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)

 

 

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.     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 57,069,777 shares of the registrant’s $.01 par value common stock held by non-affiliates of the registrant as of February 27, 2004, was $1,561,999,796 (based upon $27.37 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 27, 2004:   80,187,495.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain portions of the Notice and Proxy Statement for the Annual Meeting of the Stockholders, to be held April 22, 2004, 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, 2003

 

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
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.  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, 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 from time to time in our filings with the SEC.  Some of the 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 full truck-load transportation and logistics 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 and logistics 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 drivers.  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, 2003, our consolidated revenue totaled $2.4 billion.  Of this total, $936 million, or 38%, was generated by our JBI business segment.  Our JBT segment generated $841 million, or 34%, of total revenue and DCS represented $671 million, or 28%.

 

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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, 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 reducing 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 shareholders.

 

Recent Focus

 

During the past three 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 yield 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.

 

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 (Intermodal) 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, 2003, we had approximately 1,000 ICs operating in the JBT segment.  JBT gross revenue for calendar year 2003 was $841 million, compared with $827 million in 2002.  At December 31, 2003, the JBT segment operated 4,429 company-owned tractors and employed 6,228 people, 5,300 of whom were drivers.

 

JBI Segment

 

The transportation service offerings of our JBI segment utilize agreements with all 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.  JBI provides 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.

 

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Our intermodal program has grown from 20 loads in late 1989 to over 527,000 in 2003.  JBI operates more than 20,000 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 nearly 1,050 tractors and about 1,380 drivers in support of intermodal operations.  At December 31, 2003, the total JBI employee count approximated 1,600, including drivers.  Gross revenue for the JBI segment in calendar year 2003 was $936 million, compared with $809 million in 2002.

 

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 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 2003 was $671 million, compared with $628 million in 2002.  At December 31, 2003, the DCS segment operated 4,456 tractors and employed 5,529 people, 4,898 of whom were drivers.

 

Logistics Business and Associated Company

 

We formally 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 2003 was $655 million, compared with $672 million in 2002.  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.”

 

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,

 

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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, 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 loss of associated companies.”

 

During the first quarter of 2002, we sold our joint venture interest in Mexico to TMM.  At December 31, 2003, we have a note receivable balance of $13.6 million from TMM in connection with this sale.  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 2003 was Wal-Mart Stores, Inc., which accounted for approximately 13% 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, 2003, we had approximately 15,700 employees, including approximately 11,600 drivers.  We had arrangements with about 1,000 ICs to transport freight in our trailing equipment.  We also employed nearly 1,000 mechanics and about 3,140 office personnel at the end of 2003.  None of our employees are represented by unions or covered by collective bargaining agreements.

 

The truck-load 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.  While the cost to recruit, train and retain drivers has increased during recent years, we have, to date, not experienced significant operational disruptions due to a shortage of drivers.

 

Revenue Equipment

 

As of December 31, 2003, we operated approximately 9,900 tractors.  In addition, our contracted ICs own and 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, 2003, the average age of our tractor fleet was 2.4 years, our trailers were 3.3 years old and our containers were 5.8 years old.  We perform routine servicing and preventative maintenance of our equipment at most of our regional terminal facilities.

 

We generally operate newer revenue equipment in our JBT segment to minimize downtime and maximize utilization.  Our JBI segment utilizes high-cube containers, which can be separated from the chassis and double-stacked

 

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on rail cars.  We are currently in the process of upgrading our container fleet and reconditioning our chassis fleet.  The composition of our DCS trailing fleet varies with specific customer requirements and currently includes dry-vans, flatbeds and temperature-controlled units.

 

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 committed to purchase 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 tractors with the new engines.  While the initial cost of these reduced-emission engines is somewhat higher, we have not yet determined their impact on operating costs such as maintenance and fuel economy.  The EPA has issued additional engine operating limitations which are scheduled to apply in 2007.

 

Competition

 

According to the American Trucking Associations, the U.S. market for all truck-based transportation services generated revenues of approximately $605 billion in 2002.  The truck-load market was estimated to represent about 45% of the total, or approximately $270 billion.  The top ten for-hire truck-load carriers only generate about 4% of the total revenue in this segment and we represent less than 1% of this segment 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.

