LANDSTAR SYSTEM INC - Quarter Report: 2008 September (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended September 27, 2008 | ||
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/0000853816/000095014408008002/g16219landstar01.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)
(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)
(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, a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange 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 October 17, 2008 was 52,408,616.
Index
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 thirty nine weeks ended
September 27, 2008 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 27, 2008.
These interim financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Companys 2007 Annual Report on Form 10-K.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
Sept 27, | Dec 29, | |||||||
2008 | 2007 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 77,604 | $ | 60,750 | ||||
Short-term investments |
25,727 | 22,921 | ||||||
Trade accounts receivable, less allowance of $5,316 and $4,469 |
391,873 | 310,258 | ||||||
Other receivables, including advances to independent contractors, less allowance
of $4,151 and $4,792 |
9,398 | 11,170 | ||||||
Deferred income taxes and other current assets |
32,251 | 28,554 | ||||||
Total current assets |
536,853 | 433,653 | ||||||
Operating property, less accumulated depreciation and amortization of $102,008
and $88,284 |
124,283 | 132,369 | ||||||
Goodwill |
31,134 | 31,134 | ||||||
Other assets |
37,310 | 31,845 | ||||||
Total assets |
$ | 729,580 | $ | 629,001 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current Liabilities |
||||||||
Cash overdraft |
$ | 32,906 | $ | 25,769 | ||||
Accounts payable |
144,730 | 117,122 | ||||||
Current maturities of long-term debt |
24,084 | 23,155 | ||||||
Insurance claims |
25,086 | 28,163 | ||||||
Accrued income taxes |
14,461 | 14,865 | ||||||
Other current liabilities |
41,662 | 40,501 | ||||||
Total current liabilities |
282,929 | 249,575 | ||||||
Long-term debt, excluding current maturities |
132,997 | 141,598 | ||||||
Insurance claims |
36,222 | 37,631 | ||||||
Deferred income taxes |
25,339 | 19,411 | ||||||
Shareholders Equity |
||||||||
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 66,109,547
and 65,630,383 shares |
661 | 656 | ||||||
Additional paid-in capital |
152,845 | 132,788 | ||||||
Retained earnings |
681,806 | 601,537 | ||||||
Cost of 13,700,931 and 13,121,109 shares of common stock in treasury |
(582,771 | ) | (554,252 | ) | ||||
Accumulated other comprehensive income (loss) |
(448 | ) | 57 | |||||
Total shareholders equity |
252,093 | 180,786 | ||||||
Total liabilities and shareholders equity |
$ | 729,580 | $ | 629,001 | ||||
See accompanying notes to consolidated financial statements.
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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)
Thirty Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
Sept 27, | Sept 29, | Sept 27, | Sept 29, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenue |
$ | 2,039,232 | $ | 1,844,412 | $ | 732,753 | $ | 634,811 | ||||||||
Investment income |
2,686 | 4,103 | 817 | 1,106 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Purchased transportation |
1,573,209 | 1,394,781 | 569,864 | 481,946 | ||||||||||||
Commissions to agents |
153,857 | 148,574 | 54,267 | 51,170 | ||||||||||||
Other operating costs |
20,814 | 21,208 | 6,874 | 7,986 | ||||||||||||
Insurance and claims |
27,159 | 38,878 | 8,125 | 9,319 | ||||||||||||
Selling, general and administrative |
105,457 | 95,002 | 34,499 | 31,082 | ||||||||||||
Depreciation and amortization |
15,558 | 14,045 | 5,251 | 4,766 | ||||||||||||
Total costs and expenses |
1,896,054 | 1,712,488 | 678,880 | 586,269 | ||||||||||||
Operating income |
145,864 | 136,027 | 54,690 | 49,648 | ||||||||||||
Interest and debt expense |
5,635 | 4,464 | 1,757 | 1,764 | ||||||||||||
Income before income taxes |
140,229 | 131,563 | 52,933 | 47,884 | ||||||||||||
Income taxes |
53,904 | 50,941 | 20,116 | 18,536 | ||||||||||||
Net income |
$ | 86,325 | $ | 80,622 | $ | 32,817 | $ | 29,348 | ||||||||
Earnings per common share |
$ | 1.64 | $ | 1.46 | $ | 0.62 | $ | 0.54 | ||||||||
Diluted earnings per share |
$ | 1.62 | $ | 1.45 | $ | 0.62 | $ | 0.54 | ||||||||
Average number of shares outstanding: |
||||||||||||||||
Earnings per common share |
52,680,000 | 55,221,000 | 52,586,000 | 54,189,000 | ||||||||||||
Diluted earnings per share |
53,142,000 | 55,740,000 | 53,028,000 | 54,608,000 | ||||||||||||
Dividends paid per common share |
$ | 0.1150 | $ | 0.0975 | $ | 0.0400 | $ | 0.0375 | ||||||||
See accompanying notes to consolidated financial statements.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Thirty Nine Weeks Ended | ||||||||
Sept 27, | Sept 29, | |||||||
2008 | 2007 | |||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 86,325 | $ | 80,622 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization of operating property |
15,558 | 14,045 | ||||||
Non-cash interest charges |
130 | 130 | ||||||
Provisions for losses on trade and other accounts receivable |
4,684 | 3,094 | ||||||
Losses (gains) on sales/disposals of operating property |
120 | (1,689 | ) | |||||
Director compensation paid in common stock |
634 | 678 | ||||||
Deferred income taxes, net |
5,984 | 2,627 | ||||||
Stock-based compensation |
4,994 | 5,500 | ||||||
Changes in operating assets and liabilities: |
||||||||
Decrease (increase) in trade and other accounts receivable |
(84,527 | ) | 8,579 | |||||
Increase in other assets |
(7,701 | ) | (7,641 | ) | ||||
Increase in accounts payable |
27,608 | 2,755 | ||||||
Increase (decrease) in other liabilities |
1,035 | (1,383 | ) | |||||
Increase (decrease) in insurance claims |
(4,486 | ) | 4,671 | |||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
50,358 | 111,988 | ||||||
INVESTING ACTIVITIES |
||||||||
Net change in other short-term investments |
(8,866 | ) | (2,845 | ) | ||||
Sales and maturities of investments |
10,551 | 30,282 | ||||||
Purchases of investments |
(6,921 | ) | (32,133 | ) | ||||
Purchases of operating property |
(4,903 | ) | (5,829 | ) | ||||
Proceeds from sales of operating property |
25 | 3,688 | ||||||
NET CASH USED BY INVESTING ACTIVITIES |
(10,114 | ) | (6,837 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Increase in cash overdraft |
7,137 | 6,766 | ||||||
Dividends paid |
(6,056 | ) | (5,390 | ) | ||||
Proceeds from exercises of stock options |
12,249 | 12,264 | ||||||
Excess tax benefit on stock option exercises |
2,185 | 3,660 | ||||||
Borrowings on revolving credit facility |
87,000 | 24,000 | ||||||
Purchases of common stock |
(28,519 | ) | (126,148 | ) | ||||
Principal payments on long-term debt and capital lease obligations |
(97,386 | ) | (52,747 | ) | ||||
NET CASH USED BY FINANCING ACTIVITIES |
(23,390 | ) | (137,595 | ) | ||||
Increase (decrease) in cash and cash equivalents |
16,854 | (32,444 | ) | |||||
Cash and cash equivalents at beginning of period |
60,750 | 91,491 | ||||||
Cash and cash equivalents at end of period |
$ | 77,604 | $ | 59,047 | ||||
See accompanying notes to consolidated financial statements.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
Thirty Nine Weeks Ended September 27, 2008
(Dollars in thousands)
(Unaudited)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY
Thirty Nine Weeks Ended September 27, 2008
(Dollars in thousands)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Treasury Stock | Other | ||||||||||||||||||||||||||||||
Common Stock | Paid-In | Retained | at Cost | Comprehensive | ||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Shares | Amount | Income (Loss) | Total | |||||||||||||||||||||||||
Balance December 29, 2007 |
65,630,383 | $ | 656 | $ | 132,788 | $ | 601,537 | 13,121,109 | $ | (554,252 | ) | $ | 57 | $ | 180,786 | |||||||||||||||||
Net income |
86,325 | 86,325 | ||||||||||||||||||||||||||||||
Dividends paid ($0.1150 per share) |
(6,056 | ) | (6,056 | ) | ||||||||||||||||||||||||||||
Director compensation paid
in common stock |
12,000 | 634 | 634 | |||||||||||||||||||||||||||||
Purchases of Common Stock |
579,822 | (28,519 | ) | (28,519 | ) | |||||||||||||||||||||||||||
Stock-based compensation expense |
4,994 | 4,994 | ||||||||||||||||||||||||||||||
Exercises of stock options,
including excess tax benefit |
467,164 | 5 | 14,429 | 14,434 | ||||||||||||||||||||||||||||
Unrealized loss on
available-for-sale investments,
net of income tax benefit |
(505 | ) | (505 | ) | ||||||||||||||||||||||||||||
Balance September 27, 2008 |
66,109,547 | $ | 661 | $ | 152,845 | $ | 681,806 | 13,700,931 | $ | (582,771 | ) | $ | (448 | ) | $ | 252,093 | ||||||||||||||||
See accompanying notes to consolidated financial statements.
