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 year ended		Commission file number
December 31, 2002		0-11757

 

J.B. HUNT TRANSPORT SERVICES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO THE FILING REQUIREMENTS FOR AT LEAST THE PAST 90 DAYS.

 

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.     o

 

INDICATED BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN EXCHANGE ACT RULE 12b-2).

 

THE AGGREGATE MARKET VALUE OF 27,493,354 SHARES OF THE REGISTRANT’S $.01 PAR VALUE COMMON STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF FEBRUARY 28, 2003 WAS $674,686,907 (BASED UPON $24.54 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 28, 2003:   39,352,835.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

CERTAIN PORTIONS OF THE NOTICE AND PROXY STATEMENT FOR THE ANNUAL MEETING OF THE STOCKHOLDERS, TO BE HELD APRIL 24, 2003, 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, 2002

 

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
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.	Disagreements on Accounting and Financial Disclosure
PART III
Item 10.	Directors and Executive Officers of Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management

 

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Item 13.	Certain Relationships and Related Transactions
Item 14.	Controls and Procedures
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures

 

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PART I

 

ITEM 1.   BUSINESS

 

GENERAL

 

J.B. Hunt Transport Services, Inc., together with its wholly-owned subsidiaries (“JBHT”), is a diversified transportation services company operating under the jurisdiction of the U.S. Department of Transportation (DOT) and various state regulatory agencies.  JBHT is an Arkansas holding company incorporated on August 10, 1961.  JBHT has been a publicly held company since our initial public offering in 1983.  Through our subsidiaries and associated companies, we provide a wide range of logistics and transportation services to a diverse group of customers.  We directly manage or provide tailored, technology-driven solutions to a growing list of Fortune 500 companies.  These customers may request specifically targeted transportation service or outsource their entire transportation function to us, or an associated company.  We also directly transport full-load containerizable freight throughout the continental United States and portions of Canada and Mexico.  Transportation services may utilize our equipment and employees, or may employ equipment and services provided by associated or unrelated third parties in the transportation industry.  We had three reportable business segments during calendar year 2002.  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, JBHT, along with five other publicly-held transportation companies, contributed our logistics business to a new, commonly owned company, Transplace, Inc.

 

JBT SEGMENT

 

Primary transportation service offerings classified in this segment include full truck-load, dry-van freight which is predominantly 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 our power equipment or a portion of the movement may be handled by a third-party motor carrier. Typically, 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.  JBT operates utilizing 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.  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 independent contractors on a limited basis in the JBT segment.  These independent contractors (I/C’s) provide their own tractors and agree to transport freight in JBHT owned or controlled trailing equipment.  At December 31, 2002, approximately 680 I/C’s were operating in the JBT segment.  JBT gross revenue for calendar year 2002 was $827 million, compared with $829 million in 2001.  At December 31, 2002, the JBT segment operated 4,924 company owned tractors and employed 7,573 people, 5,541 of whom were drivers.

 

JBI SEGMENT

 

Transportation service offerings of our JBI segment utilize agreements with various railroads to provide proven intermodal freight solutions to our customers in all major lanes of commerce in the United States, Canada, and Mexico.  We differentiate ourselves from others through our premium service network, as well as, coordinated door to door service on company-owned and controlled assets.  We established our first intermodal agreement with the Santa Fe Railway in 1989.  Through growth of this transportation segment and additions, deletions, and mergers of rail carriers, we now have agreements with seven North American rail carriers including:  BNSF, Norfolk Southern, CSX, Kansas City Southern, Union Pacific, Canadian National, and Florida East Coast railroads.  Typically, freight is picked up at the dock or specified location of the shipper and transported to the rail carrier for loading on rail cars.  Upon completion of the rail routing, the freight is picked up at the rail carrier’s ramp and transported to the consignee.  These originating and destination drays may be transported entirely by our power equipment or may be handled by a third-party motor carrier.  It is our customary business practice that all charges for the entire movement are billed to the customer by us and we, in turn, pay the rail carrier and third-party motor carrier for their portion of the transportation services provided.  In 1993, rail operations were expanded to utilize high-cube containers which can be separated from the chassis and double-stacked on rail cars to provide improved productivity.  This concept is known as container-on-flatcar.  Most of our agreements with rail carriers allow for the majority of JBI business carried under these rail agreements to receive priority space on trains and preferential loading and unloading at rail facilities.  JBI gross revenue for calendar year 2002 was $809 million, compared with $740 million in

 

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2001.  At December 31, 2002, the JBI segment operated 917 tractors and employed 1,557 people, 1,215 of whom were drivers.

