1.3		1.4		5.4
General and administrative expenses, net of gains		1.4		1.4		10.7
Communication and utilities		0.8		1.0		(1.8	)
Total operating expenses		88.9		92.4		10.2
Operating income		11.1		7.6		67.1
Interest income		0.1		0.1		(30.9	)
Interest expense		0.3		0.8		(63.1	)
Equity in loss of associated companies		0.1		—		255.9
Earnings before income taxes		10.8		6.9		80.2
Income taxes		5.5		3.0		69.4
Net earnings		5.3	%	3.9	%	88.4	%

 

Consolidated Operating Expenses

 

Total operating expenses increased 10.2% in 2004 over 2003, while operating revenues increased 14.5%.  The combination of the change in these two categories resulted in our operating ratio improving by 350 basis points to 88.9% in 2004, from 92.4% in 2003.  As previously mentioned, increases in revenue per loaded mile, excluding fuel surcharges, and lower casualty and workers’ compensation claims costs were two of the more significant factors driving these changes.  We also increased the number of ICs in our JBT and DCS fleets to 1,301 at December 31, 2004, from 994 at the end of 2003.  When we replace company-operated tractors and driver employees with ICs, certain costs such as salaries, wages, employee benefits and fuel are reduced and other costs such as purchased transportation increase.

 

The expense category of salaries, wages and employee benefits declined to 29.8% of revenue in 2004 from 32.5% in 2003 and the total expense dollars only increased 4.8% from 2003, compared with the 14.5% increase in revenue.  While we did increase compensation levels for many of our drivers in 2004, these increases were partly offset by lower workers’ compensation costs.  The number of company drivers at December 31, 2004 was approximately equal to the number at the end of 2003.  The 16.6% increase in rents and purchased transportation was primarily due to additional funds paid to railroads and drayage companies, related to JBI business growth, and to the continued expansion of our IC fleets.

 

Fuel cost per gallon was approximately 21% higher in 2004 over 2003.  This increase in fuel costs and slightly lower fuel efficiency accounted for the 24.2% increase in fuel costs.  We have fuel surcharge programs in place with the majority of our customers that allow us to adjust charges relatively quickly when fuel costs change.  If fuel costs change rapidly, we may experience some financial impact from timing differences between financial reporting periods.  We were able to recover substantially all of our increased fuel costs experienced in

 

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calendar year 2004.  We currently have no contract or derivative programs in place to hedge changes in fuel costs.

 

The significant decline in insurance and claims expense was primarily due to lower accident and claims experience in 2004.  As mentioned above, we have made safety a primary focus item throughout our entire organization.  The category of general and administrative expenses includes driver recruiting and testing, legal and professional fees and bad debt expense.  Gains and losses on revenue equipment dispositions are also classified in the general and administrative category.  We experienced a net gain of approximately $402,000 on revenue equipment and other dispositions in 2004, compared with a $1.1 million loss in 2003.

 

Our net interest expense declined to $5.5 million in 2004 from $17.2 million in 2003.  We were able to continue reducing our debt and capitalized lease obligations during 2004 and paid off all our remaining balance sheet debt and capital leases as of December 31, 2004.  Our continued improvement in net earnings and strong cash flow allowed us to pay off this debt.  Our effective income tax rate was 51.6% in 2004, compared with 43.1% in 2003.  Income tax expense in 2004 reflects a contingent tax liability of $33.6 million, including accrued interest expense, related to certain sale-leaseback transactions that closed in 1999.  Income tax expense in 2003 reflected the reversal of $7.7 million of non-cash tax benefits taken in early 2003, related to these sale-leaseback transactions.  See Risk Factors for additional information on this matter.  Our 2004 and 2003 income tax rates are also higher than statutory federal and state rates, primarily due to our driver per diem plan.  This plan generates net benefits to most of our eligible drivers and to the Company.  However, it does result in an increase in our effective income tax rates.

 

We expect our effective income tax rate to be 38.5% for the calendar year 2005.

