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 December 31, 2006

 

0-11757

Commission file number

 

J.B. HUNT TRANSPORT SERVICES, INC.

(Exact name of registrant as specified in its charter)

 

Registrant’s telephone number, including area code:  (479) 820-0000

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.01 Par Value

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  x   No  o

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  o   No  x

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 such filing requirements for the past 90 days. Yes  x    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 a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     x    Accelerated filer     o    Non-accelerated filer    o    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o   No  x

The aggregate market value of 102,751,752 shares of the registrant’s $.01 par value common stock held by non-affiliates as of June 30, 2006, was $2.6 billion (based upon $24.91 per share).

As of February 23, 2007, the number of outstanding shares of the registrant’s common stock was 142,889,138.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the Notice and Proxy Statement for the Annual Meeting of the Stockholders, to be held May 2, 2007, are incorporated by reference in Part III of this Form 10-K.

 

J.B. HUNT TRANSPORT SERVICES, INC.

Form 10-K

For The Calendar Year Ended December 31, 2006

Table of Contents

				Page
		PART I
Item 1.		Business		3
Item 1A.		Risk Factors		7
Item 1B.		Unresolved Staff Comments		11
Item 2.		Properties		11
Item 3.		Legal Proceedings		11
Item 4.		Submission of Matters to a Vote of Security Holders		12
		PART II
Item 5.		Market for Registrant’s Common Stock and Related Security Holder Matters		12
Item 6.		Selected Financial Data		14
Item 7.		Management’s Discussion and Analysis of Results of Operations and Financial Condition		16
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk		27
Item 8.		Financial Statements and Supplementary Data		28
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		28
Item 9A.		Controls and Procedures		28
Item 9B.		Other Information		29
		PART III
Item 10.		Directors and Executive Officers of Registrant		29
Item 11.		Executive Compensation		30
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Security Holder Matters		30
Item 13.		Certain Relationships and Related Transactions		30
Item 14.		Principal Accountant Fees and Services		30
		PART IV
Item 15.		Exhibits and Financial Statement Schedules		30
Signatures				31
Index to Consolidated Financial Statements				33

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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 of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.   Forward-looking statements are inherently uncertain, subject to risks, and should be viewed with caution.  These statements are based on our belief or interpretation of information currently available.  Stockholders and prospective investors are cautioned that actual results and future events may differ materially from the forward-looking statements as a result of many factors.  Some of the factors and events that are not within our control and that could have a material impact on future operating results include:  general economic and business conditions, competition and competitive rate fluctuations, cost and availability of diesel fuel, ability to attract and retain qualified drivers, a loss of one or more major customers, interference with or termination of our relationships with certain railroads, insurance costs and availability, claims expense, retention of key employees, terrorist attacks or actions, acts of war, adverse weather conditions, new or different environmental or other laws and regulations, increased costs for new revenue equipment or decreases in the value of used equipment and the ability of revenue equipment manufacturers to perform in accordance with agreements for guaranteed equipment trade-in values.  Current and future changes in fuel prices could result in significant fluctuations of quarterly earnings.

You should understand that many important factors, in addition to those listed above, could impact us financially.  Our operating results may fluctuate as a result of these and other risk factors or events as described in our filings with the SEC.  Some important factors that could cause our actual results to differ from estimates or projections contained in the forward-looking statements are described under “Risk Factors” in Item 1A.  We assume no obligation to update any forward-looking statement to the extent we become aware that it will not be achieved for any reason.

PART I

ITEM 1.   BUSINESS

OVERVIEW

We are one of the largest surface transportation companies in North America.  J.B. Hunt Transport Services, Inc. is a publicly held holding company that, together with our wholly owned subsidiaries and associated companies, provides a wide range of transportation services to a diverse group of customers throughout the continental United States, Canada and Mexico.  Unless otherwise indicated by the context, “we,” “us,” “our” and “JBHT” refer to J.B. Hunt Transport Services, Inc. and its consolidated subsidiaries.  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-load freight, which we directly transport in multi-modal arrangements utilizing our company-owned revenue equipment and company drivers, independent contractors, or third parties.  This full-load freight may be transported entirely by truck over roads and highways, or may be moved, in part, by rail.  We have arrangements with most of the major North American rail carriers to transport freight in containers and trailers.  We also provide customized freight movement, revenue equipment, labor and systems services that are tailored to meet individual customers’ requirements and typically involve long-term contracts.  These arrangements are generally referred to as dedicated services and may include multiple pickups and drops, local and home deliveries, freight handling, specialized equipment and network design.  We also provide integrated capacity and comprehensive transportation services and solutions by utilizing a network of thousands of reliable third-party carriers.  While these unrelated outside carriers at times supplement our dry van, full-load operations, they also provide flatbed, refrigerated, less-than-truckload and other specialized equipment, drivers and services.  In addition, we have a 37% ownership interest in a global transportation logistics company, Transplace, Inc. (TPI).  TPI is co-owned by five large transportation companies and provides supplemental sales, management and freight-movement services through arrangements with a large number of common carriers.

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Our business operations are primarily organized through three distinct, but complementary, business segments.  These segments include intermodal (JBI), dedicated contract services (DCS), and full-load dry-van (JBT).  Our business is somewhat seasonal with slightly higher freight volumes typically experienced during the months of August through early November.  Our DCS segment is subject to less seasonal variation than our JBI and JBT segments.  For the calendar year ended December 31, 2006, our consolidated revenue totaled $3.3 billion, after the elimination of inter-segment business.  Of the total, $1.4 billion, or 42%, was generated by our JBI business segment.  Our JBT segment generated $1.0 billion, or 30%, of total revenue and DCS represented $915 million, or 28%.

