LANDSTAR SYSTEM INC - Quarter Report: 2007 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, 2007 | ||
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 LOGO)](https://www.sec.gov/Archives/edgar/data/0000853816/000095014407007187/g08441landstar.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 þ 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 þ 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 þ
The number of shares of the registrants common stock, par value $0.01 per share, outstanding
as of the close of business on July 20, 2007 was 54,878,469.
Index
Page 3 | ||
Page 4 | ||
Page 5 | ||
Page 6 | ||
Page 7 | ||
Page 11 | ||
Page 19 | ||
Page 19 | ||
Page 20 | ||
Page 20 | ||
Page 21 | ||
Page 22 | ||
Page 22 | ||
Page 24 |
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 June
30, 2007 are not necessarily indicative of the results that may be expected for the entire fiscal
year ending December 29, 2007.
These interim financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Companys 2006 Annual Report on Form 10-K.
2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
June 30, | Dec. 30, | |||||||
2007 | 2006 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 56,162 | $ | 91,491 | ||||
Short-term investments |
20,741 | 21,548 | ||||||
Trade accounts receivable, less allowance of $4,939 and $4,834 |
311,125 | 318,983 | ||||||
Other receivables, including advances to independent contractors, less
allowance of $4,694 and $4,512 |
13,919 | 14,198 | ||||||
Deferred income taxes and other current assets |
38,057 | 25,142 | ||||||
Total current assets |
440,004 | 471,362 | ||||||
Operating property, less accumulated depreciation and amortization of $80,274
and $77,938 |
118,067 | 110,957 | ||||||
Goodwill |
31,134 | 31,134 | ||||||
Other assets |
36,395 | 33,198 | ||||||
Total assets |
$ | 625,600 | $ | 646,651 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Cash overdraft |
$ | 28,067 | $ | 25,435 | ||||
Accounts payable |
128,611 | 122,313 | ||||||
Current maturities of long-term debt |
20,097 | 18,730 | ||||||
Insurance claims |
27,364 | 25,238 | ||||||
Other current liabilities |
56,184 | 58,478 | ||||||
Total current liabilities |
260,323 | 250,194 | ||||||
Long-term debt, excluding current maturities |
76,535 | 110,591 | ||||||
Insurance claims |
41,790 | 36,232 | ||||||
Deferred income taxes |
21,154 | 19,360 | ||||||
Shareholders Equity |
||||||||
Common stock, $0.01 par value, authorized 160,000,000 shares, issued
65,410,393 and 64,993,143 |
654 | 650 | ||||||
Additional paid-in capital |
123,360 | 108,020 | ||||||
Retained earnings |
547,192 | 499,273 | ||||||
Cost of 10,534,724 and 9,028,009 shares of common stock in treasury |
(445,416 | ) | (377,662 | ) | ||||
Accumulated other comprehensive income (loss) |
8 | (7 | ) | |||||
Total shareholders equity |
225,798 | 230,274 | ||||||
Total liabilities and shareholders equity |
$ | 625,600 | $ | 646,651 | ||||
See accompanying notes to consolidated financial statements.
3
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Twenty Six Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
June 30, | July 1, | June 30, | July 1, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenue |
$ | 1,209,601 | $ | 1,253,280 | $ | 632,952 | $ | 643,238 | ||||||||
Investment income |
2,997 | 1,252 | 1,257 | 873 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Purchased transportation |
912,835 | 944,309 | 478,777 | 486,059 | ||||||||||||
Commissions to agents |
97,404 | 97,521 | 50,772 | 50,510 | ||||||||||||
Other operating costs |
13,222 | 22,288 | 7,716 | 10,220 | ||||||||||||
Insurance and claims |
29,559 | 20,574 | 12,019 | 9,022 | ||||||||||||
Selling, general and administrative |
63,920 | 70,924 | 30,755 | 35,088 | ||||||||||||
Depreciation and amortization |
9,279 | 8,050 | 4,662 | 3,957 | ||||||||||||
Total costs and expenses |
1,126,219 | 1,163,666 | 584,701 | 594,856 | ||||||||||||
Operating income |
86,379 | 90,866 | 49,508 | 49,255 | ||||||||||||
Interest and debt expense |
2,700 | 3,142 | 1,108 | 1,292 | ||||||||||||
Income before income taxes |
83,679 | 87,724 | 48,400 | 47,963 | ||||||||||||
Income taxes |
32,405 | 33,909 | 18,730 | 18,498 | ||||||||||||
Net income |
$ | 51,274 | $ | 53,815 | $ | 29,670 | $ | 29,465 | ||||||||
Earnings per common share |
$ | 0.92 | $ | 0.92 | $ | 0.53 | $ | 0.50 | ||||||||
Diluted earnings per share |
$ | 0.91 | $ | 0.90 | $ | 0.53 | $ | 0.50 | ||||||||
Average number of shares outstanding: |
||||||||||||||||
Earnings per common share |
55,761,000 | 58,700,000 | 55,597,000 | 58,499,000 | ||||||||||||
Diluted earnings per share |
56,328,000 | 59,665,000 | 56,191,000 | 59,287,000 | ||||||||||||
Dividends paid per common share |
$ | 0.060 | $ | 0.050 | $ | 0.030 | $ | 0.025 | ||||||||
See accompanying notes to consolidated financial statements.
4
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Twenty Six Weeks Ended | ||||||||
June 30, | July 1, | |||||||
2007 | 2006 | |||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 51,274 | $ | 53,815 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization of operating property |
9,279 | 8,050 | ||||||
Non-cash interest charges |
87 | 87 | ||||||
Provisions for losses on trade and other accounts receivable |
2,040 | 3,287 | ||||||
(Gains) losses on sales of operating property |
(1,735 | ) | 112 | |||||
Director compensation paid in common stock |
600 | 265 | ||||||
Deferred income taxes, net |
1,758 | (653 | ) | |||||
Stock-based compensation |
3,644 | 3,297 | ||||||
Changes in operating assets and liabilities: |
||||||||
Decrease in trade and other accounts receivable |
6,097 | 156,985 | ||||||
Increase in other assets |
(11,804 | ) | (9,245 | ) | ||||
Increase (decrease) in accounts payable |
6,298 | (30,225 | ) | |||||
Decrease in other liabilities |
(2,303 | ) | (9,336 | ) | ||||
Increase (decrease) in insurance claims |
7,684 | (1,851 | ) | |||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
72,919 | 174,588 | ||||||
INVESTING ACTIVITIES |
||||||||
Net change in other short-term investments |
(934 | ) | (3,306 | ) | ||||
Sales and maturities of investments |
23,507 | 17,929 | ||||||
Purchases of investments |
(26,101 | ) | (18,094 | ) | ||||
Purchases of operating property |
(3,652 | ) | (1,214 | ) | ||||
Proceeds from sales of operating property |
3,672 | 1,057 | ||||||
NET CASH USED BY INVESTING ACTIVITIES |
(3,508 | ) | (3,628 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Increase (decrease) in cash overdraft |
2,632 | (5,017 | ) | |||||
Dividends paid |
(3,355 | ) | (2,944 | ) | ||||
Proceeds from exercises of stock options |
9,398 | 5,975 | ||||||
Excess tax benefit on stock option exercises |
1,702 | 3,269 | ||||||
Purchases of common stock |
(67,754 | ) | (54,694 | ) | ||||
Principal payments on long-term debt and capital lease obligations |
(47,363 | ) | (66,132 | ) | ||||
NET CASH USED BY FINANCING ACTIVITIES |
(104,740 | ) | (119,543 | ) | ||||
Increase (decrease) in cash and cash equivalents |
(35,329 | ) | 51,417 | |||||
Cash and cash equivalents at beginning of period |
91,491 | 29,398 | ||||||
Cash and cash equivalents at end of period |
$ | 56,162 | $ | 80,815 | ||||
See accompanying notes to consolidated financial statements.