 

The “Equity in loss of associated company” item on our consolidated statement of earnings reflects our share of the operating results for Transplace, Inc. (TPI).  Effective January 1, 2003, we increased our interest in TPI to approximately 37%, from 27% in 2002. JBHT’s financial exposure is limited to its approximate $5.3 million investment in TPI since we have not made any additional commitments or guaranteed any of TPI’s financial obligations.

 

2003 Compared With 2002

 

Overview of 2003

 

Our consolidated net earnings for calendar year 2003 totaled $95 million, after reversing $7.7 million of non-cash tax benefits, which resulted from a sale-and-leaseback transaction on intermodal trailing equipment.  This compares with our previous record net earnings of $52 million in 2002.  Diluted earnings per share were $1.17 in 2003, also a record number, compared with $0.66 in 2002.  The average number of diluted shares outstanding in 2003 was approximately 5% higher than the comparable number in 2002.  Consolidated operating revenues were $2.43 billion in 2003, an increase of 8% over the $2.25 billion in 2002.

 

Each of our business segments contributed to our improved financial results in 2003.  While the overall economy and level of freight activity were not particularly strong during 2003, a number of factors contributed to our improved level of earnings.  We continued our focus on capacity management, as well as individual load and lane profitability.  A number of new proprietary technology tools and increased management focus allowed us to reduce the amount of unprofitable lanes and freight, and to properly charge for equipment and services provided to customers.  In addition, significant increases in certain operating costs, such as insurance, fuel and equipment, reduced the level of capacity available in the industry.

 

JBT Segment

 

JBT segment gross revenue was $841 million in 2003, up 2% over the $827 million in 2002.  Higher fuel prices in 2003 and the resulting increase in fuel surcharge revenue accounted for this entire level of revenue growth.  The average tractor count in 2003 was down nearly 3% from 2002.  However, revenue per loaded mile,

 

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excluding fuel surcharges, rose 5.2% in 2003, more than offsetting the decline in the size of the fleet and enhancing operating income.

 

Operating income of the JBT segment rose to $49 million in 2003, from $27 million in 2002.  In addition to the higher revenue per mile, we implemented an accountable expense reimbursement plan (driver per diem plan) in early 2003.  This new plan benefited most of our eligible drivers and increased operating income.

 

JBI Segment

 

JBI segment gross revenue grew by 16%, to $936 million in 2003, from $809 million in 2002.  Revenue growth was due, in part, to a strong demand for our unique intermodal service offering which generated an 11% increase in number of loads year over year.  Freight mix changes also played an important role that led to improved revenue per load.

 

Operating income in the JBI segment increased to $91 million in 2003 from $55 million in 2002.  The JBI segment operating ratio improved by 300 basis points to 90.3% for 2003, compared to 93.3% for 2002.  These improved financial results were attributable to our investment in upgrading our tractor fleet and adding incremental containers, improved utilization of both drivers and equipment and a concentrated focus on yield management and revenue quality.

 

DCS Segment

 

DCS segment revenue grew approximately 7% to $671 million in 2003 from $628 in 2002.  Revenue, net of purchased transportation and fuel surcharge revenue increased 5%.  The increase in revenue occurred even as the business unit’s average tractor count for 2003 declined approximately 1%, compared to 2002.  More than offsetting the decline in the tractor fleet was a nearly 6% improvement in revenue (excluding fuel surcharge) per tractor per day.  Driving this increase in productivity was an increase in length of haul of 7% and increased focus on backhaul opportunities.

 

Operating income increased 130% to $45 million in 2003 versus $20 million in 2002.  At the end of 2002, we began analyzing a number of underperforming accounts and identified opportunities to redeploy assets from accounts that did not offer appropriate financial returns on the segment’s assets.  At the same time, cost controls were implemented to improve operating results at all accounts.  The success of these efforts improved the operating ratio by 360 basis points, to 93.3% in 2003.  Cost reductions in driver pay, salary and office wages and associated payroll taxes also enhanced 2003 operating income.  A decline of 16% in the average age of the tractor fleet helped reduce maintenance costs and an ongoing commitment to safety contributed to an improvement in the segment’s insurance and claims costs.  We also incurred certain new start-up costs in 2002 associated with several large accounts that did not impact 2003.  Revenue growth will continue to be driven by improvement in productivity and new customer opportunities that provide appropriate financial returns to justify commitment of additional assets.