 

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 supply chain solutions.  Capitalizing on advanced systems and technologies, DCS offers engineered transportation 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, and temperature-controlled operations.  Near 100% on-time service is standard with efficient routes executed to design specifications.

 

DCS operations focus on driving out cost 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 2002 was $628 million, compared with $549 million in 2001.  At December 31, 2002, the DCS segment operated 4,812 tractors and employed 5,989 people, 5,273 of whom were drivers.

 

LOGISTICS BUSINESS AND ASSOCIATED COMPANY

 

We formally began offering logistics transportation 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 may have required a significant amount of up-front analysis and design time, while 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, commonly-owned company, Transplace, Inc. (“TPI”).

 

TPI is an Internet-based global transportation logistics company.  TPI commenced operations in July of 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 2002 approximated $672 million, which revenue is not included in our financial statements for 2002.  We initially had an approximate 27% ownership interest in TPI.  In November of 2002, we agreed to purchase a portion of Werner Enterprises’ (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 earnings (loss) of associated companies.”

 

ASSOCIATED COMPANY - 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 U.S. 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.  For the calendar year ended December 31, 2001 and for prior years, our share of the Mexican joint venture operating results was included on a one-line, non-operating item on the Consolidated Statements of Earnings entitled “Equity in earnings (loss) of associated companies.  During the first quarter of 2002, we sold our joint venture interest in Mexico to TMM.  We still provide transportation services to and from Mexico by utilizing the services of a variety of Mexican carriers.

 

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MARKETING AND OPERATIONS

 

We transport 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.  Our primary customers include many of the “Fortune 500” companies.  Our largest customer in 2002 was Wal-Mart Stores, Inc., which accounted for approximately 18% of total revenue.  A broad geographic dispersion and a good balance in the type of freight transported allows us 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, driver cost and availability, and railroad service levels.

 

We generally market all of our service offerings through a nationwide marketing network.  All transportation services offered are typically billed directly to the customer by us and all inquiries, claims and other customer contacts are handled by us.  Certain marketing, sales, engineering and design functions are assigned to each operating segment.  However, marketing and pricing strategy, and national account service coordination is managed at the corporate level.

 

PERSONNEL

 

At December 31, 2002, we employed 16,265 people, including 12,029 drivers.  Historically the truckload transportation industry and JBHT have experienced shortages of qualified drivers.  In addition, driver turnover rates for truckload motor carriers frequently exceed 100%.  During the past few years a number of changes have occurred within the industry relative to drivers.  In 1996, we announced and implemented an approximate 33% increase in wages for our over-the-road drivers.  As anticipated, this increase in driver compensation was partially offset by lower driver recruiting and training expense, reduced accident and safety costs and better equipment utilization.  We also experienced a decline in driver turnover rates between 1997 and 1999.  During late 2000 and 2001, supply and demand conditions for drivers changed and a number of truck load carriers, including JBHT, implemented lower mileage pay rates for newly hired drivers.  Partly as a result of this reduced compensation level for drivers, our driver turnover rate increased during 2000 and has remained at historically high levels in 2001 and 2002.  During calendar year 2002, we have once again experienced some difficulty attracting and retaining a desired level of drivers.  To date, we continue to hire only experienced drivers and, although recruiting costs have increased significantly, operations have not been disrupted by a shortage of qualified drivers.  At December 31, 2002, we also employed approximately 3,100 office employees and 1,137 mechanics.  None of our employees are represented by collective bargaining agreements.

 

REVENUE EQUIPMENT

 

At December 31, 2002, we owned or leased 10,653 company operated tractors, 26,087 trailers and 19,672 containers.  We believe that modern, late-model, clean equipment differentiates quality customer service, increases equipment utilization and reduces maintenance costs and downtime.  We generally operate with newer revenue equipment in the JBT segment, with the age of tractors and trailers approximating 2.1 years and 2.2 years, respectively, at December 31, 2002.  Somewhat older equipment and tractors designed for local and regional operations are typically utilized in the JBI and DCS segments.  Specially designed high-cube containers which can be separated from the chassis and double-stacked on rail cars are also operated by JBI.  The average age of JBI tractors and containers at December 31, 2002 was approximately 4.6 years and 5.2 years, respectively.  The JBI segment commenced receiving brand new containers and reconditioned chassis in late 2001.  Approximately 6,300 new containers and 6,300 new and reconditioned chassis were placed in service during 2002.  The composition of the dedicated contract fleet varies with specific customer service requirements.  At December 31, 2002, the average age of DCS segment tractors was 2.8 years.  In November of 2002, we committed to purchase approximately 2,100 new tractors, the majority of which will be traded one-for-one for units in the JBI and DCS fleets.  These trades will significantly reduce the average age of these tractor fleets.  All of our revenue equipment is maintained in accordance with a specific maintenance program primarily based on age and/or miles traveled.