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 proxy statement and our earnings releases.  Our website also contains corporate governance guidelines, our code of ethics, our whistleblower policy, committee charters for our Board of Directors and other corporate policies.

OUR MISSION AND STRATEGY

We forge long-term partnerships with key customers that include supply-chain management as an integral part of their strategy.  Working in concert, we drive out cost, add value and function as an extension of our customers’ enterprise.  We believe that our operating strategy can add value to customers and increase our profits and returns to stockholders.

RECENT FOCUS

During the past several years, we have taken significant steps to re-establish a primary focus on the profitability of our three business segments.  In each segment we have implemented capacity management decision making processes that result in the deployment of our assets where we believe they will generate more profit.  We continually focus on replacing 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.

In addition, a continuing shortage of qualified drivers and fundamental changes in shipper supply-chain transportation logistics have resulted in the conversion of freight from traditional random truckload to intermodal and dedicated operations.  We continue to ingrain safety into our corporate culture and conduct all of our operations as safely as possible.

OPERATING SEGMENTS

Segment information is included in Note 13 to our Consolidated Financial Statements.

JBI Segment

The transportation service offerings of our JBI segment utilize arrangements with most major North American rail carriers to provide intermodal freight solutions for our customers throughout the continental United States, Canada and Mexico.  Our JBI segment began operations in 1989 with a unique partnership with the former Santa Fe Railway (now the BNSF Railway Company), a watershed event in the industry and the first agreement that linked major rail and truckload carriers in a joint marketing environment.  Essentially, JBI draws on the intermodal (also known as “container on flatcar”) services of rail carriers for the underlying linehaul movement of its equipment and performs the pickups and deliveries (“drayage”) for customers at the origin and destination rail terminal locations. We may directly provide the drayage service at either the origin or destination rail ramp utilizing our company-owned tractors, or we may purchase these services from third parties.  JBI provides seamless coordination of the rail and over-the-road transport movements for our customers and delivers a 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 nearly 630,000 in 2006.  JBI operates 27,622 company-controlled containers systemwide.  The entire fleet comprises 53-foot, high-cube containers and is designed to take advantage of intermodal double-stack economics and superior ride quality.  JBI also manages a fleet of 1,551 company-owned tractors and 1,946 company drivers in support of intermodal operations.  We also began utilizing independent contractors (ICs) in our intermodal segment during 2005.  We had 23 ICs operating in our JBI business segment at December 31, 2006.  At December 31, 2006, the total JBI employee count was 2,189, including the 1,946 drivers.  Revenue for the JBI segment in calendar year 2006 was $1.43 billion, compared with $1.28 billion in 2005.  As previously announced, an arbitration process with the BNSF Railway Company (BNI) was concluded during the third quarter of 2005.  In accordance with the settlement terms, we paid BNI $25.8 million in the third quarter of 2005.  In addition, this settlement also resulted in higher rail purchase transportation expenses effective October 1, 2005.  Normal commercial business activity continued with BNI during the approximate 15-month arbitration process, and normal business operations have continued since the final settlement.

DCS Segment

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

DCS operations focus on delivering recognizable customer value through best-in-class service, cost control and guaranteed dedicated capacity.  DCS utilizes a proprietary methodology known as Customer Value Delivery® (CVD) to create, measure and communicate value generated for each customer.  DCS leverages the JBHT freight network 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 revenue for calendar year 2006 was $915 million, compared with $844 million in 2005.  In early 2004, we began utilizing ICs in the DCS segment and at December 31, 2006, we had 122 ICs operating in the DCS segment.  At December 31, 2006, the DCS segment operated 5,177 company-controlled and 59 customer-owned tractors and employed 6,242 people, 5,496 of whom were drivers.

JBT Segment

Our primary transportation service offerings classified in this segment include full-load, dry-van freight, which is predominantly transported utilizing company-controlled tractors operating over roads and highways.  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 who agree to transport freight in our trailers.  We also assign freight to be handled by third-party motor carriers other than ICs.  This type of freight movement typically results in our billing the customer for all applicable freight charges and, in turn, paying the third party for their portion of the transportation services provided.  This type of service usually results in our recognition of revenue for the entire billing and the payment to the third-party being classified as purchased transportation expense.

We operate under the approval of 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 substantially all the Canadian provinces, but to date we have served limited points in Canada, primarily through interchange operations with Canadian motor carriers.  In late 2000, we began utilizing ICs in the JBT segment and at December 31, 2006, we had 962 ICs operating in the JBT segment, some of whom were leasing company-controlled tractors.  JBT revenue for calendar year 2006 was $1.01 billion, compared with $1.02 billion in 2005.  At December 31, 2006, the JBT

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segment operated 4,232 company-owned tractors and employed 5,916 people, 4,981 of whom were drivers.  A portion of our JBT segment non-driver employees provide freight solicitation, order entry and other operational support services to our other two segments.  We record inter-segment credits and charges to properly reflect these inter-segment support services.

Logistics Business and Associated Company

Effective July 1, 2000, we contributed an existing logistics segment business to a newly formed company, Transplace, Inc. (TPI).  TPI provides supplemental logistics sales and management support and also has arrangements with approximately 2,700 motor carriers to provide capacity to transport freight.  Our share of TPI’s financial results is included on a one-line, non-operating item included on our Consolidated Statements of Earnings entitled “equity in loss of associated company.”