 

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The following table sets forth items in our 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 Change
		Operating Revenue				Between Years
		2003		2002		2003 vs. 2002
Operating revenues		100.0	%	100.0	%	8.3	%
Operating expenses:
Salaries, wages and employee benefits		32.5	%	36.4	%	(3.2	)%
Rents and purchased transportation		32.8		31.1		14.4
Fuel and fuel taxes		9.6		9.4		10.3
Depreciation and amortization		6.2		6.5		3.0
Operating supplies and expenses		4.9		5.8		(8.8	)
Insurance and claims		2.6		2.5		13.1
Operating taxes and licenses		1.4		1.4		1.3
General and administrative expenses, net of gains		1.4		1.3		15.7
Communication and utilities		1.0		1.1		(1.6	)
Total operating expenses		92.4		95.5		4.7
Operating income		7.6		4.5		83.9
Interest income		0.1		0.1		—
Interest expense		0.8		1.2		(30.5	)
Equity in loss of associated companies		—		0.1		(48.7	)
Earnings before income taxes		6.9		3.3		124.1
Income taxes		3.0		1.0		213.8
Net earnings		3.9	%	2.3	%	84.2	%

 

Consolidated Operating Expenses

 

Total operating expenses increased 4.7% in 2003 over 2002, while operating revenues increased 8.3%.  The combination of the change in these two categories resulted in our operating ratio improving by 310 basis points to 92.4% in 2003, from 95.5% in 2002.  As previously mentioned, increases in revenue per loaded mile, excluding fuel surcharges, and the implementation of a driver per-diem plan were two of the more significant factors driving these changes.  We also increased the number of independent contractors (ICs) in our JBT fleet to 994 at December 31, 2003, from 679 at the end of 2002.  When we replace company-operated tractors and driver employees with ICs, certain costs such as salaries, wages, employee benefits and fuel are reduced and other costs such as purchased transportation increase.

 

Fuel cost per gallon was approximately 13% higher in 2003 over 2002.  However, we have fuel surcharge programs in place with the majority of our customers that allow us to adjust charges relatively quickly when fuel costs change.  If fuel costs change rapidly we may experience some financial impact from timing differences between financial reporting periods when fuel costs change more quickly than our compensating fuel surcharges.  We recovered through our fuel surcharge programs substantially all of the increased fuel costs experienced in calendar year 2003.  We currently have no contracts or derivative programs in place to hedge changes in fuel costs.  Insurance and claims costs rose during 2003, primarily due to higher premium costs.  While our accident frequency declined in 2003, severity, or the cost per accident, increased over 2002.  General and administrative

 

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expenses include driver recruiting and testing, bad debts and professional service fees, all of which increased in 2003.  Gains and losses on revenue equipment dispositions are also classified in the general and administrative category.  We had a net loss of approximately $1.1 million on equipment and other dispositions in 2003, compared with a $1.8 million loss in 2002.  These losses were primarily a result of revenue equipment which was lost or written off.

 

Our net interest expense declined to $17.2 million in 2003, from $24.8 million in 2002.  We were able to reduce our total debt levels to $172 million as of December 31, 2003, from $343 million at the end of 2002.  This reduced debt level was primarily a result of improved earnings and cash flow in 2003 and proceeds from a secondary stock offering which closed in mid-2002.  Our effective income tax rate increased to 43.1% in 2003, from 30.8% in 2002.  This higher tax rate was primarily due to our increased level of earnings, the driver-per diem plan and a reversal of a $7.7 million non-cash tax benefit taken in 2003 related to certain sale-leaseback transactions that closed in 1999.  As previously mentioned, we implemented a driver per-diem pay plan in early 2003.  This plan generates net benefits to most of our eligible drivers and to the Company.  However, it does result in an increase in our effective income tax rate.  The $7.7 million reversal of tax benefits was retroactive to January 1, 2003, and related to a proposed adjustment by the IRS that would disallow the tax benefits associated with a series of sale-and-leaseback transactions, which occurred in 1999.  This issue is discussed in further detail under “Risk Factors.”