5
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
Twenty Six Weeks Ended June 30, 2007
(Dollars in thousands)
(Unaudited)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
Twenty Six Weeks Ended June 30, 2007
(Dollars in thousands)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||
Addl | Treasury Stock | Other | ||||||||||||||||||||||||||||||
Common Stock | Paid-In | Retained | at Cost | Comprehensive | ||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Shares | Amount | Income (Loss) | Total | |||||||||||||||||||||||||
Balance December 30, 2006 |
64,993,143 | $ | 650 | $ | 108,020 | $ | 499,273 | 9,028,009 | $ | (377,662 | ) | $ | (7 | ) | $ | 230,274 | ||||||||||||||||
Net income |
51,274 | 51,274 | ||||||||||||||||||||||||||||||
Dividends paid |
(3,355 | ) | (3,355 | ) | ||||||||||||||||||||||||||||
Director compensation paid
in common stock |
12,000 | 600 | 600 | |||||||||||||||||||||||||||||
Purchases of common stock |
1,506,715 | (67,754 | ) | (67,754 | ) | |||||||||||||||||||||||||||
Stock-based compensation |
3,644 | 3,644 | ||||||||||||||||||||||||||||||
Exercises of stock options,
including
excess tax benefit |
405,250 | 4 | 11,096 | 11,100 | ||||||||||||||||||||||||||||
Unrealized holding gains
on available-for-sale
investments, net of income taxes |
15 | 15 | ||||||||||||||||||||||||||||||
Balance June 30, 2007 |
65,410,393 | $ | 654 | $ | 123,360 | $ | 547,192 | 10,534,724 | $ | (445,416 | ) | $ | 8 | $ | 225,798 | |||||||||||||||||
See accompanying notes to consolidated financial statements.
6
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
As of June 30, 2007, the Company had two employee stock option plans and one stock option plan
for members of its Board of Directors (the Plans). Amounts recognized in the financial
statements with respect to these Plans are as follows (in thousands):
Twenty Six Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
June 30, | July 1, | June 30, | July 1, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Total cost of share-based payment
plans during the period |
$ | 3,644 | $ | 3,297 | $ | 1,852 | $ | 1,886 | ||||||||
Amount of related income tax benefit
recognized during the period |
1,185 | 1,063 | 662 | 596 | ||||||||||||
Net cost of share-based payment
plans during the period |
$ | 2,459 | $ | 2,234 | $ | 1,190 | $ | 1,290 | ||||||||
The fair value of each option grant on its grant date was calculated using the
Black-Scholes option pricing model with the following weighted average assumptions for grants made
in the 2007 and 2006 twenty six week periods:
2007 | 2006 | |||||||
Expected volatility |
33.0 | % | 34.0 | % | ||||
Expected dividend yield |
0.3 | % | 0.3 | % | ||||
Risk-free interest rate |
4.75 | % | 4.75 | % | ||||
Expected lives (in years) |
4.2 | 4.5 |
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 terms of the options
granted. The weighted average grant date fair value of stock options granted during the twenty six
week periods ended June 30, 2007 and July 1, 2006 was $14.22 and $15.32, respectively.
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 30, 2006 |
2,566,571 | $ | 27.35 | |||||||||||||
Granted |
266,500 | $ | 42.97 | |||||||||||||
Exercised |
(405,250 | ) | $ | 23.19 | ||||||||||||
Forfeited |
(2,500 | ) | $ | 44.45 | ||||||||||||
Options outstanding at June 30, 2007 |
2,425,321 | $ | 29.74 | 7.1 | $ | 44,897 | ||||||||||
Options exercisable at June 30, 2007 |
962,039 | $ | 22.68 | 5.9 | $ | 24,600 | ||||||||||
As of June 30, 2007, there were 6,055,621 shares of the Companys common stock reserved
for issuance upon exercise of options granted and to be granted under the Plans.
7
The total intrinsic value of stock options exercised during the twenty six week periods ended
June 30, 2007 and July 1, 2006 was $10,087,000 and $16,410,000, respectively. The total intrinsic
value of stock options exercised during the thirteen week periods ended June 30, 2007 and July 1,
2006 was $6,037,000 and $8,189,000 respectively.
As of June 30, 2007, there was $12,380,000 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 2.5 years.
Under the Directors Stock Compensation Plan, outside members of the Board of 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. 12,000 shares of the Companys
common stock were issued to members of the Board of Directors upon such members re-election at the
2007 annual shareholders meeting and 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 annual shareholders
meeting. During the 2007 and 2006 twenty six week periods, the Company reported $600,000 and
$265,000, respectively, in compensation expense representing the fair market value of these share
awards. As of June 30, 2007, there were 152,000 shares of the Companys common stock reserved for
issuance upon the grant of common stock under the Directors Stock Compensation Plan.
(2) Income Taxes
The provisions for income taxes for both the 2007 and 2006 twenty six week periods were based
on an estimated full year combined effective income tax rate of approximately 38.7%, which was
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.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprises financial statements in accordance with
FASB Statement No. 109, Accounting for Income Taxes. FIN 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.
As of December 31, 2006, the date of adoption of FIN 48, the Company had $11.5 million of
net unrecognized tax benefits representing the provision for the uncertainty of certain tax positions
plus a component of interest and penalties. The implementation of FIN 48 did not have a
significant impact on the provision for unrecognized tax benefits as of December 31, 2006.
Estimated interest and penalties on the provision for the uncertainty of certain tax positions is
included in income tax expense. Upon adoption there was $5,116,000 accrued for the estimated
interest and penalties related to the uncertainty of certain tax positions. The Company does not
currently anticipate any significant increase or decrease to the unrecognized tax benefit during
the remainder of 2007.
The Company is subject to U.S. federal income tax as well as income tax in the majority of
state jurisdictions. The Company has concluded all U.S. federal income tax matters through 2002.
Substantially all material income tax matters in major state and local income tax jurisdictions
have been concluded for all years prior to 2002.