 

COMPETITION

 

We are one of the largest publicly held truckload carriers in the United States. We compete primarily with other irregular route, truckload common carriers. Less-than-truckload common carriers and private carriers generally provide limited competition for truckload carriers.  JBHT and our associated companies are 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 us the opportunity to differentiate our services in the marketplace.

 

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REGULATION

 

Our operations as a for-hire carrier are subject to regulation by the U.S. Department of Transportation’s Federal Motor Carrier Safety Administration (FMCSA) and by various Canadian provinces.  Entry control barriers were substantially removed as a result of federal deregulation statutes such as the Interstate Commerce Commission Termination Act of 1995 (ICCTA).   The FMCSA continues to enforce safety regulations and has proposed new rules which, if approved in their present form, would limit driver’s hours of service.  President Bush is considering implementation of provisions of the North America Free Trade Agreement (NAFTA), which may result in increased competition between U.S. and Mexican carriers for truckload services moving between these two countries.  The Clean Air Act of 1990 established tighter pollution standards for emissions from automobiles and trucks.  These new standards were effective on a phased in basis beginning with model year 1994.  As part of a 1998 consent decree with the U.S. Environmental Protection Agency (EPA), a number of heavy-duty diesel engine manufacturers agreed to significantly reduce emissions from their engines produced subsequent to October 1, 2002.  JBHT and a number of other truckload motor carriers believe the new engines have not yet been sufficiently tested for fuel economy and reliability.  While we continue to test a limited number of the new EPA compliant engines, we committed in November of 2002 to purchase approximately 2,100 new tractors, the majority of which will be equipped with Mercedes engines, which are not covered by the EPA’s October 1, 2002 rules.

 

INTERNET WEB SITE

 

We maintain a web site on the Internet through which additional information about JBHT is available.  Our web site address is www.jbhunt.com.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, press releases, earnings releases and other reports filed pursuant to Section 13 or 15 (d) of the Exchange Act are available, free of charge, on our website as soon as practical after they are filed.

 

SEC FILINGS

 

We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission (SEC).  Our reports and any materials we file with the SEC are available at the Public Reference Room, located at 450 Fifth Street, N.W., Washington, D.C.  20549.  Information may be obtained from the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC also maintains a web site at www.sec.gov that contains information we file with the agency.  Our common stock is traded in the over-the-counter market under the symbol “JBHT.”

 

ITEM 2.   PROPERTIES

 

Our corporate headquarters are in Lowell, Arkansas. A 150,000-square-foot building was constructed and occupied in September 1990.  We also utilize our former corporate building as general offices.  In 1999, a new 20,000 square foot building was constructed and occupied near the corporate headquarters.  A portion of this leased facility serves as a backup data center and provides disaster recovery support services. An additional 20,000 square foot building consisting of general office space for our corporate employees was completed and occupied in 2000. This building is located next to the data center building and is a leased facility.

 

Principal outside facilities consist primarily of general offices which support operational, safety and maintenance functions.  In addition to the principal facilities listed below, we lease numerous small offices and trailer parking yards in various locations throughout the country to support customer trailing equipment pool commitments.

 

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A summary of our principal facilities follows:

 

Location		Acreage		Maintenance Shop (square feet)		Office Space (square feet)
Atlanta, Georgia		30		29,800		10,400
Chicago, Illinois		27		50,000		14,000
Dallas, Texas		14		24,000		7,800
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)		25		—		150,000
Lowell, Arkansas		40		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
Phoenix, Arizona		14		10,000		5,300
San Bernardino, California		8		14,000		4,000
South Boston, VA		3		30,000		3,500
South Gate, California		12		12,000		5,500
Syracuse, New York		13		19,000		8,000
Vancouver, WA		4		20,000		—

 

ITEM 3.   LEGAL PROCEEDINGS

 

JBHT 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, 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.