 

The “Equity in loss of associated company” item on our consolidated statement of earnings reflects our share of the operating results for Transplace, Inc. (TPI).  Effective January 1, 2003, we increased our interest in TPI to approximately 37%, from 27% in 2002.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Cash Flow

 

We generate significant amounts of cash from operating activities.  Net cash provided by operating activities was $394 million in 2004, $333 million in 2003 and $174 million in 2002.  Part of the increase in net cash provided from 2002 through 2004 was a result of our continued improvement in net earnings.  Increases in net cash provided have also resulted from deferred income taxes, tax benefits of stock options exercised and higher levels of accrued payroll and other accrued expenses.  Some of the significant changes in the trade accounts payable balances which appear on our consolidated statement of cash flows in 2002 through 2004 were a result of timing differences among years of insurance-related payments.  Cash flows used in investing activities primarily reflect additions to and dispositions from our fleet of revenue equipment.  The higher level of cash used in investing activities during 2004 was due to delayed tractor purchases in early 2003 while we were still testing the new EPA-compliant engines and our decision in late 2003 to commence purchasing tractors that were under capital lease arrangements.  We paid $60.8 million in 2004 to purchase tractors which were previously under capital lease programs.  At December 31, 2004, we have no revenue equipment on capital leases.  In 2004, we also purchased approximately $5.9 million of intermodal trailing equipment that had been under operating lease programs.

 

Net cash used in financing activities during 2003 and 2004 reflects payments of our remaining debt and capital lease obligations.  Our improving cash flows allowed us to close calendar year 2004 with no balance sheet debt and no capital lease obligations.  In addition, we re-initiated the payment of a cash dividend in early 2004 and, in December 2004, announced an increase in our quarterly cash dividend to $.12 from $.03 per share.  We also announced, in December 2004, our intent to purchase up to $100 million of our common stock during the next year.

 

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Selected Balance Sheet Data

 

As of December 31		2004		2003			2002
Working capital ratio		1.51		.99			1.32
Current maturities of long-term debt and lease obligations (millions)		—		$	172		$	124
Total debt and capitalized lease obligations (millions)		—		$	172		$	343
Total debt to equity		—		.24			.58
Total debt as a percentage of total capital		—		.20			.37

 

From time to time, our Board of Directors authorizes the repurchase of our common stock.  We did not repurchase any of our common stock during the years 2002 through 2004.  As previously mentioned, the Board, in December 2004, authorized the purchase of up to $100 million of our common stock during the next year.  We commenced repurchases of our common stock in January 2005.

 

Liquidity

 

Our need for capital typically has resulted from the acquisition of revenue equipment required to support our growth and the replacement of older revenue equipment with new, late-model equipment.  We are frequently able to accelerate or postpone a portion of equipment replacements depending on market conditions.  We have obtained capital through a secondary common stock offering, revolving lines of credit and cash generated from operations.  We have also periodically utilized capital and operating leases to acquire revenue equipment.

 

We utilized capital leases to acquire certain tractors in 2000 and 2001.  Since late 2001, we have been acquiring tractors and trailing equipment under purchase arrangements and anticipate purchasing our revenue equipment in the foreseeable future.  We are currently committed to spend approximately $189 million, net of expected proceeds from sale or trade-in allowances, on revenue equipment and construction of new facilities.

 

We are authorized to borrow up to $150 million under our current revolving line of credit, which expires November 14, 2005.  We had no balances outstanding on this line at December 31, 2004.  While we do anticipate some need to borrow on our revolver during 2005, we believe that our liquid assets, cash generated from operations and revolving line of credit will provide sufficient funds for our operating and capital requirements for the foreseeable future.  Our revolving line of credit does not contain “ratings triggers” that would accelerate payments or amounts due under the agreement.

 

Off-Balance Sheet Arrangements

 

We have no remaining capitalized leases at December 31, 2004.  Our only off-balance sheet arrangements are related to our operating leases for trailing equipment and some limited data processing equipment and facilities.  As of December 31, 2004, we had approximately 20,300 trailers and 5,100 containers/chassis that were subject to operating leases, and we had approximately $151 million of obligations remaining under these leases.  Our standby letters of credit are also not recorded on our books at December 31, 2004, since there were no balances outstanding at that time under these arrangements.