(3) 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 | |||||||||||||||
June 30, | July 1, | June 30, | July 1, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Average number
of common shares
outstanding |
55,761 | 58,700 | 55,597 | 58,499 | ||||||||||||
Incremental shares
from assumed
exercises of stock
options |
567 | 965 | 594 | 788 | ||||||||||||
Average number of
common shares and
common share
equivalents
outstanding |
56,328 | 59,665 | 56,191 | 59,287 | ||||||||||||
8
(4) Additional Cash Flow Information
During the 2007 twenty six week period, Landstar paid income taxes and interest of $31,502,000
and $3,432,000, respectively. During the 2006 twenty six week period, Landstar paid income taxes
and interest of $34,789,000 and $3,925,000, respectively. Landstar acquired operating property by
entering into capital leases in the amount of $14,674,000 and $7,488,000 in the 2007 and 2006
twenty six week periods, respectively.
(5) Segment Information
The following tables summarize information about Landstars reportable business segments as of
and for the twenty six and thirteen week periods ended June 30, 2007 and July 1, 2006 (in
thousands):
Twenty Six Week Period Ended June 30, 2007 | ||||||||||||||||||||
Carrier | Global Logistics | Insurance | Other | Total | ||||||||||||||||
External revenue |
$ | 893,961 | $ | 297,209 | $ | 18,431 | $ | 1,209,601 | ||||||||||||
Investment income |
2,997 | 2,997 | ||||||||||||||||||
Internal revenue |
23,226 | 1,520 | 16,823 | 41,569 | ||||||||||||||||
Operating income |
89,878 | 8,016 | 14,009 | $ | (25,524 | ) | 86,379 | |||||||||||||
Goodwill |
20,496 | 10,638 | 31,134 |
Twenty Six Week Period 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 |
Thirteen Week Period Ended June 30, 2007 | ||||||||||||||||||||
Carrier | Global Logistics | Insurance | Other | Total | ||||||||||||||||
External revenue |
$ | 470,387 | $ | 153,344 | $ | 9,221 | $ | 632,952 | ||||||||||||
Investment income |
1,257 | 1,257 | ||||||||||||||||||
Internal revenue |
10,530 | 698 | 10,627 | 21,855 | ||||||||||||||||
Operating income |
48,469 | 3,328 | 10,650 | $ | (12,939 | ) | 49,508 |
Thirteen Week Period 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 |
(6) Comprehensive Income
The following table includes the components of comprehensive income for the twenty six and
thirteen week periods ended June 30, 2007 and July 1, 2006 (in thousands):
Twenty Six Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
June 30, | July 1, | June 30, | July 1, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Net income |
$ | 51,274 | $ | 53,815 | $ | 29,670 | $ | 29,465 | ||||||||
Unrealized holding gains on available
-for-sale investments, net of income taxes |
15 | 153 | | 16 | ||||||||||||
Comprehensive income |
$ | 51,289 | $ | 53,968 | $ | 29,670 | $ | 29,481 | ||||||||
9
Accumulated other comprehensive income at June 30, 2007 of $8,000 represents the unrealized
holding gains on available-for-sale investments of $12,000, net of related income taxes of $4,000.
(7) Commitments and Contingencies
As of June 30, 2007, Landstar had $26,868,000 of letters of credit outstanding under the
Companys revolving credit facility and $46,003,000 of letters of credit secured by investments
held by the Companys insurance segment. Short-term investments include $15,625,000 in current
maturities of investment grade bonds and $5,116,000 of cash equivalents held by the Companys
insurance segment at June 30, 2007. These short-term investments together with $6,518,000 of the
non-current portion of investment grade bonds and $20,958,000 of cash equivalents included in other
assets at June 30, 2007, provide collateral for the $46,003,000 of letters of credit issued to
guarantee payment of insurance claims.
On November 1, 2002, the Owner-Operator Independent Drivers Association, Inc. (OOIDA) and
certain BCO Independent Contractors (as defined below) (collectively with OOIDA, the Plaintiffs)
filed a putative class action complaint on behalf of independent contractors who provide truck
capacity to the Company and its subsidiaries under exclusive lease arrangements (BCO Independent
Contractors) in the United States District Court for the Middle District of Florida (the District
Court) in Jacksonville, Florida, against the Company and certain of its subsidiaries. The
complaint was amended on April 7, 2005 (as amended, the Amended Complaint). The Amended Complaint
alleged that certain aspects of the Companys motor carrier leases and related practices with its
BCO Independent Contractors violate certain federal leasing regulations and sought injunctive
relief, an unspecified amount of damages and attorneys fees. On August 30, 2005, the District
Court granted a motion by the Plaintiffs to certify the case as a class action.
On October 6, 2006, the District Court issued a summary judgment ruling which found, among
other things, that (1) the lease agreements of the Defendants (as defined below) literally complied
with the requirements of Section 376.12(d) of the applicable federal leasing regulations relating
to reductions to revenue derived from freight upon which BCO Independent Contractors compensation
is calculated, (2) charge-back amounts which include fees and profits to the motor carrier are not
unlawful under Section 376.12(h) and (3) the Defendants had violated 376.12(h) of the regulations
by failing to provide access to documents to determine the validity of certain charges. On January
12, 2007, the District Court ruled that the monetary remedy available to the Plaintiffs would be
limited to damages sustained as a result of the violation and rejected Plaintiffs request for
equitable relief in the form of restitution or disgorgement.
On January 16, 2007, the District Court ordered the decertification of the class of BCO
Independent Contractors for purposes of determining remedies. Immediately thereafter, the trial
commenced for purposes of determining what remedies, if any, would be awarded to the remaining
named BCO Independent Contractor Plaintiffs against the following subsidiaries of the Company:
Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc. (the Defendants). On January
18, 2007, in response to a motion filed by the Defendants following the presentation by the
Plaintiffs of their case in chief, the District Court granted judgment as a matter of law in favor
of the Defendants on the issue of damages and stated that the Plaintiffs had failed to present
evidence that any of the Plaintiffs had sustained damages as a result of any violation of the
applicable federal leasing regulations. On that date, the District Court also ruled that access to
documents describing a third party vendors charges to determine the validity of charge-back
amounts under 376.12(h) was not required under Defendants current lease with respect to programs
where the lease contains a price to a BCO Independent Contractor that is not calculated on the
basis of a third party vendors charge to the Defendants. On March 29, 2007, the District Court
denied Plaintiffs request for injunctive relief, entered a Judgment in favor of the Defendants and
issued written orders setting forth its rulings related to the decertification of the class and the
denial of Plaintiffs requests for damages and injunctive relief. The Plaintiffs and the Defendants
have each filed motions with the District Court concerning an award of attorney fees from the other
party.
