LANDSTAR SYSTEM INC - Quarter Report: 2006 July (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 1, 2006
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to _____________________
Commission File Number: 0-21238
![(landstar)](https://www.sec.gov/Archives/edgar/data/0000853816/000095014406007440/g02611g02611a01.gif)
LANDSTAR SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
06-1313069 (I.R.S. Employer Identification No.) |
13410 Sutton Park Drive South, Jacksonville, Florida
(Address of principal executive offices)
32224
(Zip Code)
(904) 398-9400
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Address of principal executive offices)
32224
(Zip Code)
(904) 398-9400
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 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. (check one)
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 Act).
Yes o No x
The number of shares of the registrants common stock, par value $0.01 per share, outstanding
as of the close of business on July 28, 2006 was 57,623,003.
Index
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EX-31.1 SECTION 302 CEO CERTIFICATION | ||||||||
EX-31.2 SECTION 302 CFO CERTIFICATION | ||||||||
EX-32.1 SECTION 906 CEO CERTIFICATION | ||||||||
EX-32.2 SECTION 906 CFO CERTIFICATION |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
The interim consolidated financial statements contained herein reflect all adjustments (all of
a normal, recurring nature) which, in the opinion of management, are necessary for a fair statement
of the financial condition, results of operations, cash flows and changes in shareholders equity
for the periods presented. They have been prepared in accordance with Rule 10-01 of Regulation S-X
and do not include all the information and footnotes required by generally accepted accounting
principles for complete financial statements. Operating results for the twenty six weeks ended July
1, 2006 are not necessarily indicative of the results that may be expected for the entire fiscal
year ending December 30, 2006.
These interim financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Companys 2005 Annual Report on Form 10-K.
2
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
(Unaudited)
July 1, | Dec 31, | |||||||
2006 | 2005 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 80,815 | $ | 29,398 | ||||
Short-term investments |
21,699 | 20,693 | ||||||
Trade accounts receivable, less allowance of $5,484 and $4,655 |
369,300 | 534,274 | ||||||
Other receivables, including advances to independent contractors,
less allowance of $4,718 and $4,342 |
16,086 | 11,384 | ||||||
Deferred income taxes and other current assets |
29,695 | 21,106 | ||||||
Total current assets |
517,595 | 616,855 | ||||||
Operating property, less accumulated depreciation and amortization
of $72,881 and $68,561 |
88,614 | 89,131 | ||||||
Goodwill |
31,134 | 31,134 | ||||||
Other assets |
32,391 | 28,694 | ||||||
Total assets |
$ | 669,734 | $ | 765,814 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Cash overdraft |
$ | 24,812 | $ | 29,829 | ||||
Accounts payable |
134,284 | 164,509 | ||||||
Current maturities of long-term debt |
13,704 | 12,122 | ||||||
Insurance claims |
27,459 | 27,887 | ||||||
Other current liabilities |
55,268 | 65,149 | ||||||
Total current liabilities |
255,527 | 299,496 | ||||||
Long-term debt, excluding current maturities |
94,625 | 154,851 | ||||||
Insurance claims |
36,417 | 37,840 | ||||||
Deferred income taxes |
17,702 | 17,938 | ||||||
Shareholders Equity |
||||||||
Common stock, $0.01 par value, authorized 160,000,000 shares,
issued 64,666,698 and 64,151,902 |
647 | 642 | ||||||
Additional paid-in capital |
97,365 | 84,532 | ||||||
Retained earnings |
443,420 | 392,549 | ||||||
Cost of 6,573,231 and 5,344,883 shares of common stock in treasury |
(275,864 | ) | (221,776 | ) | ||||
Accumulated other comprehensive loss |
(58 | ) | (211 | ) | ||||
Note receivable arising from exercise of stock options |
(47 | ) | (47 | ) | ||||
Total shareholders equity |
265,463 | 255,689 | ||||||
Total liabilities and shareholders equity |
$ | 669,734 | $ | 765,814 | ||||
See accompanying notes to consolidated financial statements.
3
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
(Unaudited)
Twenty Six Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
July 1, | June 25, | July 1, | June 25, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenue |
$ | 1,253,280 | $ | 1,041,316 | $ | 643,238 | $ | 539,104 | ||||||||
Investment income |
1,252 | 1,235 | 873 | 696 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Purchased transportation |
944,309 | 783,092 | 486,059 | 405,514 | ||||||||||||
Commissions to agents |
97,521 | 82,039 | 50,510 | 42,913 | ||||||||||||
Other operating costs |
22,288 | 16,615 | 10,220 | 7,917 | ||||||||||||
Insurance and claims |
20,574 | 22,904 | 9,022 | 9,779 | ||||||||||||
Selling, general and administrative |
70,924 | 63,851 | 35,088 | 32,036 | ||||||||||||
Depreciation and amortization |
8,050 | 7,928 | 3,957 | 3,966 | ||||||||||||
Total costs and expenses |
1,163,666 | 976,429 | 594,856 | 502,125 | ||||||||||||
Operating income |
90,866 | 66,122 | 49,255 | 37,675 | ||||||||||||
Interest and debt expense |
3,142 | 1,989 | 1,292 | 1,052 | ||||||||||||
Income before income taxes |
87,724 | 64,133 | 47,963 | 36,623 | ||||||||||||
Income taxes |
33,909 | 24,891 | 18,498 | 14,199 | ||||||||||||
Net income |
$ | 53,815 | $ | 39,242 | $ | 29,465 | $ | 22,424 | ||||||||
Earnings per common share |
$ | 0.92 | $ | 0.66 | $ | 0.50 | $ | 0.38 | ||||||||
Diluted earnings per share |
$ | 0.90 | $ | 0.64 | $ | 0.50 | $ | 0.37 | ||||||||
Average number of shares outstanding: |
||||||||||||||||
Earnings per common share |
58,700,000 | 59,878,000 | 58,499,000 | 59,402,000 | ||||||||||||
Diluted earnings per share |
59,665,000 | 61,137,000 | 59,287,000 | 60,421,000 | ||||||||||||
Dividends paid per common share |
$ | 0.050 | $ | 0.025 | ||||||||||||
See accompanying notes to consolidated financial statements.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
(Unaudited)
Twenty Six Weeks Ended | ||||||||
July 1, | June 25, | |||||||
2006 | 2005 | |||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 53,815 | $ | 39,242 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization of operating property |
8,050 | 7,928 | ||||||
Non-cash interest charges |
87 | 87 | ||||||
Provisions for losses on trade and other accounts receivable |
3,287 | 2,884 | ||||||
(Gains) losses on sales and disposals of operating property |
112 | (668 | ) | |||||
Director compensation paid in common stock |
265 | 193 | ||||||
Deferred income taxes, net |
(653 | ) | (2,375 | ) | ||||
Stock-based compensation |
3,297 | 3,028 | ||||||
Changes in operating assets and liabilities: |
||||||||
Decrease in trade and other accounts receivable |
156,985 | 55,705 | ||||||
Increase in other assets |
(9,245 | ) | (9,382 | ) | ||||
Decrease in accounts payable |
(30,225 | ) | (15,504 | ) | ||||
Decrease in other liabilities |
(9,336 | ) | (2,239 | ) | ||||
Increase (decrease) in insurance claims |
(1,851 | ) | 1,261 | |||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
174,588 | 80,160 | ||||||
INVESTING ACTIVITIES |
||||||||
Net change in other short-term investments |
(3,306 | ) | (6,067 | ) | ||||
Sales and maturities of investments |
17,929 | 3,013 | ||||||
Purchases of investments |
(18,094 | ) | (1,309 | ) | ||||
Purchases of operating property |
(1,214 | ) | (1,184 | ) | ||||
Proceeds from sales of operating property |
1,057 | 3,109 | ||||||
NET CASH USED BY INVESTING ACTIVITIES |
(3,628 | ) | (2,438 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Increase (decrease) in cash overdraft |
(5,017 | ) | 1,039 | |||||
Proceeds from repayment of notes receivable arising from exercises of stock
options |
275 | |||||||
Dividends paid |
(2,944 | ) | ||||||
Proceeds from exercises of stock options |
5,975 | 4,018 | ||||||
Excess tax benefit on stock option exercises |
3,269 | 1,233 | ||||||
Borrowings on revolving credit facility |
2,000 | |||||||
Purchases of common stock |
(54,694 | ) | (80,659 | ) | ||||
Principal payments on long-term debt and capital lease obligations |
(66,132 | ) | (5,427 | ) | ||||
NET CASH USED BY FINANCING ACTIVITIES |
(119,543 | ) | (77,521 | ) | ||||
Increase in cash and cash equivalents |
51,417 | 201 | ||||||
Cash and cash equivalents at beginning of period |
29,398 | 61,684 | ||||||
Cash and cash equivalents at end of period |
$ | 80,815 | $ | 61,885 | ||||
See accompanying notes to consolidated financial statements.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
Twenty Six Weeks Ended July 1, 2006
(Dollars in thousands)
(Unaudited)
(Dollars in thousands)
(Unaudited)
Note | ||||||||||||||||||||||||||||||||||||
Receivable | ||||||||||||||||||||||||||||||||||||
Arising | ||||||||||||||||||||||||||||||||||||
Treasury Stock | Accumulated | from | ||||||||||||||||||||||||||||||||||
Common Stock | Add'l | at Cost | Other | Exercise | ||||||||||||||||||||||||||||||||
Paid-In | Retained | Comprehensive | of Stock | |||||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Shares | Amount | Income (Loss) | Options | Total | ||||||||||||||||||||||||||||
Balance December 31, 2005 |
64,151,902 | $ | 642 | $ | 84,532 | $ | 392,549 | 5,344,883 | $ | (221,776 | ) | $ | (211 | ) | $ | (47 | ) | $ | 255,689 | |||||||||||||||||
Net income |
53,815 | 53,815 | ||||||||||||||||||||||||||||||||||
Dividends paid |
(2,944 | ) | (2,944 | ) | ||||||||||||||||||||||||||||||||
Director compensation paid in
common stock |
6,000 | 265 | 265 | |||||||||||||||||||||||||||||||||
Purchases of common stock |
1,242,948 | (54,694 | ) | (54,694 | ) | |||||||||||||||||||||||||||||||
Stock based compensation expense |
3,297 | 3,297 | ||||||||||||||||||||||||||||||||||
Exercises of stock options,
including excess tax benefit |
508,796 | 5 | 9,239 | 9,244 | ||||||||||||||||||||||||||||||||
Incentive compensation paid in
common stock |
32 | (14,600 | ) | 606 | 638 | |||||||||||||||||||||||||||||||
Change in other comprehensive
income on available-for-sale
investments, net of income taxes |
153 | 153 | ||||||||||||||||||||||||||||||||||
Balance July 1, 2006 |
64,666,698 | $ | 647 | $ | 97,365 | $ | 443,420 | 6,573,231 | $ | (275,864 | ) | $ | (58 | ) | $ | (47 | ) | $ | 265,463 | |||||||||||||||||
See accompanying notes to consolidated financial statements.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System, Inc. and its
subsidiary, Landstar System Holdings, Inc., and reflect all adjustments (all of a normal, recurring
nature) which are, in the opinion of management, necessary for a fair statement of the results for
the periods presented. The preparation of the consolidated financial statements requires the use of
managements estimates. Actual results could differ from those estimates. Landstar System, Inc.