 

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Contractual Cash Obligations

As of December 31, 2004

(000)

 

		Amounts Due By Period
					One Year		One To		Four To		After
		Total			Or Less		Three Years		Five Years		Five Years
Operating leases		$	164,517		65,300		80,484		15,263		3,470
Commitments to acquire revenue equipment		175,454			175,454		—		—		—
Facilities		13,497			13,497		—		—		—
Total		$	353,468		254,251		80,484		15,263		3,470

 

 

Financing Commitments

As of December 31, 2004

(000)

 

		Commitments Expiring By Period
					One Year		One To		Four To		After
		Total			Or Less		Three Years		Five Years		Five Years
Revolving credit agreement		$	150,000		150,000		—		—		—-
Standby letters of credit		18,510			18,510		—		—		—
Total		$	168,510		168,510		—		—		—

 

RISK FACTORS

 

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

 

Our business is dependent upon a number of factors that may have a material adverse effect on the results of our operations, many of which are beyond our control.  These factors include significant increases or rapid fluctuations in fuel prices, excess capacity in the trucking industry, surpluses in the market for used equipment, interest rates, fuel taxes, license and registration fees, insurance premiums, self-insurance levels, and difficulty in attracting and retaining qualified drivers and independent contractors.

 

We are also affected by recessionary economic cycles and downturns in customers’ business cycles, particularly in market segments and industries such as retail and manufacturing, where we have a significant concentration of customers.  Economic conditions may adversely affect our customers and their ability to pay for our services.  Customers encountering adverse economic conditions represent a greater potential for loss, and we may be required to increase our reserve for bad-debt losses.  In addition, our results of operations may be affected by seasonal factors.  Customers tend to reduce shipments after the winter holiday season, and our operating expenses tend to be higher in the winter months primarily due to colder weather, which causes higher fuel consumption from increased idle time and higher maintenance costs.

 

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

 

Some of these factors include:

 

•      We compete with many other truck-load carriers of varying sizes and, to a lesser extent, with less-than-truck-load carriers and railroads, some of which have more equipment and greater capital resources than we do.

 

•      Some of our competitors periodically reduce their freight rates to gain business, especially during times of reduced growth rates in the economy, which may limit our ability to maintain or increase freight rates or maintain our profit margins.

 

•      Many customers reduce the number of carriers they use by selecting so-called “core carriers” as approved transportation service providers, and in some instances we may not be selected.

 

•      Many customers periodically accept bids from multiple carriers for their shipping needs, and this process may depress freight rates or result in the loss of some business to competitors.

 

•      Certain of our customers that operate private fleets to transport their own freight could decide to expand their operations.

 

•      The trend toward consolidation in the trucking industry may create other large carriers with greater financial resources and other competitive advantages relating to their size.

 

•      Advances in technology require increased investments to remain competitive, and our customers may not be willing to accept higher freight rates to cover the cost of these investments.

 

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

 

For the calendar year ended December 31, 2004, our top 10 customers, based on revenue, accounted for approximately 42% of our revenue.  Our largest customer is Wal-Mart Stores, Inc., which accounted for approximately 15% of our total revenue in 2004.  Generally, we do not have long-term contracts with our customers, and we cannot assure you that our current customers will continue to utilize our services or that they will continue at the same levels.  A reduction in or termination of our services by one or more of our major customers could have a material adverse effect on our business and operating results.

 

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

 

Our Intermodal business segment utilizes railroads in the performance of its transportation services.  These services are provided pursuant to contractual relationships with the railroads.  While we have agreements with various Class I railroads, the majority of our business travels on the Burlington Northern Santa Fe and the Norfolk Southern Railroad.  The inability to utilize one or more of these railroads could have a material adverse effect on our business and operating results.  We also utilize the services of a number of third-party dray carriers to perform a significant number of our origin and destination pickups and deliveries.  In addition, a portion of the freight we deliver is imported to the United States through ports of call that are subject to labor union contracts.

 

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