Operations in Mexico

We have provided transportation services to and from Mexico since 1989.  These services typically involve equipment interchange operations with various Mexican motor carriers.  As previously reported, we sold a joint venture interest with a Mexican transportation company in 2002.  We received all remaining funds due in connection with this sale during 2005.  This transaction did not significantly impact our earnings.  We continue to 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 large number 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 provide a broad range of transportation services to larger shippers that seek to use a limited number of “core” carriers.  Our largest customer in 2006 was Wal-Mart Stores, Inc., which accounted for approximately 14% 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, 2006, we had approximately 17,150 employees, including 12,423 company drivers, 1,175 mechanics and 3,548 office personnel.  We also had arrangements with 1,107 ICs to transport freight in our trailing equipment.  None of our employees is represented by unions or covered by collective bargaining agreements.

Our industry has periodically had a difficult time attracting and retaining enough qualified truck drivers.  It is also common for the driver turnover rate of individual carriers to exceed 100%.  It has been our practice during the past few years to compensate our drivers at an above-average level in order to attract a higher caliber of experience and minimize turnover.  During 2006 and 2005, we increased company driver and IC compensation in order to attract and retain an adequate supply of qualified drivers.  While we have not, to date, experienced significant operational disruptions due to driver shortages, we expect the costs to recruit, train and retain company drivers and ICs will continue to rise in the foreseeable future.

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Revenue Equipment

As of December 31, 2006, we operated 10,961 company-owned tractors.  In addition, our 1,107 ICs operate their own tractors, but transport freight in our trailing equipment.  We operate with standardized tractors in as many fleets as possible, particularly in our JBI and JBT fleets.  Based on our customers’ preferences 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, 2006, the average age of our combined tractor fleet was 2.2 years, our trailers averaged 5.7 years of age and our containers averaged 6.5 years.  We perform routine servicing and preventive maintenance of our equipment at most of our regional terminal facilities.

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

Effective with model-year 2007 tractors, the EPA has mandated lower emission standards for newly manufactured heavy-duty tractor engines.  We are planning our new equipment purchases to accommodate these new standards but allow adequate testing of the new engines.  The 2007 EPA-compliant engines will be equipped with a particulate trap and will require more costly ultra-low-sulfur diesel (ULSD) fuel.  The EPA estimates that ULSD fuel will cost approximately $.04 to $.05 more per gallon.  In 2006, we began testing the 2007 model-year engines in a group of our tractors.  We are unable at this time to determine the increase in acquisition and operating costs of these new 2007 EPA-compliant engines.

Competition and the Industry

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.  We compete with other freight transportation carriers primarily in terms of on-time pickup and delivery service, availability of drivers, and revenue equipment and price.

Regulation

Our operations as a for-hire motor carrier are subject to regulation by the U.S. Department of Transportation (DOT) and the Federal Motor Carrier Safety Administration, 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 October 1, 2005, driver hours-of-service regulations (HOS) were revised.  The majority of these rule changes had initially been effective January 4, 2004.  These collective changes were the most significant changes to driver HOS in more than 40 years.  In general, the new rules require a driver to take at least eight consecutive hours in the sleeper berth during a ten-hour off-duty period.  These new rules primarily affect short-haul and multiple-stop freight operations and had a minor negative impact on our overall operations and financial results.

ITEM 1A.   RISK FACTORS

In addition to the forward-looking statements outlined previously in this Form 10-K and other comments regarding risks and uncertainties, the following risk factors should be carefully considered when evaluating our business.  Our business, financial condition or financial results could be materially

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and adversely affected by any of these risks.  Also note that additional risks not currently identified or known to us could also negatively impact our business or financial results.

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

Our business is dependent upon a number of factors that may have a material adverse effect on the results of our operations, many of which are beyond our control.  These factors include significant increases or rapid fluctuations in fuel prices, excess capacity in the trucking industry, interest rates, fuel taxes, license and registration fees, insurance premiums, self-insurance levels, interference with or termination of our relationships with certain railroads, terrorist attacks or actions, acts of war, adverse weather conditions, increased costs for new revenue equipment or decreases in the value of used equipment, surpluses in the market for used equipment, and difficulty in attracting and retaining qualified drivers and independent contractors.

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

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

Some of these factors include:

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

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

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

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

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

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

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

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

For the calendar year ended December 31, 2006, our top 10 customers, based on revenue, accounted for approximately 40% of our revenue.  Our largest customer is Wal-Mart Stores, Inc., which accounted for approximately 14% of our total revenue in 2006.  Our JBT and JBI segments typically do not have long-term contracts with their customers.  While our DCS segment business may involve a written contract, those contracts may contain cancellation clauses, and there is no assurance that our current customers will continue to utilize our services or that they will continue at the same levels.  A reduction in or termination of our services by one or more of our major customers could have a material adverse effect on our business and operating results.

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

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

Difficulty in attracting and retaining drivers could affect our profitability and ability to grow.

Periodically, the trucking industry experiences substantial difficulty in attracting and retaining qualified drivers, including ICs.  A shortage of qualified company drivers and ICs has proven to be particularly severe during the past few years.  In spite of continued increases in driver compensation and recruiting costs, the industry is currently experiencing a shortage of drivers.  If we are unable to continue attracting an adequate number of drivers or contract with enough independent contractors, we could be required to significantly increase our driver compensation package or let trucks sit idle, which could adversely affect our growth and profitability.

Ongoing insurance and claims expenses could significantly reduce our earnings.