and its subsidiary are herein referred to as Landstar or the Company.
(1) Share-Based Payments
Prior to 2006, the Company accounted for share-based payment plans in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25),
and related interpretations. Under APB 25, no stock-based compensation was reflected in net income
from stock options granted as all options granted had an exercise price equal to the fair market
value of the underlying common stock on the date of grant. On January 1, 2006, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 123R (FAS 123R), Share-Based
Payment. The Company adopted FAS 123R using the modified retrospective method. Amounts for prior
year periods have been adjusted to reflect the adoption of FAS 123R.
Retrospective Application
Under the modified retrospective method, compensation cost is recognized in the financial
statements beginning January 1, 2006, based on the requirements of FAS 123R for all share-based
payments granted after that date, and based on the requirements of FAS 123 for all unvested awards
granted prior to the effective date of FAS 123R. In addition, results for prior periods have been
retrospectively adjusted utilizing the pro forma disclosures in those prior financial statements.
The unaudited Balance Sheet as of December 31, 2005, reflects the adoption of FAS 123R as follows:
(1) retained earnings has been reduced by $20,421,000, representing cumulative share-based
compensation expense, net of related income tax benefits, for stock options granted from 1995
through 2005, (2) additional paid-in-capital has been increased by $23,475,000, representing
cumulative share-based compensation expense and reduced by income tax benefits realized excluding
tax benefits in excess of recognized compensation costs (excess tax benefits), for stock options
granted from 1995 through 2005, and (3) deferred tax assets have been increased by $3,054,000
representing the estimated future tax benefits attributable to share-based compensation expense
expected to be realized.
As a result of the FAS 123R retroactive application, for the twenty six and thirteen weeks
ended June 25, 2005, net income was reduced by $2,129,000 and $1,069,000, respectively, and
earnings per common share was reduced by $.04 and $.02 in the twenty six and thirteen weeks ended
June 25, 2005, respectively, and diluted earnings per share was reduced by $.03 and $.02 in the
twenty six and thirteen weeks ended June 25, 2005, respectively.
Prior to the adoption of FAS 123R, under APB 25, the Company was required to record tax
benefits realized from share-based payment arrangements as an operating cash flow. However, FAS
123R requires that excess tax benefits be recorded as a financing cash inflow and corresponding
operating cash outflow. The change in presentation of tax benefits from share-based payment
arrangements results in a decrease in cash from operating activities and an increase in cash from
financing activities of the same amount and does not impact the Companys overall cash position.
The cash flow presentation for the twenty six weeks ended June 25, 2005, has been adjusted to
conform to the current year presentation. In the accompanying unaudited Consolidated Statements of
Cash Flows for the twenty six week periods ended July 1, 2006 and June 25, 2005, the Company
realized tax benefits of $3,269,000 and $1,233,000, respectively, in excess of recognized
compensation cost and reported that amount as a cash outflow from operating activities and a cash
inflow from financing activities.
Share-based payment arrangements
As of July 1, 2006, the Company had two employee stock option plans and one stock option plan
for members of its Board of Directors (the Plans). The Plans have been approved by the Companys
shareholders and are further described below. Amounts recognized in the financial statements with
respect to these Plans are as follows (in thousands):
Twenty Six Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
July 1, | June 25, | July 1, | June 25, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Total cost of share-based payment
plans during the period |
$ | 3,297 | $ | 3,028 | $ | 1,886 | $ | 1,516 | ||||||||
Amount of related income tax benefit
recognized during the period |
1,063 | 899 | 596 | 447 | ||||||||||||
Net cost of share based payment plans
during the period |
$ | 2,234 | $ | 2,129 | $ | 1,290 | $ | 1,069 | ||||||||
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Employee and director stock option plans
Under the 1993 Stock Option Plan, as amended, the Compensation Committee of the Board of
Directors was authorized to grant options to Company employees to purchase up to 4,460,000 shares
of common stock. Under the 2002 Employee Stock Option Plan, the Compensation Committee of the Board
of Directors is authorized to grant options to Company employees to purchase up to 6,400,000
shares of common stock. Under the 1994 Directors Stock Option Plan, as amended (the DSOP),
options to purchase up to 420,000 shares of common stock were authorized to be granted to outside
members of the Board of Directors upon election or re-election to the Board of Directors. Effective
May 15, 2003, no further grants will be made under the DSOP. Also, no further grants will be made
under the 1993 Stock Option Plan as it has expired.
Options granted under the Plans become exercisable in either three or five equal annual
installments commencing on the first anniversary of the date of grant or vest 100% four and
one-half years from the date of grant or 100% on the fifth anniversary from the date of grant,
subject to acceleration in certain circumstances. All options granted under the Plans expire on the
tenth anniversary of the date of grant. Under the Plans, the exercise price of each option equals
the fair market value of the Companys common stock on the date
of grant. As of July 1, 2006, there
were 6,793,016 shares of the Companys common stock reserved for issuance upon exercise of options
granted and to be granted under the Plans.
The fair value of each option grant on its grant date was calculated using the Black-Scholes
option pricing model with the following assumptions for grants made in 2006 and 2005: risk-free
interest rate of 4.75% and 4.5% in 2006 and 2005, respectively, expected lives of 4.5 years and 5
years in 2006 and 2005, respectively, a dividend yield of 0.3% in 2006 and no dividend yield in
2005. The expected volatility used in calculating the fair market value of stock options granted
was 34% and 31% in 2006 and 2005, respectively. The Company utilizes historical data, including
exercise patterns and employee departure behavior, in estimating the term options will be
outstanding. Expected volatility was based on historical volatility and other factors, such as
expected changes in volatility arising from planned changes to the Companys business, if any. The
risk-free interest rate was based on the yield of zero coupon U.S. Treasury bonds for terms that
approximated the term of the options granted.
Under the Directors Stock Compensation Plan, all independent Directors who are elected or
re-elected to the Board will receive 6,000 shares of common stock of the Company, subject to certain restrictions
including restrictions on transfer. During each of the 2006 and 2005 twenty six week periods, 6,000
shares of the Companys common stock were issued to a member of the Board of Directors upon such
members re-election at the 2006 and 2005 annual shareholders meetings. During the twenty six and
thirteen week periods ended July 1, 2006 and June 25, 2005, the Company reported $265,000 and
$193,000, respectively, in compensation expense representing the fair market value of these share
awards.
Summary details for plan stock options
Information regarding the Companys stock options is as follows:
Weighted Average | Weighted Average | |||||||||||||||
Number of | Exercise Price | Remaining Contractual | Aggregate Intrinsic | |||||||||||||
Options | per Share | Term (years) | Value (000s) | |||||||||||||
Options outstanding at December 31, 2005 |
2,794,652 | $ | 19.07 | |||||||||||||
Granted |
630,000 | $ | 43.60 | |||||||||||||
Exercised |
(508,796 | ) | $ | 11.74 | ||||||||||||
Forfeited/expired |
(17,800 | ) | $ | 15.03 | ||||||||||||
Options outstanding at July 1, 2006 |
2,898,056 | $ | 25.71 | 7.5 | $ | 60,700 | ||||||||||
Options exercisable at July 1, 2006 |
1,099,584 | $ | 15.65 | 6.0 | $ | 34,095 | ||||||||||
The weighted average grant date fair value of stock options granted during the twenty six
week periods ended July 1, 2006 and June 25, 2005 was $15.32 and $12.76, respectively.
8
Table of Contents
The total intrinsic value of stock options exercised during the twenty six and thirteen week
periods ended July 1, 2006 was $16,410,000 and $8,189,000, respectively. The total intrinsic value
of stock options exercised during the twenty six and thirteen week periods ended June 25, 2005 was
$11,352,000 and $2,693,000, respectively.
As of July 1, 2006, there was $15,989,000 of total unrecognized compensation cost related to
non-vested stock options granted under the plans. The compensation cost related to these non-vested
options is expected to be recognized over a weighted average period of 2.6 years.
(2) Dividends on Common Stock
On May 31, 2006, the Company paid cash dividends of $0.025 per common share to stockholders of
record on May 10, 2006. On February 28, 2006, the Company paid cash dividends of $0.025 per common
share to stockholders of record on February 14, 2006.