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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 September 27, 2008, 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):
Thirty Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
Sept 27, | Sept 29, | Sept 27, | Sept 29, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Total cost of the Plans during
the period |
$ | 4,994 | $ | 5,500 | $ | 1,642 | $ | 1,856 | ||||||||
Amount of related income tax
benefit recognized during the
period |
1,534 | 1,732 | 474 | 547 | ||||||||||||
Net cost of the Plans during the period |
$ | 3,460 | $ | 3,768 | $ | 1,168 | $ | 1,309 | ||||||||
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 2008
and 2007 thirty-nine-week periods:
2008 | 2007 | |||||||||||
Expected volatility | 33.0 | % | 33.0 | % | ||||||||
Expected dividend yield | 0.375 | % | 0.300 | % | ||||||||
Risk-free interest rate | 3.00 | % | 4.75 | % | ||||||||
Expected lives (in years) | 4.1 | 4.2 |
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
thirty-nine-week periods ended September 27, 2008 and September 29, 2007 was $12.60 and $14.26,
respectively.
The following table summarizes information regarding the Companys stock options under the Plans: |
Weighted Average | Weighted Average | |||||||||||||||
Number of | Exercise Price | Remaining Contractual | Aggregate Intrinsic | |||||||||||||
Options | per Share | Term (years) | Value (000s) | |||||||||||||
Options outstanding at December 29, 2007 |
2,199,308 | $ | 31.10 | |||||||||||||
Granted |
777,500 | $ | 42.30 | |||||||||||||
Exercised |
(467,164 | ) | $ | 26.22 | ||||||||||||
Forfeited |
(3,000 | ) | $ | 44.74 | ||||||||||||
Options outstanding at September 27, 2008 |
2,506,644 | $ | 35.47 | 7.2 | $ | 21,023 | ||||||||||
Options exercisable at September 27, 2008 |
820,211 | $ | 30.72 | 5.8 | $ | 10,780 | ||||||||||
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As of September 27, 2008, there were 5,372,544 shares of the Companys common stock
reserved for issuance upon exercise of options granted and to be granted under the Plans.
The total intrinsic value of stock options exercised during the thirty-nine-week periods ended
September 27, 2008 and September 29, 2007 was $11,587,000 and $16,502,000, respectively. The total
intrinsic value of stock options exercised during the thirteen-week periods ended September 27,
2008 and September 29, 2007 was $1,541,000 and $6,415,000, respectively.
As of September 27, 2008, there was $13,110,000 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 3.4 years.
Under the Directors Stock Compensation Plan, outside members of the Board of Directors who
are elected or re-elected to the Board receive 6,000 shares of common stock of the Company, subject
to certain restrictions including restrictions on transfer. The Company issued an aggregate of
12,000 shares of its common stock in each of the thirty-nine-week periods ended September 27, 2008
and September 29, 2007, to members of the Board of Directors re-elected at, respectively, the 2008
and 2007 annual stockholders meetings. On July 19, 2007, 1,577
shares of the Companys common stock were issued to a member of the
Board of Directors upon such members election to the Board of
Directors. During the 2008 and 2007 thirty-nine-week periods, the
Company reported $634,000 and $678,000, respectively, in compensation expense representing the fair
market value of these share awards. As of September 27, 2008, there were 138,423 shares of the
Companys common stock reserved for issuance upon the grant of common stock under the Directors
Stock Compensation Plan.
(2) | Debt |
On June 27, 2008, Landstar entered into a credit agreement with a syndicate of banks and
JPMorgan Chase Bank, N.A., as administrative agent (the Credit Agreement). The Credit Agreement,
which expires on June 27, 2013, 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 initial borrowing of $67,000,000 under the Credit Agreement was used to refinance
$67,000,000 of outstanding borrowings under the prior credit agreement, which was terminated in
connection with the Credit Agreement. Borrowings under the Credit Agreement are unsecured, however,
all but two of the Companys subsidiaries guarantee the obligations under the Credit Agreement.
All amounts outstanding under the Credit Agreement are payable on June 27, 2013, the expiration
date of the Credit Agreement.
Borrowings under the Credit Agreement bear interest at rates equal to, at the option of the
Company, either (i) the greater of (a) the prime rate as publicly announced from time to time by
JPMorgan Chase Bank, N.A. and (b) the federal funds effective rate plus 0.5%, or, (ii) the rate at
the time offered to JPMorgan Chase Bank, N.A. in the Eurodollar market for amounts and periods
comparable to the relevant loan plus, in either case, a margin that is determined based on the
level of the Companys Leverage Ratio, as defined in the Credit Agreement. The unused portion of
the revolving credit facility under the Credit Agreement carries a commitment fee determined based
on the level of the Leverage Ratio, as therein defined. The commitment fee for the unused portion
of the revolving credit facility under the Credit Agreement ranges from .175% to .35%, based on
achieving certain levels of the Leverage Ratio. As of September 27, 2008, the weighted average
interest rate on borrowings outstanding was 3.90%.
The Credit Agreement contains a number of covenants that limit, among other things, the
incurrence of additional indebtedness. The Company is required to, among other things, maintain a
minimum Fixed Charge Coverage Ratio, as defined in the Credit Agreement, and maintain a Leverage
Ratio below a specified maximum. The Credit Agreement provides for a restriction on cash dividends
and other distributions to stockholders on the Companys capital stock to the extent there is a
default under the Credit Agreement. In addition, the Credit Agreement under certain circumstances
limits the amount of such cash dividends and other distributions to stockholders in the event that,
after giving effect to any payment made to effect such cash dividend or other distribution, the
Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Companys most
recently completed fiscal quarter. The Credit Agreement provides for an event of default in the
event, among other things, that a person or group acquires 25% or more of the outstanding capital
stock of the Company or obtains the power to elect a majority of the Companys directors. 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 Credit Agreement.
(3) | Income Taxes |
The provisions for income taxes for each of the 2008 and 2007 thirty-nine-week periods were
based on estimated full year combined effective income tax rates of approximately 38.4% and 38.7%,
respectively, which were higher than the statutory federal income tax rate primarily as a result of
state taxes, the meals and entertainment exclusion and non-deductible stock-based compensation.
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(4) | Earnings Per Share |
Earnings per common share amounts are based on the weighted average number of common shares
outstanding and diluted earnings per share amounts are based on the weighted average number of
common shares outstanding plus the incremental shares that would have been outstanding upon the
assumed exercise of all dilutive stock options.
The following table provides a reconciliation of the average number of common shares
outstanding used to calculate earnings per share to the average number of common shares and common
share equivalents outstanding used to calculate diluted earnings per share (in thousands):
Thirty Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
Sept 27, | Sept 29, | Sept 27, | Sept 29, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Average number
of common shares
outstanding |
52,680 | 55,221 | 52,586 | 54,189 | ||||||||||||
Incremental shares
from assumed
exercises of stock
options |
462 | 519 | 442 | 419 | ||||||||||||
Average number of
common shares and
common share
equivalents
outstanding |
53,142 | 55,740 | 53,028 | 54,608 | ||||||||||||
(5) | Additional Cash Flow Information |
During the 2008 thirty-nine-week period, Landstar paid income taxes and interest of
$47,584,000 and $6,258,000, respectively. During the 2007 thirty-nine-week period, Landstar paid
income taxes and interest of $45,441,000 and $5,289,000, respectively. Landstar acquired operating
property by entering into capital leases in the amount of $2,714,000 and $27,461,000 in the 2008
and 2007 thirty-nine-week periods, respectively.
