LANDSTAR SYSTEM INC - Quarter Report: 2010 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 25, 2010
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/0000853816/000095012310098195/g24632g2463201.gif)
LANDSTAR SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
06-1313069 (I.R.S. Employer Identification No.) |
13410 Sutton Park Drive South, Jacksonville, Florida
(Address of principal executive offices)
32224
(Zip Code)
(904) 398-9400
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Address of principal executive offices)
32224
(Zip Code)
(904) 398-9400
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files):
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 the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | 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, 2010 was 49,119,836.
Index
PART I - Financial Information |
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Item 1. Financial Statements (unaudited) |
Page 3 | |
Consolidated Balance Sheets as of September 25, 2010 and December 26, 2009 |
Page 4 | |
Consolidated Statements of Income for the Thirty Nine and Thirteen Weeks Ended September 25, 2010 and September 26, 2009 |
Page 5 | |
Consolidated Statements of Cash Flows for the Thirty Nine Weeks Ended September 25, 2010 and September 26, 2009 |
Page 6 | |
Consolidated Statement of Changes in Equity for the Thirty Nine Weeks Ended September 25, 2010 |
Page 7 | |
Notes to Consolidated Financial Statements |
Page 8 | |
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
Page 13 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
Page 23 | |
Item 4. Controls and Procedures |
Page 23 | |
PART II - Other Information |
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Item 1. Legal Proceedings |
Page 24 | |
Item 1A. Risk Factors |
Page 25 | |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
Page 25 | |
Item 6. Exhibits |
Page 26 | |
Signatures |
Page 28 | |
EX - 31.1 Section 302 CEO Certification |
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EX - 31.2 Section 302 CFO Certification |
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EX - 32.1 Section 906 CEO Certification |
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EX - 32.2 Section 906 CFO Certification |
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EX - 101 Instance Document |
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EX - 101 Schema Document |
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EX - 101 Calculation Linkbase Document |
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EX - 101 Labels Linkbase Document |
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EX - 101 Presentation Linkbase Document |
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EX - 101 Definition Linkbase Document |
2
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 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 25, 2010
are not necessarily indicative of the results that may be expected for the entire fiscal year
ending December 25, 2010.
These interim financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Companys 2009 Annual Report on Form 10-K.
3
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
September 25, | December 26, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 55,075 | $ | 85,719 | ||||
Short-term investments |
24,243 | 24,325 | ||||||
Trade accounts receivable, less allowance of $5,973 and $5,547 |
320,188 | 278,854 | ||||||
Other receivables, including advances to independent contractors, less allowance
of $5,042 and $5,797 |
22,778 | 18,149 | ||||||
Deferred income taxes and other current assets |
19,303 | 19,565 | ||||||
Total current assets |
441,587 | 426,612 | ||||||
Operating property, less accumulated depreciation and amortization of $136,105
and $124,810 |
137,101 | 116,656 | ||||||
Goodwill |
57,470 | 57,470 | ||||||
Other assets |
77,482 | 48,054 | ||||||
Total assets |
$ | 713,640 | $ | 648,792 | ||||
LIABILITIES AND EQUITY |
||||||||
Current liabilities |
||||||||
Cash overdraft |
$ | 22,497 | $ | 28,919 | ||||
Accounts payable |
146,707 | 121,030 | ||||||
Current maturities of long-term debt |
23,488 | 24,585 | ||||||
Insurance claims |
33,004 | 41,627 | ||||||
Other current liabilities |
53,392 | 42,474 | ||||||
Total current liabilities |
279,088 | 258,635 | ||||||
Long-term debt, excluding current maturities |
103,643 | 68,313 | ||||||
Insurance claims |
33,111 | 30,680 | ||||||
Deferred income taxes |
21,261 | 23,013 | ||||||
Equity |
||||||||
Landstar System, Inc. and subsidiary shareholders equity |
||||||||
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 66,517,400
and 66,255,358 shares |
665 | 663 | ||||||
Additional paid-in capital |
167,909 | 161,261 | ||||||
Retained earnings |
822,452 | 766,040 | ||||||
Cost of 17,397,564 and 16,022,111 shares of common stock in treasury |
(715,093 | ) | (660,446 | ) | ||||
Accumulated other comprehensive income |
1,181 | 498 | ||||||
Total Landstar System, Inc. and subsidiary shareholders equity |
277,114 | 268,016 | ||||||
Noncontrolling interest |
(577 | ) | 135 | |||||
Total equity |
276,537 | 268,151 | ||||||
Total liabilities and equity |
$ | 713,640 | $ | 648,792 | ||||
See accompanying notes to consolidated financial statements.
4
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Thirty Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
September 25, | September 26, | September 25, | September 26, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue |
$ | 1,812,635 | $ | 1,461,081 | $ | 622,826 | $ | 500,670 | ||||||||
Investment income |
1,069 | 954 | 495 | 279 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Purchased transportation |
1,381,955 | 1,090,219 | 474,665 | 372,328 | ||||||||||||
Commissions to agents |
134,695 | 117,735 | 47,316 | 39,484 | ||||||||||||
Other operating costs |
21,952 | 21,749 | 6,448 | 6,911 | ||||||||||||
Insurance and claims |
37,609 | 29,056 | 11,480 | 10,257 | ||||||||||||
Selling, general and administrative |
114,886 | 99,690 | 41,070 | 33,078 | ||||||||||||
Depreciation and amortization |
18,444 | 17,414 | 6,456 | 6,213 | ||||||||||||
Total costs and expenses |
1,709,541 | 1,375,863 | 587,435 | 468,271 | ||||||||||||
Operating income |
104,163 | 86,172 | 35,886 | 32,678 | ||||||||||||
Interest and debt expense |
2,699 | 3,093 | 1,035 | 957 | ||||||||||||
Income before income taxes |
101,464 | 83,079 | 34,851 | 31,721 | ||||||||||||
Income taxes |
38,761 | 31,466 | 13,315 | 11,859 | ||||||||||||
Net income |
62,703 | 51,613 | 21,536 | 19,862 | ||||||||||||
Less: Net loss attributable to noncontrolling interest |
(712 | ) | (214 | ) | (266 | ) | (214 | ) | ||||||||
Net income attributable to Landstar System, Inc. and subsidiary |
$ | 63,415 | $ | 51,827 | $ | 21,802 | $ | 20,076 | ||||||||
Earnings per common share attributable to Landstar System, Inc. and subsidiary |
$ | 1.27 | $ | 1.01 | $ | 0.44 | $ | 0.39 | ||||||||
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary |
$ | 1.27 | $ | 1.01 | $ | 0.44 | $ | 0.39 | ||||||||
Average number of shares outstanding: |
||||||||||||||||
Earnings per common share |
49,921,000 | 51,325,000 | 49,434,000 | 51,069,000 | ||||||||||||
Diluted earnings per share |
49,990,000 | 51,507,000 | 49,447,000 | 51,245,000 | ||||||||||||
Dividends paid per common share |
$ | 0.1400 | $ | 0.1250 | $ | 0.0500 | $ | 0.0450 | ||||||||
See accompanying notes to consolidated financial statements.