(3) Income Taxes
The provisions for income taxes for the 2006 and 2005 twenty six week periods were based on
estimated full year combined effective income tax rates of approximately 38.7% and 38.8%,
respectively, which are higher than the statutory federal income tax rate primarily as a result of
state income taxes, the meals and entertainment exclusion and non-deductible stock-based
compensation.
(4) Earnings Per Share
Earnings per common share amounts are based on the weighted average number of common shares
outstanding and diluted earnings per share amounts are based on the weighted average number of
common shares outstanding plus the incremental shares that would have been outstanding upon the
assumed exercise of all dilutive stock options.
The following table provides a reconciliation of the average number of common shares
outstanding used to calculate earnings per share to the average number of common shares and common
share equivalents outstanding used in calculating diluted earnings per share (in thousands):
Twenty Six Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
July 1, | June 25, | July 1, | June 25, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Average number
of common shares
outstanding |
58,700 | 59,878 | 58,499 | 59,402 | ||||||||||||
Incremental shares
from assumed
exercises of stock
options |
965 | 1,259 | 788 | 1,019 | ||||||||||||
Average number of
common shares and
common share
equivalents
outstanding |
59,665 | 61,137 | 59,287 | 60,421 | ||||||||||||
For the twenty six and thirteen week periods ended June 25, 2005, there were 470,000 and
495,000, respectively, options outstanding to purchase shares of common stock excluded from the
calculation of diluted earnings per share because they were antidilutive. For the twenty six and
thirteen week periods ended July 1, 2006, there were no such options outstanding.
(5) Additional Cash Flow Information
During the 2006 twenty six week period, Landstar paid income taxes and interest of $34,789,000
and $3,925,000, respectively. During the 2005 twenty six week period, Landstar paid income taxes
and interest of $29,760,000 and $2,221,000, respectively. Landstar acquired operating property by
entering into capital leases in the amount of $7,488,000 and $12,955,000 in the 2006 and 2005
twenty six week periods, respectively.
9
Table of Contents
(6) Segment Information
The following tables summarize information about Landstars reportable business segments as of
and for the twenty six and thirteen week periods ended July 1, 2006 and June 25, 2005 (in
thousands):
Twenty Six Weeks Ended July 1, 2006 | ||||||||||||||||||||
Carrier | Global Logistics | Insurance | Other | Total | ||||||||||||||||
External revenue |
$ | 895,933 | $ | 340,467 | $ | 16,880 | $ | 1,253,280 | ||||||||||||
Investment income |
1,252 | 1,252 | ||||||||||||||||||
Internal revenue |
23,908 | 999 | 16,411 | 41,318 | ||||||||||||||||
Operating income |
88,064 | 17,022 | 15,089 | $ | (29,309 | ) | 90,866 | |||||||||||||
Goodwill |
20,496 | 10,638 | 31,134 | |||||||||||||||||
Total assets |
362,475 | 144,153 | 99,271 | 63,835 | 669,734 |
Twenty Six Weeks Ended June 25, 2005 | ||||||||||||||||||||
Carrier | Global Logistics | Insurance | Other | Total | ||||||||||||||||
External revenue |
$ | 783,521 | $ | 242,588 | $ | 15,207 | $ | 1,041,316 | ||||||||||||
Investment income |
1,235 | 1,235 | ||||||||||||||||||
Internal revenue |
11,640 | 888 | 17,848 | 30,376 | ||||||||||||||||
Operating income |
70,279 | 9,142 | 11,628 | $ | (24,927 | ) | 66,122 | |||||||||||||
Goodwill |
20,496 | 10,638 | 31,134 | |||||||||||||||||
Total assets |
329,230 | 76,178 | 97,352 | 40,623 | 543,383 |
Thirteen Weeks Ended July 1, 2006 | ||||||||||||||||||||
Carrier | Global Logistics | Insurance | Other | Total | ||||||||||||||||
External revenue |
$ | 467,620 | $ | 167,042 | $ | 8,576 | $ | 643,238 | ||||||||||||
Investment income |
873 | 873 | ||||||||||||||||||
Internal revenue |
12,052 | 639 | 10,472 | 23,163 | ||||||||||||||||
Operating income |
47,493 | 8,295 | 8,413 | $ | (14,946 | ) | 49,255 |
Thirteen Weeks Ended June 25, 2005 | ||||||||||||||||||||
Carrier | Global Logistics | Insurance | Other | Total | ||||||||||||||||
External revenue |
$ | 412,478 | $ | 118,892 | $ | 7,734 | $ | 539,104 | ||||||||||||
Investment income |
696 | 696 | ||||||||||||||||||
Internal revenue |
5,756 | 538 | 11,258 | 17,552 | ||||||||||||||||
Operating income |
39,248 | 3,976 | 7,536 | $ | (13,085 | ) | 37,675 |
(7) Comprehensive Income
The following table includes the components of comprehensive income for the twenty six and
thirteen week periods ended July 1, 2006 and June 25, 2005 (in thousands):
Twenty Six Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
July 1, | June 25, | July 1, | June 25, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Net income |
$ | 53,815 | $ | 39,242 | $ | 29,465 | $ | 22,424 | ||||||||
Unrealized holding gains (losses) on available-for-sale investments, net of income taxes |
153 | (109 | ) | 16 | (31 | ) | ||||||||||
Comprehensive income |
$ | 53,968 | $ | 39,133 | $ | 29,481 | $ | 22,393 | ||||||||
Accumulated other comprehensive loss at July 1, 2006 of $58,000 represents the unrealized
holding loss on available-for-sale investments of $90,000, net of income tax benefits of $32,000.
(8) Commitments and Contingencies
As
of July 1, 2006, Landstar had $27,219,000 of letters of credit outstanding under the Companys
revolving credit facility and $42,585,000 of letters of credit
secured by investments held by the
Companys insurance segment. Short-term investments include $19,683,000 in current maturities of
investment grade bonds and $2,016,000 of cash equivalents held by the Companys insurance segment
at July 1, 2006. These short-term investments together with $994,000 of the non-current portion of
investment grade bonds and $21,958,000 of cash equivalents included in other assets at July 1,
2006, provide collateral for the $42,585,000 of letters of credit issued to guarantee payment of
insurance claims.
On November 1, 2002, the Owner Operator Independent Drivers Association, Inc. (OOIDA) and
six individual independent contractors who provide truck capacity to the Company under exclusive
lease arrangements (BCO Independent Contractors and collectively with OOIDA, the Plaintiffs)
filed a putative class action complaint (the Complaint) in the United States District Court for
the Middle District of Florida (the Court) in Jacksonville, Florida, against the Company. The
Complaint alleges that certain aspects of the Companys motor carrier leases with its BCO
Independent Contractors violate certain federal leasing regulations and
seeks injunctive relief, an unspecified amount
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of damages and attorneys fees. Claims are
currently pending against the following Company entities: Landstar Inway, Inc., Landstar Ligon,
Inc. and Landstar Ranger, Inc. (the Defendants). On April 7, 2005, Plaintiffs amended the
Complaint (the Amended Complaint) to include additional allegations with respect to violations of
certain federal leasing regulations. On August 30, 2005, the Court granted a motion by Plaintiffs
to certify the case as a class action.
Discovery is ongoing but substantially complete in the case, which is currently scheduled for
a jury trial in October 2006. The Plaintiffs and the Defendants each have motions for partial
summary judgment pending before the Court, which is expected to rule on these motions prior to or
at trial. On August 4, 2006, the Defendants filed a motion, which is pending, asking that the
Court bifurcate the proceedings such that only common issues of law
would be decided on a classwide basis and any remaining issues of
fact, including whether any class member can prove liability or
damages, would be tried on an individualized basis.
In
May 2006, the Plaintiffs served Defendants with a report,
prepared by their consultant, asserting that as a result
of the alleged violations by the Defendants of the federal leasing regulations, class members
suffered damages, excluding interest, during the period ending April 30, 2006 of approximately $39.1
million in the aggregate (the Plaintiffs Report). The Plaintiffs allege that the damages of the
class members will continue to accrue through the pendency of this litigation and the Amended
Complaint also asserts alternative damage theories, including claims for equitable relief.
The
Defendants had no role in preparing the Plaintiffs Report. In the event that the Court rules
for Defendants on all or a portion of the legal issues raised in the pending motions for summary
judgment or, ultimately, at trial, claims for damages that are the
subject of the Plaintiffs Report
could be eliminated or significantly reduced. In addition, the Defendants believe that they have
meritorious defenses, intend to continue asserting these defenses vigorously and have retained
experts in support of their positions. In this regard, the Defendants have denied that any BCO
Independent Contractor has sustained any damages as a result of the alleged violations of the
federal leasing regulations.
Management believes that if this litigation resulted in a liability up to the amount asserted
in the Plaintiffs Report, such result would not reasonably be expected to have a material adverse
effect on the financial condition of the Company, but could have a material adverse effect on the
Companys results of operations in a given quarter or year. In addition, as a result of decisions
in a separate insurance coverage lawsuit relating to the litigation described immediately above,
the Company believes it is probable that it will recover a significant portion of the
costs, including legal fees, incurred by Defendants in the defense of the litigation. No
assurances can be given with respect to the outcome of any of these matters.
The Company is involved in certain other claims and pending litigation arising from the normal
conduct of business. Based on knowledge of the facts and, in certain cases, opinions of outside
counsel, management believes that adequate provisions have been made for probable losses with
respect to the resolution of all such other claims and pending litigation and that the ultimate
outcome, after provisions thereof, will not have a material adverse effect on the financial
condition of the Company, but could have a material effect on the results of operations in a given
quarter or year.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the attached interim consolidated
financial statements and notes thereto, and with the Companys audited financial statements and
notes thereto for the fiscal year ended December 31, 2005 and Managements Discussion and Analysis
of Financial Condition and Results of Operations included in the 2005 Annual Report on Form 10-K.