(6) | Segment Information |
Historically, the Company reported the results of three operating segments: the carrier
segment, the global logistics segment and the insurance segment. Beginning in the thirteen week
period ended March 29, 2008, the Company revised the presentation format of its segment disclosure
to consolidate the previously reported three segments to two segments: the transportation logistics
segment and the insurance segment. This change in segment reporting reflected increased
centralization and consolidation of certain administrative and sales functions across all of the
Companys operating subsidiaries and the increased similarity of the services provided by the
operations of the Companys various operating subsidiaries, primarily with respect to truck
brokerage services. As a result of this change in presentation, the revenue and operating results
formerly separated into the carrier and global logistics segments, together with corporate
overhead, which was previously included as other in the segment information, were consolidated
into the transportation logistics segment. This change in segment reporting had no impact on the
Companys consolidated balance sheets, statements of income, statements of cash flows or statements
of changes in shareholders equity for any periods. This change in segment reporting also had no
impact on financial reporting with respect to the Companys insurance segment. Prior period
segment information has been adjusted to reflect the change in segment reporting.
The following tables summarize information about Landstars reportable business segments as of
and for the thirty-nine-week and thirteen-week periods ended September 27, 2008 and September 29,
2007 (in thousands):
Thirty Nine Weeks Ended | ||||||||||||||||||||||||
Sept 27, 2008 | Sept 29, 2007 | |||||||||||||||||||||||
Transportation | Transportation | |||||||||||||||||||||||
Logistics | Insurance | Total | Logistics | Insurance | Total | |||||||||||||||||||
External revenue |
$ | 2,011,766 | $ | 27,466 | $ | 2,039,232 | $ | 1,816,751 | $ | 27,661 | $ | 1,844,412 | ||||||||||||
Investment income |
2,686 | 2,686 | 4,103 | 4,103 | ||||||||||||||||||||
Internal revenue |
21,713 | 21,713 | 23,019 | 23,019 | ||||||||||||||||||||
Operating income |
118,171 | 27,693 | 145,864 | 110,441 | 25,586 | 136,027 | ||||||||||||||||||
Goodwill |
31,134 | 31,134 | 31,134 | 31,134 |
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Thirteen Weeks Ended | ||||||||||||||||||||||||
Sept 27, 2008 | Sept 29, 2007 | |||||||||||||||||||||||
Transportation | Transportation | |||||||||||||||||||||||
Logistics | Insurance | Total | Logistics | Insurance | Total | |||||||||||||||||||
External revenue |
$ | 723,535 | $ | 9,218 | $ | 732,753 | $ | 625,581 | $ | 9,230 | $ | 634,811 | ||||||||||||
Investment income |
817 | 817 | 1,106 | 1,106 | ||||||||||||||||||||
Internal revenue |
5,852 | 5,852 | 6,196 | 6,196 | ||||||||||||||||||||
Operating income |
44,611 | 10,079 | 54,690 | 38,071 | 11,577 | 49,648 |
(7) | Comprehensive Income |
The following table includes the components of comprehensive income for the thirty-nine-week
and thirteen-week periods ended September 27, 2008 and September 29, 2007 (in thousands):
Thirty Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
Sept 27, | Sept 29, | Sept 27, | Sept 29, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net income |
$ | 86,325 | $ | 80,622 | $ | 32,817 | $ | 29,348 | ||||||||
Unrealized holding losses on
available-for-sale
investments, net of income
taxes |
(505 | ) | | (368 | ) | (15 | ) | |||||||||
Comprehensive income |
$ | 85,820 | $ | 80,622 | $ | 32,449 | $ | 29,333 | ||||||||
Accumulated other comprehensive loss at September 27, 2008 of $448,000 represents the
unrealized holding losses on available-for-sale investments of $694,000, net of related income tax
benefits of $246,000.
(8) | Commitments and Contingencies |
As of September 27, 2008, Landstar had $28,032,000 of letters of credit outstanding under the
Companys revolving credit facility and $48,148,000 of letters of credit secured by investments
held by the Companys insurance segment. Short-term investments include $4,005,000 in current
maturities of investment grade bonds and $21,722,000 of cash equivalents held by the Companys
insurance segment at September 27, 2008. These short-term investments together with $15,344,000 of
the non-current portion of investment grade bonds and $9,012,000 of cash equivalents included in
other assets at September 27, 2008, provide collateral for the $48,148,000 of letters of credit
issued to guarantee payment of insurance claims.
As further described in periodic and current reports previously filed by Landstar System, Inc.
(the Company) with the Securities and Exchange Commission, the Company and certain of its
subsidiaries (the Defendants) are defendants in a suit (the Litigation) brought in the United
States District Court for the Middle District of Florida (the District Court) by the
Owner-Operator Independent Drivers Association, Inc. (OOIDA) and four former BCO Independent
Contractors (the Named Plaintiffs and, with OOIDA, the Plaintiffs) on behalf of all independent
contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease
arrangements (the BCO Independent Contractors). The Plaintiffs allege that certain aspects of
the Companys motor carrier leases and related practices with its BCO Independent Contractors
violate certain federal leasing regulations and seek injunctive relief, an unspecified amount of
damages and attorneys fees.
On March 29, 2007, the District Court denied the request by Plaintiffs 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 plaintiff class and other important elements of the
Litigation relating to liability, injunctive relief and monetary relief. The Plaintiffs filed an
appeal with the United States Court of Appeals for the Eleventh Circuit (the Appellate Court) of
certain of the District Courts rulings in favor of the Defendants. The Defendants asked the
Appellate Court to affirm such rulings and filed a cross-appeal with the Appellate Court with
respect to certain other rulings of the District Court.
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On September 3, 2008, the Appellate Court issued its ruling, which, among other things,
affirmed the District Courts rulings that (i) the Defendants are not prohibited by the applicable
federal leasing regulations from charging administrative or other fees to BCO Independent
Contractors in connection with voluntary programs offered by the Defendants through which a BCO
Independent Contractor may purchase discounted products and services for a charge that is deducted
against the compensation payable to the BCO Independent Contractor (a Charge-back Deduction),
(ii) the Plaintiffs are not entitled to restitution or disgorgement with respect to violations by
Defendants of the applicable federal leasing regulations but instead may recover only actual
damages, if any, which they sustained as a result of any such violations and (iii) the claims of
BCO Independent Contractors may not be handled on a class action basis for purposes of determining
the amount of actual damages, if any, they sustained as a result of any violations. Further, the
analysis of the Appellate Court confirmed the absence of any violations alleged by the Plaintiffs
of the federal leasing regulations with respect to the written terms of all leases currently in use
between the Defendants and BCO Independent Contractors.
However, the ruling of the Appellate Court reversed the District Courts rulings (i) that an
old version of the lease formerly used by Defendants but not in use with any current BCO
Independent Contractor complied with applicable disclosure requirements under the federal leasing
regulations with respect to adjustments to compensation payable to BCO Independent Contractors on
certain loads sourced from the U. S. Dept. of Defense, and (ii) that the Defendants had provided
sufficient documentation to BCO Independent Contractors under the applicable federal leasing
regulations relating to how the component elements of Charge-back Deductions were computed. The
Appellate Court then remanded the case to the District Court to permit the Plaintiffs to seek
injunctive relief with respect to these violations of the federal leasing regulations and to hold
an evidentiary hearing to give the Named Plaintiffs an opportunity to produce evidence of any
damages they actually sustained as a result of such violations.
Each of the parties to the Litigation has filed a petition with the Appellate Court seeking
rehearing of the Appellate Courts ruling; however, there can be no assurance that any petition for
rehearing will be granted.
Although no assurances can be given with respect to the outcome of the Litigation, including
any possible award of attorneys fees to the Plaintiffs, the Company believes that (i) no Plaintiff
has sustained any actual damages as a result of any violations by the Defendants of the federal
leasing regulations and (ii) injunctive relief, if any, that may be granted by the District Court
on remand is unlikely to have a material adverse financial effect on the Company.
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 therefor, 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.