5
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Thirty Nine Weeks Ended | ||||||||
September 25, | September 26, | |||||||
2010 | 2009 | |||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 62,703 | $ | 51,613 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
18,444 | 17,414 | ||||||
Non-cash interest charges |
164 | 164 | ||||||
Provisions for losses on trade and other accounts receivable |
3,539 | 6,364 | ||||||
Losses (gains) on sales/disposals of operating property |
570 | (96 | ) | |||||
Deferred income taxes, net |
(1,592 | ) | 3,756 | |||||
Stock-based compensation |
3,567 | 3,747 | ||||||
Changes in operating assets and liabilities: |
||||||||
Decrease (increase) in trade and other accounts receivable |
(49,502 | ) | 62,862 | |||||
Decrease in other assets |
323 | 4,736 | ||||||
Increase (decrease) in accounts payable |
25,677 | (12,635 | ) | |||||
Increase (decrease) in other liabilities |
10,582 | (9,609 | ) | |||||
Decrease in insurance claims |
(6,192 | ) | (117 | ) | ||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
68,283 | 128,199 | ||||||
INVESTING ACTIVITIES |
||||||||
Net change in other short-term investments |
149 | 26,334 | ||||||
Sales and maturities of investments |
31,145 | 10,032 | ||||||
Purchases of investments |
(60,865 | ) | (43,559 | ) | ||||
Purchases of operating property |
(25,474 | ) | (2,276 | ) | ||||
Proceeds from sales of operating property |
948 | 654 | ||||||
Consideration paid for acquisitions |
| (14,888 | ) | |||||
NET CASH USED BY INVESTING ACTIVITIES |
(54,097 | ) | (23,703 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Decrease in cash overdraft |
(6,422 | ) | (10,846 | ) | ||||
Dividends paid |
(7,003 | ) | (6,419 | ) | ||||
Proceeds from exercises of stock options |
1,527 | 1,116 | ||||||
Excess tax benefit on stock option exercises |
1,556 | 325 | ||||||
Borrowings on revolving credit facility |
40,000 | 15,000 | ||||||
Purchases of common stock |
(54,647 | ) | (31,660 | ) | ||||
Capital contribution for noncontrolling interest |
| 1,375 | ||||||
Principal payments on long-term debt and capital lease obligations |
(19,912 | ) | (103,674 | ) | ||||
NET CASH USED BY FINANCING ACTIVITIES |
(44,901 | ) | (134,783 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
71 | 373 | ||||||
Decrease in cash and cash equivalents |
(30,644 | ) | (29,914 | ) | ||||
Cash and cash equivalents at beginning of period |
85,719 | 98,904 | ||||||
Cash and cash equivalents at end of period |
$ | 55,075 | $ | 68,990 | ||||
See accompanying notes to consolidated financial statements.
6
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Thirty Nine Weeks Ended September 25, 2010
(Dollars in thousands)
(Unaudited)
Landstar System, Inc. and Subsidiary Shareholders | ||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||
Additional | Treasury Stock | Other | Non- | |||||||||||||||||||||||||||||||||
Common Stock | Paid-In | Retained | at Cost | Comprehensive | controlling | |||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Shares | Amount | Income | Interest | Total | ||||||||||||||||||||||||||||
Balance December 26, 2009 |
66,255,358 | $ | 663 | $ | 161,261 | $ | 766,040 | 16,022,111 | $ | (660,446 | ) | $ | 498 | $ | 135 | $ | 268,151 | |||||||||||||||||||
Net income (loss) |
63,415 | (712 | ) | 62,703 | ||||||||||||||||||||||||||||||||
Dividends paid ($0.14 per share) |
(7,003 | ) | (7,003 | ) | ||||||||||||||||||||||||||||||||
Purchases of common stock |
1,375,453 | (54,647 | ) | (54,647 | ) | |||||||||||||||||||||||||||||||
Stock-based compensation |
3,567 | 3,567 | ||||||||||||||||||||||||||||||||||
Exercises of stock options and
issuance of non-vested stock,
including excess tax benefit |
262,042 | 2 | 3,081 | 3,083 | ||||||||||||||||||||||||||||||||
Foreign currency translation |
71 | 71 | ||||||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale investments, net of income
taxes |
612 | 612 | ||||||||||||||||||||||||||||||||||
Balance September 25, 2010 |
66,517,400 | $ | 665 | $ | 167,909 | $ | 822,452 | 17,397,564 | $ | (715,093 | ) | $ | 1,181 | $ | (577 | ) | $ | 276,537 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
7
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System, Inc. and its
subsidiary, Landstar System Holdings, Inc., and reflect all adjustments (all of a normal, recurring
nature) which are, in the opinion of management, necessary for a fair statement of the results for
the periods presented. The preparation of the consolidated financial statements requires the use of
managements estimates. Actual results could differ from those estimates. Landstar System, Inc.
and its subsidiary are herein referred to as Landstar or the Company. Significant intercompany
accounts have been eliminated in consolidation.
Landstar owns, through various subsidiaries, a controlling interest in A3i Acquisition LLC,
which in turn owns 100% of A3 Integration, LLC (A3i Acquisition LLC, A3 Integration, LLC and its
subsidiaries are collectively referred to herein as A3i), a supply chain systems integration and
solutions company acquired in the Companys 2009 fiscal third quarter. Given Landstars controlling
interest in A3i Acquisition, the accounts of A3i have been consolidated herein and a noncontrolling
interest has been recorded for the noncontrolling investors interests in the net assets and
operations of A3i.
(1) Share-based Payment Arrangements
As of September 25, 2010, the Company had an employee stock option plan, an employee stock
option and stock incentive plan (the ESOSIP), one stock option plan for members of its Board of
Directors and a stock compensation plan for members of its Board of Directors (the Directors Stock
Compensation Plan) (all together, the Plans). No further grants can be made under the employee
stock option plan as its term for granting stock options has expired. In addition, no further
grants are to be made under the stock option plan for members of the Board of Directors. Amounts
recognized in the financial statements with respect to these Plans are as follows (in thousands):
Thirty Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
September 25, | September 26, | September 25, | September 26, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Total cost of the Plans during the period |
$ | 3,567 | $ | 3,747 | $ | 1,199 | $ | 1,177 | ||||||||
Amount of related income tax benefit
recognized during the period |
906 | 923 | 285 | 273 | ||||||||||||
Net cost of the Plans during the period |
$ | 2,661 | $ | 2,824 | $ | 914 | $ | 904 | ||||||||
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 2010
and 2009 thirty-nine-week periods:
2010 | 2009 | |||||||
Expected volatility |
37.0 | % | 38.0 | % | ||||
Expected dividend yield |
0.400 | % | 0.400 | % | ||||
Risk-free interest rate |
2.50 | % | 1.50 | % | ||||
Expected lives (in years) |
4.2 | 4.4 |
The Company utilizes historical data, including exercise patterns and employee departure
behavior, in estimating the term that 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 25, 2010 and September 26, 2009 was $12.00 and $11.75,
respectively.