Introduction
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (together, referred
to herein as Landstar or the Company), provide transportation services to a variety of market
niches throughout the United States and to a lesser extent in Canada, and between the United States
and Canada, Mexico and other countries through its operating subsidiaries. Landstars business
strategy is to be a non-asset based provider of transportation capacity and logistics services
delivering safe, specialized transportation services globally, utilizing a network of independent
commission sales agents and third party capacity providers. Landstar focuses on providing
transportation services which emphasize safety, customer service and information coordination among
its independent commission sales agents, customers and capacity providers. The Company markets its
services primarily through independent commission sales agents and exclusively utilizes third party
capacity providers to transport customers freight. The nature of the Companys business is such
that a significant portion of its operating costs varies directly with revenue. The Company has
three reportable business segments. These are the carrier, global logistics and insurance segments.
The carrier segment consists of Landstar Ranger, Inc., Landstar Inway, Inc., Landstar Ligon,
Inc., Landstar Gemini, Inc. and Landstar Carrier Services, Inc. The carrier segment primarily
provides transportation services to the truckload market for a wide range of general commodities
over irregular or non-repetitive routes utilizing dry and specialty vans and unsided trailers,
including flatbed,
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drop deck and specialty. It also provides short-to-long haul movement of containers by truck,
dedicated power-only truck capacity and truck brokerage. The carrier segment markets its services
primarily through independent commission sales agents and utilizes independent contractors who
provide truck capacity to the Company under exclusive lease arrangements (the Business Capacity
Owner Independent Contractors or BCO Independent Contractors) and other third party truck
capacity providers under non-exclusive contractual arrangements (Truck Brokerage Carriers).
The global logistics segment is comprised of Landstar Global Logistics, Inc. and its
subsidiaries, Landstar Logistics, Inc. and Landstar Express America, Inc. Transportation and
logistics services provided by the global logistics segment include the arrangement of multimodal
(ground, air, ocean and rail) moves, contract logistics, truck brokerage, emergency and expedited
ground, air and ocean freight and buses. The global logistics segment markets its services
primarily through independent commission sales agents and utilizes capacity provided by BCO
Independent Contractors and other third party capacity providers, including Truck Brokerage
Carriers, railroads, air and ocean cargo carriers and bus providers.
The insurance segment is comprised of Signature Insurance Company (Signature), a
wholly-owned offshore insurance subsidiary, and Risk Management Claim Services, Inc. The insurance
segment provides risk and claims management services to Landstars operating subsidiaries. In
addition, it reinsures certain risks of the Companys BCO Independent Contractors and provides
certain property and casualty insurance directly to Landstars operating subsidiaries.
Changes in Financial Condition and Results of Operations
Management believes the Companys success principally depends on its ability to generate
freight through its network of independent commission sales agents and to efficiently deliver that
freight utilizing third party capacity providers. Management believes the most significant factors
to the Companys success include increasing revenue, sourcing capacity and controlling costs.
While customer demand, which is subject to overall economic conditions, ultimately drives
increases or decreases in revenue, the Company primarily relies on its independent commission sales
agents to establish customer relationships and generate revenue opportunities. Managements primary
focus with respect to revenue growth is revenue generated by independent commission sales agents
who on an annual basis generate $1 million or more of Landstar revenue (Million Dollar Agents).
Management believes future revenue growth is primarily dependent on its ability to increase both
the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a
combination of recruiting new agents and increasing the revenue opportunities generated by existing
independent commission sales agents. During the 2005 fiscal year, 466 independent commission sales agents generated $1 million or
more of Landstars revenue and thus qualified as Million Dollar Agents. During the 2005 fiscal
year, the average revenue generated by a Million Dollar Agent was $5,063,000 and revenue generated
by Million Dollar Agents in the aggregate represented 94% of
consolidated Landstar revenue. As of July 1, 2006 and June 25, 2005, the Company had a
network of 1,249 and 1,106 independent commission sales agent locations, respectively.
Management monitors business activity by tracking the number of loads (volume) and revenue per
load generated by the carrier and global logistics segments. In addition, management tracks
revenue per revenue mile, average length of haul and total revenue miles at the carrier segment.
Revenue per revenue mile and revenue per load (collectively, price) as well as the number of loads,
can be influenced by many factors which do not necessarily indicate a change in price or volume.
Those factors include the average length of haul, freight type, special handling and equipment
requirements and delivery time requirements. The following table summarizes this data by
reportable segment:
Twenty Six Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
July 1, | June 25, | July 1, | June 25, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Carrier Segment: |
||||||||||||||||
External revenue generated through (in thousands): |
||||||||||||||||
BCO Independent Contractors |
$ | 640,596 | $ | 599,222 | $ | 336,803 | $ | 316,547 | ||||||||
Truck Brokerage Carriers |
255,337 | 184,299 | 130,817 | 95,931 | ||||||||||||
$ | 895,933 | $ | 783,521 | $ | 467,620 | $ | 412,478 | |||||||||
Revenue per revenue mile |
$ | 2.00 | $ | 1.81 | $ | 2.01 | $ | 1.82 | ||||||||
Revenue per load |
$ | 1,594 | $ | 1,454 | $ | 1,607 | $ | 1,463 | ||||||||
Average length of haul (miles) |
797 | 802 | 800 | 802 | ||||||||||||
Number of loads |
562,000 | 539,000 | 291,000 | 282,000 | ||||||||||||
Global Logistics Segment: |
||||||||||||||||
External revenue generated through (in thousands): |
||||||||||||||||
BCO Independent Contractors (1) |
$ | 47,163 | $ | 35,335 | $ | 22,331 | $ | 17,497 | ||||||||
Truck Brokerage Carriers |
198,301 | 154,665 | 97,674 | 75,584 | ||||||||||||
Rail, air, ocean and bus carriers (2) |
95,003 | 52,588 | 47,037 | 25,811 | ||||||||||||
$ | 340,467 | $ | 242,588 | $ | 167,042 | $ | 118,892 | |||||||||
Revenue per load (3) |
$ | 1,504 | $ | 1,484 | $ | 1,507 | $ | 1,431 | ||||||||
Number of loads (3) |
189,000 | 158,000 | 97,000 | 82,000 |
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(1) | Includes revenue from freight hauled by carrier segment BCO Independent Contractors for global logistics customers. | |
(2) | Included in the 2006 twenty six and thirteen week periods was $19,438,000 and $8,582,000, respectively, of revenue attributable to buses provided under contract between Landstar Express America, Inc. and the United States Department of Transportation/Federal Aviation Administration (the FAA). | |
(3) | Number of loads and revenue per load in the twenty six and thirteen week periods ended July 1, 2006, exclude the effect of $56,297,000 and $20,848,000, respectively, of revenue derived from transportation services provided under the FAA contract. Number of loads and revenue per load in the twenty six and thirteen week periods ended June 25, 2005, exclude the effect of $8,075,000 and $775,000, respectively, of revenue derived under the FAA contract. See Use of Non-GAAP Financial Measures. |
Also critical to the Companys success is its ability to secure capacity, particularly truck
capacity, at rates that allow the Company to profitably transport customers freight. The
following table summarizes available truck capacity:
July 1, 2006 | June 25, 2005 | |||||||
BCO Independent Contractors |
8,347 | 7,840 | ||||||
Truck Brokerage Carriers: |
||||||||
Approved and active (1) |
14,034 | 12,458 | ||||||
Other approved |
7,977 | 7,605 | ||||||
22,011 | 20,063 | |||||||
Total available truck capacity providers |
30,358 | 27,903 | ||||||
Number of trucks provided
by BCO Independent Contractors |
9,047 | 8,609 | ||||||
(1) | Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal quarter end. |
Historically, the Companys carrier segment has primarily relied on capacity provided by BCO
Independent Contractors. Pursuant to a continuing plan to augment its available capacity and
increase its revenue, the Company has been increasing the carrier segments use of capacity
provided by Truck Brokerage Carriers. The percent of consolidated revenue generated through all
Truck Brokerage Carriers was 36.2% during the twenty six week period ended July 1, 2006 and 32.6%
during the twenty six week period ended June 25, 2005.
The Company incurs costs that are directly related to the transportation of freight that
include purchased transportation and commissions to agents. The Company incurs indirect costs
associated with the transportation of freight that include other operating costs and insurance and
claims. In addition, the Company incurs selling, general and administrative costs essential to
administering its business operations. Management continually monitors all components of the costs
incurred by the Company and establishes annual cost budgets which, in general, are used to
benchmark costs incurred on a monthly basis.
Purchased transportation represents the amount a BCO Independent Contractor or other third
party capacity provider is paid to haul freight. The amount of purchased transportation paid to a
BCO Independent Contractor is primarily based on a contractually agreed-upon percentage of revenue
generated by the haul. Purchased transportation for the brokerage services operations of the
carrier segment is based on a negotiated rate for each load hauled. Purchased transportation for
the brokerage services operations of the global logistics segment is based on either a negotiated
rate for each load hauled or a contractually agreed-upon rate. Purchased transportation for the
rail intermodal, air and ocean freight operations of the global logistics segment is based on a
contractually agreed-upon fixed rate. Purchased transportation for bus services is based upon a
negotiated rate per mile or per day. Purchased transportation as a percentage of revenue for truck
brokerage services, rail intermodal and bus operations is normally higher than that of Landstars
other transportation operations. Purchased transportation is the largest component of costs and
expenses and, on a consolidated basis, increases or decreases in proportion to the revenue
generated through BCO Independent Contractors, other third party capacity providers and revenue
from the insurance segment.