 

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

 

No matters were submitted during the fourth quarter of 2002 to a vote of security holders.

 

OUR EXECUTIVE OFFICERS

 

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

 

Name		Age		Position with JBHT		Executive Officer Since
J.B. Hunt		76		Senior Chairman of the Board; Director		1961
Wayne Garrison		50		Chairman of the Board; Director		1979
Johnelle D. Hunt		71		Secretary; Director		1972
Kirk Thompson		49		President and Chief Executive Officer; Director		1984
Paul R. Bergant		56		Executive Vice President, Marketing and Chief Marketing Officer		1985
Bob D. Ralston		56		Executive Vice President, Equipment and Properties		1989
Jerry W. Walton		56		Executive Vice President, Finance and Administration and Chief Financial Officer		1991
Craig Harper		45		Executive Vice President, Operations and Chief Operations Officer		1997
John N. Roberts III(1)		38		President, Dedicated Contract Services, and Executive Vice President,  Enterprise Solutions		1997
Kay J. Palmer(2)		39		Executive Vice President and Chief Information Officer		1999

 

(1)             Mr. Roberts joined JBHT 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.  In June of 1998, he was appointed to the additional position of Executive Vice President of Enterprise Solutions.

 

(2)             Ms. Palmer joined JBHT in 1988 as a programming specialist.  In June of 1989, she was named Director of Application Services.  In June of 1995, she was named Vice President of Applications.  She became Senior Vice President of Information Services in August of 1998 and named Executive Vice President and Chief Information Officer in June of 1999.

 

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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”).

 

 

On February 28, 2003, the high and low sales prices for our common stock as reported by the NASDAQ were $24.91 and $24.51, respectively. As of February 28, 2003, we had 1,378 stockholders of record.

 

DIVIDEND POLICY

 

On January 21,  2000, our Board of Directors declared a quarterly dividend of $.05 per share,  paid on February 17, 2000 to shareholders of record on February 3, 2000. We declared and paid cash dividends of $.20 per share in 1999 and 1998.  On February 16, 2000, our Board of Directors announced a decision to discontinue our policy of paying quarterly cash dividends.  No dividends have been paid since February of 2000.

 

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ITEM 6.   SELECTED FINANCIAL DATA

(Dollars in millions, except per share amounts)

 

 

Years Ended December 31		2002			2001			2000			1999			1998
Operating revenues		$	2,247.9		$	2,100.3		$	2,160.4		$	2,045.1		$	1,841.6
Operating income		101.0			72.2			63.4			74.3			101.5
Net earnings		51.8			32.9			36.1			31.9			46.8
Diluted earnings per share		1.33			.91			1.02			.89			1.28
Cash dividends per share		—			—-			.05			.20			.20
Total assets		1,318.7			1,260.3			1,231.9			1,127.5			1,171.5
Long-term debt and lease obligations		219.0			353.6			300.4			267.6			417.0
Stockholders’ equity		590.5			458.3			417.8			391.2			365.5

 

Percentage of Operating Revenue

 

Years Ended December 31		2002		2001		2000		1999		1998
Operating revenues		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Operating expenses:
Salaries, wages and employee benefits		36.4		37.6		35.6		34.9		34.9
Rents and purchased transportation		31.1		28.8		32.1		33.7		33.7
Fuel and fuel taxes		9.4		10.8		11.3		8.3		7.5
Depreciation and amortization		6.5		6.8		6.2		7.3		7.6
Operating supplies and expenses		5.8		6.9		6.1		6.2		5.3
Insurance and claims		2.5		2.0		1.8		2.0		1.8
Operating taxes and licenses		1.4		1.6		1.5		1.3		1.3
General and administrative expenses, net of gains		1.3		.9		1.3		1.7		1.4
Communication and utilities		1.1		1.2		1.2		1.0		1.0
Total operating expenses		95.5		96.6		97.1		96.4		94.5
Operating income		4.5		3.4		2.9		3.6		5.5
Interest expense		(1.1	)	(1.3	)	(1.1	)	(1.4	)	(1.6	)
Equity in earnings (loss) of associated companies		(.1	)	—		.2		.2		.1
Earnings before income taxes		3.3		2.1		2.0		2.4		4.0
Income taxes		1.0		.5		.3		.8		1.5
Net earnings		2.3	%	1.6	%	1.7	%	1.6	%	2.5	%

 

The following table sets forth certain operating data.