The following table summarizes information regarding the Companys stock options granted
under the Plans:
8
Weighted Average | ||||||||||||||||
Weighted Average | Remaining | |||||||||||||||
Number of | Exercise Price | Contractual | Aggregate Intrinsic | |||||||||||||
Options | per Share | Term (years) | Value (000s) | |||||||||||||
Options outstanding at December 26, 2009 |
2,557,802 | $ | 36.86 | |||||||||||||
Granted |
225,250 | $ | 37.39 | |||||||||||||
Exercised |
(405,954 | ) | $ | 21.28 | ||||||||||||
Forfeited |
(56,867 | ) | $ | 43.06 | ||||||||||||
Options outstanding at September 25, 2010 |
2,320,231 | $ | 39.49 | 6.7 | $ | | ||||||||||
Options exercisable at September 25, 2010 |
954,181 | $ | 38.27 | 5.2 | $ | 38 | ||||||||||
As of September 25, 2010, there were 1,650,313 stock options outstanding that were
out-of-the-money based on that days per share closing market price of $38.31 as reported on the
NASDAQ Global Select Market. The remaining 669,918 stock options outstanding as of September 25,
2010 that were in-the-money had an aggregate intrinsic value of $3,796,000. The total intrinsic
value of stock options exercised during the thirty-nine-week periods ended September 25, 2010 and
September 26, 2009 was $9,115,000 and $1,453,000, respectively.
As of September 25, 2010, there was $10,602,000 of total unrecognized compensation cost
related to non-vested stock options granted under the Plans. The unrecognized compensation cost
related to these non-vested options is expected to be recognized over a weighted average period of
2.9 years.
The fair value of each share of non-vested restricted stock issued under the Plans is based on
the fair value of a share of the Companys common stock on the date of grant.
The following table summarizes information regarding the Companys non-vested restricted stock
under the Plans:
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Non-vested restricted stock outstanding at December 26, 2009 |
11,500 | $ | 34.82 | |||||
Granted |
18,354 | $ | 42.41 | |||||
Non-vested restricted stock outstanding at September 25, 2010 |
29,854 | $ | 39.49 | |||||
As of September 25, 2010, there was $944,000 of total unrecognized compensation cost related
to non-vested shares of restricted stock granted under the Plans. The unrecognized compensation
cost related to these non-vested shares of restricted stock is expected to be recognized over a
weighted average period of 2.9 years.
As of September 25, 2010, there were 128,469 shares of the Companys common stock reserved for
issuance under the Directors Stock Compensation Plan and 4,719,448 shares of the Companys common
stock reserved for issuance under the Companys other plans.
(2) Income Taxes
The provisions for income taxes for the 2010 and 2009 thirty-nine-week periods were based on
estimated full year combined effective income tax rates of approximately 38.2% and 37.9%,
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.
(3) Earnings Per Share
Earnings per common share attributable to Landstar System, Inc. and subsidiary are based on
the weighted average number of common shares outstanding. Diluted earnings per share attributable
to Landstar System, Inc. and subsidiary 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 attributable to Landstar System, Inc. and
subsidiary to the average number of common shares and common share equivalents outstanding used to
calculate diluted earnings per share attributable to Landstar System, Inc. and subsidiary (in
thousands):
9
Thirty Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
September 25, | September 26, | September 25, | September 26, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Average number of common shares outstanding |
49,921 | 51,325 | 49,434 | 51,069 | ||||||||||||
Incremental shares from assumed exercises of stock options |
69 | 182 | 13 | 176 | ||||||||||||
Average number of common shares and common share
equivalents outstanding |
49,990 | 51,507 | 49,447 | 51,245 | ||||||||||||
For the thirty-nine-week and thirteen-week periods ended September 25, 2010 there were
1,353,313 and 1,650,313, respectively, options outstanding to purchase shares of common stock
excluded from the calculation of diluted earnings per share because they were antidilutive. For
the thirty-nine-week and thirteen-week periods ended September 26, 2009 there were 2,000,747 and
1,897,747, respectively, options outstanding to purchase shares of common stock excluded from the
calculation of diluted earnings per share because they were antidilutive.
(4) Additional Cash Flow Information
During the 2010 thirty-nine-week period, Landstar paid income taxes and interest of
$36,568,000 and $2,847,000, respectively. During the 2009 thirty-nine-week period, Landstar paid
income taxes and interest of $22,349,000 and $3,437,000, respectively. Landstar acquired operating
property by entering into capital leases in the amount of $14,145,000 and $12,284,000 in the 2010
and 2009 thirty-nine-week periods, respectively. During the 2010 thirty-nine-week period, the
Company purchased $25,474,000 of operating property, including $21,135,000 for the purchase of the
Companys primary facility in Jacksonville, Florida.
(5) Segment Information
The following tables summarize information about Landstars reportable business segments as of
and for the thirty-nine-week and thirteen-week periods ended September 25, 2010 and September 26,
2009 (in thousands):
Thirty Nine Weeks Ended | ||||||||||||||||||||||||
September 25, 2010 | September 26, 2009 | |||||||||||||||||||||||
Transportation | Transportation | |||||||||||||||||||||||
Logistics | Insurance | Total | Logistics | Insurance | Total | |||||||||||||||||||
External revenue |
$ | 1,787,107 | $ | 25,528 | $ | 1,812,635 | $ | 1,433,812 | $ | 27,269 | $ | 1,461,081 | ||||||||||||
Investment income |
1,069 | 1,069 | 954 | 954 | ||||||||||||||||||||
Internal revenue |
21,463 | 21,463 | 21,350 | 21,350 | ||||||||||||||||||||
Operating income |
88,460 | 15,703 | 104,163 | 62,227 | 23,945 | 86,172 | ||||||||||||||||||
Expenditures on long-lived assets |
25,474 | 25,474 | 2,276 | 2,276 | ||||||||||||||||||||
Goodwill |
57,470 | 57,470 | 57,297 | 57,297 |
Thirteen Weeks Ended | ||||||||||||||||||||||||
September 25, 2010 | September 26, 2009 | |||||||||||||||||||||||
Transportation | Transportation | |||||||||||||||||||||||
Logistics | Insurance | Total | Logistics | Insurance | Total | |||||||||||||||||||
External revenue |
$ | 614,273 | $ | 8,553 | $ | 622,826 | $ | 491,780 | $ | 8,890 | $ | 500,670 | ||||||||||||
Investment income |
495 | 495 | 279 | 279 | ||||||||||||||||||||
Internal revenue |
5,902 | 5,902 | 5,833 | 5,833 | ||||||||||||||||||||
Operating income |
31,108 | 4,778 | 35,886 | 25,731 | 6,947 | 32,678 | ||||||||||||||||||
Expenditures on long-lived assets |
790 | 790 | 229 | 229 |
In the thirty-nine-week period ended September 25, 2010, one customer accounted for
approximately 11 percent of the Companys revenue. In the thirteen-week period ended September 25,
2010, there were no customers who accounted for 10 percent or more of the Companys revenue. In
the thirty-nine-week and thirteen-week periods ended September 26, 2009, there were no customers
who accounted for 10 percent or more of the Companys revenue.