The Plaintiffs have filed an appeal with the United States Court of Appeals for the Eleventh
Circuit (the Appellate Court) with respect to certain of the District Courts rulings, including
the judgments entered by the District Court in favor of the Defendants on the issues of damages and
injunctive relief. The Defendants have asked the Appellate Court to affirm the rulings of the
District Court that have been appealed by the Plaintiffs. The Defendants have also filed a
cross-appeal with the Appellate Court with respect to certain other rulings of the District Court.
Although no assurances can be given with respect to the outcome of the appeal or any proceedings
that may be conducted thereafter, the Company believes it has meritorious defenses and it intends
to continue asserting these defenses vigorously.
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.
10
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 30, 2006 and Managements Discussion and Analysis
of Financial Condition and Results of Operations included in the 2006 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, third party capacity providers and employees. 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, 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
subsidiary, 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, bus
brokerage and warehousing. 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, bus providers and warehouse owners. Beginning in August 2006, the global
logistics segment began the rollout of warehousing services with independent contractors who
provide warehouse capacity to the Company under non-exclusive contractual arrangements (Warehouse
Capacity Owners or WCO Independent Contractors). As of June 30, 2007, Landstar Global Logistics,
Inc. has executed contracts with 115 Warehouse Capacity Owners.
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 on 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 2006 fiscal year, 490 independent commission sales
agents generated $1 million or more of Landstars revenue and thus qualified as Million Dollar
Agents. During the 2006 fiscal year, the average revenue generated by a Million Dollar Agent was
$4,700,000 and revenue generated by Million Dollar Agents in the aggregate represented
92% of consolidated Landstar revenue. As of June 30, 2007 and July 1, 2006, the Company had a
network of 1,381 and 1,249 independent commission sales agent locations, respectively.
11
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) can be influenced by many
factors which do not necessarily indicate a change in price. 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 | |||||||||||||||
June 30, | July 1, | June 30, | July 1, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Carrier Segment: |
||||||||||||||||
External revenue generated through (in thousands): |
||||||||||||||||
BCO Independent Contractors |
$ | 639,656 | $ | 640,596 | $ | 340,258 | $ | 336,803 | ||||||||
Truck Brokerage Carriers |
254,305 | 255,337 | 130,129 | 130,817 | ||||||||||||
$ | 893,961 | $ | 895,933 | $ | 470,387 | $ | 467,620 | |||||||||
Revenue per revenue mile |
$ | 2.00 | $ | 2.00 | $ | 2.02 | $ | 2.01 | ||||||||
Revenue per load |
$ | 1,591 | $ | 1,594 | $ | 1,611 | $ | 1,607 | ||||||||
Average length of haul (miles) |
794 | 797 | 796 | 800 | ||||||||||||
Number of loads |
562,000 | 562,000 | 292,000 | 291,000 | ||||||||||||
Global Logistics Segment: |
||||||||||||||||
External revenue generated through (in thousands): |
||||||||||||||||
BCO Independent Contractors (1) |
$ | 52,185 | $ | 47,163 | $ | 25,344 | $ | 22,331 | ||||||||
Truck Brokerage Carriers |
165,895 | 198,301 | 85,942 | 97,674 | ||||||||||||
Rail, air, ocean and bus carriers (2) |
79,129 | 95,003 | 42,058 | 47,037 | ||||||||||||
$ | 297,209 | $ | 340,467 | $ | 153,344 | $ | 167,042 | |||||||||
Revenue per load (3) |
$ | 1,506 | $ | 1,504 | $ | 1,460 | $ | 1,507 | ||||||||
Number of loads (3) |
195,000 | 189,000 | 105,000 | 97,000 |
(1) | Includes revenue from freight hauled by carrier segment BCO Independent Contractors for global logistics customers. | |
(2) | Included in the 2007 and 2006 twenty six week period was $481,000 and $19,438,000, respectively, of revenue attributable to buses provided under a contract between Landstar Express America, Inc. and the United States Department of Transportation/Federal Aviation Administration (the FAA). Included in the 2006 thirteen week period was $8,582,000 of revenue attributable to buses provided under the FAA contract. | |
(3) | Number of loads and revenue per load in the twenty six week period ended June 30, 2007 exclude the effect of $3,445,000 of revenue derived under the FAA contract. 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. 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 providers:
June 30, 2007 |
July 1, 2006 |
|||||||
BCO Independent Contractors |
8,431 | 8,347 | ||||||
Truck Brokerage Carriers: |
||||||||
Approved and active (1) |
15,100 | 14,034 | ||||||
Other approved |
8,700 | 7,977 | ||||||
23,800 | 22,011 | |||||||
Total available truck capacity providers |
32,231 | 30,358 | ||||||
Number of trucks provided by BCO Independent Contractors |
9,036 | 9,047 | ||||||
(1) | Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal quarter end. |
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
12
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 and 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 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.
Rent and maintenance costs for Company provided 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 varies depending on when such claims were 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.
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 | |||||||||||||||
June 30, | July 1, | June 30, | July 1, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Investment income |
0.2 | 0.1 | 0.2 | 0.1 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Purchased transportation |
75.5 | 75.3 | 75.7 | 75.6 | ||||||||||||
Commissions to agents |
8.0 | 7.8 | 8.0 | 7.8 | ||||||||||||
Other operating costs |
1.1 | 1.8 | 1.2 | 1.6 | ||||||||||||
Insurance and claims |
2.4 | 1.6 | 1.9 | 1.4 | ||||||||||||
Selling, general and administrative |
5.3 | 5.7 | 4.9 | 5.4 | ||||||||||||
Depreciation and amortization |
0.8 | 0.6 | 0.7 | 0.6 | ||||||||||||
Total costs and expenses |
93.1 | 92.8 | 92.4 | 92.4 | ||||||||||||
Operating income |
7.1 | 7.3 | 7.8 | 7.7 | ||||||||||||
Interest and debt expense |
0.2 | 0.3 | 0.2 | 0.2 | ||||||||||||
Income before income taxes |
6.9 | 7.0 | 7.6 | 7.5 | ||||||||||||
Income taxes |
2.7 | 2.7 | 2.9 | 2.9 | ||||||||||||
Net income |
4.2 | % | 4.3 | % | 4.7 | % | 4.6 | % | ||||||||
13
TWENTY SIX WEEKS ENDED JUNE 30, 2007 COMPARED TO TWENTY SIX WEEKS ENDED JULY 1, 2006
Revenue for the 2007 twenty six week period was $1,209,601,000, a decrease of $43,679,000, or
3.5%, compared to the 2006 twenty six week period. The decrease in revenue was primarily
attributable to lower disaster relief revenue provided under the FAA contract in the twenty six
week period ended June 30, 2007 compared to the twenty six week period ended July 1, 2006. Revenue
for disaster relief services provided under the FAA contract in the twenty six week periods ended
June 30, 2007 and July 1, 2006 was $3,445,000 and $56,297,000, respectively, including trailer
rental revenue of $28,000 and $8,383,000, respectively. Revenue decreased $1,972,000 and
$43,258,000 at the carrier and global logistics segments, respectively, while revenue increased
$1,551,000 at the insurance segment. With respect to the carrier segment, revenue per load, the
number of loads delivered, the average length of haul and revenue per revenue mile in the 2007
twenty six week period all were approximately the same as compared to the 2006 twenty six week
period. The decrease in revenue at the global logistics segment was primarily due to the decreased
revenue for disaster relief services provided under the FAA contract. Excluding the number of loads
and revenue related to disaster relief efforts provided by the global logistics segment in the 2007
and 2006 twenty six week periods, the number of loads delivered by the global logistics segment in
the 2007 twenty six week period increased approximately 3% and revenue per load increased
approximately 1% compared to the 2006 twenty six week period.