(9) | Concentrations of Credit Risk in Key Customers |
Financial instruments that potentially subject the Company to significant concentrations of credit
risk consist principally of accounts receivable from trade customers. The Company performs ongoing
credit evaluations of the financial condition of its customers and an allowance for doubtful
accounts is maintained as required under U.S. generally accepted accounting principles. Credit risk
with respect to the Companys accounts receivable historically has been broadly diversified due to
the large number of entities comprising the Companys customer base and their dispersion across
many different industries and geographical regions. No single customer accounted for more than 10% of
Company revenue for the thirty-nine-week period ended September 27, 2008, and no single customer
accounted for more than 10% of the gross accounts receivable balance at September 27, 2008. It
should be noted, however, that revenue from customers in the automotive sector represented in the
aggregate approximately 7% of the Companys revenue for the 2008 thirty-nine-week period. The
Company estimates that receivable balances relating to customers with a significant concentration
of their business either in the automotive industry or directly impacted by the financial condition
of the larger U.S. domestic automobile manufacturers represented approximately 6% to 8% of gross
accounts receivable at September 27, 2008. The financial condition of the U.S. domestic automotive
industry may be significantly adversely affected by the availability of credit to U.S. consumers
and the overall financial condition of the U.S. economy, both of which have recently weakened. A
significant deterioration in the financial condition or operations of the Companys customers
within the automotive sector, including the larger U.S. domestic automobile manufacturers and their
vendors, suppliers and other service providers, could negatively impact the collectability of trade
accounts receivable due from these customers, which could result in an adverse effect on the
Companys operating results in a given quarter or year.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with the attached interim consolidated
financial statements and notes thereto, and with the Companys audited financial statements and
notes thereto for the fiscal year ended December 29, 2007 and Managements Discussion and Analysis
of Financial Condition and Results of Operations included in the 2007 Annual Report on Form 10-K.
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Introduction
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (together, referred
to herein as Landstar or the Company), provide transportation and logistics 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, utilizing a network of
independent commission sales agents, third party capacity providers and employees. Landstar focuses
on providing transportation and logistics 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 utilizes third party capacity providers exclusively to handle customers freight. The nature of
the Companys business is such that a significant portion of its operating costs varies directly
with revenue.
Historically, the Company reported the results of three operating segments: the carrier
segment, the global logistics segment and the insurance segment. Beginning in the thirteen-week
period ended March 29, 2008, the Company revised the presentation format of its segment disclosure
to consolidate the previously reported three segments to two segments: the transportation logistics
segment and the insurance segment. This change in segment reporting reflected increased
centralization and consolidation of certain administrative and sales functions across all of the
Companys operating subsidiaries and the increased similarity of the services provided by the
operations of the Companys various operating subsidiaries, primarily with respect to truck
brokerage services. As a result of this change in presentation, the revenue and operating results
formerly separated into the carrier and global logistics segments, together with corporate
overhead, which was previously included as other in the segment information, were consolidated
into the transportation logistics segment. This change in reporting had no impact on reporting with
respect to the insurance segment.
The transportation logistics segment markets its services primarily through independent
commission sales agents. Each of the independent commission sales agents has the opportunity to
market all of the services provided by the transportation logistics segment. This segment provides
a wide range of transportation and logistics services, including truckload transportation, rail
intermodal, the arrangement of multimodal (ground, air, ocean and rail) moves, expedited
transportation services, air cargo and ocean cargo services and warehousing. Truckload services
primarily are provided for a wide range of general commodities, much of
which are over irregular or non-repetitive routes, utilizing dry and specialty vans and unsided
trailers, including flatbed, drop deck and specialty trailers. Available truckload services also
include short-to-long haul movement of containers by truck and expedited ground and dedicated
power-only truck capacity. These services are provided by independent contractors who provide truck
capacity to the Company under exclusive lease arrangements (the BCO Independent Contractors) and
other third party truck capacity providers under non-exclusive contractual arrangements (Truck
Brokerage Carriers). Rail intermodal, air and ocean services are provided by third party railroad,
air and ocean cargo carriers. The Company has contracts with all of the Class 1 domestic railroads
and certain Canadian railroads and contracts with domestic and international airlines and ocean
lines. Warehousing services are provided by independent contractors who provide warehouse capacity
to the Company under non-exclusive contractual arrangements (Warehouse Capacity Owners). As of
September 27, 2008, Landstar had 118 Warehouse Capacity Owners under contract. During the
thirty-nine weeks ended September 27, 2008, revenue hauled by BCO Independent Contractors, Truck
Brokerage Carriers, rail intermodal, air cargo carriers and ocean cargo carriers represented 53%,
38%, 5%, 1%, and 2%, respectively, of the Companys transportation logistics segment revenue. In
addition, during the thirty-nine-week period ended September 27, 2008, revenue for bus capacity
provided for evacuation assistance related to the storms that impacted the Gulf Coast in September
2008 (Bus Revenue) represented 1% of the Companys transportation logistics segment revenue.
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. Revenue, representing
premiums on reinsurance programs provided to the Companys BCO Independent Contractors, at the
insurance segment represented approximately 1% of total revenue for the thirty-nine weeks ended
September 27, 2008.
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
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by
existing independent commission sales agents. During the 2007 fiscal year, 495 independent commission sales
agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the
2007 fiscal year, the average revenue generated by a Million Dollar Agent was $4,571,000 and
revenue generated by Million Dollar Agents in the aggregate represented 91% of consolidated
Landstar revenue. The Company had 1,403 and 1,414 agent locations at September 27, 2008 and
September 29, 2007, respectively.
Management monitors business activity by tracking the number of loads (volume) and revenue per
load. Revenue per load can be influenced by many factors other than a change in price. Those
factors include the average length of haul, freight type, special handling and equipment
requirements and delivery time requirements. For shipments involving two or more modes of
transportation, revenue is classified by the mode of transportation having the highest cost for the
load. The following table summarizes this data by mode of transportation:
Thirty Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
Sept 27, | Sept 29, | Sept 27, | Sept 29, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenue generated through (in thousands): |
||||||||||||||||
BCO Independent Contractors |
$ | 1,070,982 | $ | 1,036,155 | $ | 370,787 | $ | 351,451 | ||||||||
Truck Brokerage Carriers |
766,262 | 648,267 | 275,928 | 225,300 | ||||||||||||
Rail intermodal |
106,936 | 91,931 | 35,338 | 34,254 | ||||||||||||
Ocean cargo carriers |
29,329 | 18,691 | 11,109 | 7,152 | ||||||||||||
Air cargo carriers |
10,135 | 15,412 | 2,686 | 4,606 | ||||||||||||
Other (1) |
55,588 | 33,956 | 36,905 | 12,048 | ||||||||||||
$ | 2,039,232 | $ | 1,844,412 | $ | 732,753 | $ | 634,811 | |||||||||
Number of loads: |
||||||||||||||||
BCO Independent Contractors |
638,330 | 646,720 | 209,250 | 213,350 | ||||||||||||
Truck Brokerage Carriers |
435,250 | 441,010 | 146,280 | 152,160 | ||||||||||||
Rail intermodal |
45,610 | 43,240 | 14,610 | 16,480 | ||||||||||||
Ocean cargo carriers |
3,990 | 3,330 | 1,400 | 1,230 | ||||||||||||
Air cargo carriers |
5,520 | 9,260 | 1,650 | 2,820 | ||||||||||||
1,128,700 | 1,143,560 | 373,190 | 386,040 | |||||||||||||
Revenue per load: |
||||||||||||||||
BCO Independent Contractors |
$ | 1,678 | $ | 1,602 | $ | 1,772 | $ | 1,647 | ||||||||
Truck Brokerage Carriers |
1,761 | 1,470 | 1,886 | 1,481 | ||||||||||||
Rail intermodal |
2,345 | 2,126 | 2,419 | 2,079 | ||||||||||||
Ocean cargo carriers |
7,351 | 5,613 | 7,935 | 5,815 | ||||||||||||
Air cargo carriers |
1,836 | 1,664 | 1,628 | 1,633 |
(1) | Includes premium revenue generated by the insurance segment and warehousing revenue generated by the Transportation Logistics segment. Also, included in the 2008 thirty-nine-week and thirteen-week periods was $27,638,000 of Bus Revenue. Included in the 2007 thirty-nine-week and thirteen-week periods was $6,209,000 and $2,764,000, respectively, of revenue derived from transportation services provided in support of disaster relief efforts provided under a contract between Landstar Express America, Inc. and the United States Department of Transportation/Federal Aviation Administration. |
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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 as of September 27, 2008 and
September 29, 2007:
Sept 27, | Sept 29, | |||||||
2008 | 2007 | |||||||
BCO Independent Contractors |
8,363 | 8,452 | ||||||
Truck Brokerage Carriers: |
||||||||
Approved and active (1) |
16,400 | 15,765 | ||||||
Other approved |
9,120 | 9,224 | ||||||
25,520 | 24,989 | |||||||
Total available truck capacity providers |
33,883 | 33,441 | ||||||
Number of trucks provided by BCO Independent Contractors |
8,949 | 9,056 | ||||||
(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 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 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
paid to a Truck Brokerage Carrier is based on either a negotiated rate for each load hauled or a
contractually agreed-upon rate. Purchased transportation paid to rail intermodal, air cargo and
ocean cargo carriers is based on contractually agreed-upon fixed rates. Purchased transportation
paid to bus capacity providers was based on a contractually agreed-upon rate. Purchased
transportation as a percentage of revenue with respect to services provided by Truck Brokerage
Carriers, rail intermodal carriers, ocean cargo carriers and bus capacity providers is normally
higher than that provided by BCO Independent Contractors and air cargo carriers. 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. Purchased
transportation costs are recognized upon the completion of freight delivery.