 

Effective January 4, 2004, the Federal Motor Carrier Safety Administration (FMCSA), 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.  Although the new regulations have only been in effect for a short time, our current estimates indicate that these new rules should not have a significant impact on our overall operations.  However, in certain fleets and a few specific DCS customer applications, these new rules may increase our cost of operating or reduce our equipment utilization.

 

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.  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.

 

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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
Cedar Rapids, Iowa		18		28,000		4,500
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		15,200		4,000
San Bernardino, California		9		18,300		9,300
South Boston, Virginia		3		26,500		3,500
South Gate, California		12		12,000		5,500
Syracuse, New York		13		19,000		6,300
Vancouver, Washington		4		15,400		4,600

 

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 materially 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 2003 to a vote of security holders.

 

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Executive Officers of the Registrant

 

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

 

Name		Age		Position with JBHT		Executive Officer  Since
J.B. Hunt		77		Senior Chairman of the Board; Director		1961
Wayne Garrison		51		Chairman of the Board; Director		1979
Johnelle D. Hunt		72		Secretary; Director		1972
Kirk Thompson		50		President and Chief Executive Officer; Director		1984
Paul R. Bergant		57		Executive Vice President, Marketing and Chief Marketing Officer		1985
Bob D. Ralston		57		Executive Vice President, Equipment and Properties		1989
Jerry W. Walton		57		Executive Vice President, Finance and Administration and Chief Financial Officer		1991
Craig Harper		46		Executive Vice President, Operations and Chief Operations Officer		1997
John N. Roberts III		39		President, Dedicated Contract Services and Executive Vice President,  Enterprise Solutions		1997
Kay J. Palmer (1)		40		Executive Vice President and Chief Information Officer		1999

 

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

 

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.

 

		2003						2002
Period		High			Low			High			Low
1st Quarter		$	15.55		$	11.62		$	14.70		$	11.04
2nd Quarter		19.70			13.36			16.19			12.30
3rd Quarter		27.60			18.85			14.92			10.78
4th Quarter		28.74			23.75			15.16			10.63

 

On February 27, 2004, the high and low sales prices for our common stock as reported by the NASDAQ were $27.83 and $26.85, respectively. As of February 27, 2004, we had 1,334 stockholders of record.

 

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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 our policy of paying cash dividends.  No dividends have been paid since February 2000.

 

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		7,885,557		$	10.67		2,361,641
Equity compensation plans not approved by security holders		—		—			—
Total		7,885,557		$	10.67		2,361,641

 

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ITEM 6.  SELECTED FINANCIAL DATA

(Dollars in millions, except per share amounts)

 

Years Ended December 31		2003			2002			2001			2000			1999
Operating revenues		$	2,433.5		$	2,247.9		$	2,100.3		$	2,160.4		$	2,045.1
Operating income		185.6			101.0			72.2			63.4			74.3
Net earnings		95.5		*	51.8			32.9			36.1			31.9
Basic earnings per share		1.20		*	.68			.46			.51			.45
Diluted earnings per share		1.17		*	.66			.46			.51			.45
Cash dividends per share		—			—			—			.03			.10
Total assets		1,347.1			1,318.7			1,260.3			1,231.9			1,127.5
Long-term debt and lease obligations		—			219.0			353.6			300.4			267.6
Stockholders’ equity		703.1			590.5			458.3			417.8			391.2

 

* Reflects reversal of $7.7 million of non-cash tax benefits retroactive to January 1, 2003.  See “Risk Factors” in Item 7.

 

Percentage of Operating Revenue

 