Commissions to agents are based on contractually agreed-upon percentages of revenue or gross
profit, defined as revenue less the cost of purchased transportation, at the carrier segment and of
gross profit at the global logistics segment. Commissions to agents as a
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percentage of consolidated revenue will vary directly with fluctuations in the percentage of
consolidated revenue generated by the carrier segment, the global logistics segment and the
insurance segment and with changes in gross profit at the global logistics segment and the truck
brokerage operations of the carrier segment.
Trailing equipment rent, maintenance costs for trailing equipment, BCO Independent Contractor
recruiting costs and bad debts from BCO Independent Contractors and independent commission sales
agents are the largest components of other operating costs.
Potential liability associated with accidents in the trucking industry is severe and
occurrences are unpredictable. Landstars retained liability for individual commercial trucking
claims depends on when such claims are incurred. For commercial trucking claims incurred prior to
June 19, 2003 and subsequent to March 30, 2004, Landstar retains liability up to $5,000,000 per
occurrence. For commercial trucking claims incurred from June 19, 2003 through March 30, 2004,
Landstar retains liability up to $10,000,000 per occurrence. The Company also retains liability for
each general liability claim up to $1,000,000, $250,000 for each workers compensation claim and
$250,000 for each cargo claim. The Companys exposure to liability associated with accidents
incurred by other third party capacity providers who haul freight on behalf of the Company is
reduced by various factors including the extent to which they maintain their own insurance
coverage. A material increase in the frequency or severity of accidents, cargo or workers
compensation claims or the unfavorable development of existing claims could be expected to
materially adversely affect Landstars results of operations.
Employee compensation and benefits account for over half of the Companys selling, general and
administrative costs.
Depreciation and amortization primarily relate to depreciation of trailing equipment and
management information services equipment.
Prior to 2006, the Company accounted for stock-based payment plans in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25),
and related interpretations. Under APB 25, no stock-based compensation was reflected in net income
from stock options granted as all options granted had an exercise price equal to the fair market
value of the underlying common stock on the date of grant. On January 1, 2006, the Company adopted
the provisions of Statement of Financial Accounting Standards No. 123R (FAS 123R), Share-Based
Payment. The Company adopted FAS 123R using the modified retrospective method. Amounts for prior
periods have been adjusted to reflect the adoption of FAS 123R.
The following table sets forth the percentage relationships of income and expense items to
revenue for the periods indicated:
Twenty Six Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
July 1, | June 25, | July 1, | June 25, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Investment income |
0.1 | 0.1 | 0.1 | 0.1 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Purchased transportation |
75.3 | 75.2 | 75.6 | 75.2 | ||||||||||||
Commissions to agents |
7.8 | 7.9 | 7.8 | 8.0 | ||||||||||||
Other operating costs |
1.8 | 1.6 | 1.6 | 1.5 | ||||||||||||
Insurance and claims |
1.6 | 2.2 | 1.4 | 1.8 | ||||||||||||
Selling, general and administrative |
5.7 | 6.1 | 5.4 | 5.9 | ||||||||||||
Depreciation and amortization |
0.6 | 0.7 | 0.6 | 0.7 | ||||||||||||
Total costs and expenses |
92.8 | 93.7 | 92.4 | 93.1 | ||||||||||||
Operating income |
7.3 | 6.4 | 7.7 | 7.0 | ||||||||||||
Interest and debt expense |
0.3 | 0.2 | 0.2 | 0.2 | ||||||||||||
Income before income taxes |
7.0 | 6.2 | 7.5 | 6.8 | ||||||||||||
Income taxes |
2.7 | 2.4 | 2.9 | 2.6 | ||||||||||||
Net income |
4.3 | % | 3.8 | % | 4.6 | % | 4.2 | % | ||||||||
TWENTY SIX WEEKS ENDED JULY 1, 2006 COMPARED TO TWENTY SIX WEEKS ENDED JUNE 25, 2005
Revenue for the 2006 twenty six week period was $1,253,280,000, an increase of $211,964,000,
or 20.4%, over the 2005 twenty six week period. The increase was attributable to increased revenue
of $112,412,000, $97,879,000 and $1,673,000 at the carrier, global logistics and insurance
segments, respectively. With respect to the carrier segment, revenue per load increased
approximately 10% in the 2006 twenty six week period while the number of loads delivered in the
2006 twenty six week period increased approximately 4%. The average length of haul per load at the
carrier segment decreased approximately 1%, however, revenue per revenue mile increased
approximately 10%. Included in revenue at the global logistics segment for the 2006 and 2005 twenty
six week
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periods was $56,297,000 and $8,075,000, respectively, of revenue related to disaster relief
efforts for the storms that impacted the United States. These disaster relief transportation
services were provided primarily under a contract between Landstar Express America, Inc. and the
United States Federal Aviation Administration (the FAA). Excluding the number of loads and
revenue related to disaster relief efforts provided by the global logistics segment, the number of
loads delivered by the global logistics segment in the 2006 twenty six week period increased
approximately 20% and revenue per load increased approximately 1% over the 2005 period.
Investment income at the insurance segment was $1,252,000 and $1,235,000 in the 2006 and 2005
periods, respectively. The increase in investment income was primarily due to an increased rate of
return, attributable to a general increase in interest rates, on investments held by the insurance
segment, partially offset by a lower average investment balance.
Purchased transportation was 75.3% and 75.2% of revenue in 2006 and 2005, respectively. The
increase in purchased transportation as a percentage of revenue was primarily attributable to
increased truck brokerage and rail intermodal revenue, which tend to have a higher cost of
purchased transportation, partially offset by increased revenue provided under the FAA contract in
2006, which tends to have a lower cost of purchased transportation. Commissions to agents were 7.8%
and 7.9% of revenue in 2006 and 2005, respectively. The decrease in commissions to agents as a
percentage of revenue was primarily attributable to increased revenue provided under the FAA
contract which tends to have a lower cost of commissions to agents. Other operating costs were 1.8%
and 1.6% of revenue in 2006 and 2005, respectively. The increase in other operating costs as a
percentage of revenue was primarily attributable to trailer rental costs incurred in support of
disaster relief services provided under the FAA contract, partially offset by reduced trailer rent
and maintenance costs, as a result of the Companys on going effort to reduce the cost of Company
provided trailing equipment. Insurance and claims were 1.6% of revenue in 2006 compared with 2.2%
of revenue in 2005. The decrease in insurance and claims as a percentage of revenue was primarily
attributable to a lower frequency of trucking accidents, favorable development of prior year claims
and an increase in truck brokerage and rail intermodal revenue, which tend to have a lower claims
risk profile compared to revenue generated through BCO Independent Contractors. Selling, general
and administrative costs were 5.7% of revenue in 2006 compared with 6.1% of revenue in 2005. The
decrease in selling, general and administrative costs as a percentage of revenue was primarily
attributable to the effect of increased revenue, partially offset by an increased provision for
bonuses under the Companys incentive compensation plans and an increased provision for customer
bad debt. Depreciation and amortization was 0.6% and 0.7% of revenue in 2006 and 2005,
respectively. The decrease in depreciation and amortization as a percentage of revenue was
primarily attributable to the effect of increased revenue.
Interest and debt expense was 0.3% and 0.2% of revenue in 2006 and 2005. The increase in
interest and debt expense as a percentage of revenue was primarily attributable to increased
interest rates and increased borrowings under the Companys revolving credit facility which were
used to finance a portion of the 2005 fiscal year end receivable from the FAA.
The provisions for income taxes for the 2006 and 2005 twenty six week periods were based on
estimated full year combined effective income tax rates of approximately 38.7% and 38.8%,
respectively, which are higher than the statutory federal income tax rate primarily as a result of
state income taxes, the meals and entertainment exclusion and non-deductible stock compensation
expense.
Net income was $53,815,000, or $0.92 per common share ($0.90 per diluted share), for the
twenty six week period ended July 1, 2006, which included approximately $7,615,000 of operating
income related to the $56,297,000 of revenue attributable to disaster relief services provided
primarily under the FAA contract. The $7,615,000 of operating income, net of related income taxes,
increased net income by $4,690,000, or $0.08 per common share ($0.08 per diluted share). Net income
was $39,242,000, or $0.66 per common share ($0.64 per diluted share), for the twenty six week
period ended June 25, 2005, which included approximately $1,505,000 of operating income related to
the $8,075,000 of revenue attributable to disaster relief services provided primarily under the FAA
contract. The $1,505,000 of operating income, net of related income taxes, increased net income by
$927,000, or $0.02 per common share ($0.02 per diluted share). The 2006 and 2005 twenty six week
periods included stock compensation expense of $3,297,000 and $3,028,000, respectively, or
$2,234,000 and $2,129,000, respectively, net of related income tax benefits. Stock compensation
expense reduced earnings per common share $0.04 ($0.04 per diluted share) and $0.04 ($0.03 per
diluted share), respectively, in the 2006 and 2005 twenty six week periods.
THIRTEEN WEEKS ENDED JULY 1, 2006 COMPARED TO THIRTEEN WEEKS ENDED JUNE 25, 2005
Revenue for the 2006 thirteen week period was $643,238,000, an increase of $104,134,000, or
19.3%, compared to the 2005 thirteen week period. The increase was attributable to increased
revenue of $55,142,000, $48,150,000 and $842,000 at the carrier, global logistics and insurance
segments, respectively. With respect to the carrier segment, revenue per load increased
approximately 10% in the 2006 thirteen week period while the number of loads delivered in the 2006
thirteen week period increased approximately 3%. The average length of haul per load at the carrier
segment remained approximately the same compared to prior year, however, revenue per revenue mile
increased approximately 10%. Included in revenue at the global
logistics segment in the 2006 thirteen week period was $20,848,000 of
revenue related to disaster relief efforts for the storms that
impacted the United States. Excluding the number of loads and revenue related to disaster relief
efforts provided by the global logistics segment in the 2006 thirteen week period, the number of
loads delivered by the global logistics segment in the 2006 thirteen week period increased
approximately 18% and revenue per load increased approximately 5% over the 2005 period.