Our future insurance and claims expenses might exceed historical levels, which could reduce our earnings.  During 2005, we self-insured a portion of our claims exposure resulting from cargo loss, personal injury, property damage and health claims for amounts up to the first $2 million for auto accidents and $1 million for workers’ compensation.  During 2006, the self-insured portion of our claims exposure for all claims was reduced to $500,000.  If the number or severity of claims for which we are self-insured increases, our operating results could be adversely affected.  The self-insured portion of our claims will also be $500,000 during 2007.  We purchase insurance coverage for the amounts above which we are self-insured.  Insurance carriers have recently raised premiums for most trucking companies.  As a result, our insurance and claims expenses could increase when our current coverage expires.  If these expenses increase, and we are unable to offset the increase with higher freight rates, our earnings could be materially and adversely affected.

The Internal Revenue Service (IRS) has proposed to disallow the tax benefits associated with certain sale-and-leaseback transactions.

As previously disclosed, the Internal Revenue Service (IRS) has proposed to disallow the tax benefits associated with certain sale-and-leaseback transactions, which we entered into in 1999.  Based on events occurring subsequent to December 31, 2004, we established a reserve for a contingent tax liability of $33.6 million at December 31, 2004.  The liability for this contingency, which includes estimated interest, is included on our Consolidated Balance Sheet at December 31, 2006, as a long-term liability.  We have accrued approximately $3.0 million of interest expense during 2006 related to this contingency.  We

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continue to believe our tax positions comply with applicable tax law for which we received advice and opinions from our then external public accountants and attorneys prior to entering into these transactions, and we continue to vigorously defend against the IRS position using all administrative and legal processes available.  If the IRS were successful in disallowing 100% of the tax benefit from this transaction, the total ultimate impact on liquidity could be approximately $44 million, excluding interest.

Our operations are subject to various environmental laws and regulations, the violation of which could result in substantial fines or penalties.

We are subject to various environmental laws and regulations dealing with the handling of hazardous materials, underground fuel storage tanks, and discharge and retention of storm water.  We operate in industrial areas, where truck terminals and other industrial activities are located, and where groundwater or other forms of environmental contamination have occurred.  Our operations involve the risks of fuel spillage or seepage, environmental damage and hazardous wastes disposal, among others.  We also maintain bulk fuel storage and fuel islands at several of our facilities.  If we are involved in a spill or other accident involving hazardous substances, or if we are found to be in violation of applicable laws or regulations, it could have a material adverse effect on our business and operating results.  If we should fail to comply with applicable environmental regulations, we could be subject to substantial fines or penalties and to civil and criminal liability.

We operate in a regulated industry, and increased direct and indirect costs of compliance with, or liability for violation of, existing or future regulations could have a material adverse effect on our business.

The DOT and various state agencies exercise broad powers over our business, generally governing matters including authorization to engage in motor carrier service, equipment operation, safety and financial reporting.  We are audited periodically by the DOT to ensure that we are in compliance with various safety, hours-of-service, and other rules and regulations.  If we were found to be out of compliance, the DOT could restrict or otherwise impact our operations.

Effective October 1, 2005, driver HOS regulations were revised.  The majority of these rule changes had initially been effective January 4, 2004.  These collective changes were the most significant changes to driver HOS in more than 40 years.  In general, the new rules require a driver to take at least eight consecutive hours in the sleeper berth during a 10-hour off-duty period.  These new rules primarily affect short-haul and multiple-stop freight operations and had a minor negative impact on our overall operations and financial results.

Effective with model-year 2007 tractors, the EPA has mandated lower emission standards for newly manufactured heavy-duty tractor engines.  We are planning our new equipment purchases to accommodate these new standards but also to allow adequate time for testing of the new engines. In 2006, we began testing the 2007 model-year engines in a group of our tractors.  We are unable to predict the impact these new standards will have on our future operations and business results.

Rapid changes in fuel costs could impact our periodic financial results.

Fuel and fuel taxes currently represent our third-largest general expense category.  During the past several years, fuel cost per gallon has varied significantly, with prices at times changing as much as $0.20 to $0.25 per gallon between consecutive months.  We have a fuel surcharge revenue program in place with the majority of our customers, which has historically enabled us to recover the majority of higher fuel costs.  Most of these programs automatically adjust weekly depending on the cost of fuel.  However, there can be timing differences between a change in our fuel cost and the timing of the fuel surcharges billed to our customers.  In addition, we incur additional costs when fuel prices rise that cannot be fully recovered due to our engines being idled during cold or warm weather and empty or out-of-route miles that cannot be billed to customers.  Rapid increases in fuel costs or shortages of fuel could have a material adverse effect on our operations or future profitability.  As of December 31, 2006, we had no derivative financial instruments to reduce our exposure to fuel price fluctuations.

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ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.   PROPERTIES

Our corporate headquarters are in Lowell, Arkansas.  We occupy a number of buildings in Lowell that we utilize for administrative support, data center, primary customer service and freight dispatch.  We maintain a backup data center for disaster recovery, maintenance shop and driver operations facility in Lowell.  In December 2005, we took occupancy of a new, approximately 110,000-square-foot office building that was constructed adjacent to our existing 150,000-square-foot building.  This new building allowed us to reduce the number of occupied buildings in Lowell and consolidate most of our corporate support and centralized operations functions.  We also own or lease other significant facilities where we perform maintenance on our equipment, provide bulk fuel and employ personnel to support operations.  Each of our three business segments utilizes our larger facilities for services including bulk fueling, maintenance and driver support activities.  In addition to our principal properties listed below, we lease a number of small offices and parking yards throughout the country that support our customers’ business needs.