Commissions to agents are based on contractually agreed-upon percentages of revenue or gross
profit, defined as revenue less the cost of purchased transportation. No commissions to agents were
incurred in connection with the 2008 Bus Revenue. Commissions to agents as a percentage of
consolidated revenue will vary directly with fluctuations in the percentage of consolidated revenue
generated by the various modes of transportation and the insurance segment and with changes in
gross profit on services provided by Truck Brokerage Carriers, rail intermodal carriers, air cargo
carriers, ocean cargo carriers and bus capacity providers. Commissions to agents are recognized
upon the completion of freight delivery.
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 are incurred. For commercial trucking claims incurred
prior to June 19, 2003 and subsequent to March 30, 2004, Landstar retains liability up to
$5,000,000 per occurrence. For commercial trucking claims incurred from June 19, 2003 through March
30, 2004, Landstar retains liability up to $10,000,000 per occurrence. The Company also retains
liability for each general liability claim up to $1,000,000, $250,000 for each workers
compensation claim and $100,000 for each cargo claim. Prior to May 1, 2008, the Company retained
cargo liability for each cargo claim up to $250,000. The Companys exposure to liability associated
with accidents incurred by Truck Brokerage Carriers, rail intermodal carriers, air cargo carriers
and ocean cargo carriers who transport freight on behalf of the Company and bus capacity providers
who provide bus capacity to 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 claims or workers compensation claims or the unfavorable development of existing
claims could have a material adverse effect on 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.
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The following table sets forth the percentage relationships of income and expense items to
revenue for the periods indicated:
Thirty Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
Sept 27, | Sept 29, | Sept 27, | Sept 29, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Investment income |
0.1 | 0.2 | 0.1 | 0.2 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Purchased transportation |
77.1 | 75.6 | 77.8 | 75.9 | ||||||||||||
Commissions to agents |
7.5 | 8.1 | 7.4 | 8.1 | ||||||||||||
Other operating costs |
1.0 | 1.1 | 0.9 | 1.3 | ||||||||||||
Insurance and claims |
1.3 | 2.1 | 1.1 | 1.5 | ||||||||||||
Selling, general and administrative |
5.2 | 5.1 | 4.7 | 4.9 | ||||||||||||
Depreciation and amortization |
0.8 | 0.8 | 0.7 | 0.7 | ||||||||||||
Total costs and expenses |
92.9 | 92.8 | 92.6 | 92.4 | ||||||||||||
Operating income |
7.2 | 7.4 | 7.5 | 7.8 | ||||||||||||
Interest and debt expense |
0.3 | 0.2 | 0.3 | 0.3 | ||||||||||||
Income before income taxes |
6.9 | 7.2 | 7.2 | 7.5 | ||||||||||||
Income taxes |
2.7 | 2.8 | 2.7 | 2.9 | ||||||||||||
Net income |
4.2 | % | 4.4 | % | 4.5 | % | 4.6 | % | ||||||||
THIRTY NINE WEEKS ENDED SEPTEMBER 27, 2008 COMPARED TO THIRTY NINE WEEKS ENDED SEPTEMBER 29,
2007
Revenue for the 2008 thirty-nine-week period was $2,039,232,000, an increase of
$194,820,000, or 10.6%, compared to the 2007 thirty-nine-week period. Revenue increased
$195,015,000, or 10.7%, at the transportation logistics segment primarily due to an 18% increase in
revenue hauled by Truck Brokerage Carriers, increased revenue hauled by BCO Independent Contractors
and rail intermodal and ocean cargo carriers and $27,638,000 of revenue for bus capacity provided
for evacuation assistance related to the storms that impacted the Gulf Coast in September 2008
(Bus Revenue), partially offset by lower revenue hauled by air cargo carriers. The number of
loads in the 2008 period hauled by Business Capacity Owners and Truck Brokerage Carriers each
decreased 1% compared to the number of loads hauled in the 2007 period. Loads hauled by rail
intermodal and ocean cargo carriers increased 5% and 20%, respectively, over the 2007 period, while
loads hauled by air cargo carriers decreased 40% compared to the 2007 period. Revenue per load for
loads hauled by Truck Brokerage Carriers, BCO Independent Contractors and rail intermodal, air
cargo and ocean cargo carriers increased 20%, 5%, 10%, 10% and 31%, respectively, over the 2007
period. The increase in revenue per load hauled by Truck Brokerage Carriers and rail intermodal,
air cargo and ocean cargo carriers was partly attributable to increased fuel surcharges billed to
customers in the 2008 period. Fuel surcharges billed to customers on revenue hauled by BCO
Independent Contractors are excluded from revenue.
Investment income at the insurance segment was $2,686,000 and $4,103,000 in the 2008 and 2007
thirty-nine-week periods, respectively. The decrease in investment income was primarily due to a
decreased rate of return, attributable to a general decrease in interest rates, on investments held
by the insurance segment in the 2008 period.
Purchased transportation was 77.1% and 75.6% of revenue in the 2008 and 2007 thirty-nine-week
periods, respectively. The increase in purchased transportation as a percentage of revenue was
primarily attributable to increased rates of purchased transportation paid to Truck Brokerage
Carriers, increased revenue hauled by Truck Brokerage Carriers, rail intermodal carriers and ocean
cargo carriers, all of which tend to have a higher cost of purchased transportation, and the effect
of Bus Revenue, which also has a higher rate of purchased transportation than revenue hauled by BCO
Independent Contractors. Commissions to agents were 7.5% of revenue in the 2008 period and 8.1% of
revenue in the 2007 period. The decrease in commissions to agents as a percentage of revenue was
primarily attributable to decreased gross profit on revenue hauled by Truck Brokerage Carriers and the effect of Bus Revenue. Other
operating costs were 1.0% and 1.1% of revenue in the 2008 and 2007 periods, respectively. The
decrease in other operating costs as a percentage of revenue was primarily attributable to the
effect of increased revenue hauled by Truck Brokerage Carriers, rail intermodal carriers and ocean
cargo carriers in the 2008 thirty-nine-week period, none of which incur significant other operating
costs, partially offset by lower gains on the sales of trailing equipment in the 2008 period
compared to the 2007 period. Insurance and claims were 1.3% of revenue in the 2008 period, compared
with 2.1% of revenue in the 2007 period. The decrease in insurance and claims as a percentage of
revenue was primarily due to a $5,000,000 charge for the estimated cost of one severe accident that
occurred during the first quarter of 2007, favorable development of prior year claims in 2008 and a
lower cost of cargo claims in the 2008 period. Selling, general and administrative costs were 5.2%
of revenue in the 2008 period, compared with 5.1% of revenue in the 2007 period. The increase in
selling, general and administrative costs as a percentage of revenue was primarily attributable to
an increased provision for bonuses under the Companys incentive compensation programs, partially
offset by the effect of increased revenue. Depreciation and amortization was 0.8% of revenue in
each of the 2008 and 2007 periods.