Investment income at the insurance segment was $2,997,000 and $1,252,000 in the 2007 and 2006
twenty six week periods, respectively. The increase in investment income was primarily due to an
increased average investment balance and an increased rate of return, attributable to a general
increase in interest rates, on investments held by the insurance segment in the 2007 period.
Purchased transportation was 75.5% and 75.3% of revenue in the 2007 and 2006 twenty six week
periods, respectively. The increase in purchased transportation as a percentage of revenue was
primarily attributable to the effect of decreased revenue under the FAA contract, which tends to
have a lower cost of purchased transportation, and increased rates for purchased transportation
paid to rail intermodal carriers, partially offset by decreased rates for purchased transportation
paid to Truck Brokerage Carriers. Commissions to agents were 8.0% of revenue in 2007 and 7.8% in
2006. The increase in commissions to agents as a percentage of revenue was primarily attributable
to decreased revenue for disaster relief services provided under the FAA contract, which tends to
have a lower agent commission rate, and increased commissions to agents primarily attributable to
increased gross profit, revenue less the cost of purchased transportation, on truck brokerage
revenue. Other operating costs were 1.1% and 1.8% of revenue in 2007 and 2006, respectively. The
decrease in other operating costs as a percentage of revenue was primarily attributable to reduced
trailer rental costs incurred in support of disaster relief services under the FAA contract and
reduced other trailer rent expense, partially offset by increased trailer maintenance costs.
Insurance and claims were 2.4% of revenue in 2007 compared with 1.6% of revenue in 2006. The
increase in insurance and claims as a percentage of revenue was primarily attributable to a
$5,000,000 charge for the estimated cost of one severe accident that occurred during the first
quarter of 2007 and increased cargo claims expense. Selling, general and administrative costs were
5.3% of revenue in 2007 compared with 5.7% of revenue in 2006. The decrease in selling, general and
administrative costs as a percentage of revenue was primarily attributable to a decreased provision
for bonuses under the Companys incentive compensation programs and decreased legal fees, partially
offset by the effect of decreased revenue. Depreciation and amortization was 0.8% of revenue in
2007 and 0.6% in 2006. The increase in depreciation and amortization as a percentage of revenue was
primarily due to an increase in Company-owned trailing equipment and the effect of decreased
revenue.
Interest and debt expense was 0.2% of revenue in 2007 and 0.3% in 2006. The decrease in
interest and debt expense was primarily attributable to lower average outstanding borrowings on the
Companys senior credit facility.
The provisions for income taxes for both the 2007 and 2006 twenty six week periods were based
on an estimated full year combined effective income tax rate of approximately 38.7%, which was
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 $51,274,000, or $0.92 per common share ($0.91 per diluted share), in the 2007
twenty six week period, which included approximately $996,000 of operating income related to the
$3,445,000 of revenue attributable to disaster relief services provided primarily under the FAA
contract. The $996,000 of operating income, net of related income taxes, increased net income by
$614,000, or $0.01 per common share ($0.01 per diluted share). Also included in the 2007 twenty
six week period net income was a $5,000,000 charge for the estimated cost of one severe accident
that occurred during the first quarter of 2007. This charge, net of related income tax benefits,
reduced the 2007 twenty six week period net income by $3,065,000, or $0.05 per common share ($0.05
per diluted share). Net income was $53,815,000, or $0.92 per common share ($0.90 per diluted
share), in the 2006 twenty six week period, which included $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).
14
THIRTEEN WEEKS ENDED JUNE 30, 2007 COMPARED TO THIRTEEN WEEKS ENDED JULY 1, 2006
Revenue for the 2007 thirteen week period was $632,952,000, a decrease of $10,286,000, or
1.6%, compared to the 2006 thirteen week period. The decrease in revenue was primarily attributable
to lower disaster relief revenue provided under the FAA contract in the thirteen week period ended
June 30, 2007 compared to the thirteen week period ended July 1, 2006. Revenue for disaster relief
services provided under the FAA contract in the thirteen week period ended July 1, 2006 was
$20,848,000, including trailer rental revenue of $2,295,000. There was no revenue generated under
the FAA contract in the 2007 thirteen week period. Revenue increased $2,767,000 and $645,000 at
the carrier and insurance segments, respectively, while revenue decreased $13,698,000 at the global
logistics segment. With respect to the carrier segment, revenue per load, the number of loads
delivered, the average length of haul and revenue per revenue mile in the 2007 thirteen week period
all were approximately the same as compared to the 2006 thirteen week period. The decrease in
revenue at the global logistics segment was primarily due to the decreased revenue for disaster
relief services provided under the FAA contract. 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 2007 thirteen week
period increased approximately 8%, however, revenue per load decreased approximately 3% compared to
the 2006 thirteen week period. The decrease in revenue per load at the global logistics segment was
primarily attributable to a change in revenue mix.
Investment income at the insurance segment was $1,257,000 and $873,000 in the 2007 and 2006
thirteen week periods, respectively. The increase in investment income was primarily due to an
increased average investment balance and an increased rate of return, attributable to a general
increase in interest rates, on investments held by the insurance segment in the 2007 period.
Purchased transportation was 75.7% and 75.6% of revenue in the 2007 and 2006 thirteen week
periods, respectively. The increase in purchased transportation as a percentage of revenue was
primarily attributable to the effect of decreased revenue under the FAA contract, which tends to
have a lower cost of purchased transportation, and increased rates for purchased transportation
paid to rail intermodal carriers, partially offset by decreased rates for purchased transportation
paid to Truck Brokerage Carriers. Commissions to agents were 8.0% of revenue in 2007 and 7.8% in
2006. The increase in commissions to agents as a percentage of revenue was primarily attributable
to decreased revenue for disaster relief services provided under the FAA contract, which tends to
have a lower agent commission rate, and increased commissions to agents primarily attributable to
increased gross profit, revenue less the cost of purchased transportation, on truck brokerage
revenue. Other operating costs were 1.2% and 1.6% of revenue in 2007 and 2006, respectively. The
decrease 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 in 2006 and
reduced other trailer rent expense, partially offset by increased trailer maintenance costs.