A summary of our principal facilities follows:

Location		Acreage		Maintenance Shop (square feet)		Office Space (square feet)
Atlanta, Georgia		28		29,800		10,400
Cedar Rapids, Iowa		12		28,500		4,500
Chicago, Illinois		27		50,000		14,000
Columbus, Ohio		10		28,100		8,500
Concord, North Carolina		12		22,900		240
Dallas, Texas		14		24,000		7,800
East Brunswick, New Jersey		19		20,000		3,200
Houston, Texas		21		24,700		7,200
Kansas City, Missouri		10		31,000		6,700
Louisville, Kentucky		14		40,000		10,000
Little Rock, Arkansas		24		29,200		7,200
Lowell, Arkansas (corporate headquarters)		59		—		261,000
Lowell, Arkansas		42		50,200		14,000
Lowell, Arkansas (office and data center)		2		—		20,000
Memphis, Tennessee		10		26,700		8,000
Phoenix, Arizona		15		15,200		5,300
Portland, Oregon		8		20,000		3,300
San Bernardino, California		9		18,300		9,300
South Gate, California		12		25,000		5,500
St. Louis, Missouri		7		18,600		1,500
Syracuse, New York		13		19,000		8,000
Tifton, Georgia		10		21,500		250
Wayne, Michigan		24		11,800		8,800

 

ITEM 3.   LEGAL PROCEEDINGS

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

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The Internal Revenue Service (IRS) has proposed to disallow the tax benefits associated with certain sale-and-leaseback transactions.  See “Risk Factors” in Item 1A of this Form 10-K.

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

There were no matters submitted to a vote of our security holders during the quarter ended December 31, 2006.

PART II

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

Our common stock is traded in the over-the-counter market under the symbol “JBHT.”  At December 31, 2006, we were authorized to issue up to 1 billion shares of our common stock and 167.1 million shares were issued.  The high and low sales prices of our common stock as reported by the National Association of Securities Dealers Automated Quotations National Market system (NASDAQ) and our quarterly dividends paid per share on our common shares were:

 

On February 23, 2007, the high and low sales prices for our common stock as reported by the NASDAQ were $28.13 and $27.47, respectively, and we had 1,354 stockholders of record.

Stock Performance Graph

The following graph compares the five-year cumulative total stockholder return for the Company with (1) the S&P 500 Composite Index, (2) a designated Peer Group Index, and (3) an index containing companies within the 4200-4299 SIC codes.  The values on the graph show the cumulative total return on $100 invested at the market close on December 31, 2001, in our common stock, or the specified indices, including the reinvestment of dividends.  We have selected a designated Peer Group Index comprised of 10 specifically named competitors.  We also used data from these same 10 competitors in our discussion of executive compensation in our Notice and Proxy Statement.  The index containing companies within

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the 4200-4299 SIC codes is also presented because we utilized this index in prior years.  The stock performance presented on the following graph is not necessarily indicative of future performance.

		Period Ending December 31,
Index		2001		2002		2003		2004		2005		2006
J.B. Hunt Transport Services, Inc		100.0		126.3		232.8		387.6		395.9		368.5
S&P 500 Index		100.0		77.9		100.2		111.2		116.6		135.0
Peer Group		100.0		111.8		137.3		189.5		204.7		218.7
SIC Codes 4200-4299		100.0		119.3		154.6		217.8		211.9		205.5

 

Dividend Policy

We paid quarterly dividends during calendar year 1999 and in a number of years prior to 1999.  In early 2000, we announced a decision to discontinue dividend payments.  In April 2004, we reinitiated a quarterly cash dividend of $0.015 per share.  This reinitiation was based on our lower debt levels and improving cash flows.  We also paid a cash dividend of $0.015 per share in July and October 2004.  In December 2004, we announced an increase in our quarterly cash dividend from $0.015 to $0.06.  We paid a $0.06 per share dividend in February, April, July and October 2005.  In January 2006, we announced an increase in our quarterly cash dividend from $0.06 to $0.08.  We paid a $0.08 per share dividend in February, April, July, and October 2006.  In January 2007, we announced an increase in our quarterly cash dividend from $0.08 to $0.09, effective with our payment in February 2007.  We currently intend to continue paying cash dividends on a quarterly basis.  However, no assurance can be given that future dividends will be paid, since such payments are dependent on earnings, cash flows and other factors.

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Purchases of Equity Securities

From time to time, our Board of Directors authorizes the purchase of our common stock.  On December 14, 2004, our Board authorized the purchase of up to $100 million worth of our common stock. We commenced purchases of our common stock in January 2005.  On April 21, 2005, our Board authorized the purchase of an additional $500 million of our common stock over the next five years.  There were no purchases of treasury stock during the quarter ended December 31, 2006.  We are authorized to spend an additional $104 million to purchase our common stock through 2010.

Securities Authorized For Issuance Under Equity Compensation Plans

Plan Category(1)		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		10,066,051		$7.56(2)		3,088,484

 

(1)       We have no equity compensation plans that are not approved by security holders.

(2)                      Upon vesting, restricted share units are settled for shares of our common stock on a one-for-one basis.  Accordingly, the restricted share units have been excluded for purposes of computing the weighted-average exercise price.