(6) Comprehensive Income
10
The following table includes the components of comprehensive income attributable to Landstar
System, Inc. and subsidiary for the thirty-nine-week and thirteen-week periods ended September 25,
2010 and September 26, 2009 (in thousands):
Thirty Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
September 25, | September 26, | September 25, | September 26, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income attributable to Landstar System, Inc.
and subsidiary |
$ | 63,415 | $ | 51,827 | $ | 21,802 | $ | 20,076 | ||||||||
Unrealized holding gains on
available-for-sale investments, net of income taxes |
612 | 439 | 486 | 197 | ||||||||||||
Foreign currency translation gains |
71 | 373 | 14 | 350 | ||||||||||||
Comprehensive income attributable to Landstar System,
Inc. and subsidiary |
$ | 64,098 | $ | 52,639 | $ | 22,302 | $ | 20,623 | ||||||||
The unrealized holding gain on available-for-sale investments during the 2010 thirty-nine-week
period represents the mark-to-market adjustment of $948,000, net of related income taxes of
$336,000. The unrealized holding gain on available-for-sale investments during the 2010
thirteen-week period represents the mark-to-market adjustment of $752,000, net of related income
taxes of $266,000. The unrealized holding gain on available-for-sale investments during the 2009
thirty-nine-week period represents the mark-to-market adjustment of $680,000, net of related income
taxes of $241,000. The unrealized holding gain on available-for-sale investments during the 2009
thirteen-week period represents the mark-to-market adjustment of $305,000, net of related income
taxes of $108,000. The foreign currency translation gain represents the unrealized net gain on the
translation of the financial statements of the Companys Canadian operations. Accumulated other
comprehensive income as reported as a component of equity at September 25, 2010 of $1,181,000
represents the unrealized net gain on the translation of the financial statements of the Companys
Canadian operations of $279,000 and the cumulative unrealized holding gains on available-for-sale
investments, net of income taxes, of $902,000.
(7) Investments
Investments
include investment-grade bonds and mortgage-backed securities having maturities of up to five years (the Bond
Portfolio). Bonds in the Bond Portfolio are reported as available-for-sale and are carried at fair
value. Bonds maturing less than one year from the balance sheet date are included in short-term
investments and bonds maturing more than one year from the balance sheet date are included in other
assets in the consolidated balance sheets. Management has performed an analysis of the nature of
the unrealized losses on available-for-sale investments to determine whether such losses are
other-than-temporary. Unrealized losses, representing the excess of the purchase price of an
investment over its fair value as of the end of a period, considered to be other-than-temporary are
to be included as a charge in the statement of income while unrealized losses considered to be
temporary are to be included as a component of equity. Investments whose values are based on quoted
market prices in active markets are classified within Level 1. Investments that trade in markets
that are not considered to be active, but are valued based on quoted market prices are classified
within Level 2. As Level 2 investments include positions that are not traded in active markets,
valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally
based on available market information. Transfers between levels are recognized as of the beginning
of the period. Fair value of the Bond Portfolio was determined using Level 1 inputs related to U.S.
Treasury obligations and money market investments and Level 2 inputs related to investment-grade
corporate bonds, mortgage-backed securities and direct obligations of U.S. government agencies.
The amortized cost and fair values of available-for-sale investments are as follows at
September 25, 2010 and December 26, 2009 (in thousands):
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
September 25, 2010 |
||||||||||||||||
Money market investments |
$ | 788 | $ | 788 | ||||||||||||
Mortgage-backed securities |
3,489 | $ | 92 | $ | 13 | 3,568 | ||||||||||
Corporate bonds and direct obligations of U.S.
government agencies |
64,082 | 1,342 | 33 | 65,391 | ||||||||||||
U.S. Treasury obligations |
11,780 | 9 | | 11,789 | ||||||||||||
Total |
$ | 80,139 | $ | 1,443 | $ | 46 | $ | 81,536 | ||||||||
11
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
December 26, 2009 |
||||||||||||||||
Corporate bonds and direct obligations of U.S.
government agencies |
$ | 39,261 | $ | 668 | $ | 226 | $ | 39,703 | ||||||||
U.S. Treasury obligations |
11,489 | 6 | | 11,495 | ||||||||||||
Total |
$ | 50,750 | $ | 674 | $ | 226 | $ | 51,198 | ||||||||
For those available-for-sale investments with unrealized losses at September 25, 2010 and
December 26, 2009, the following table summarizes the duration of the unrealized loss (in
thousands):
Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
September 25, 2010 |
||||||||||||||||||||||||
Corporate bonds and direct obligations of
U.S. government agencies |
$ | 348 | $ | 2 | $ | 7,423 | $ | 44 | $ | 7,771 | $ | 46 | ||||||||||||
Mortgage-backed securities |
234 | 13 | | | 234 | 13 | ||||||||||||||||||
Total |
$ | 582 | $ | 15 | $ | 7,423 | $ | 44 | $ | 8,005 | $ | 59 | ||||||||||||
December 26, 2009 |
||||||||||||||||||||||||
Corporate bonds and direct obligations of
U.S. government agencies |
$ | 1,989 | $ | 10 | $ | 1,192 | $ | 216 | $ | 3,181 | $ | 226 |
(8) Commitments and Contingencies
Short-term investments include $22,662,000 in current maturities of investment-grade bonds and
money market investments and $1,581,000 of cash equivalents held by the Companys insurance segment
at September 25, 2010. These short-term investments together with $25,265,000 of the non-current
portion of investment-grade bonds included in other assets at September 25, 2010 provide collateral
for the $44,715,000 of letters of credit issued to guarantee payment of insurance claims. As of
September 25, 2010, Landstar also had $33,699,000 of letters of credit outstanding under the
Companys credit agreement.
Under the terms of the purchase agreement by which the Company acquired National Logistics
Management Co. (NLM) in July 2009, Landstar agreed to pay additional purchase price contingent
upon the achievement by NLM of certain levels of earnings through 2014. Landstar recently agreed
with the prior owner of NLM to buy-out the Companys contingent payment obligations for a total
payment of $3,800,000. This one-time charge is included in selling, general and administrative
costs in the thirty-nine-week and thirteen-week periods ended September 25, 2010.
As further described in periodic and current reports previously filed by the Company with the
Securities and Exchange Commission (the SEC), 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 initial ruling. Each of the parties to the Litigation subsequently filed a petition
with the Appellate Court seeking rehearing of the Appellate Courts ruling.
12
On October 4, 2010, the Appellate Court denied each of the motions for rehearing, withdrew its
initial ruling and substituted a new ruling in its place. The new ruling by 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. In particular, the new ruling, among other things, held 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
amounts payable to the BCO Independent Contractor (a Charge-back Deduction), (ii) in the case of
a Charge-back Deduction expressed as a flat-fee in the lease, the applicable federal leasing
regulations do not require Defendants to do more than disclose the flat-fee Charge-back Deduction
in the lease and follow up with settlement statements that explain the final amount charged back,
(iii) 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 (iv) 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.
However, the new ruling of the Appellate Court reversed the District Courts ruling 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 amounts payable to BCO Independent Contractors on
certain loads sourced from the U. S. Department of Defense. The Appellate Court then remanded the
case to the District Court to permit the Plaintiffs to seek injunctive relief with respect to this
violation 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 violation.
The
Plaintiffs have filed a petition with the Appellate Court seeking
rehearing en banc of the Appellate Courts October 4, 2010
ruling.
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 effect on the Companys financial condition or
results of operations.
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 in respect thereof, will not have a material adverse effect on the
financial condition of the Company, but could have a material effect on the results of operations
in a given quarter or year.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the attached interim consolidated
financial statements and notes thereto, and with the Companys audited financial statements and
notes thereto for the fiscal year ended December 26, 2009 and Managements Discussion and Analysis
of Financial Condition and Results of Operations included in the 2009 Annual Report on Form 10-K.
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; disruptions or failures in the Companys computer
systems; changes in fuel taxes; status of independent contractors; a downturn in economic growth or
growth in the transportation sector; acquired businesses; intellectual property; and other
operational, financial or legal risks or uncertainties detailed in Landstars Form 10-K for the
2009 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
13
reliance on such forward-looking statements and the Company
undertakes no obligation to publicly update or revise any forward-looking statements.