Insurance and claims were 1.9% of revenue in 2007 compared with 1.4% of revenue in 2006. The
increase in insurance and claims as a percentage of revenue was primarily attributable to increased
cargo claims expense. Selling, general and administrative costs were 4.9% of revenue in 2007
compared with 5.4% of revenue in 2006. The decrease in selling, general and administrative costs as
a percentage of revenue was primarily attributable to a decreased provision for bonuses under the
Companys incentive compensation programs and decreased legal fees, partially offset by the effect
of decreased revenue. Depreciation and amortization was 0.7% of revenue in 2007 and 0.6% in 2006.
The increase in depreciation and amortization as a percentage of revenue was primarily due to an
increase in Company-owned trailing equipment and the effect of decreased revenue.
Interest and debt expense was 0.2% of revenue in both the 2007 and 2006 thirteen week periods.
The provisions for income taxes for the 2007 and 2006 thirteen week periods were based on estimated full year combined effective income tax rates of approximately 38.7% and 38.6%,
respectively, which were 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 $29,670,000, or $0.53 per common share ($0.53 per diluted share), in the 2007
thirteen week period. 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).
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.
15
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 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 $225,798,000 at June 30, 2007, compared to $230,274,000 at December
30, 2006. The decrease in shareholders equity was primarily a result of the purchase of 1,506,715
shares of the Companys common stock at a total cost of $67,754,000, partially offset by net income
and the effect of the exercises of stock options during the period. As of June 30, 2007, the
Company may purchase up to an additional 1,320,786 shares of its common stock under its authorized
stock purchase programs. Shareholders equity was 70% of total capitalization (defined as total
debt plus equity) at June 30, 2007 compared to 64% at December 30, 2006.
Long-term debt including current maturities was $96,632,000 at June 30, 2007, $32,689,000
lower than at December 30, 2006.
Working capital and the ratio of current assets to current liabilities were $179,681,000 and
1.7 to 1, respectively, at June 30, 2007, compared with $221,168,000 and 1.9 to 1, respectively, at
December 30, 2006. 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 $72,919,000 in the 2007 twenty six week
period compared with $174,588,000 in the 2006 twenty six week period. The decrease in cash flow
provided by operating activities was primarily attributable to the collection of a significant
portion of the 2005 fiscal year end receivable from the FAA for disaster relief transportation
services during the first half of 2006.
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, 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. None of these covenants are
presently considered by management to be materially restrictive to the Companys operations,
capital resources or liquidity. The Company is currently in compliance with all of the debt
covenants under the Fourth Amended and Restated Credit Agreement.
At June 30, 2007, the Company had $22,000,000 in borrowings outstanding and $26,868,000 of
letters of credit outstanding under the Fourth Amended and Restated Credit Agreement. At June 30,
2007, there was $176,132,000 available for future borrowings under the Companys Fourth Amended and
Restated Credit Agreement. In addition, the Company has $46,003,000 in letters of credit
outstanding, as collateral for insurance claims, that are secured by investments and cash
equivalents totaling $48,217,000.
On April 19, 2007, Landstar System, Inc. announced that its Board of Directors declared a cash
dividend of $0.03 per share with respect to its outstanding shares of common stock. The
distribution date for this cash dividend was on May 31, 2007, to stockholders of record on May 10,
2007. On February 1, 2007, Landstar System, Inc. announced that its Board of Directors declared a
cash dividend of $0.03 per share with respect to its outstanding shares of common stock. The
distribution date for this cash dividend was on February 28, 2007, to stockholders of record on
February 13, 2007. It is the intention of the Board of Directors to continue to pay a quarterly
dividend.
Historically, the Company has generated sufficient operating cash flow to meet its debt
service requirements, fund continued growth, both internal and through acquisitions, complete or
execute share purchases of its common stock under authorized share purchase programs, pay dividends
and 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 trailing equipment 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, thereby reducing the Companys capital requirements. During the 2007 twenty six week
period, the Company purchased $3,652,000 of operating property and acquired $14,674,000 of trailing
equipment by entering into capital leases. Landstar anticipates acquiring approximately $28,000,000
of operating property during the remainder of the 2007 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
2007.
16
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
certain BCO Independent Contractors (as defined below) (collectively with OOIDA, the Plaintiffs)
filed a putative class action complaint on behalf of independent contractors who provide truck
capacity to the Company and its subsidiaries under exclusive lease arrangements (BCO Independent
Contractors) in the United States District Court for the Middle District of Florida (the District
Court) in Jacksonville, Florida, against the Company and certain of its subsidiaries. The
complaint was amended on April 7, 2005 (as amended, the Amended Complaint). The Amended Complaint
alleged that certain aspects of the Companys motor carrier leases and related practices with its
BCO Independent Contractors violate certain federal leasing regulations and sought injunctive
relief, an unspecified amount of damages and attorneys fees. On August 30, 2005, the District
Court granted a motion by the Plaintiffs to certify the case as a class action.
On October 6, 2006, the District Court issued a summary judgment ruling which found, among
other things, that (1) the lease agreements of the Defendants (as defined below) literally complied
with the requirements of Section 376.12(d) of the applicable federal leasing regulations relating
to reductions to revenue derived from freight upon which BCO Independent Contractors compensation
is calculated, (2) charge-back amounts which include fees and profits to the motor carrier are not
unlawful under Section 376.12(h) and (3) the Defendants had violated 376.12(h) of the regulations
by failing to provide access to documents to determine the validity of certain charges. On January
12, 2007, the District Court ruled that the monetary remedy available to the Plaintiffs would be
limited to damages sustained as a result of the violation and rejected Plaintiffs request for
equitable relief in the form of restitution or disgorgement.
On January 16, 2007, the District Court ordered the decertification of the class of BCO
Independent Contractors for purposes of determining remedies. Immediately thereafter, the trial
commenced for purposes of determining what remedies, if any, would be awarded to the remaining
named BCO Independent Contractor Plaintiffs against the following subsidiaries of the Company:
Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc. (the Defendants). On January
18, 2007, in response to a motion filed by the Defendants following the presentation by the
Plaintiffs of their case in chief, the District Court granted judgment as a matter of law in favor
of the Defendants on the issue of damages and stated that the Plaintiffs had failed to present
evidence that any of the Plaintiffs had sustained damages as a result of any violation of the
applicable federal leasing regulations. On that date, the District Court also ruled that access to
documents describing a third party vendors charges to determine the validity of charge-back
amounts under 376.12(h) was not required under Defendants current lease with respect to programs
where the lease contains a price to a BCO Independent Contractor that is not calculated on the
basis of a third party vendors charge to the Defendants. On March 29, 2007, the District Court
denied Plaintiffs request for injunctive relief, entered a Judgment in favor of the Defendants and
issued written orders setting forth its rulings related to the decertification of the class and the
denial of Plaintiffs requests for damages and injunctive relief. The Plaintiffs and the Defendants
have each filed motions with the District Court concerning an award of attorney fees from the other
party.