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Interest and debt expense was 0.3% and 0.2% of revenue in the 2008 and 2007 thirty-nine-week
periods, respectively. The increase in interest and debt expense as a percentage of revenue was
primarily due to higher average borrowings on the Companys senior credit facility in the 2008
period, partially offset by lower interest rates on borrowings under the senior credit facility.
The provisions for income taxes for the 2008 and 2007 thirty-nine-week periods were based on
estimated full year combined effective income tax rates of approximately 38.4% and 38.7%,
respectively, which were higher than the statutory federal income tax rate primarily as a result of
state taxes, the meals and entertainment exclusion and non-deductible stock compensation expense.
Net income was $86,325,000, or $1.64 per common share ($1.62 per diluted share), in the 2008
thirty-nine-week period. Net income was $80,622,000, or $1.46 per common share ($1.45 per diluted
share), in the 2007 thirty-nine-week period. Included in the 2008 thirty-nine-week period is
operating income of $2,870,000 related to the $27,638,000 of Bus Revenue. The $2,870,000 of
operating income, net of related income taxes, increased 2008 thirty-nine-week period net income by
$1,722,000, or $0.03 per common share ($0.03 per diluted share). Included in the 2007
thirty-nine-week period is approximately $1,638,000 of operating income related to $6,209,000 of
revenue attributable to disaster relief services provided under the former contract between
Landstar Express America, Inc. and the U.S. Department of Transportation/Federal Aviation
Administration (the FAA). The $1,638,000 of operating income, net of related income taxes,
increased net income by $1,009,000, or $0.02 per common share ($0.02 per diluted share) in the 2007
period. Also included in the 2007 thirty-nine-week period 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 2007 thirty-nine-week period net income by $3,065,000, or
$0.06 per common share ($0.05 per diluted share).
THIRTEEN WEEKS ENDED SEPTEMBER 27, 2008 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 29, 2007
Revenue for the 2008 thirteen-week period was $732,753,000, an increase of $97,942,000, or
15.4%, compared to the 2007 thirteen-week period. Revenue increased $97,954,000, or 15.7%, at the
transportation logistics segment. The increase in revenue at the transportation logistics segment
was primarily attributable to a 22% increase in revenue hauled by Truck Brokerage Carriers, Bus
Revenue of $27,638,000 in the 2008 period and increased revenue hauled by BCO Independent
Contractors, rail intermodal carriers and ocean cargo carriers, partially offset by lower revenue
hauled by air cargo carriers. The number of loads in the 2008 period hauled by Truck Brokerage
Carriers, BCO Independent Contractors, air cargo carriers and rail intermodal carriers decreased
4%, 2%, 41% and 11%, respectively, compared to the 2007 period, while the number of loads hauled by
ocean cargo carriers increased 14% over the same period. Revenue per load for loads hauled by Truck
Brokerage Carriers, BCO Independent Contractors and rail intermodal and ocean cargo carriers
increased 27%, 8%, 16% and 36%, respectively, over the 2007 period. Revenue per load for loads
hauled by air cargo carriers was approximately equal to the revenue per load in the 2007 period.
The increase in revenue per load hauled by Truck Brokerage Carriers, rail intermodal and ocean
carriers was partially attributable to increased fuel surcharges billed to customers in the 2008
period.
Investment income at the insurance segment was $817,000 and $1,106,000 in the 2008 and 2007
thirteen-week periods, respectively. The decrease in investment income was primarily due to a
decreased rate of return, attributable to a general decrease in interest rates, on investments held
by the insurance segment in the 2008 period.
Purchased transportation was 77.8% and 75.9% of revenue in the 2008 and 2007 thirteen-week
periods, respectively. The increase in purchased transportation as a percentage of revenue was
primarily attributable to increased rates of purchased transportation paid to Truck Brokerage
Carriers and the effect of Bus Revenue. Commissions to agents were 7.4% of revenue in the
2008 period and 8.1% of revenue in the 2007 period. The decrease in commissions to agents as a
percentage of revenue was primarily attributable to the effect of Bus Revenue and decreased
gross profit on revenue hauled by Truck Brokerage Carriers. Other operating costs were 0.9% and
1.3% of revenue in the 2008 and 2007 periods, respectively. The decrease in other operating costs
as a percentage of revenue was primarily attributable to increased revenue hauled by Truck
Brokerage Carriers and ocean cargo carriers, neither of which incur significant other operating
expenses and higher 2007 trailing equipment rental costs incurred to support disaster relief
services provided under a contract with the FAA. Insurance and claims were 1.1% of revenue
in the 2008 period, compared with 1.5% of revenue in the 2007 period. The decrease in insurance and
claims as a percentage of revenue was primarily due to favorable development of prior year claims
in 2008 and increased revenue hauled by Truck Brokerage Carriers and ocean cargo carriers, both of
which have a lower claims risk profile. Selling, general and administrative costs were 4.7% of
revenue in the 2008 period and 4.9% of revenue in the 2007 period. The decrease in selling, general
and administrative costs as a percentage of revenue was primarily attributable to the effect of
increased revenue, partially offset by an increased provision for bonuses under the Companys
incentive compensation programs. Depreciation and amortization was 0.7% of revenue in both the 2008
and 2007 periods.
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Interest and debt expense was 0.3% of revenue in both the 2008 and 2007 thirteen-week periods.
The provisions for income taxes for the 2008 and 2007 thirteen-week periods were based on
estimated full year combined effective income tax rates of approximately 38.0% and 38.7%,
respectively, which were higher than the statutory federal income tax rate primarily as a result of
state taxes, the meals and entertainment exclusion and non-deductible stock compensation expense.
The decrease in the effective income tax rate was primarily attributable to the timing of certain
discrete items reported in 2008.
Net income was $32,817,000, or $0.62 per common share ($0.62 per diluted share), in the 2008
thirteen-week period, compared to $29,348,000, or $0.54 per common share ($0.54 per diluted share),
in the 2007 thirteen-week period. Included in the 2008 thirteen-week period is operating income of
$2,870,000 related to the $27,638,000 of Bus Revenue. The $2,870,000 of operating income, net of
related income taxes, increased net income by $1,722,000, or $0.03 per common share ($0.03 per
diluted share). Included in the 2007 thirteen-week period is approximately $624,000 of operating
income related to the $2,764,000 of revenue attributable to disaster relief services provided
primarily under the former FAA contract. The $642,000 of operating income, net of related income
taxes, increased net income by $394,000, or $0.01 per common share ($0.01 per diluted share).
CAPITAL RESOURCES AND LIQUIDITY
Shareholders equity was $252,093,000 at September 27, 2008, compared to $180,786,000 at
December 29, 2007. The increase in shareholders equity was primarily a result of net income and
the effect of the exercises of stock options during the period, partially offset by the purchase of
579,822 shares of the Companys common stock at a total cost of $28,519,000 and dividends paid. The
Company paid $0.115 per share, or $6,056,000, in cash dividends during the thirty-nine-week period
ended September 27, 2008. It is the intention of the Board of Directors to continue to pay a
quarterly dividend. As of September 27, 2008, the Company may purchase up to an additional
2,154,579 shares of its common stock under its authorized stock purchase programs. Shareholders
equity was 62% of total capitalization (defined as total debt plus equity) at September 27, 2008
compared to 52% at December 29, 2007.
Working capital and the ratio of current assets to current liabilities were $253,924,000 and
1.9 to 1, respectively, at September 27, 2008, compared with $184,078,000 and 1.7 to 1,
respectively, at December 29, 2007. 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 $50,358,000 in the
2008 thirty-nine-week period compared with $111,988,000 in the 2007 thirty-nine-week period. The
decrease in cash flow provided by operating activities was primarily attributable to the timing of
collections of trade receivables.
Long-term debt, including current maturities, was $157,081,000 at September 27, 2008,
$7,672,000 lower than at December 29, 2007.
On June 27, 2008, Landstar entered into a credit agreement with a syndicate of banks and
JPMorgan Chase Bank, N.A., as administrative agent (the Credit Agreement). The Credit Agreement,
which expires on June 27, 2013, 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 initial borrowing of $67,000,000 under the Credit Agreement was used to refinance
$67,000,000 of outstanding borrowings under the prior credit agreement, which was terminated in
connection with the Credit Agreement.