Introduction
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (together, referred
to herein as Landstar or the Company),
is a non-asset based provider of freight transportation services and supply chain solutions.
The Company offers services to its customers across multiple transportation modes, with the ability
to arrange for individual shipments of freight to enterprise-wide solutions to manage all of a
customers transportation and logistics needs. Landstar provides services principally throughout
the United States and to a lesser extent in Canada, and between the United States and Canada,
Mexico and other countries around the world. The Companys services emphasize safety, information
coordination and customer service and are delivered through a network of independent commission
sales agents and third party capacity providers linked together by a series of technological
applications which are provided and coordinated by the Company. Landstar markets its freight
transportation services and supply chain solutions primarily through independent commission sales
agents and exclusively utilizes third party capacity providers to transport and store customers
freight. The nature of the Companys business is such that a significant portion of its operating
costs varies directly with revenue.
In the Companys 2009 fiscal third quarter, the Company completed the acquisitions of (i)
National Logistics Management Co. (together with a limited liability company and certain corporate
subsidiaries and affiliates, NLM) and (ii) A3 Integration LLC (A3i) through A3i Acquisition
LLC, an entity of which the Company owns 100% of the non-voting, preferred interests and 75% of the
voting, common equity interests. A3i is a wholly-owned subsidiary of A3i Acquisition. These two
acquisitions are referred to herein collectively as the Recent Acquisitions. NLM and A3i offer
customers technology-based supply chain solutions and other value-added services on a
fee-for-service basis. NLM and A3i are herein referred to as the Acquired Entities. The results
of operations from NLM and A3i are presented as part of the Companys transportation logistics
segment.
Landstar markets its freight transportation services and supply chain solutions primarily
through independent commission sales agents who enter into contractual arrangements with the
Company and are responsible for locating freight, making that freight available to Landstars
capacity providers and coordinating the transportation of the freight with customers and capacity
providers. The Companys third party capacity providers consist of independent contractors who
provide truck capacity to the Company under exclusive lease arrangements (the BCO Independent
Contractors), unrelated trucking companies who provide truck capacity to the Company under
non-exclusive contractual arrangements (the Truck Brokerage Carriers), air cargo carriers, ocean
cargo carriers, railroads and independent warehouse capacity providers (Warehouse Capacity
Owners). The Company has contracts with all of the Class 1 domestic and Canadian railroads and
certain short-line railroads and contracts with domestic and international airlines and ocean
lines. Through this network of agents and capacity providers linked together by Landstars
technological applications, Landstar operates a transportation services and supply chain solutions
business primarily throughout North America with revenue of approximately $2.0 billion during the
most recently completed fiscal year. The Company reports the results of two operating segments: the
transportation logistics segment and the insurance segment.
The transportation logistics segment provides a wide range of transportation services and
supply chain solutions. Transportation services offered by the Company include truckload and
less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and
air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico
cross-border, project cargo and customs brokerage. Supply chain solutions are based on advanced
technology solutions offered by the Company and include integrated multi-modal solutions,
outsourced logistics, supply chain engineering and warehousing. Also, supply chain solutions can be
delivered through a software-as-a-service model. Industries serviced by the transportation
logistics segment include automotive products, paper, lumber and building products, metals,
chemicals, foodstuffs, heavy machinery, retail, electronics, ammunition and explosives and military
hardware. In addition, the transportation logistics segment provides transportation services to
other transportation companies, including logistics and less-than-truckload service providers. Each
of the independent commission sales agents has the opportunity to market all of the services
provided by the transportation logistics segment. Freight transportation services are typically
charged to customers on a per shipment basis for the physical transportation of freight. Supply
chain solution customers are generally charged fees for the services provided. Revenue recognized
by the transportation logistics segment when providing capacity to customers to haul their freight
is referred to herein as transportation services revenue and revenue for freight management
services recognized on a fee-for-service basis is referred to herein as transportation management
fees. During the thirty nine weeks ended September 25, 2010, transportation services revenue
hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal, ocean cargo
carriers and air cargo carriers represented 54%, 39%, 3%, 2%, and 1%, respectively, of the
Companys transportation logistics segment revenue. Transportation management fees represented 1%
of the Companys transportation logistics segment revenue in the thirty-nine-week period ended
September 25, 2010.
14
The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore
insurance subsidiary, and Risk Management Claim Services, Inc. This segment provides risk and
claims management services to certain of Landstars operating subsidiaries. In addition, it
reinsures certain risks of the Companys BCO Independent Contractors and provides certain property
and casualty insurance directly to certain of Landstars operating subsidiaries. Revenue,
representing premiums on reinsurance programs provided to the Companys BCO Independent
Contractors, at the insurance segment represented approximately 1% of the Companys total revenue
for the thirty nine weeks ended September 25, 2010.
Changes in Financial Condition and Results of Operations
Management believes the Companys success principally depends on its ability to generate
freight through its network of independent commission sales agents and to efficiently deliver that
freight utilizing third party capacity providers. Management believes the most significant factors
to the Companys success include increasing revenue, sourcing capacity and controlling costs.
While customer demand, which is subject to overall economic conditions, ultimately drives
increases or decreases in revenue, the Company primarily relies on its independent commission sales
agents to establish customer relationships and generate revenue opportunities. Managements primary
focus with respect to revenue growth is on revenue generated by independent commission sales agents
who on an annual basis generate $1 million or more of Landstar revenue (Million Dollar Agents).
Management believes future revenue growth is primarily dependent on its ability to increase both
the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a
combination of recruiting new agents and increasing the revenue opportunities generated by existing
independent commission sales agents. During the 2009 fiscal year, 405 independent commission sales
agents generated $1 million or more of Landstars revenue and thus qualified as Million Dollar
Agents. During the 2009 fiscal year, the average revenue generated by a Million Dollar Agent was
$4,292,000 and revenue generated by Million Dollar Agents in the aggregate represented 87% of
consolidated Landstar revenue. The Company had 1,341 and 1,403 agent locations at September 25,
2010 and September 26, 2009, respectively.