The Plaintiffs have filed an appeal with the United States Court of Appeals for the Eleventh
Circuit (the Appellate Court) with respect to certain of the District Courts rulings, including
the judgments entered by the District Court in favor of the Defendants on the issues of damages and
injunctive relief. The Defendants have asked the Appellate Court to affirm the rulings of the
District Court that have been appealed by the Plaintiffs. The Defendants have also filed a
cross-appeal with the Appellate Court with respect to certain other rulings of the District Court.
Although no assurances can be given with respect to the outcome of the appeal or any proceedings
that may be conducted thereafter, the Company believes it has meritorious defenses and it intends
to continue asserting these defenses vigorously.
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.
17
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
June 30, 2007 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 both the 2007 and 2006 twenty six week periods,
insurance and claims costs included approximately $3.3 million 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 June 30, 2007.
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. Certain of these tax planning strategies result in a level
of uncertainty as to whether the related tax positions taken by the Company will result in a
recognizable benefit. The Company has provided for its estimated exposure attributable to such tax
positions due to the corresponding level of uncertainty with respect to the amount of income tax
benefit that may ultimately be realized. Management believes that the provision for liabilities
resulting from the uncertainty in such income tax positions 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 the uncertainty of such
income tax positions are not appropriate.
Significant variances from managements estimates for the amount of uncollectible receivables,
the ultimate resolution of self-insured claims or the provision for uncertainty in income tax
positions can be expected to positively or negatively affect Landstars earnings in a 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.
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 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 other
claims; unfavorable development of existing accident claims; dependence on third party insurance
companies; dependence on independent commission sales agents; dependence on third party capacity
providers; substantial industry competition; dependence on key personnel; disruptions or failures
in our computer systems; changes in fuel taxes; status of independent contractors; a downturn in
economic growth or growth in the transportation sector; and other operational, financial or legal
risks or uncertainties detailed in Landstars Form 10-K for the 2006 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.
18
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.
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 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 June 30, 2007,
the weighted average interest rate on borrowings outstanding was 5.96%. During the second quarter
of fiscal 2007, the average outstanding balance under the Fourth Amended and Restated Credit
Agreement was approximately $20,467,000. 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 June 30, 2007 was estimated to approximate carrying value. Assuming that debt levels on the
Fourth Amended and Restated Credit Agreement remain at $22,000,000, the balance at June 30, 2007, 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 $220,000
on an annualized basis.
All amounts outstanding on the Fourth Amended and Restated Credit Agreement are payable on
July 8, 2009, the expiration 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 two years. Assuming that the long-term portion of investments in bonds
remains at $6,518,000, the balance at June 30, 2007, 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 June 30, 2007, 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 June 30, 2007 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
In designing and evaluating controls and procedures, Company management recognized that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Because of the inherent limitation in any control system, no evaluation or implementation of a
control system can provide complete assurance that all control issues and all possible instances of
fraud have been or will be detected.
19
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On November 1, 2002, the Owner-Operator Independent Drivers Association, Inc. (OOIDA) and
certain BCO Independent Contractors (as defined below) (collectively with OOIDA, the Plaintiffs)
filed a putative class action complaint on behalf of independent contractors who provide truck
capacity to the Company and its subsidiaries under exclusive lease arrangements (BCO Independent
Contractors) in the United States District Court for the Middle District of Florida (the District
Court) in Jacksonville, Florida, against the Company and certain of its subsidiaries. The
complaint was amended on April 7, 2005 (as amended, the Amended Complaint). The Amended Complaint
alleged that certain aspects of the Companys motor carrier leases and related practices with its
BCO Independent Contractors violate certain federal leasing regulations and sought injunctive
relief, an unspecified amount of damages and attorneys fees. On August 30, 2005, the District
Court granted a motion by the Plaintiffs to certify the case as a class action.
On October 6, 2006, the District Court issued a summary judgment ruling which found, among
other things, that (1) the lease agreements of the Defendants (as defined below) literally complied
with the requirements of Section 376.12(d) of the applicable federal leasing regulations relating
to reductions to revenue derived from freight upon which BCO Independent Contractors compensation
is calculated, (2) charge-back amounts which include fees and profits to the motor carrier are not
unlawful under Section 376.12(h) and (3) the Defendants had violated 376.12(h) of the regulations
by failing to provide access to documents to determine the validity of certain charges. On January
12, 2007, the District Court ruled that the monetary remedy available to the Plaintiffs would be
limited to damages sustained as a result of the violation and rejected Plaintiffs request for
equitable relief in the form of restitution or disgorgement.
On January 16, 2007, the District Court ordered the decertification of the class of BCO
Independent Contractors for purposes of determining remedies. Immediately thereafter, the trial
commenced for purposes of determining what remedies, if any, would be awarded to the remaining
named BCO Independent Contractor Plaintiffs against the following subsidiaries of the Company:
Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc. (the Defendants). On January
18, 2007, in response to a motion filed by the Defendants following the presentation by the
Plaintiffs of their case in chief, the District Court granted judgment as a matter of law in favor
of the Defendants on the issue of damages and stated that the Plaintiffs had failed to present
evidence that any of the Plaintiffs had sustained damages as a result of any violation of the
applicable federal leasing regulations. On that date, the District Court also ruled that access to
documents describing a third party vendors charges to determine the validity of charge-back
amounts under 376.12(h) was not required under Defendants current lease with respect to programs
where the lease contains a price to a BCO Independent Contractor that is not calculated on the
basis of a third party vendors charge to the Defendants. On March 29, 2007, the District Court
denied Plaintiffs request for injunctive relief, entered a Judgment in favor of the Defendants and
issued written orders setting forth its rulings related to the decertification of the class and the
denial of Plaintiffs requests for damages and injunctive relief. The Plaintiffs and the Defendants
have each filed motions with the District Court concerning an award of attorney fees from the other
party.
The Plaintiffs have filed an appeal with the United States Court of Appeals for the Eleventh
Circuit (the Appellate Court) with respect to certain of the District Courts rulings, including
the judgments entered by the District Court in favor of the Defendants on the issues of damages and
injunctive relief. The Defendants have asked the Appellate Court to affirm the rulings of the
District Court that have been appealed by the Plaintiffs. The Defendants have also filed a
cross-appeal with the Appellate Court with respect to certain other rulings of the District Court.
Although no assurances can be given with respect to the outcome of the appeal or any proceedings
that may be conducted thereafter, the Company believes it has meritorious defenses and it intends
to continue asserting these defenses vigorously.
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 30,
2006 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. Other than
with respect to the risk factor set forth immediately below, 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 30, 2006 in response to Part I, Item 1A of that form.
20
Contract with the United States Department of Transportation/Federal Aviation Administration.
Historically, the United States Government has been the Companys largest customer. During fiscal
years 2001 through 2003, revenue derived from various departments of the United States Government,
primarily the United States Department of Defense, contributed between 5.0% and 7.5% of the
Companys annual revenue. During 2006, 2005 and 2004, revenue derived from the United States
Government, represented approximately 9%, 17% and 9% of consolidated revenue, respectively.