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Investment income at the insurance segment was $873,000 and $696,000 in the 2006 and 2005
periods, respectively. The increase in investment income was primarily due to an increased rate of
return, attributable to a general increase in interest rates, on investments held by the insurance
segment, partially offset by a lower average investment balance.
Purchased transportation was 75.6% and 75.2% of revenue in 2006 and 2005, respectively. The
increase in purchased transportation as a percentage of revenue was primarily attributable to
increased truck brokerage and rail intermodal revenue, which tend to have a higher cost of
purchased transportation, partially offset by increased revenue provided under the FAA contract in
2006, which tends to have a lower cost of purchased transportation, and lower rates paid to Truck
Broker Carriers for non-FAA related revenue. Commissions to agents were 7.8% of revenue in 2006 and
8.0% in 2005. The decrease in commissions to agents as a percentage of revenue compared to prior
year was primarily attributable to increased revenue provided for disaster relief services under
the FAA contract, which tends to have a lower cost of commissions to
agents. Other operating costs were 1.6% and 1.5%
of revenue in 2006 and 2005, respectively. The increase in other operating costs as a percentage of
revenue was primarily attributable to trailer rental costs incurred in support of disaster relief
services under the FAA contract, partially offset by reduced trailer rent and maintenance costs.
Insurance and claims were 1.4% of revenue in 2006 compared with 1.8% of revenue in 2005. The
decrease in insurance and claims as a percentage of revenue was primarily attributable to a lower
frequency of trucking accidents, favorable development of prior year claims and an increase in
truck brokerage and rail intermodal revenue, which tend to have a lower claims risk profile
compared to revenue generated through BCO Independent Contractors. Selling, general and
administrative costs were 5.4% of revenue in 2006 compared with 5.9% of revenue in 2005. The
decrease in selling, general and administrative costs as a percentage of revenue was primarily
attributable to the effect of increased revenue. Depreciation and amortization was 0.6% and 0.7% of
revenue in 2006 and 2005, respectively. The decrease in depreciation and amortization as a
percentage of revenue was primarily attributable to the effect of increased revenue.
Interest and debt expense was 0.2% of revenue in both 2006 and 2005.
The provisions for income taxes for the 2006 and 2005 thirteen week periods were based on
estimated full year combined effective income tax rates of approximately 38.6% and 38.8%,
respectively, which are higher than the statutory federal income tax rate primarily as a result of
state income taxes, the meals and entertainment exclusion and non-deductible stock compensation
expense.
Net income was $29,465,000, or $0.50 per common share ($0.50 per diluted share), in the 2006
thirteen week period, which included approximately $2,606,000 of operating income related to the
$20,848,000 of revenue attributable to disaster relief services provided primarily under the FAA
contract. The $2,606,000 of operating income, net of related income taxes, increased net income by
$1,605,000, or $0.03 per common share ($0.03 per diluted share). Net income was $22,424,000, or
$0.38 per common share ($0.37 per diluted share), in the 2005 thirteen week period. The 2006 and
2005 thirteen week periods included stock compensation expense of $1,886,000 and $1,516,000,
respectively, or $1,290,000 and $1,069,000, respectively, net of related income tax benefits. Stock
compensation expense reduced earnings per common share $0.02 ($0.02 per diluted share) and $0.02
($0.02 per diluted share), respectively, in the 2006 and 2005 thirteen week periods.
USE OF NON-GAAP FINANCIAL MEASURES
In this quarterly report on Form 10-Q, Landstar provided the following information that may be
deemed non-GAAP financial measures: (1) revenue per load for the global logistics segment excluding
revenue and loads related to disaster relief transportation services provided primarily under a
contract with the FAA and (2) the percentage change in revenue per load for the global logistics
segment excluding revenue and loads related to disaster relief transportation services provided
primarily under a contract with the FAA as compared to revenue per load for the global logistics
segment for the corresponding prior year period. This financial information should be considered in
addition to, and not as a substitute for, the corresponding GAAP financial information also
presented in this Form 10-Q.
Management believes that it is appropriate to present this financial information for the
following reasons: (1) a significant portion of the disaster relief transportation services were
provided under the FAA contract on the basis of a daily rate for the use of transportation
equipment in question, and therefore load and per load information is not necessarily available or
appropriate for a significant portion of the related revenue, (2) disclosure of the effect of the
transportation services provided by Landstar relating to disaster relief efforts for the storms
that impacted the United States will allow investors to better understand the underlying trends in
Landstars financial condition and results of operations, (3) this information will facilitate
comparisons by investors of Landstars results as compared to the results of peer companies and (4)
management considers this financial information in its decision making.
CAPITAL RESOURCES AND LIQUIDITY
Shareholders equity was $265,463,000 at July 1, 2006, compared to $255,689,000 at December
31, 2005. The increase in shareholders equity was primarily a result of net income for the period
and exercises of stock options, partially offset by the purchase
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of 1,242,948 shares of the Companys common stock at a total cost of $54,694,000. At July 1,
2006, the Company may purchase up to an additional 1,282,279 shares of its common stock under its
authorized stock purchase programs. Shareholders equity was 71% of total capitalization (defined
as total debt plus equity) at July 1, 2006 compared to 60% at December 31, 2005.
Long-term debt including current maturities was $108,329,000 at July 1, 2006, $58,644,000
lower than at December 31, 2005, primarily as a result of
repayment of a portion of the borrowings under the Companys
senior credit facility using proceeds from the collection of a vast majority of the
$215,250,000 December 31, 2005 receivable from the FAA during the twenty six week period ended July
1, 2006.
Working capital and the ratio of current assets to current liabilities were $262,068,000 and
2.0 to 1, respectively, at July 1, 2006, compared with $317,359,000 and 2.1 to 1, respectively, at
December 31, 2005. Landstar has historically operated with current ratios within the range of 1.5
to 1 to 2.0 to 1. Cash provided by operating activities was $174,588,000 in the 2006 twenty six
week period compared with $80,160,000 in the 2005 twenty six week period. The increase in cash flow
provided by operating activities was primarily attributable to the timing of collections of trade
accounts receivable, including the vast majority of the 2005 fiscal year end receivable from the
FAA for disaster relief transportation services provided during the later half of fiscal 2005, and
increased earnings.
On July 8, 2004, Landstar renegotiated its existing credit agreement with a syndicate of banks
and JPMorgan Chase Bank, as administrative agent (the Fourth Amended and Restated Credit
Agreement). The Fourth Amended and Restated Credit Agreement provides $225,000,000 of borrowing
capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the
form of letter of credit guarantees.
At July 1, 2006, the Company had $60,000,000 in borrowings outstanding and $27,219,000 of
letters of credit outstanding under the Fourth Amended and Restated Credit Agreement. At July 1,
2006, there was $137,781,000 available for future borrowings under the Companys Fourth Amended and
Restated Credit Agreement. In addition, the Company has $42,585,000 in letters of credit
outstanding, as collateral for insurance claims, that are secured by investments and cash
equivalents totaling $44,651,000.
On April 20, 2006, Landstar System, Inc. announced that its Board of Directors declared a cash
dividend of $0.025 per share with respect to its outstanding shares of common stock. The
distribution date for this cash dividend was on May 31, 2006, to stockholders of record on May 10,
2006. On February 2, 2006, the Company announced that its Board of Directors declared a cash
dividend of $0.025 per share with respect to its outstanding shares of common stock. The
distribution date for this cash dividend was on February 28, 2006, to stockholders of record on
February 14, 2006. It is the intention of the Board of Directors to pay a quarterly dividend going
forward.
Historically, the Company has generated sufficient operating cash flow to meet its debt
service requirements, fund continued growth, both internal and through acquisitions, pay dividends
and to meet working capital needs. As a non-asset based provider of transportation capacity and
logistics services, the Companys annual capital requirements for operating property are generally
for trailers and management information services equipment. In addition, a significant portion of
the trailing equipment used by the Company is provided by third party capacity providers and
through leases at rental rates that vary with the revenue generated through the use of the leased
equipment, thereby reducing the Companys capital requirements. During the 2006 twenty six week
period, the Company purchased $1,214,000 of operating property and acquired $7,488,000 worth of
trailing equipment by entering into capital leases. Landstar anticipates acquiring approximately
$35,000,000 of operating property during the remainder of the 2006 fiscal year either by purchase
or by lease financing. It is expected that capital leases will fund any significant acquisitions of
Company provided trailing equipment made during the remainder of 2006.
Management believes that cash flow from operations combined with the Companys borrowing
capacity under the Fourth Amended and Restated Credit Agreement will be adequate to meet Landstars
debt service requirements, fund continued growth, both internal and through acquisitions, pay
dividends, complete the authorized share purchase programs and meet working capital needs.
LEGAL MATTERS
On November 1, 2002, the Owner Operator Independent Drivers Association, Inc. (OOIDA) and
six individual independent contractors who provide truck capacity to the Company under exclusive
lease arrangements (BCO Independent Contractors and collectively with OOIDA, the Plaintiffs)
filed a putative class action complaint (the Complaint) in the United States District Court for
the Middle District of Florida (the Court) in Jacksonville, Florida, against the Company. The
Complaint alleges that certain aspects of the Companys motor carrier leases with its BCO
Independent Contractors violate certain federal leasing regulations and seeks injunctive relief, an
unspecified amount of damages and attorneys fees. Claims are currently pending against the
following Company entities: Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc.