ITEM 6.   SELECTED FINANCIAL DATA
(Dollars in millions, except per share amounts)

Years Ended December 31		2006			2005			2004			2003			2002
Operating revenues		$	3,328		$	3,128		$	2,786		$	2,434		$	2,248
Operating income (2)		373			344			310			186			101
Net earnings (1) (2)		220			207			146			96			52
Basic earnings per share (1) (2)		1.48			1.32			0.91			0.60			0.34
Diluted earnings per share (1) (2)		1.44			1.28			0.88			0.58			0.33
Cash dividends per share		0.32			0.24			0.045			—			—
Total assets		1,770			1,549			1,503			1,356			1,323
Long-term debt, less current maturities		182			124			—			—			105
Capital lease obligations		—			—			—			—			114
Stockholders’ equity		759			817			861			703			591

 

(1)          Reflects a $33.6 million reserve, including accrued interest expense in 2004, and $7.7 million reversal of non-cash tax benefit in 2003.  See Note 6 of our Notes to Consolidated Financial Statements.

(2)          Reflects a $25.8 million pretax, or a $16.5 million after-tax, charge in 2005 for a BNI arbitration settlement.  See Note 11 of our Notes to Consolidated Financial Statements.

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Percentage of Operating Revenue

Years Ended December 31		2006		2005		2004		2003		2002
Operating revenues		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Operating expenses:
Rents and purchased transportation		33.8		33.8		33.5		32.8		31.1
Salaries, wages and employee benefits		26.8		27.3		29.8		32.5		36.4
Fuel and fuel taxes		13.4		12.4		10.4		9.6		9.4
Depreciation and amortization		5.5		5.2		5.4		6.2		6.5
Operating supplies and expenses		4.4		4.3		4.4		4.9		5.8
Insurance and claims		2.2		1.8		2.0		2.6		2.5
Operating taxes and licenses		1.0		1.2		1.2		1.4		1.4
General and administrative expenses, net of gains		1.0		1.5		1.4		1.4		1.3
Communication and utilities		0.7		0.7		0.8		1.0		1.1
Arbitration settlement (2)		—		0.8		—		—		—
Total operating expenses		88.8		89.0		88.9		92.4		95.5.
Operating income		11.2		11.0		11.1		7.6		4.5
Interest income		—		—		0.1		0.1		0.1
Interest expense		0.5		0.2		0.3		0.8		1.2
Equity in loss of associated companies		0.1		0.2		0.1		—		0.1
Earnings before income taxes		10.6		10.6		10.8		6.9		3.3
Income taxes (1)		4.0		4.0		5.6		3.0		1.0
Net earnings		6.6	%	6.6	%	5.2	%	3.9	%	2.3	%

 

(1)          Reflects a $33.6 million reserve, including accrued interest expense in 2004, and $7.7 million reversal of non-cash tax benefit in 2003.  See Note 6 of our Notes to Consolidated Financial Statements.

(2)          Reflects a $25.8 million pretax, or a $16.5 million after-tax, charge in 2005 for a BNI arbitration settlement.  See Note 11 of our Notes to Consolidated Financial Statements.

The following table sets forth certain operating data.

Years Ended December 31		2006		2005		2004		2003		2002
Total loads		2,914,926		2,866,043		2,883,504		2,857,176		2,847,377
Average number of company-operated tractors during the year		10,721		10,316		10,042		10,293		10,712
Company tractors operated (at year-end)		10,961		10,480		10,151		9,932		10,653
Independent contractors (at year-end)		1,107		1,310		1,301		994		679
Trailers/containers (at year-end)		53,349		49,733		48,317		46,747		45,759
Company tractor miles (in thousands)		964,936		952,545		943,064		943,054		981,818

 

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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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements in accordance with U.S. generally accepted accounting principles 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 liabilities are affected by these estimates.  We evaluate these estimates on an ongoing basis, utilizing historical experience, consultation with third parties 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, accidents and cargo claims.  Most of our 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.  Our policies also include a contractual premium adjustment factor to be applied to incurred loss amounts at the end of 48 months from each policy period inception.  This contractual adjustment factor is used to convert the self-insured losses to fully insured losses and relieves us of any further liability on those claims.  In the fourth quarter of 2006, we increased the estimated accrual of our ultimate losses by $9.2 million to reflect the inclusion of these premium factors as part of the liability we recognize when the accidents occurred rather than in the final year of the self-insurance period.  See Note 2 of our Notes to Consolidated Financial Statements.

The amounts of self-insurance change from time to time based on certain measurement dates and policy expiration dates.  During 2006, we were self-insured for $500,000 of our claims for personal injury, property damage and workers’ compensation.  For the two years ended December 31, 2005, we were self-insured for $2 million of our claims for personal injury and property damage and $1 million for workers’ compensation claims.   For 2007, we maintained our $500,000 self-insured coverage limit.

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 and 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 and includes the contractual premium adjustment factor mentioned above.  In doing so, the recorded liability considers future claims growth, conversion to fully insured status and provides an allowance for incurred-but-not-reported claims.  We do not discount our estimated losses.  At December 31, 2006, we had an accrual of approximately $20 million for estimated net claims.  In addition, we are required to pay certain advanced deposits and monthly premiums.  At December 31, 2006, we had a prepaid insurance asset of approximately $67 million, which represented pre-funded claims and premiums.  We are also substantially self-insured for loss of and damage to our owned and leased revenue equipment.

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Revenue Equipment

We operate a significant number of tractors, trailers and containers in connection with our business.  This equipment may be purchased or acquired under capital or operating lease agreements.  In addition, we may rent revenue equipment from third parties and various railroads under short-term rental arrangements.  Revenue equipment which is purchased is depreciated on the straight-line method over the estimated useful life down to an estimated salvage or trade-in value.  We periodically review the useful lives and salvage values of our revenue equipment and evaluate our long-lived assets for impairment.  We have not identified any impairments to our existing assets.