Included in revenue derived from United States Government during fiscal years 2006, 2005 and 2004
was $100.7 million, $275.9 million and $63.8 million of revenue, respectively, related to disaster
relief services provided by the Company for storms that impacted the United States. These
emergency transportation services were provided primarily under a contract (the FAA Contract)
with the Federal Aviation Administration (the FAA). The $100.7 million of revenue recognized
under the FAA Contract during the 2006 fiscal year generated $14.6 million of operating income
which, net of related income taxes, increased net income $8.9 million. The $275.9 million of
revenue recognized under the FAA Contract during the 2005 fiscal year generated $51.9 million of
operating income which, net of related income taxes, increased net income $31.6 million. The $63.8
million of revenue recognized under the FAA Contract during the 2004 fiscal year generated $11.8
million of operating income which, net of related income taxes, increased net income $7.3 million.
On December 20, 2006, the FAA Contract was amended to extend the term of the contract through
June 30, 2007, with an option held by the FAA to extend the term through December 31, 2007. On
June 8, 2007, the FAA exercised this option and the FAA Contract was amended to that effect.
It is expected that the United States Government will request proposals from various companies
for a new contract regarding disaster relief services. The Company cannot predict whether a request
for proposal, if any, will: a) be made to Landstar Express America or b) include pricing and other
provisions that are the same or similar to the current contract provisions. If a request for
proposal is received by Landstar Express America, there can be no assurances that Landstar Express
America would submit a proposal, or if it did, the United States Government would select Landstar
Express America as the transportation provider for disaster relief services in periods subsequent
to December 31, 2007.
The amount of revenue derived under the United States Government contract, if any, is
dependent on the occurrence of specific events, primarily disasters, natural or otherwise, for
which the Company provides emergency transportation services in support of disaster relief efforts
undertaken by the United States Government and administered by the FAA. Because of the
unpredictable nature of the occurrence and severity of such events, even if Landstar Express
America were to enter into a new contract with the United States Government, there can be no
assurance that such events will occur, and if such events occur, the extent to which the United
States Government will require the services of Landstar Express America, if at all.
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, 2007 to June 30, 2007, the Companys second fiscal quarter:
The following table provides information regarding the Companys purchases of its common stock during the period from April 1, 2007 to June 30, 2007, 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 | ||||||||||||
March 31, 2007 |
271,549 | |||||||||||||||
Apr. 1, 2007 Apr. 28, 2007 |
2,271,549 | |||||||||||||||
Apr. 29, 2007 May 26, 2007 |
2,271,549 | |||||||||||||||
May 27, 2007 June 30, 2007 |
950,763 | $ | 46.46 | 950,763 | 1,320,786 | |||||||||||
Total |
950,763 | $ | 46.46 | 950,763 | ||||||||||||
On August 3, 2006, Landstar System, Inc. announced that it had been authorized by its
Board of Directors to purchase up to 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 June
30, 2007, the Company completed the purchase of shares authorized for purchase under this program.
On April 19, 2007, Landstar System, Inc. announced that it had been authorized by its Board of
Directors to purchase 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 April 19, 2007 authorization.
On April 19, 2007, Landstar System, Inc. announced that its Board of Directors declared a cash
dividend of $0.03 per share with respect to its outstanding shares of common stock. The
distribution date for this cash dividend was on May 31, 2007, to stockholders of record on May 10,
2007. On February 1, 2007, Landstar System, Inc. announced that its Board of Directors declared a
cash dividend of $0.03 per share with respect to its outstanding shares of common stock. The
distribution date for this cash dividend was on
February 28, 2007, to stockholders of record on February 13, 2007. It is the intention of the
Board of Directors to continue to pay a quarterly dividend.
21
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 3, 2007, Landstar System, Inc. (LSI) held its Annual Meeting of Stockholders (the
Meeting) in the offices of Landstar System, Inc., in Rockford, Illinois. The matters voted upon
at the Meeting included (i) the election of the two Class II directors for terms to expire at the
2010 Annual Meeting of Stockholders, (ii) the ratification of appointment of KPMG LLP as LSIs
independent registered public accounting firm for fiscal year 2007 and (iii) the approval of the
Companys Executive Incentive Compensation Plan (the EICP Plan) to assure the deductibility by
the Company for federal income tax purposes of certain compensation payable under the EICP Plan.
Pursuant to LSIs Restated Certificate of Incorporation and Amended and Restated Bylaws, the
size of the Board of Directors was reduced from seven to six members upon completion of the
Meeting, to be comprised of: two Class I directors whose members terms will expire at the 2009
Annual Meeting of Stockholders; two Class II directors whose members terms will expire at the 2010
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 II directors at the
Meeting, nominee William S. Elston and nominee Diana M. Murphy were elected to the Board of
Directors of LSI. Mr. Elston received 52,223,846 votes for election to the Board and 254,763 votes
were withheld. Ms. Murphy received 52,222,185 votes for election to the Board and 256,424 votes
were withheld. The names of the other directors whose terms of office as directors continued after
the Meeting are as follows: Ronald W. Drucker (a Class I director), Henry H. Gerkens (a Class I
director), David G. Bannister (a Class III director) and Jeffrey C. Crowe (a Class III director).
Merrit J. Mott, who served as a member of the Board of Directors since 1994, ceased to serve as a
director upon completion of his current term at the Meeting. As disclosed under Item 5.02 in the
Companys Current Report on Form 8-K filed on July 19, 2007, the Board of Directors increased the
size of the Board from six directors to seven and elected Michael A. Henning as a Class III
director.
The proposal to ratify the appointment of KPMG LLP as LSIs independent registered public
accounting firm for fiscal year 2007 was approved by LSIs stockholders. Votes for the proposal
were 52,366,394, votes against were 99,002 and votes abstaining were 13,213.
The proposal to re-adopt the Companys EICP Plan was approved by LSIs stockholders. Votes for
the proposal were 46,894,530, votes against were 1,791,017 and votes abstaining were 122,684.
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.
22
EXHIBIT INDEX
Registrants Commission File No.: 0-21238
Exhibit No. | Description | |
(10)
|
Material Contracts | |
10.1*
|
Amendment to Solicitation, Offer and Award Agreement (as previously amended), dated June 8, 2007, between the United States Department of Transportation/Federal Aviation Administration and Landstar Express America, Inc. | |
10.2
|
Letter Agreement, dated June 8, 2007, between Landstar System, Inc. and Henry H. Gerkens (incorporated by reference to Exhibit 99.1 to the Registrants Current Report on Form 8-K filed on June 11, 2007 (Commission File No. 0-21238)) | |
(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 |
23
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 3, 2007 | /s/ Henry H. Gerkens | |||
Henry H. Gerkens | ||||
President and Chief Executive Officer | ||||
Date: August 3, 2007 | /s/ James B. Gattoni | |||
James B. Gattoni | ||||
Vice President and Chief Financial Officer | ||||
24