 

Years Ended December 31		2002		2001		2000		1999		1998
Total loads		2,847,377		2,565,915		2,697,582		2,769,834		2,243,856
Average number of tractors owned/leased in the fleet during the year		10,712		10,710		10,055		9,183		8,207
Company tractors operated (at year end)		10,653		10,770		10,649		9,460		8,906
Independent contractors (at year end)		679		336		16		—		—
Trailers/containers (at year end)		45,759		44,318		44,330		39,465		35,366
Company tractor miles (in thousands)		981,818		1,022,677		1,000,127		986,288		922,560

 

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

 

FORWARD-LOOKING STATEMENTS

 

This report contains statements that may be considered to be forward-looking or predictions concerning future operations or events.  Such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  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.  Shareholders 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.  Among all the factors and events that are not within our control and 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, terrorists 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.  The above is not an all-inclusive list.  Financial and operating results of JBHT may fluctuate as a result of these and other risk factors or events as described from time to time in our filings with the Securities and Exchange Commission.  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.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Certain amounts included in or affecting our financial statements and related disclosures must be estimated, requiring certain assumptions with respect to values or conditions that cannot be known with certainty at the time the financial statements are prepared.

 

The preparation of our financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect:

•                  the amounts reported for assets and liabilities;

•                  the disclosure of contingent assets and liabilities at the date of the financial statements; and

•                  the amounts reported for revenues and expenses during the reporting period.

 

Therefore, the reported amounts of assets and liabilities, revenues and expenses and associated disclosures with respect to contingent assets and obligations are necessarily 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 estimates.  Any effects on business, financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

 

In preparing our financial statements and related disclosures, we must use estimates in determining the economic useful lives of assets, provisions for uncollectible accounts receivable, exposures under self-insurance plans and various other recorded or disclosed amounts.  However, we believe that certain accounting policies are of more significance in the financial statement preparation process than others and are discussed below.  To the extent that actual outcomes differ from estimates, or additional facts and circumstances cause us to revise estimates, earnings will be affected.

 

Workers’ Compensation and Accident Costs

 

We purchase insurance coverage for a portion of our 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.  Our current insurance coverage specifies that the self insured limit on the majority of our claims is $1.5 million, which is prefunded with our insurance carrier.  We are substantially self-insured for loss of and damage to our owned and leased revenue equipment.  Our safety and claims personnel work directly with representatives from our insurance companies to continually update the estimated ultimate cost of each claim.  At December 31, 2002, we

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had approximately $15 million of estimated net claims payable.  In addition, we are required to pay certain advanced deposits and monthly premiums.  At December 31, 2002, we had a prepaid insurance asset of approximately $45 million.

 

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 leases.  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 have an agreement with our primary tractor supplier for guaranteed residual or trade-in values for certain new equipment acquired since 1999.  We have utilized these values in accounting for purchased and leased tractors.  If the supplier was unable to perform under the terms of such agreements, it could have a material negative impact on our financial results.

 

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 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 2002.  Segments included Truck (JBT), Intermodal (JBI) and Dedicated Contract Services (DCS).  JBT business included full truck-load, dry-van freight which is primarily transported utilizing company-owned or controlled revenue equipment.  Freight in the JBT segment is typically transported over roads and highways and no portion of a movement involves railroads.  The JBI segment includes freight which is transported by rail over at least a portion of the movement.  JBI freight may also include certain repositioning truck loads which are moved by JBI equipment or third-party carriers, in circumstances where the movement directs JBI equipment back toward intermodal operations.  DCS segment business usually includes company-owned revenue equipment and employee drivers who are assigned to a specific customer, traffic lane or service.  DCS operations most frequently involve formal, written long-term agreements which govern services performed and applicable rates.

 

Prior to July 1, 2000, the Logistics business segment (JBL) primarily consisted of J.B. Hunt Logistics, a wholly-owned subsidiary which provided a wide range of comprehensive transportation and freight management services.  Such services included experienced professional managers, information and freight optimization technology and the actual design or redesign of freight system solutions.  JBL utilized JBT, JBI or DCS owned or controlled assets and employees, third-party carriers, or a combination of these options to meet service requirements.  JBL services were typically provided in accordance with written long-term agreements.  Effective July 1, 2000, JBL exchanged its ownership in substantially all of its assets for an initial membership interest in TPI.  As of January 1, 2003, we increased our interest in TPI from approximately 27% to 37%.