Years Ended December 31		2003		2002		2001		2000		1999
Operating revenues		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Operating expenses:
Salaries, wages and employee benefits		32.5		36.4		37.6		35.6		34.9
Rents and purchased transportation		32.8		31.1		28.8		32.1		33.7
Fuel and fuel taxes		9.6		9.4		10.8		11.3		8.3
Depreciation and amortization		6.2		6.5		6.8		6.2		7.3
Operating supplies and expenses		4.9		5.8		6.9		6.1		6.2
Insurance and claims		2.6		2.5		2.0		1.8		2.0
Operating taxes and licenses		1.4		1.4		1.6		1.5		1.3
General and administrative expenses, net of gains		1.4		1.3		0.9		1.3		1.7
Communication and utilities		1.0		1.1		1.2		1.2		1.0
Total operating expenses		92.4		95.5		96.6		97.1		96.4
Operating income		7.6		4.5		3.4		2.9		3.6
Interest expense		(0.7	)	(1.1	)	(1.3	)	(1.1	)	(1.4	)
Equity in earnings (loss) of associated companies		—		(0.1	)	—		0.2		0.2
Earnings before income taxes		6.9		3.3		2.1		2.0		2.4
Income taxes		3.0	*	1.0		0.5		0.3		0.8
Net earnings		3.9	%	2.3	%	1.6	%	1.7	%	1.6	%

 

* Reflects reversal of $7.7 million of non-cash tax benefits retroactive to January 1, 2003.  See “Risk Factors” in Item 7.

 

The following table sets forth certain operating data.

 

Years Ended December 31		2003		2002		2001		2000		1999
Total loads		2,857,176		2,847,377		2,565,915		2,697,582		2,769,834
Average number of company-operated tractors during the year		10,293		10,712		10,710		10,055		9,183
Company tractors operated (at year end)		9,932		10,653		10,770		10,649		9,460
Independent contractors (at year end)		994		679		336		16		—
Trailers/containers (at year end)		46,747		45,759		44,318		44,330		39,465
Company tractor miles (in thousands)		943,054		981,818		1,022,677		1,000,127		986,288

 

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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.

 

EXECUTIVE SUMMARY

 

We are one of the largest truck-load transportation and logistics companies in North America.  Our business operations are primarily organized through three business segments.  Our JBT segment typically picks up freight loaded in trailers at the dock or specified location of the shipper and transports a complete truck load directly to the consignee.  JBT utilizes primarily company-controlled tractors or ICs and transports freight over highway routes.  JBI freight is usually loaded in containers and picked up at a shipper’s location by company-controlled tractors or designed third-party dray companies and transported to railroad yards.  This intermodal container is then transferred from highway vehicles (chassis) and stacked on rail cars for what is typically the longest leg of the route.  At the destination rail yard, JBI freight is removed from the rail car, remounted on a chassis and moved to the final destination by company-controlled tractors or dray carriers.  DCS segment operations vary significantly by individual customer account.  A DCS account may involve a limited number of tractors, drivers and trailing equipment or may include a large fleet.  The specific services offered frequently range from typical freight transportation to labor-intensive deliveries, freight handling and other specialized services.

 

We separated our JBT and JBI segment business effective January 1, 2000.  We contributed our JBL business to a newly-formed, associated logistics company in July 2000.  In late 2001, we established goals to improve the operating margins of each of our three segments.  Our financial results for calendar year 2003 represented the second consecutive year of record revenues and earnings, driven by strong performance from each of our segments.  Our financial results for 2003 were impacted by a number of items.  We implemented a driver pay per diem plan in February 2003.  Under this plan, a portion of certain road driver’s pay is designated as reimbursement of expense.  This designation provides benefits both to our driver and to the business.  Although the driver per diem plan increased our effective income tax rate, it reduced our total segment operating costs.

 

During 2003, we also continued to focus on a process we call yield management.  Yield 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.  Management actions may also involve price changes to ensure that we are charging for all services provided.  These price and freight mix actions favorably impacted a number of our key segment operating statistics shown in the following tables, particularly revenue per loaded mile and revenue per tractor per week.  Our yield management activities also significantly contributed to our improved margins in 2003, particularly in our JBT and DCS segments.

 

We also placed special emphasis during 2003 on dray costs and equipment utilization in our JBI segment.  We were able to increase the average number of loads that our drivers moved by creating pay incentives that rewarded productivity.  We also improved our box turns, or what we call velocity, which is the average number of loads moved by each container each month.  This continued focus allowed us to reduce our JBI segment operating ratio to 90.3% in 2003 from 93.3% in 2002 and 94.3% in 2001.

 

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Another area of management focus during 2003 was maintenance and revenue equipment.  We reduced the average age of our tractor fleet to 2.4 years at December 31, 2003 from 2.6 years at the end of 2002.  We also converted a portion of our maintenance work to our company-controlled facilities from third-party-owned shops.  The combination of the newer tractor fleet and conversion to our facilities reduced overall maintenance costs in 2003.