Management monitors business activity by tracking the number of loads (volume) and revenue per
load by mode of transportation. Revenue per load can be influenced by many factors other than a
change in price, including the average length of haul, freight type, fuel surcharges, 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 | |||||||||||||||
September 25, | September 26, | September 25, | September 26, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue generated through (in thousands): |
||||||||||||||||
BCO Independent Contractors |
$ | 966,221 | $ | 840,391 | $ | 334,485 | $ | 289,726 | ||||||||
Truck Brokerage Carriers |
705,189 | 495,661 | 239,026 | 166,182 | ||||||||||||
Rail intermodal |
51,840 | 57,094 | 17,748 | 20,366 | ||||||||||||
Ocean cargo carriers |
34,045 | 25,459 | 13,210 | 7,941 | ||||||||||||
Air cargo carriers |
13,853 | 10,259 | 5,291 | 2,751 | ||||||||||||
Other (1) |
41,487 | 32,217 | 13,066 | 13,704 | ||||||||||||
$ | 1,812,635 | $ | 1,461,081 | $ | 622,826 | $ | 500,670 | |||||||||
Number of loads: |
||||||||||||||||
BCO Independent Contractors |
624,270 | 561,840 | 203,500 | 196,840 | ||||||||||||
Truck Brokerage Carriers |
456,410 | 363,000 | 148,080 | 122,980 | ||||||||||||
Rail intermodal |
23,120 | 28,600 | 7,630 | 10,310 | ||||||||||||
Ocean cargo carriers |
4,930 | 3,920 | 1,820 | 1,330 | ||||||||||||
Air cargo carriers |
4,870 | 6,440 | 1,740 | 1,340 | ||||||||||||
1,113,600 | 963,800 | 362,770 | 332,800 | |||||||||||||
15
Thirty Nine Weeks Ended | Thirteen Weeks Ended | |||||||||||||||
September 25, | September 26, | September 25, | September 26, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue per load: |
||||||||||||||||
BCO Independent Contractors |
$ | 1,548 | $ | 1,496 | $ | 1,644 | $ | 1,472 | ||||||||
Truck Brokerage Carriers |
1,545 | 1,365 | 1,614 | 1,351 | ||||||||||||
Rail intermodal |
2,242 | 1,996 | 2,326 | 1,975 | ||||||||||||
Ocean cargo carriers |
6,906 | 6,495 | 7,258 | 5,971 | ||||||||||||
Air cargo carriers |
2,845 | 1,593 | 3,041 | 2,053 | ||||||||||||
(1) | Includes premium revenue generated by the insurance segment and warehousing and transportation management fee revenue generated by the transportation logistics segment. |
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:
September 25, 2010 | September 26, 2009 | |||||||
BCO Independent Contractors |
7,893 | 8,070 | ||||||
Truck Brokerage Carriers: |
||||||||
Approved and active (1) |
17,393 | 14,541 | ||||||
Other approved |
9,490 | 10,576 | ||||||
26,883 | 25,117 | |||||||
Total available truck capacity providers |
34,776 | 33,187 | ||||||
Number of trucks provided by BCO Independent Contractors |
8,481 | 8,655 | ||||||
(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 BCO Independent Contractor or other third
party capacity provider is paid to haul freight. The amount of purchased transportation paid to a
BCO Independent Contractor is primarily based on a contractually agreed-upon percentage of revenue
generated by the haul. Purchased transportation 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 or ocean cargo carriers is based on contractually
agreed-upon fixed rates. Purchased transportation as a percentage of revenue for truck brokerage,
rail intermodal and ocean cargo services is normally higher than that of BCO Independent Contractor
and air cargo services. 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, transportation management
fees and revenue from the insurance segment. Purchased transportation as a percent of revenue also
increases or decreases in relation to the general availability of truck brokerage capacity in the
marketplace and the price of fuel on revenue hauled by Truck Brokerage Carriers. 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, or gross profit less a
contractually agreed upon percentage of revenue retained by Landstar. 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, transportation management
fees and the insurance segment and with changes in gross profit on services provided by Truck
Brokerage Carriers, rail intermodal, air cargo and ocean cargo carriers. Commissions to agents are
recognized upon the completion of freight delivery.
Revenue less the cost of purchased transportation and commissions to agents is referred to as
net revenue. Net revenue divided by revenue is referred to as net revenue margin. In general, net
revenue margin on revenue hauled by BCO Independent Contractors represents a fixed percentage of
revenue due to the terms of the applicable contracts with the Company that provide for the payment
of a
16
fixed percentage of revenue to both the BCO Independent Contractors and independent commission
sales agents. For revenue hauled by Truck Brokerage Carriers, net revenue margin is either fixed or
variable as a percent of revenue, depending on the Companys contract with each individual
independent commission sales agent. Under certain contracts with independent commission sales
agents, the Company retains a fixed percentage of revenue and the agent retains the amount
remaining less the cost of purchased transportation (the retention contracts). Net revenue margin
on revenue hauled by rail intermodal, air cargo carriers, ocean cargo carriers and Truck Brokerage
Carriers, other than under retention contracts, is variable in nature, as the Companys contracts
with independent commission sales agents provide commissions
to agents at a contractually agreed upon percentage of gross profit. Approximately 74% of the
Companys revenue in the thirty-nine-week period ended September 25, 2010 had a fixed net revenue
margin.
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. For commercial trucking claims, Landstar retains liability up to
$5,000,000 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 up to $250,000 for each cargo
claim. The Companys exposure to liability associated with accidents incurred by Truck Brokerage
Carriers, rail intermodal capacity providers and air cargo and ocean cargo carriers who transport
freight on behalf of the Company is reduced by various factors including the extent to which they
maintain their own insurance coverage. A material increase in the frequency or severity of
accidents, cargo claims or workers compensation claims or the unfavorable development of existing
claims could be expected to materially adversely affect Landstars results of operations.
Employee compensation and benefits account for over half of the Companys selling, general and
administrative costs.
Depreciation and amortization primarily relate to depreciation of trailing equipment,
amortization of intangible assets attributable to the Recent Acquisitions and management
information services equipment.
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 | |||||||||||||||
September 25, | September 26, | September 25, | September 26, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Investment income |
0.1 | 0.1 | 0.1 | 0.1 | ||||||||||||
Costs and expenses: |
||||||||||||||||
Purchased transportation |
76.3 | 74.6 | 76.2 | 74.4 | ||||||||||||
Commissions to agents |
7.4 | 8.1 | 7.6 | 7.9 | ||||||||||||
Other operating costs |
1.2 | 1.5 | 1.0 | 1.4 | ||||||||||||
Insurance and claims |
2.1 | 2.0 | 1.9 | 2.1 | ||||||||||||
Selling, general and administrative |
6.4 | 6.8 | 6.6 | 6.6 | ||||||||||||
Depreciation and amortization |
1.0 | 1.2 | 1.0 | 1.2 | ||||||||||||
Total costs and expenses |
94.4 | 94.2 | 94.3 | 93.6 | ||||||||||||
Operating income |
5.7 | 5.9 | 5.8 | 6.5 | ||||||||||||
Interest and debt expense |
0.1 | 0.2 | 0.2 | 0.2 | ||||||||||||
Income before income taxes |
5.6 | 5.7 | 5.6 | 6.3 | ||||||||||||
Income taxes |
2.1 | 2.2 | 2.1 | 2.3 | ||||||||||||
Net income |
3.5 | % | 3.5 | % | 3.5 | % | 4.0 | % | ||||||||
THIRTY NINE WEEKS ENDED SEPTEMBER 25, 2010 COMPARED TO THIRTY NINE WEEKS ENDED SEPTEMBER 26,
2009
Revenue for the 2010 thirty-nine-week period was $1,812,635,000, an increase of $351,554,000,
or 24.1%, compared to the 2009 thirty-nine-week period. Revenue increased $353,295,000, or 24.6%,
at the transportation logistics segment. The increase in revenue at the transportation logistics
segment was primarily attributable to a 16% increase in the number of loads hauled and a higher
revenue per load of approximately 7%. The increase in the number of loads hauled was generally
attributable to improved industrial production in the U.S.
17
during 2010 and the impact of market
share gains from agents recruited during 2010 and 2009. The increase in revenue per load was
generally attributable to increased demand and tightening capacity. Revenue hauled by BCO
Independent Contractors, Truck Brokerage Carriers, air cargo carriers and ocean cargo carriers
increased 15%, 42%, 35% and 34%, respectively, while revenue hauled by rail intermodal carriers
decreased 9%. Included in the 2010 and 2009 thirty-nine-week periods was $15,592,000 and
$4,764,000, respectively, of transportation management fees related to NLM. The number of loads in
the 2010 period hauled by BCO Independent Contractors,
Truck Brokerage Carriers and ocean cargo carriers increased 11%, 26% and 26%, respectively,
compared to the 2009 period, while the number of loads hauled by rail intermodal carriers and air
cargo carriers decreased 19% and 24%, respectively, over the same period. Revenue per load for
loads hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers,
air cargo carriers and ocean cargo carriers increased approximately 3%, 13%, 12%, 79% and 6%,
respectively, compared to the 2009 period.