 

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RESULTS OF OPERATIONS

 

2002 Compared With 2001

 

Operating Segments

For Years Ended December 31

(in millions of dollars)

 

		Gross Revenue								Operating Income
		2002			2001			% Change		2002			2001
JBT		$	827.3		$	828.6		—		26.6			$	8.7
JBI		809.1			740.5			9	%	54.6			42.1
DCS		628.3			548.7			15	%	19.7			17.4
JBL		—			—			—		—-			—
Other		—			.6			—		.1			4.0
Subtotal		2,264.7			2,118.4			7	%	$	101.0		72.2
Inter-segment eliminations		(16.8		)	(18.1		)	—		—			—
Total		$	2,247.9		$	2,100.3		7	%	$	101.0		$	72.2

 

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related footnotes appearing in this annual report.

 

Overview of 2002

 

Our consolidated net earnings for calendar year 2002 were $51.8 million, or diluted earnings per share of $1.33, compared with 2001 full-year earnings of $32.9 million, or 91 cents per diluted share.  We generated $101 million of operating income in 2002, a nearly 40% increase over the $72.2 million of operating income in 2001.  Our operating ratio was 95.5% in 2002 and 96.6% in 2001.  Our increase in 2002 net earnings was in spite of an effective income tax rate which rose to 30.8% from 23.5% in 2001 and the number of diluted shares outstanding increasing by nearly 8%.  The increase in shares outstanding reflects a secondary public offering, which closed in June of 2002.   Each of our three segments contributed to the improved earnings levels in 2002.

 

JBT segment gross revenue was essentially flat, totaling $827.3 million in 2002 and $828.6 million in 2001.  However, 2002 revenues were generated with approximately 3% fewer tractors.  In addition, 2002 fuel surcharge revenues were $14.2 million lower than the comparable amount in 2001, which negatively impacted the revenue comparison by approximately 2%.  Truck segment operating income rose to $26.6 million in 2002, from $8.7 million in 2001.  The improvement in 2002 operating income reflected higher revenue per loaded mile, reduced empty miles and lower driver pay rates.  A significant portion of the higher revenue per loaded mile and reduced empty miles was a result of our continued focus on yield management and improved revenue quality.  The reduction in driver pay per mile was a result of changes in pay scales for newly-hired drivers.

 

JBI segment gross revenue grew 9%, to $809.1 million in 2002, from $740.5 million in 2001.  Revenue growth was due, in part, to continued demand for our intermodal service offering and conversion of our container fleet to 100% 53-foot units.  Operating income in the JBI segment rose to $54.6 million in 2002 from $42.1 million in 2001.  Our JBI operating ratio was 93.3% in 2002 and 94.3% in 2001.  Financial results in this segment were enhanced by improved container utilization, improved driver productivity and a focus on revenue quality.

 

DCS segment revenue grew nearly 15%, to $628.3 million in 2002, from $548.7 million in 2001.  Revenue growth was primarily a result of a 9% increase in the size of the DCS tractor fleet and our focus on improving the quality of individual fleets.  While operating income rose to $19.7 million in 2002 from $17.4 million in 2001, the segment’s operating ratio was 96.9% in 2002 and 96.8% in 2001.  We reduced some costs in the DCS segment such as driver pay and overhead, however, higher accident and claims expenses, as well as new project start up costs, more than offset the improvements.

 

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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
		2002		2001		2002 vs. 2001
Operating revenues		100.0	%	100.0	%	7.0	%
Operating expenses:
Salaries, wages and employee benefits		36.4	%	37.6	%	3.6	%
Rents and purchased transportation		31.1		28.8		15.5
Fuel and fuel taxes		9.4		10.8		(6.8	)
Depreciation and amortization		6.5		6.8		2.2
Operating supplies and expenses		5.8		6.9		(10.3	)
Insurance and claims		2.5		2.0		32.4
Operating taxes and licenses		1.4		1.6		.6
General and administrative expenses, net of gains		1.3		.9		55.7
Communication and utilities		1.1		1.2		(2.0	)
Total operating expenses		95.5		96.6		5.9
Operating income		4.5		3.4		39.8
Interest expense		(1.1	)	(1.3	)	(8.4	)
Equity in earnings (loss) of associated companies		(.1	)	—		(35.0	)
Earnings before income taxes		3.3		2.1		73.7
Income taxes		1.0		.5		127.2
Net earnings		2.3	%	1.6	%	57.3	%