The Credit Agreement contains a number of covenants that limit, among other things, the
incurrence of additional indebtedness. The Company is required to, among other things, maintain a
minimum Fixed Charge Coverage Ratio, as defined in the Credit Agreement, and maintain a Leverage
Ratio below a specified maximum. The Credit Agreement provides for a restriction on cash dividends
and other distributions to stockholders on the Companys capital stock to the extent there is a
default under the Credit Agreement. In addition, the Credit Agreement under certain circumstances
limits the amount of such cash dividends and other distributions to stockholders in the event that
after giving effect to any payment made to effect such cash dividend or other distribution, the
Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Companys most
recently completed fiscal quarter. The Credit Agreement provides for an event of default in the
event, among other things, that a person or group acquires 25% or more of the outstanding capital
stock of the Company or obtains power to elect a majority of the Companys directors. 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 Credit Agreement.
At September 27, 2008, the Company had $87,000,000 in borrowings outstanding and $28,032,000
of letters of credit outstanding under the Credit Agreement. At September 27, 2008, there was
$109,968,000 available for future borrowings under the Credit Agreement. In addition, the Company
has $48,148,000 in letters of credit outstanding, as collateral for insurance claims, that are
secured by investments and cash equivalents totaling $50,083,000. Investments, all of which are
carried at fair value, consist of investment-grade bonds having maturities of up to five years.
Fair value of investments is based primarily on quoted market prices.
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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 portion of the trailing equipment used by the Company is provided by
third party capacity providers, thereby reducing the Companys capital requirements. During the
2008 thirty-nine-week period, the Company purchased $4,903,000 of operating property and acquired
$2,714,000 of trailing equipment by entering into capital leases. Landstar anticipates acquiring
approximately $4,000,000 of operating property, primarily trailing equipment, during the remainder
of the 2008 fiscal year either by purchase or by lease financing.
Management believes that cash flow from operations combined with the Companys borrowing
capacity under the 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 program and meet working capital needs.
LEGAL MATTERS
As further described in periodic and current reports previously filed by Landstar System, Inc.
(the Company) with the Securities and Exchange Commission, the Company and certain of its
subsidiaries (the Defendants) are defendants in a suit (the Litigation) brought in the United
States District Court for the Middle District of Florida (the District Court) by the
Owner-Operator Independent Drivers Association, Inc. (OOIDA) and four former BCO Independent
Contractors (the Named Plaintiffs and, with OOIDA, the Plaintiffs) on behalf of all independent
contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease
arrangements (the BCO Independent Contractors). The Plaintiffs allege that certain aspects of
the Companys motor carrier leases and related practices with its BCO Independent Contractors
violate certain federal leasing regulations and seek injunctive relief, an unspecified amount of
damages and attorneys fees.
On March 29, 2007, the District Court denied the request by Plaintiffs 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 plaintiff class and other important elements of the
Litigation relating to liability, injunctive relief and monetary relief. The Plaintiffs filed an
appeal with the United States Court of Appeals for the Eleventh Circuit (the Appellate Court) of
certain of the District Courts rulings in favor of the Defendants. The Defendants asked the
Appellate Court to affirm such rulings and filed a cross-appeal with the Appellate Court with
respect to certain other rulings of the District Court.
On September 3, 2008, the Appellate Court issued its ruling, which, among other things,
affirmed the District Courts rulings that (i) the Defendants are not prohibited by the applicable
federal leasing regulations from charging administrative or other fees to BCO Independent
Contractors in connection with voluntary programs offered by the Defendants through which a BCO
Independent Contractor may purchase discounted products and services for a charge that is deducted
against the compensation payable to the BCO Independent Contractor (a Charge-back Deduction),
(ii) the Plaintiffs are not entitled to restitution or disgorgement with respect to violations by
Defendants of the applicable federal leasing regulations but instead may recover only actual
damages, if any, which they sustained as a result of any such violations and (iii) the claims of
BCO Independent Contractors may not be handled on a class action basis for purposes of determining
the amount of actual damages, if any, they sustained as a result of any violations. Further, the
analysis of the Appellate Court confirmed the absence of any violations alleged by the Plaintiffs
of the federal leasing regulations with respect to the written terms of all leases currently in use
between the Defendants and BCO Independent Contractors.
However, the ruling of the Appellate Court reversed the District Courts rulings (i) that an
old version of the lease formerly used by Defendants but not in use with any current BCO
Independent Contractor complied with applicable disclosure requirements under the federal leasing
regulations with respect to adjustments to compensation payable to BCO Independent Contractors on
certain loads sourced from the U. S. Dept. of Defense, and (ii) that the Defendants had provided
sufficient documentation to BCO Independent Contractors under the applicable federal leasing
regulations relating to how the component elements of Charge-back Deductions were computed. The
Appellate Court then remanded the case to the District Court to permit the Plaintiffs to seek
injunctive relief with respect to these violations of the federal leasing regulations and to hold
an evidentiary hearing to give the Named Plaintiffs an opportunity to produce evidence of any
damages they actually sustained as a result of such violations.
Each of the parties to the Litigation has filed a petition with the Appellate Court seeking
rehearing of the Appellate Courts ruling; however, there can be no assurance that any petition for
rehearing will be granted.
Although no assurances can be given with respect to the outcome of the Litigation, including
any possible award of attorneys fees to the Plaintiffs, the Company believes that (i) no Plaintiff
has sustained any actual damages as a result of any violations by the Defendants of the federal
leasing regulations and (ii) injunctive relief, if any, that may be granted by the District Court
on remand is unlikely to have a material adverse financial effect on the Company.
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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 therefor, will not have a material adverse effect on the financial
condition of the Company, but could have a material effect on the results of operations in a given
quarter or year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The allowance for doubtful accounts for both trade and other receivables represents
managements estimate of the amount of outstanding receivables that will not be collected.
Historically, managements estimates for uncollectible receivables have been materially correct.
Although management believes the amount of the allowance for both trade and other receivables at
September 27, 2008 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 applicable 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 years claims
estimates. The Company continually revises its existing claim estimates as new or revised
information becomes available on the status of each claim. During the 2008 and 2007
thirty-nine-week periods, insurance and claims costs included $10,002,000 and $7,437,000,
respectively, 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 reserves at September 27, 2008.
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 would result in a recognizable benefit. The
Company has provided for its estimated exposure attributable to certain positions that create
uncertainty in the level of income tax benefit that would ultimately be realized. Management
believes that the provision for liabilities resulting from the uncertainty in certain 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 certain income tax positions are not appropriate.
Significant variances from managements estimates for the amount of uncollectible receivables,
the ultimate resolution of 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 2007 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.
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Table of Contents
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 June 27, 2008, Landstar entered into a credit agreement with a syndicate of banks and
JPMorgan Chase Bank, N.A., as administrative agent (the Credit Agreement). The Credit Agreement,
which expires on June 27, 2013, 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 Credit Agreement bear interest at rates equal to, at the option of the
Company, either (i) the greater of (a) the prime rate as publicly announced from time to time by
JPMorgan Chase Bank, N.A. and (b) the federal funds effective rate plus .5%, or, (ii) the rate at
the time offered to JPMorgan Chase Bank, N.A. in the Eurodollar market for amounts and periods
comparable to the relevant loan plus, in either case, a margin that is determined based on the
level of the Companys Leverage Ratio, as defined in the Credit Agreement. As of September 27,
2008, the weighted average interest rate on borrowings outstanding was 3.90%. During the third
quarter of 2008, the average outstanding balance under the Credit Agreement was approximately
$92,066,000. Based on the borrowing rates in the Credit Agreement and the repayment terms, the fair
value of the outstanding borrowings as of September 27, 2008 was estimated to approximate carrying
value. Assuming that debt levels on the Credit Agreement remain at $87,000,000, the balance at
September 27, 2008, a hypothetical increase of 100 basis points in current rates provided for under
the Credit Agreement is estimated to result in an increase in interest expense of $870,000 on an
annualized basis.
All amounts outstanding under the Credit Agreement are payable on June 27, 2013, the
expiration date of the Credit Agreement.
Long-term investments, all of which are available-for-sale, consist of investment grade bonds
having maturities of up to five years. Assuming that the long-term portion of investments in bonds
remains at $15,344,000, the balance at September 27, 2008, 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 quarterly report on Form 10-Q, 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
September 27, 2008, 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 September 27, 2008 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 recognizes 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.