 

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.

 

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 2003, 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 $1.5 million of each claim.  In January 2004, we changed our level of self-insurance to $2 million for auto accidents and $1 million for workers’ compensation.

 

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.  We are also substantially self-insured for loss of and damage to our owned and leased revenue equipment.  At December 31, 2003, we had approximately $8 million of estimated net claims payable.  In addition, we are required to pay certain advanced deposits and monthly premiums.  At December 31, 2003, we had a prepaid insurance asset of approximately $57 million, which represented pre-funded claims and premiums.

 

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

 

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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.  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.  These changes in useful lives and salvage values increased net earnings during the fourth quarter of 2003 by approximately $963,000.  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.

 

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 2003.  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

 

		For Years Ended December 31 (in millions of dollars)
		2003			2002			2001
JBT		$	841.1		$	827.3		$	828.6
JBI		936.2			809.1			740.5
DCS		671.2			628.3			548.7
Other		—			—-			0.6
Subtotal		2,448.5			2,264.7			2,118.4
Inter-segment eliminations		(15.0		)	(16.8		)	(18.1		)
Total		$	2,433.5		$	2,247.9		$	2,100.3

 

Operating Income by Segment

 

		For Years Ended December 31 (in millions of dollars)
		2003			2002			2001
JBT		$	49.3		$	26.6		$	8.7
JBI		91.2			54.6			42.1
DCS		45.2			19.7			17.4
Other		(0.1		)	0.1			4.0
Total		$	185.6		$	101.0		$	72.2

 

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Operating Data By Segment

 

		For Years Ended December 31
		2003			2002			2001
JBT
Operating ratio		94.1		%	96.8		%	98.9		%
Total loads		956,807			970,055			946,672
Revenue (excl. fuel surcharge) per tractor per week		$	2,770		$	2,695		$	2,575
Length of haul in miles		534			556			590
Revenue per loaded mile (excl. fuel surcharge)		$	1.509		$	1.434		$	1.374
Average number of tractors during the period		5,592			5,751			5,923
Tractors at end of period
Company owned		4,429			4,924			5,382
Independent contractor		994			679			336
Total tractors		5,423			5,603			5,718
Average effective trailing equipment usage *		14,979			15,591			16,222
JBI
Operating ratio		90.3		%	93.3		%	94.3		%
Total loads		527,404			473,856			446,569
Net change in revenue per loaded mile (excl. fuel surcharge)		0.7		%	0.6		%	1.7		%
Tractors at end of period		1,047			917			910
Average effective trailing equipment usage *		19,719			18,517			18,845
DCS
Operating ratio		93.3		%	96.9		%	96.8		%
Revenue (excl. fuel surcharge) per tractor per week		$	2,850		$	2,667		$	2,498
Average number of tractors during the period		4,528			4,602			4,235
Tractors at end of period		4,456			4,812			4,478
Average effective trailing equipment usage *		11,448			10,860			9,515

 

* Reflects average use of corporate-wide trailing equipment

 

RESULTS OF OPERATIONS

 

2003 Compared With 2002

 

Overview of 2003

 

Our consolidated net earnings for calendar year 2003 totaled a record $95.5 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 $51.8 million in 2002.  Diluted earnings per share were $1.17 in 2003, also a record number, compared with 66 cents 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.

 

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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 have continued our focus on yield 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, significant increases in certain operating costs, such as insurance, fuel and equipment, have reduced the level of capacity available in the industry.

 

JBT Segment

 

JBT segment gross revenue was $841.1 million in 2003, up 2% over the $827.3 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, excluding fuel surcharges, rose 5.2% in the current year, more than offsetting the decline in the size of the fleet and enhancing operating income.

 

Operating income of the JBT segment rose to $49.3 million in 2003, from $26.6 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 $936.2 million in 2003, from $809.1 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 $91.2 million in 2003 from $54.6 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 over 6% to $671.2 million in 2003 from $628.3 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 nearly 2%, compared to 2002.  More than offsetting the decline in the tractor fleet was a nearly 7% 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 $45.2 million in 2003 versus $19.7 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 Operating Revenue				Percentage Change 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