We have an agreement with our primary tractor supplier for residual or trade-in values for certain new equipment.  We have utilized these trade-in values as well as other operational information, such as anticipated annual miles, in accounting for depreciation expense.  If our tractor supplier were unable to perform under the terms of our agreement for trade-in values, it could have a material negative impact on our financial results.  We had no revenue equipment under capital lease arrangements at December 31, 2006 and 2005.

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.

Our trade accounts receivable includes accounts receivable reduced by an allowance for uncollectible accounts and reserves for revenue adjustments.  The allowance for uncollectible accounts and reserves for revenue adjustments are based on historical experience as well as any known trends or uncertainties related to customer billing and account collectibility.  The adequacy of our allowances and reserves is reviewed quarterly.

Income Taxes

We account for income taxes under the asset-and-liability method in accordance with current accounting standards.  Our deferred tax assets and liabilities represent items that will result in taxable income or a tax deduction in future years for which we have already recorded the related tax expense or benefit in our statement of earnings.  Deferred tax accounts arise as a result of timing differences  between when items are recognized in our Consolidated Financial Statements compared to when they are recognized in our tax returns.  We assess the likelihood that deferred tax assets will be recovered from future taxable income.  To the extent we believe recovery is not probable, a valuation allowance is established. To the extent we establish a valuation allowance, we include an expense as part of our income tax provision.  We have not recorded a valuation allowance at December 31, 2006, as all deferred tax assets are more likely than not to be realized.

Significant judgment is required in determining and assessing the impact of complex tax laws and certain tax-related contingencies on our provision for income taxes.  We establish accruals when, despite our belief that our tax return positions are fully supportable, it is probable that we have incurred a loss related to tax contingencies and the loss or range of loss can be reasonably estimated.  We adjust the accruals related to tax contingencies as part of our provision for income taxes based upon changing facts and circumstances.  A number of years may elapse before a particular matter, for which we have established an accrual, is audited and resolved.  See Note 6, Income Taxes, in our Consolidated Financial Statements, for a discussion of our current tax contingencies.

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YEAR IN REVIEW

Our financial results for calendar year 2006 represented the fifth consecutive year of record revenues and earnings.  Our 2006 net earnings of $220.0 million, or $1.44 per diluted share, were up 6% over the $207.3 million, or $1.28 per diluted share, earned in 2005.  Fuel costs continued to represent a challenge for the transportation industry during 2006.  Our 2006 fuel cost per gallon averaged 13% above 2005 levels.  However, due to our fuel surcharge programs and the support and understanding of our customers, we were able to recover the majority of our higher fuel costs.

Freight demand during 2006 was relatively consistent for our intermodal and dedicated segments.  Demand for dry-van truck capacity was softer, particularly during the fourth quarter of 2006.  Comparisons of 2006 dry-van volumes to 2005 were negatively impacted by hurricane relief shipments in 2005 and lower-than-expected seasonal demand during August through November of 2006.  Our intermodal and dedicated business units contributed to our higher level of profitability in 2006, while our truck segment experienced an approximate 27% decline in operating income as compared to 2005.  Partly in response to changing market conditions, we increased the size of our intermodal and dedicated tractor fleets by 16% and 7%, respectively, and decreased our dry-van fleet by 6%.  We were able to effect some of these changes by merely transferring tractors among our fleets.

We also continued our focus on capacity management during 2006.  Capacity management is a continuous process of reviewing our freight demand on a daily basis and our contractual relationships to determine which business application and segment generates the best returns. We also continually analyze our business to ensure we are charging a fair price for all services that we provide.  In addition to our capacity management actions, the continuing shortage of quality drivers and changes in the shipper supply chain resulted in the conversion of freight from over-the-road truck operations to intermodal and dedicated.

Our 2006 consolidated operating ratio (operating expenses divided by total operating revenues) was 88.8%, compared with 89.0% in 2005.  The current year was the third consecutive time that we have achieved an operating ratio for a full year below 90%.  Our 2006 operating income reflected a $12.4 million pretax charge to increase insurance reserves, and 2005 results included a $25.8 million pretax arbitration charge.  We reinitiated paying a quarterly cash dividend in early 2004 and have increased our dividend to $0.06 in late 2004, $0.08 in late 2005 and to $0.09 in January 2007.  We have continued to purchase shares of our outstanding stock through 2006.  During the current year we purchased $257 million of our common stock and at December 31, 2006, we had $104 million authorized for future purchases.

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RESULTS OF OPERATIONS

The following table sets forth items in our Consolidated Statements of Earnings as a percentage of operating revenues and the percentage increase or decrease of those items as compared with the prior year.