Investment income at the insurance segment was $1,069,000 and $954,000 in the 2010 and 2009
thirty-nine-week periods, respectively. The increase in investment income was primarily due to
increased average investments held by the insurance segment in the 2010 period.
Purchased transportation was 76.3% and 74.6% of revenue in the 2010 and 2009 thirty-nine-week
periods, respectively. The increase in purchased transportation as a percentage of revenue was
primarily attributable to increased revenue hauled by Truck Brokerage Carriers, which tends to have
a higher cost of purchased transportation, and increased rates of purchased transportation paid to
Truck Brokerage Carriers. Commissions to agents were 7.4% of revenue in the 2010 period and 8.1% of
revenue in the 2009 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.
Other operating costs were 1.2% and 1.5% of revenue in the 2010 and 2009 periods, respectively. The
decrease in other operating costs as a percentage of revenue was primarily attributable to the
effect of increased revenue in the 2010 period, partly offset by an increase of $954,000 in other
operating costs attributable to the Acquired Entities in the 2010 period compared to the 2009
period. The increase in other operating costs of the Acquired Entities was primarily due to the
results of the Acquired Entities being included in the Companys results for the complete
thirty-nine-week period of 2010 compared to only thirteen weeks in 2009. Insurance and claims were
2.1% of revenue in the 2010 period and 2.0% of revenue in the 2009 period. The increase in
insurance and claims as a percentage of revenue was primarily due to favorable development of prior
year claims reported in 2009. Selling, general and administrative costs were 6.4% of revenue in
the 2010 period and 6.8% of revenue in the 2009 period. The decrease in selling, general and
administrative costs as a percentage of revenue was primarily attributable to the effect of
increased revenue and a decreased provision for customer bad debt, partially offset by a
$10,193,000 provision for bonuses under the Companys incentive compensation programs in the 2010
period compared to no provision in the 2009 period and an increase of $12,454,000 of selling,
general and administrative costs attributable to the Acquired Entities in the 2010 period compared
to the 2009 period. The increase in selling, general and administrative costs of the Acquired
Entities was primarily due to the results of the Acquired Entities being included in the Companys
results for the complete thirty-nine-week period of 2010 compared to only thirteen weeks in 2009.
Under the terms of the purchase agreement by which the Company acquired NLM in July 2009, Landstar
agreed to pay additional purchase price contingent upon the achievement by NLM of certain levels of
earnings through 2014. Landstar recently agreed with the prior owner of NLM to buy-out the
Companys contingent payment obligations for a total payment of $3,800,000. This one-time charge is
included in selling, general and administrative costs in the thirty-nine-week period ended
September 25, 2010. Included in selling, general and administrative costs in the 2009 period was
$2,005,000 of one-time costs related to the acquisitions of the Acquired Entities. Depreciation and
amortization was 1.0% of revenue in the 2010 period compared with 1.2% in the 2009 period. The
decrease in depreciation and amortization as a percentage of revenue was primarily due to the
effect of increased revenue, partially offset by amortization of intangible assets attributable to
the Acquired Entities.
Interest and debt expense was 0.1% of revenue in the 2010 thirty-nine-week period, compared to
0.2% in the 2009 period. The decrease in interest and debt expense as a percentage of revenue was
primarily attributable to the effect of increased revenue and lower average capital lease
obligations.
The provisions for income taxes for the 2010 and 2009 thirty-nine-week periods were based on
estimated full year combined effective income tax rates of approximately 38.2% and 37.9%,
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 increase in the effective income tax rate was primarily attributable to recognition of benefits
relating to several uncertain tax positions for which the applicable statute of limitations passed
in the 2009 third quarter.
The net loss attributable to noncontrolling interest of $712,000 and $214,000 in the 2010 and
2009 thirty-nine-week periods, respectively, represent the noncontrolling investors 25 percent
share of the net losses incurred by A3i.
18
Net income attributable to the Company was $63,415,000, or $1.27 per common share ($1.27 per
diluted share), in the 2010 thirty-nine-week period compared to $51,827,000, or $1.01 per common
share ($1.01 per diluted share), in the 2009 thirty-nine-week period.
Included in the 2010 thirty-nine-week period was a one-time charge of $3,800,000 related to the
buy-out of the Companys contingent payment obligations to the prior owner of NLM. The one-time
charge of $3,800,000, net of related income taxes, decreased 2010 thirty-nine-week period net
income attributable to the Company by $2,348,000, or $0.05 per common share ($0.05 per diluted
share).
THIRTEEN WEEKS ENDED SEPTEMBER 25, 2010 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 26, 2009
Revenue for the 2010 thirteen-week period was $622,826,000, an increase of $122,156,000, or
24.4%, compared to the 2009 thirteen-week period. Revenue increased $122,493,000, or 24.9%, at the
transportation logistics segment. The increase in revenue at the transportation logistics segment
was primarily attributable to a 9% increase in the number of loads hauled and a higher revenue per
load of approximately 15%. The increase in the number of loads hauled was generally attributable to
improved industrial production in the U.S. during 2010 and the impact of market share gains from
agents recruited during 2010 and 2009. The increase in revenue per load was generally attributable
to increased demand and tightening capacity. Revenue hauled by BCO Independent Contractors, Truck
Brokerage Carriers, air cargo carriers and ocean cargo carriers increased 15%, 44%, 92% and 66%,
respectively, while revenue hauled by rail intermodal carriers decreased 13%. Included in the 2010
and 2009 thirteen-week periods was $4,381,000 and $4,764,000, respectively, of transportation
management fees related to the Acquired Entities. The number of loads in the 2010 period hauled by
BCO Independent Contractors, Truck Brokerage Carriers, air cargo carriers and ocean cargo carriers
increased 3%, 20%, 30% and 37%, respectively, compared to the 2009 period, while the number of
loads hauled by rail intermodal carriers decreased 26% over the same period. Revenue per load for
loads hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers,
air cargo carriers and ocean cargo carriers increased approximately 12%, 19%, 18%, 48% and 22%,
respectively, compared to the 2009 period.
Investment income at the insurance segment was $495,000 and $279,000 in the 2010 and 2009
thirteen-week periods, respectively. The increase in investment income was primarily due to an
increased rate of return on investments and increased average investments held by the insurance
segment in the 2010 period.
Purchased transportation was 76.2% and 74.4% of revenue in the 2010 and 2009 thirteen-week
periods, respectively. The increase in purchased transportation as a percentage of revenue was
primarily attributable to increased revenue hauled by Truck Brokerage Carriers, which tends to have
a higher cost of purchased transportation, and increased rates of purchased transportation paid to
Truck Brokerage Carriers. Commissions to agents were 7.6% of revenue in the 2010 period and 7.9% of
revenue in the 2009 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.