 

Consolidated Operating Expenses

 

Total operating expenses in 2002 increased 5.9% over 2001, while operating revenues rose 7.0%.  Our operating ratio improved to 95.5% in 2002, compared with 96.6% in 2001.  Salaries, wages and employee benefits expense increased 3.6% in 2002, and declined to 36.4% of revenue in 2002 from 37.6% in 2001.  As previously mentioned, a lower mileage pay rate in our JBT segment for newly-hired drivers and the use of additional independent contractors were primary contributors to the relationship of this cost category to operating revenues.  Partly offsetting a decline in drivers’ wages relative to revenue were increases in maintenance wages, workers’ compensation, health insurance and office employee incentive expenses.  We opened some new company managed maintenance facilities and increased our mechanic labor force by about 14% in order to reduce the amount of maintenance that we outsource.  We also experienced higher costs in workers’ compensation and other fringe benefit programs and paid additional incentive payments to our office and administrative personnel that resulted from improved 2002 net earnings.

 

Rents and purchased transportation expense increased 15.5%, primarily due to the growth of our JBI business segment and the related payments to railroads and drayage carriers and the use of more independent contractors.  The 6.8% decline in fuel and fuel tax expense was primarily a result of fuel costs per gallon averaging about 5% less vs. 2001.  Operating supplies and expenses were down 10.3% in 2002 reflecting the reduced amount of outsourced tractor and trailer maintenance work and our focus on reducing travel expenses.  The 32.4% increase in insurance and claims costs reflects escalating liability insurance premiums which have been experienced industry wide and our higher accident costs.  The significant increase in general and administrative expenses was due primarily to higher driver advertising and recruiting expense in 2002 and changes in our gains and losses on revenue equipment dispositions.  In 2002, we had a $1.8 million net loss on equipment and facility dispositions, compared with a net gain of $4.8 million in 2001.

 

Our net interest expense declined in 2002, partly due to the approximate $68 million of capital we raised through a secondary public offering of common stock which closed in June of 2002.  We increased our effective income tax rate to 30.8% in 2002, from 23.5% in 2001, primarily to reflect additional taxes associated with our increased earnings.

 

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Equity in losses of associated companies reflects our share of operating results for TPI and for our Mexican joint venture.  Amounts included the following:

 

 

JBHT’s financial exposure is limited to its approximate $8.5 million investment in TPI as we have not made any additional commitments or guaranteed any of TPI’s financial obligations.

 

The year 2001 financial results of our Mexican joint venture primarily reflect adjustments to the carrying value of the investment due to the anticipated sale of our interests.  During the first quarter of 2002, we sold our joint venture interest in Mexico for its carrying value, to the majority owner, Transportacion Maritima Mexicana (TMM).  We recorded an $18.1 million note receivable from TMM, which, according to the terms of this sale, will be paid in four annual payments of approximately $4.5 million, plus interest at 5% per annum, through June of 2005.  The first payment was received as scheduled in June of 2002.

 

2001 Compared With 2000

 

Operating Segments

For Years Ended December 31

(in millions of dollars)

 

		Gross Revenue								Operating Income
		2001			2000			% Change		2001			2000
JBT		$	828.6		$	833.8		(1	)%	$	8.7		$	(7.1	)
JBI		740.5			681.1			9	%	42.1			36.7
DCS		548.7			478.6			15	%	17.4			28.4
JBL		—			230.0		*	—		—			8.1		*
Other		.6			—			—		4.0			(2.7		)
Subtotal		2,118.4			2,223.5			(5	)%	72.2			63.4
Inter-segment eliminations		(18.1		)	(63.1		)	—		—			—
Total		$	2,100.3		$	2,160.4		(3	)%	$	72.2		$	63.4

 

*As of December 31, 2000, TPI qualified as a reportable business segment for financial reporting purposes. However, the logistics segment (JBL) information for 2001 shown above excludes TPI.  TPI is accounted for on the equity method and does not qualify as a reporting segment in 2001.

 

The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related footnotes appearing in this annual report.