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Table of Contents
PART II
OTHER INFORMATION
OTHER INFORMATION
Item 1. | Legal Proceedings |
As further described in periodic and current reports previously filed by Landstar System, Inc.
(the Company) with the Securities and Exchange Commission, the Company and certain of its
subsidiaries (the Defendants) are defendants in a suit (the Litigation) brought in the United
States District Court for the Middle District of Florida (the District Court) by the
Owner-Operator Independent Drivers Association, Inc. (OOIDA) and four former BCO Independent
Contractors (the Named Plaintiffs and, with OOIDA, the Plaintiffs) on behalf of all independent
contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease
arrangements (the BCO Independent Contractors). The Plaintiffs allege that certain aspects of
the Companys motor carrier leases and related practices with its BCO Independent Contractors
violate certain federal leasing regulations and seek injunctive relief, an unspecified amount of
damages and attorneys fees.
On March 29, 2007, the District Court denied the request by Plaintiffs 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 plaintiff class and other important elements of the
Litigation relating to liability, injunctive relief and monetary relief. The Plaintiffs filed an
appeal with the United States Court of Appeals for the Eleventh Circuit (the Appellate Court) of
certain of the District Courts rulings in favor of the Defendants. The Defendants asked the
Appellate Court to affirm such rulings and filed a cross-appeal with the Appellate Court with
respect to certain other rulings of the District Court.
On September 3, 2008, the Appellate Court issued its ruling, which, among other things,
affirmed the District Courts rulings that (i) the Defendants are not prohibited by the applicable
federal leasing regulations from charging administrative or other fees to BCO Independent
Contractors in connection with voluntary programs offered by the Defendants through which a BCO
Independent Contractor may purchase discounted products and services for a charge that is deducted
against the compensation payable to the BCO Independent Contractor (a Charge-back Deduction),
(ii) the Plaintiffs are not entitled to restitution or disgorgement with respect to violations by
Defendants of the applicable federal leasing regulations but instead may recover only actual
damages, if any, which they sustained as a result of any such violations and (iii) the claims of
BCO Independent Contractors may not be handled on a class action basis for purposes of determining
the amount of actual damages, if any, they sustained as a result of any violations. Further, the
analysis of the Appellate Court confirmed the absence of any violations alleged by the Plaintiffs
of the federal leasing regulations with respect to the written terms of all leases currently in use
between the Defendants and BCO Independent Contractors.
However, the ruling of the Appellate Court reversed the District Courts rulings (i) that an
old version of the lease formerly used by Defendants but not in use with any current BCO
Independent Contractor complied with applicable disclosure requirements under the federal leasing
regulations with respect to adjustments to compensation payable to BCO Independent Contractors on
certain loads sourced from the U. S. Dept. of Defense, and (ii) that the Defendants had provided
sufficient documentation to BCO Independent Contractors under the applicable federal leasing
regulations relating to how the component elements of Charge-back Deductions were computed. The
Appellate Court then remanded the case to the District Court to permit the Plaintiffs to seek
injunctive relief with respect to these violations of the federal leasing regulations and to hold
an evidentiary hearing to give the Named Plaintiffs an opportunity to produce evidence of any
damages they actually sustained as a result of such violations.
Each of the parties to the Litigation has filed a petition with the Appellate Court seeking
rehearing of the Appellate Courts ruling; however, there can be no assurance that any petition for
rehearing will be granted.
Although no assurances can be given with respect to the outcome of the Litigation, including
any possible award of attorneys fees to the Plaintiffs, the Company believes that (i) no Plaintiff
has sustained any actual damages as a result of any violations by the Defendants of the federal
leasing regulations and (ii) injunctive relief, if any, that may be granted by the District Court
on remand is unlikely to have a material adverse financial effect on the Company.
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 therefor, 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 29,
2007, and in Managements Discussion and Analysis of Financial Condition and Results of
Operations, Notes to Consolidated Financial Statements and as set forth immediately below in
this Quarterly Report on Form 10-Q.
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Concentrations of Credit Risk in Key Customers
Financial instruments that potentially subject the Company to significant concentrations of credit
risk consist principally of accounts receivable from trade customers. The Company performs ongoing
credit evaluations of the financial condition of its customers and an allowance for doubtful
accounts is maintained as required under U.S. generally accepted accounting principles. Credit risk
with respect to the Companys accounts receivable historically has been broadly diversified due to
the large number of entities comprising the Companys customer base and their dispersion across
many different industries and geographical regions. No single customer accounted for more than 10% of
Company revenue for the thirty-nine-week period ended September 27, 2008, and no single customer
accounted for more than 10% of the gross accounts receivable balance at September 27, 2008. It
should be noted, however, that revenue from customers in the automotive sector represented in the
aggregate approximately 7% of the Companys revenue for the 2008 thirty-nine-week period. The
Company estimates that receivable balances relating to customers with a significant concentration
of their business either in the automotive industry or directly impacted by the financial condition
of the larger U.S. domestic automobile manufacturers represented approximately 6% to 8% of gross
accounts receivable at September 27, 2008. The financial condition of the U.S. domestic automotive
industry may be significantly adversely affected by the availability of credit to U.S. consumers
and the overall financial condition of the U.S. economy, both of which have recently weakened. A
significant deterioration in the financial condition or operations of the Companys customers
within the automotive sector, including the larger U.S. domestic automobile manufacturers and their
vendors, suppliers and other service providers, could negatively impact the collectability of trade
accounts receivable due from these customers, which could result in an adverse effect on the
Companys operating results in a given quarter or year.
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 June 29, 2008 to September 27, 2008, the Companys third 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 | ||||||||||||
June 28, 2008 |
734,401 | |||||||||||||||
June 29, 2008 July 26, 2008 |
429,822 | $ | 49.63 | 429,822 | 2,304,579 | |||||||||||
July 27, 2008 Aug. 23, 2008 |
2,304,579 | |||||||||||||||
Aug. 24,
2008 Sept. 27, 2008 |
150,000 | $ | 47.90 | 150,000 | 2,154,579 | |||||||||||
Total |
579,822 | $ | 49.19 | 579,822 | ||||||||||||
On August 27, 2007, Landstar System, Inc. announced that it had been authorized by its
Board of Directors to purchase up to an additional 2,000,000 shares of its common stock from time
to time in the open market and in privately negotiated transactions. As of September 27, 2008, the
Company may purchase 154,579 shares of its common stock under this authorization. On July 16,
2008, Landstar System, Inc. announced that it had been authorized by its Board of Directors to
purchase up to an additional 2,000,000 shares of its common stock from time to time in the open
market and in privately negotiated transactions. No specific expiration date has been assigned to
either the August 27, 2007 or July 16, 2008 authorizations.
During the thirty-nine-week period ended September 27, 2008, Landstar paid dividends as
follows:
Dividend Amount | Declaration | Record | Payment | |||
per share | Date | Date | Date | |||
$0.0375
|
January 31, 2008 | February 8, 2008 | February 29, 2008 | |||
$0.0375
|
April 17, 2008 | May 9, 2008 | May 30, 2008 | |||
$0.0400
|
July 16, 2008 | August 11, 2008 | August 29, 2008 |
The Credit Agreement provides for a restriction on cash dividends and other
distributions to stockholders on the Companys capital stock to the extent there is a default under
the Credit Agreement. In addition, the Credit Agreement under certain circumstances limits the
amount of such cash dividends and other distributions to stockholders in the event that after
giving effect to any payment made to
effect such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro
forma basis as of the end of the Companys most recently completed fiscal quarter.
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Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
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.
EXHIBIT INDEX
Registrants Commission File No.: 0-21238
Exhibit No. | Description | |||||||||||
(31 | ) | Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: |
||||||||||
31.1 | * | Chief Executive Officer certification, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
||||||||||
31.2 | * | Chief Financial Officer certification, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
||||||||||
(32 | ) | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: |
||||||||||
32.1 | ** | Chief Executive Officer certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
||||||||||
32.2 | ** | Chief Financial Officer certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith | |
** | Furnished herewith |
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Table of Contents
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: October 31, 2008 | /s/ Henry H. Gerkens | |||
Henry H. Gerkens | ||||
President and Chief Executive Officer | ||||
Date: October 31, 2008 | /s/ James B. Gattoni | |||
James B. Gattoni | ||||
Vice President and Chief Financial Officer | ||||
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