		Percentage of						Percentage Change
		Operating Revenues						Between Years
								2006 vs.		2005 vs.
		2006		2005		2004		2005		2004
Operating revenues		100.0	%	100.0	%	100.0	%	6.4	%	12.3	%
Operating expenses:
Rents and purchased transportation		33.8		33.8		33.5		6.3		13.5
Salaries, wages and employee benefits		26.8		27.3		29.8		4.3		3.0
Fuel and fuel taxes		13.4		12.4		10.4		15.0		34.8
Depreciation and amortization		5.5		5.2		5.4		12.6		8.9
Operating supplies and expenses		4.4		4.3		4.4		9.7		7.0
Insurance and claims		2.2		1.8		2.0		29.5		0.9
Operating taxes and licenses		1.0		1.2		1.2		(3.9	)	2.3
General and administrative expenses, net of gains		1.0		1.5		1.4		(27.7	)	19.4
Communication and utilities		0.7		0.7		0.8		(0.1	)	(1.9	)
Arbitration settlement		—		0.8		—		—		—
Total operating expenses		88.8		89.0		88.9		6.2		12.4
Operating income		11.2		11.0		11.1		8.4		10.9
Net interest expense		0.5		0.2		0.4		172.4		(1.7	)
Equity in loss of associated company		0.1		0.2		0.1		(32.5	)	90.6
Earnings before income taxes		10.6		10.6		10.8		6.2		10.4
Income taxes		4.0		4.0		5.6		6.4		(19.0	)
Net earnings		6.6	%	6.6	%	5.2	%	6.1	%	41.7	%

 

2006 Compared With 2005

Consolidated Operating Revenues

Our total consolidated operating revenues rose to $3.33 billion in 2006, a 6.4% increase over 2005.  Significantly higher fuel prices resulted in FSC revenues of $430 million in 2006, compared with $336 million in 2005.  This FSC revenue impacted our year-to-year comparison.  If FSC revenues were excluded from both years, the increase of 2006 revenue over 2005 was 3.8%.  This increased level of revenue, excluding FSC, was primarily a result of increases in load volume and price improvements as a result of our capacity-management actions.  A 5.1% and 2.2% increase in 2006 JBI and DCS load volume, respectively, contributed to our higher levels of revenue.  The increases in revenue of our JBI and DCS segments were partially offset by decreases in our JBT segment as a result of a smaller tractor fleet and a decline in tractor utilization.

Consolidated Operating Expenses

Our total 2006 consolidated operating expenses increased 6.1% over 2005.  The combination of the 6.4% increase in 2006 revenue over 2005 and this increase in operating expenses resulted in our 2006 operating ratio improving slightly to 88.8% from 89.0% in 2005.  Rents and purchased transportation costs rose 6.3% in 2006, primarily due to additional funds paid to railroads and drayage companies related to JBI growth.  The total cost of salaries, wages and employee benefits increased 4.3% in 2006 over 2005, primarily due to higher levels of driver compensation.

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Fuel and fuel taxes expense was up 15.0% in 2006, primarily due to 12.6% higher fuel cost per gallon and slightly lower fuel miles per gallon.  We have fuel surcharge programs in place with the majority of our customers that allow us to recognize and adjust revenue charges relatively quickly when fuel costs change.  It is not meaningful to compare the amount of FSC revenue or the change of FSC revenue between reporting periods to fuel and fuel taxes expense or the change of fuel expense between periods, as a significant portion of fuel costs is included in our payments to railroads, dray carriers and other third parties.  These payments are classified as purchased transportation expense.  While we are not always able to recover all fuel cost increases, partly due to empty miles run and engine-idling time, we were able to recover the majority of our increased fuel costs.

The 12.6% increase in depreciation and amortization expense was driven by our trailing equipment purchases, higher new-tractor purchase prices, and an approximate 5% increase in the size of our company-owned tractor fleet.  Operating supplies and expenses rose 9.7% in 2006, partly a result of higher tractor maintenance, tires and tolls costs.  A number of states have recently raised their rates for highway and bridge tolls.  The 27.7% decrease in general and administrative expenses reflects driver recruiting and testing costs, legal and professional fees related to our arbitration proceeding, and charitable contributions in 2005 that declined or did not reoccur in 2006.  Also included in the general and administrative expense category, we recognized a $2.9 million net gain on the disposition of assets in 2006, compared with a $1.8 million gain in 2005.  The arbitration settlement expense incurred during 2005 was due to the BNI arbitration decision discussed in the section on Operating Segments.

We accrued approximately $3.0 million of interest expense during 2006 related to an IRS contingency.  Our effective income tax rate was 37.9% in 2006 and 2005.  We expect our effective income tax rate to approximate 38.5% for calendar year 2007, but it may be impacted by the adoption of FIN 48.  We are currently assessing the impact of this pronouncement on our effective tax rate.  See the Recent Accounting Pronouncements section for a discussion of FIN 48.  The “equity in loss of associated company” item on our Consolidated Statement of Earnings reflects our share of the operating results of TPI.

Segments

We operated three business segments during calendar year 2006.  The operation of each of these businesses is described in our notes to the Consolidated Financial Statements.  The following tables summarize financial and operating data by segment.

Operating Revenue by Segment

 

20

 

Operating Income by Segment

(1)JBI 2005 operating income reflects a $25.8 million BNI arbitration settlement charge.

Operating Data By Segment

		For Years Ended December 31
		2006			2005			2004
JBI
Loads		629,533			598,857			581,849
Average length of haul (miles)		1,989			2,010			1,982
Revenue per load		$	2,272		$	2,145		$	1,917
Average tractors (during the period)(1)		1,485			1,259			1,141
Tractors (end of period)
Company-owned		1,551			1,341			1,192
Independent contractor		23			16			—
Total Tractors		1,574			1,357			1,192
Containers (end of period)		27,622			23,755			22,210
Average effective trailing equipment usage(2)		25,219			22,881			21,409
DCS
Loads		1,376,538			1,346,480			1,342,396
Average length of haul (miles)		264			265			262
Revenue per tractor per week(3)		$	3,466		$	3,290		$	3,033
Average tractors (during the period)(1)		5,176			5,012			4,891
Tractors (end of period)