 

Overview of 2001

 

Financial and operating results for the year 2001 were impacted by a number of significant items.  General economic conditions in the transportation industry were soft during the majority of the year and fuel costs varied dramatically, sometimes changing more than 10% from one month to the next.  However, overall fuel costs for 2001 were down from the prior year.  Consolidated operating revenues for 2001 decreased approximately 3% from 2000.  Excluding the JBL operations, which were contributed to TPI as of July 1, 2000, revenue growth for the remaining business segments was approximately 6%.  The growth in the remaining segments is attributable to expansion of our operating fleet of tractors from an average of 10,055 in 2000 to 10,710 in 2001, an average increase of 655 tractors or 6.5%.  While fuel costs and related fuel surcharge revenues varied significantly during 2001, the net change in fuel surcharge revenue had less than a 1% impact on revenue between 2001 and 2000.

 

JBT segment revenue totaled $828.6 million in 2001, down 1% from 2000.  This decline was due in part to the softer economy that created a reduced demand for freight.  JBT began focusing on improving the operating ratio through cost management initiatives rather than JBT fleet growth.  We had no plans to grow the JBT fleet until such time that a reasonable operating income had been achieved, warranting the additional investment of capital.  JBT tractor count,

 

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including independent contractors (I/C’s) declined nearly 3% during 2001 and tractor utilization was also down approximately 3%.  However, revenue per loaded mile increased 3.9%, excluding fuel surcharges, reflecting freight mix changes and pure rate increases,.  The Truck segment generated operating income of $8.7 million in 2001, compared with a loss of $7.1 million in 2000.  As a result of a new initiative commenced in late 2000, the number of I/C’s in JBT grew to 337 in 2001, from 16 at the end of 2000.  Continued volatility in the earnings power of the Truck unit is likely to prevail until supply and demand factors in the truckload industry improve.  Additional improvement is significantly dependent upon increases in the availability of freight.

 

JBI segment business was reasonably strong during 2001 and grew 9% to $740.5 million from $681.1 million in 2000.  The Intermodal segment held its tractor count essentially flat at 910 during 2001. Unlike the other segments, growth of JBI is not easily tracked by number of tractors, as JBI can utilize outside dray carriers and the other JBHT business units to support load and revenue growth.  The increase in revenue can be attributed to a 5% increase in the number of loads from 2000 to 2001, coupled with a 1.7% increase in revenue per loaded mile, excluding fuel surcharges.  As a result of revenue growth and utilization of containers, JBI operating income climbed 15% in 2001 to $42.1 million from $36.7 million in 2000.

 

DCS segment revenue grew 15% during 2001, to $548.7 million from $478.6 million in 2000.  This growth rate was down significantly from recent years due to:  1) soft economic conditions which made companies more apprehensive about changing or outsourcing their transportation needs, and;  2) our unwillingness to reduce rates to increase market share.  The DCS segment tractor fleet grew by 15% during 2001, but revenue growth was limited by idle tractors throughout most of the year.  DCS generated $17.4 million of operating income in 2001, compared with $28.4 million in 2000.  The lower margin and reduced operating income was primarily a result of idle tractors and a higher proportionate amount of shared trailer pool and corporate support costs being assigned to the business, as a result of improving the tracking of trailer usage and the increased internal transfer price, which is charged by JBT and JBI when DCS utilizes their assigned trailers.  Cost control and close analysis of individual fleet profitability remains a DCS objective.

 

For the year ended December 31, 2001, JBHT’s share of TPI’s results of operations totaled a loss of $1.9 million, compared with earnings of $440,000 for the six month period ended December 31, 2000.  TPI’s operating loss in 2001 was primarily due to start up expenses.  JBHT’s financial exposure is limited to its approximate $6.4 million investment in TPI as we have not made any additional commitments or guaranteed any of TPI’s financial obligations.

 

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
		2001		2000		2001 vs. 2000
Operating revenues		100.0	%	100.0	%	(2.8	)%
Operating expenses:
Salaries, wages and employee benefits		37.6	%	35.6	%	2.7	%
Rents and purchased transportation		28.8		32.1		(13.0	)
Fuel and fuel taxes		10.8		11.3		(6.9	)
Depreciation and amortization		6.8		6.2		6.2
Operating supplies and expenses		6.9		6.1		11.4
Insurance and claims		2.0		1.8		8.7
Operating taxes and licenses		1.6		1.5		—
General and administrative expenses, net of gains		.9		1.3		(32.5	)
Communication and utilities		1.2		1.2		(.7	)
Total operating expenses		96.6		97.1		(3.3	)
Operating income		3.4		2.9		13.9
Interest expense		(1.3	)	(1.1	)	5.0
Equity in earnings (loss) of associated companies		—		.2		—
Earnings before income taxes		2.1		2.0		1.5
Income taxes		.5