(the Defendants). On April 7, 2005, Plaintiffs amended the Complaint (the Amended Complaint) to
include additional allegations with respect to violations of certain federal leasing regulations.
On August 30, 2005, the Court granted a motion by Plaintiffs to certify the case as a class action.
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Discovery is ongoing but substantially complete in the case, which is currently scheduled for
a jury trial in October 2006. The Plaintiffs and the Defendants each have motions for partial
summary judgment pending before the Court, which is expected to rule on these motions prior to or
at trial. On August 4, 2006, the Defendants filed a motion, which is pending, asking that the
Court bifurcate the proceedings such that only common issues of law
would be decided on a classwide basis and any remaining issues of
fact, including whether any class member can prove liability or
damages, would be tried on an individualized basis.
In
May 2006, the Plaintiffs served Defendants with a report,
prepared by their consultant, asserting that as a result
of the alleged violations by the Defendants of the federal leasing regulations, class members
suffered damages, excluding interest, during the period ending April 30, 2006 of approximately $39.1
million in the aggregate (the Plaintiffs Report). The Plaintiffs allege that the damages of the
class members will continue to accrue through the pendency of this litigation and the Amended
Complaint also asserts alternative damage theories, including claims for equitable relief.
The Defendants had no role in preparing the Plaintiffs Report. In the event that the Court rules
for Defendants on all or a portion of the legal issues raised in the pending motions for summary
judgment or, ultimately, at trial, claims for damages that are the subject of the Plaintiffs Report
could be eliminated or significantly reduced. In addition, the Defendants believe that they have
meritorious defenses, intend to continue asserting these defenses vigorously and have retained
experts in support of their positions. In this regard, the Defendants have denied that any BCO
Independent Contractor has sustained any damages as a result of the alleged violations of the
federal leasing regulations.
Management believes that if this litigation resulted in a liability up to the amount asserted
in the Plaintiffs Report, such result would not reasonably be expected to have a material adverse
effect on the financial condition of the Company, but could have a material adverse effect on the
Companys results of operations in a given quarter or year. In addition, as a result of decisions
in a separate insurance coverage lawsuit relating to the litigation described immediately above,
the Company believes it is probable that it will recover a significant portion of the
costs, including legal fees, incurred by Defendants in the defense of the litigation. No
assurances can be given with respect to the outcome of any of these matters.
The Company is involved in certain other claims and pending litigation arising from the normal
conduct of business. Based on knowledge of the facts and, in certain cases, opinions of outside
counsel, management believes that adequate provisions have been made for probable losses with
respect to the resolution of all such other claims and pending litigation and that the ultimate
outcome, after provisions thereof, will not have a material adverse effect on the financial
condition of the Company, but could have a material effect on the results of operations in a given
quarter or year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The allowance for doubtful accounts for both trade and other receivables represents
managements estimate of the amount of outstanding receivables that will not be collected.
Historically, managements estimates for uncollectible receivables have been materially correct.
Although management believes the amount of the allowance for both trade and other receivables at
July 1, 2006 is appropriate, a prolonged period of low or no economic growth may adversely affect
the collection of these receivables. Conversely, a more robust economic environment may result in
the realization of some portion of the estimated uncollectible receivables.
Landstar provides for the estimated costs of self-insured claims primarily on an actuarial
basis. The amount recorded for the estimated liability for claims incurred is based upon the facts
and circumstances known on the balance sheet date. The ultimate resolution of these claims may be
for an amount greater or less than the amount estimated by management. Historically, the Company
has experienced both favorable and unfavorable development of prior year claims estimates. The
Company continually revises its existing claim estimates as new or revised information becomes
available on the status of each claim. During the 2006 twenty six week period, insurance and claims
costs included $3,332,000 of favorable adjustments to prior years claims estimates. During the 2005
twenty six week period, insurance and claims costs included $2,301,000 of favorable adjustments to
prior years claims estimates. It is reasonably likely that the ultimate outcome of settling all
outstanding claims will be more or less than the estimated claims reserve at July 1, 2006.
The Company utilizes certain income tax planning strategies to reduce its overall cost of
income taxes. Upon audit, it is possible that certain strategies might be disallowed resulting in
an increased liability for income taxes. The Company has provided for its estimated exposure
attributable to income tax planning strategies. Management believes that the provision for
liabilities resulting from the implementation of income tax planning strategies is appropriate. To
date, the Company has not experienced an examination by governmental revenue authorities that would
lead management to believe that the Companys past provisions for exposures related to income tax
planning strategies are not appropriate.
Significant variances from managements estimates for the amount of uncollectible receivables,
the ultimate resolution of claims or the provision for liabilities for income tax planning
strategies can be expected to positively or negatively affect Landstars earnings in a
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given quarter or year. However, management believes that the ultimate resolution of these
items, given a range of reasonably likely outcomes, will not significantly affect the long-term
financial condition of Landstar or its ability to fund its continuing operations.
EFFECTS OF INFLATION
Management does not believe inflation has had a material impact on the results of operations
or financial condition of Landstar in the past five years. However, inflation higher than that
experienced in the past five years might have an adverse effect on the Companys results of
operations.
SEASONALITY
Landstars operations are subject to seasonal trends common to the trucking industry. Results
of operations for the quarter ending in March are typically lower than the quarters ending June,
September and December.
RECENTLY ISSUED ACCOUNTING STANDARDS NOT CURRENTLY EFFECTIVE
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 clarifies the accounting for
uncertainty in income taxes recognized in the Companys financial statements in accordance with
FASB Statement No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a recognition threshold
and measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return based on whether it is more likely than not that
certain return positions will be sustained upon examination by taxing authorities. Implementation
of FIN No. 48 is required for fiscal years beginning after December 15, 2006. Although the effect
of implementing FIN No. 48 has not been quantified, management believes that the implementation of
FIN No. 48 will not have a material effect on the financial position of the Company.
FORWARD-LOOKING STATEMENTS
The following is a safe harbor statement under the Private Securities Litigation Reform Act
of 1995. Statements contained in this document that are not based on historical facts are
forward-looking statements. This Managements Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-Q statement contain forward-looking
statements, such as statements which relate to Landstars business objectives, plans, strategies
and expectations. Terms such as anticipates, believes, estimates, expects, plans,
predicts, may, should, could, will, the negative thereof and similar expressions are
intended to identify forward-looking statements. Such statements are by nature subject to
uncertainties and risks, including but not limited to: an increase in the frequency or severity of
accidents or workers compensation claims; unfavorable development of existing accident claims;
dependence on independent commission sales agents; dependence on third party capacity providers;
disruptions or failures in our computer systems; a downturn in economic growth or growth
in the transportation sector; substantial industry competition; and other operational, financial or
legal risks or uncertainties detailed in Landstars Form 10-K for the 2005 fiscal year, described
in Item 1A Risk Factors, this report or in Landstars other Securities and Exchange Commission
filings from time to time. These risks and uncertainties could cause actual results or events to
differ materially from historical results or those anticipated. Investors should not place undue
reliance on such forward-looking statements and the Company undertakes no obligation to publicly
update or revise any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates as a result of its financing activities,
primarily its borrowings on the revolving credit facility, and investing activities with respect to
investments held by the insurance segment.
On July 8, 2004, Landstar entered into a new senior credit facility with a syndicate of banks
and JPMorgan Chase Bank, as administrative agent (the Fourth Amended and Restated Credit
Agreement). The Fourth Amended and Restated Credit Agreement, which expires on July 8, 2009,
provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000
of which may be utilized in the form of letter of credit guarantees.
The Fourth Amended and Restated Credit Agreement contains a number of covenants that limit,
among other things, the incurrence of additional indebtedness, the incurrence of operating or
capital lease obligations and the purchase of operating property. Landstar is required to, among
other things, maintain minimum levels of Consolidated Net Worth and Fixed Charge Coverage, as each
is defined in the Fourth Amended and Restated Credit Agreement.
Borrowings under the Fourth Amended and Restated Credit Agreement bear interest at rates equal
to, at the option of Landstar, either (i) the greatest of (a) the prime rate as publicly announced
from time to time by JPMorgan Chase Bank, (b) the three month CD
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rate adjusted for statutory reserves and FDIC assessment costs plus 1% and (c) the federal
funds effective rate plus 1/2%, or, (ii) the rate at the time offered to JPMorgan Chase Bank in the
Eurodollar market for amounts and periods comparable to the relevant loan plus a margin that is
determined based on the level of the Companys Leverage Ratio, as defined in the Fourth Amended and
Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount
outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the borrowing
capacity. As of July 1, 2006, the weighted average interest rate on borrowings outstanding was
5.45%. During the second quarter of fiscal 2006, the average outstanding balance under the Fourth
Amended and Restated Credit Agreement was approximately $60,414,000. Based on the borrowing rates
in the Fourth Amended and Restated Credit Agreement and the repayment terms, the fair value of the
outstanding borrowings as of July 1, 2006 was estimated to approximate carrying value. Assuming
that debt levels on the Fourth Amended and Restated Credit Agreement remain at $60,000,000, the
balance at July 1, 2006, a hypothetical increase of 100 basis points in current rates provided for
under the Fourth Amended and Restated Credit Agreement is estimated to result in an increase in
interest expense of $600,000 on an annualized basis.
All amounts outstanding on the Fourth Amended and Restated Credit Agreement are payable on
July 8, 2009, the expiration date of the Fourth Amended and Restated Credit Agreement.
The Companys obligations under the Fourth Amended and Restated Credit Agreement are
guaranteed by all but one of Landstar System Holdings, Inc.s subsidiaries.
Long-term investments, all of which are available-for-sale, consist of investment grade bonds
having maturities of up to five years. Assuming that the long-term portion of investments in bonds
remains at $994,000, the balance at July 1, 2006, a hypothetical increase or decrease in interest
rates of 100 basis points would not have a material impact on future earnings on an annualized
basis. Short-term investments consist of short-term investment grade instruments and the current
maturities of investment grade bonds. Accordingly, any future interest rate risk on these
short-term investments would not be material.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was carried out, under the
supervision and with the participation of the Companys management, including the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Companys
disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended). Based on that evaluation, the CEO and CFO concluded that the
Companys disclosure controls and procedures were effective as of July 1, 2006, to provide
reasonable assurance that information required to be disclosed by the Company in reports that it
filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms.
There were no significant changes in the Companys internal controls over financial reporting
during the Companys fiscal quarter ended July 1, 2006 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On November 1, 2002, the Owner Operator Independent Drivers Association, Inc. (OOIDA) and
six individual independent contractors who provide truck capacity to the Company under exclusive
lease arrangements (BCO Independent Contractors and collectively with OOIDA, the Plaintiffs)
filed a putative class action complaint (the Complaint) in the United States District Court for
the Middle District of Florida (the Court) in Jacksonville, Florida, against the Company. The
Complaint alleges that certain aspects of the Companys motor carrier leases with its BCO
Independent Contractors violate certain federal leasing regulations and seeks injunctive relief, an
unspecified amount of damages and attorneys fees. Claims are currently pending against the
following Company entities: Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc.
(the Defendants). On April 7, 2005, Plaintiffs amended the Complaint (the Amended Complaint) to
include additional allegations with respect to violations of certain federal leasing regulations.
On August 30, 2005, the Court granted a motion by Plaintiffs to certify the case as a class action.
Discovery is ongoing but substantially complete in the case, which is currently scheduled for
a jury trial in October 2006. The Plaintiffs and the Defendants each have motions for partial
summary judgment pending before the Court, which is expected to rule on these motions prior to or
at trial. On August 4, 2006, the Defendants filed a motion, which is pending, asking that the
Court bifurcate the proceedings such that only common issues of law
would be decided on a classwide basis and any remaining issues of
fact, including whether any class member can prove liability or
damages, would be tried on an individualized basis.
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In
May 2006, the Plaintiffs served Defendants with a report,
prepared by their consultant, asserting that as a result
of the alleged violations by the Defendants of the federal leasing regulations, class members
suffered damages, excluding interest, during the period ending April 30, 2006 of approximately $39.1
million in the aggregate (the Plaintiffs Report). The Plaintiffs allege that the damages of the
class members will continue to accrue through the pendency of this litigation and the Amended
Complaint also asserts alternative damage theories, including claims for equitable relief.
The Defendants had no role in preparing the Plaintiffs Report. In the event that the Court rules
for Defendants on all or a portion of the legal issues raised in the pending motions for summary
judgment or, ultimately, at trial, claims for damages that are the subject of the Plaintiffs Report
could be eliminated or significantly reduced. In addition, the Defendants believe that they have
meritorious defenses, intend to continue asserting these defenses vigorously and have retained
experts in support of their positions. In this regard, the Defendants have denied that any BCO
Independent Contractor has sustained any damages as a result of the alleged violations of the
federal leasing regulations.
Management believes that if this litigation resulted in a liability up to the amount asserted
in the Plaintiffs Report, such result would not reasonably be expected to have a material adverse
effect on the financial condition of the Company, but could have a material adverse effect on the
Companys results of operations in a given quarter or year. In addition, as a result of decisions
in a separate insurance coverage lawsuit relating to the litigation described immediately above,
the Company believes it is probable that it will recover a significant portion of the
costs, including legal fees, incurred by Defendants in the defense of the litigation. No
assurances can be given with respect to the outcome of any of these matters.
The Company is involved in certain other claims and pending litigation arising from the normal
conduct of business. Based on knowledge of the facts and, in certain cases, opinions of outside
counsel, management believes that adequate provisions have been made for probable losses with
respect to the resolution of all such other claims and pending litigation and that the ultimate
outcome, after provisions thereof, will not have a material adverse effect on the financial
condition of the Company, but could have a material effect on the results of operations in a given
quarter or year.
Item 1A. Risk Factors
For a discussion identifying risk factors and other important factors that could cause actual
results to differ materially from those anticipated, see the discussions under Part I, Item 1A,
Risk Factors in the Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2005 and in Managements Discussion and Analysis of Financial Condition and Results of Operations
and Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q. There have
been no material changes from the risk factors previously disclosed in the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2005 in response to Part I, Item 1A of that
form.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Company
The following table provides information regarding the Companys purchases of its common stock during the period from April 1, 2006 to July 1, 2006, the Companys second fiscal quarter:
The following table provides information regarding the Companys purchases of its common stock during the period from April 1, 2006 to July 1, 2006, the Companys second fiscal quarter:
Total number of shares | Maximum number of | |||||||||||||||
purchased as part of | shares that may yet be | |||||||||||||||
Total number of | Average price paid | publicly announced | purchased under the | |||||||||||||
Fiscal period | shares purchased | per share | programs | programs | ||||||||||||
April 1, 2006 |
2,275,927 | |||||||||||||||
Apr. 2, 2006 Apr. 29, 2006 |
2,275,927 | |||||||||||||||
Apr. 30, 2006 May 27, 2006 |
719,800 | $ | 44.00 | 719,800 | 1,556,127 | |||||||||||
May 28, 2006 July 1, 2006 |
273,848 | $ | 43.43 | 273,848 | 1,282,279 | |||||||||||
Total |
993,648 | $ | 43.84 | 993,648 | ||||||||||||
On April 20, 2006, Landstar System, Inc. announced that its Board of Directors declared a
cash dividend of $0.025 per share with respect to its outstanding shares of common stock. The
distribution date for this cash dividend was on May 31, 2006, to stockholders of record on May 10,
2006. On February 2, 2006, Landstar System, Inc. announced that its Board of Directors declared a
cash dividend of $0.025 per share with respect to its outstanding shares of common stock. The
distribution date for this cash dividend was on February 28, 2006, to stockholders of record on
February 14, 2006. It is the intention of the Board of Directors to pay a quarterly dividend going
forward.
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On April 28, 2005, Landstar System, Inc. announced that it had been authorized by its Board of
Directors to purchase up to an additional 2,000,000 shares of its common stock from time to time in
the open market and in privately-negotiated transactions. During the thirteen week period ended
July 1, 2006, the Company completed the purchase of shares authorized for purchase under this
program. On July 28, 2005, Landstar System, Inc. announced that it had been authorized by its Board
of Directors to purchase up to an additional 2,000,000 shares of its common stock from time to time
in the open market and in privately negotiated transactions.
No specific expiration date has been assigned to the July 28, 2005 authorization.
The Fourth Amended and Restated Credit Agreement provides for a restriction in cash dividends
on the Companys capital stock only to the extent there is an event of default under the Fourth
Amended and Restated Credit Agreement.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On May 4, 2006, Landstar System, Inc. (LSI) held its Annual Meeting of Stockholders (the
Meeting) at its principal offices in Jacksonville, Florida. The matters voted upon at the Meeting
included (i) the election of the two Class I directors for terms to expire at the 2009 Annual
Meeting of Stockholders, (ii) the ratification of appointment of KPMG LLP as LSIs independent
registered public accounting firm for fiscal year 2006 and (iii) an amendment to the Companys
Executive Incentive Compensation Plan (the EICP Plan) to increase the maximum amount that the
Compensation Committee of the Board of Directors of LSI may award as an annual bonus to an eligible
participant under the EICP to $3,000,000.
Pursuant to LSIs Restated Certificate of Incorporation, the Board of Directors has fixed the
number of directors at seven: two Class I directors whose members terms will expire at the 2009
Annual Meeting of Stockholders; three Class II directors whose members terms will expire at the
2007 Annual Meeting of Stockholders; and two Class III directors whose members terms will expire
at the 2008 Annual Meeting of Stockholders. With respect to the election of two Class I directors
at the Meeting, nominee Ronald W. Drucker and nominee Henry H. Gerkens were elected to the Board of
Directors of LSI. Mr. Drucker received 53,964,504 votes for election to the Board and 1,346,481
votes were withheld. Mr. Gerkens received 53,967,711 votes for election to the Board and 1,343,274
votes were withheld. The names of the other directors whose terms of office as directors continued
after the Meeting are as follows: Merritt J. Mott (a Class II director), William S. Elston (a Class
II director), Diana M. Murphy (a Class II director), David G. Bannister (a Class III director) and
Jeffrey C. Crowe (a Class III director).
The proposal to ratify the appointment of KPMG LLP as LSIs independent registered public
accounting firm for fiscal year 2006 was approved by LSIs stockholders. Votes for the proposal
were 54,873,017, votes against were 433,559 and votes abstaining were 4,409.
The proposal to approve the amendment to the Companys EICP Plan was approved by LSIs
stockholders. Votes for the proposal were 53,585,259, votes against were 1,680,641 and votes
abstaining were 45,085.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits listed on the Exhibit Index are furnished as part of this quarterly report on Form
10-Q.
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EXHIBIT INDEX
Registrants Commission File No.: 0-21238
Exhibit No.
|
Description | |
(31)
|
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: | |
31.1*
|
Chief Executive Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Chief Financial Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
(32)
|
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: | |
32.1**
|
Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2**
|
Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* Filed herewith
** Furnished herewith
** Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LANDSTAR SYSTEM, INC. |
||||
Date: August 4, 2006 | /s/ Henry H. Gerkens | |||
Henry H. Gerkens | ||||
President and Chief Executive Officer | ||||
Date: August 4, 2006 | /s/ Robert C. LaRose | |||
Robert C. LaRose | ||||
Executive Vice President and Chief Financial Officer |
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