Other operating costs were 1.0% and 1.4% of revenue in the 2010 and 2009 periods, respectively. The
decrease in other operating costs as a percentage of revenue was primarily attributable to the
effect of increased revenue in the 2010 period and a decrease of $814,000 of other operating costs
of the Acquired Entities in the 2010 period compared to the 2009 period. Insurance and claims were
1.9% of revenue in the 2010 period and 2.1% of revenue in the 2009 period. The decrease in
insurance and claims as a percentage of revenue was primarily due to the effect of increased Truck
Brokerage Carrier volume as a percent of total volume, which tends to have a lower claims risk
profile, and decreased severity of commercial trucking claims in the 2010 period, partially offset
by favorable development of prior year claims reported in 2009. Selling, general and
administrative costs were 6.6% of revenue in both the 2010 and 2009 periods. Included in selling,
general and administrative costs in the 2010 period was a one-time charge of $3,800,000 related to
the buyout of the Companys contingent payment obligations to the prior owner of NLM and a
$3,777,000 provision for incentive compensation. No such provision for incentive compensation was
reported in the 2009 period. Depreciation and amortization was 1.0% of revenue in the 2010 period,
compared with 1.2% of revenue in the 2009 period. The decrease in depreciation and amortization as
a percentage of revenue was primarily due to the effect of increased revenue.
Interest and debt expense was 0.2% of revenue in each of the 2010 and 2009 thirteen-week
periods.
The provisions for income taxes for the 2010 and 2009 thirteen-week periods were based on
estimated full year combined effective income tax rates of approximately 38.2% and 37.4%,
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 increase in the effective income tax rate was primarily attributable to recognition of benefits
relating to several uncertain tax positions for which the applicable statute of limitations passed
in the 2009 third quarter.
The net loss attributable to noncontrolling interest of $266,000 and $214,000 in the 2010 and
2009 thirteen-week periods, respectively, represents the noncontrolling investors 25 percent share
of the net losses incurred by A3i.
19
Net income attributable to the Company was $21,802,000, or $0.44 per common share ($0.44
per diluted share), in the 2010 thirteen-week period. Net income attributable to the Company
was $20,076,000, or $0.39 per common share ($0.39 per diluted share), in the 2009 thirteen-week
period. Included in the 2010 thirteen-week period was a one-time charge of $3,800,000 related to
the buyout of the Companys contingent payment obligations to the prior owner of NLM. The
one-time charge of $3,800,000, net of related income taxes, decreased 2010 thirteen-week period
net income attributable to the Company by $2,348,000, or $0.05 per common share ($0.05 per
diluted share).
CAPITAL RESOURCES AND LIQUIDITY
Equity was $276,537,000, or 69% of total capitalization (defined as long-term debt including
current maturities plus equity), at September 25, 2010, compared to $268,151,000, or 74% of total
capitalization, at December 26, 2009. The increase in 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 1,375,453 shares of the Companys common stock at a total cost of $54,647,000 and
dividends paid by the Company.
The Company paid $0.14 per share, or $7,003,000, in cash dividends during the thirty-nine-week
period ended September 25, 2010. It is the intention of the Board of Directors to continue to pay
a quarterly dividend. On August 23, 2010, 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 25, 2010, the Company may purchase up to an additional 2,000,000 shares of its common
stock under its authorized stock purchase program. Long-term debt, including current maturities,
was $127,131,000 at September 25, 2010, $34,233,000 higher than at December 26, 2009.
Working capital and the ratio of current assets to current liabilities were $162,499,000 and
1.6 to 1, respectively, at September 25, 2010, compared with $167,977,000 and 1.6 to 1,
respectively, at December 26, 2009. 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 $68,283,000 in the
2010 thirty-nine-week period compared with $128,199,000 in the 2009 thirty-nine-week period. The
decrease in cash flow provided by operating activities was primarily attributable to the increase
in customer receivables related to the significant revenue growth experienced in 2010.
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 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, as defined in the Credit Agreement, 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 25, 2010, the Company had $33,699,000 of letters of credit outstanding under the
Credit Agreement. At September 25, 2010, there was $111,301,000 available for future borrowings
under the Credit Agreement. In addition, the Company has $44,715,000 in letters of credit
outstanding, as collateral for insurance claims, that are secured by investments totaling
$49,508,000. Investments, all of which are carried at fair value, consist of investment-grade
bonds having maturities of up to five years and money market investments. Fair value of
investments is based primarily on quoted market prices.
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 services and supply
chain solutions, the Companys annual capital requirements for operating property are generally for
trailing equipment and management
20
information services equipment. In addition, a significant
portion of the trailing equipment used by the Company is provided by third party capacity
providers, thereby reducing the Companys capital requirements. During the 2010 thirty-nine-week
period, the Company purchased $25,474,000 of operating property, including $21,135,000 for the
purchase of the Companys primary facility in Jacksonville, Florida, and acquired $14,145,000 of
trailing equipment by entering into capital leases. Landstar anticipates purchasing approximately
$1,000,000 in operating property, primarily new trailing equipment to replace older trailing
equipment, and information technology equipment during the remainder of fiscal year 2010 either by
purchase or 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 programs and meet working capital needs.
LEGAL MATTERS
As further described in periodic and current reports previously filed by the Company with the
Securities and Exchange Commission (the SEC), 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 initial ruling. Each of the parties to the Litigation subsequently filed a petition
with the Appellate Court seeking rehearing of the Appellate Courts ruling.
On October 4, 2010, the Appellate Court denied each of the motions for rehearing, withdrew its
initial ruling and substituted a new ruling in its place. The new ruling by 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. In particular, the new ruling, among other things, held 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) in the case of a Charge-back Deduction
expressed as a flat-fee in the lease, the applicable federal leasing regulations do not require
Defendants to do more than disclose the flat-fee Charge-back Deduction in the lease and follow up
with settlement statements that explain the final amount charged back, (iii) 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 (iv) 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.
However, the new ruling of the Appellate Court reversed the District Courts ruling 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. Department of Defense. The Appellate Court then remanded the
case to the District Court to permit the Plaintiffs to seek injunctive relief with respect to this
violation 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 violation.
The
Plaintiffs have filed a petition with the Appellate Court seeking
rehearing en banc of the Appellate Courts October 4, 2010
ruling.
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
21
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 in respect thereof, will not have a material adverse effect on the
financial condition of the Company, but could have a material effect on the results of operations
in a given quarter or year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The allowance for doubtful accounts for both trade and other receivables represents
managements estimate of the amount of outstanding receivables that will not be collected. In 2009,
the Company experienced a higher level of customer bad debt expense than typically experienced in
the past. Management believes this resulted from the difficult economic environment experienced by
the Companys customers. 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 25, 2010 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. The Company
continually revises its existing claim estimates as new or revised information becomes available on
the status of each claim. Historically, the Company has experienced both favorable and unfavorable
development of prior years claims estimates. During the 2010 thirty-nine-week period, insurance
and claims costs included $1,634,000 of unfavorable adjustments to prior years claims estimates.
During the 2009 thirty-nine-week period, insurance and claims costs included $5,586,000 of
favorable adjustments to prior years claims estimates. It is reasonably likely that the ultimate
outcome of settling all outstanding claims will be more or less than the estimated claims reserve
at September 25, 2010.
The Company utilizes certain income tax planning strategies to reduce its overall cost of
income taxes. Upon audit, it is possible that certain strategies might be disallowed resulting in
an increased liability for income taxes. Certain of these tax planning strategies result in a level
of uncertainty as to whether the related tax positions taken by the Company would result in a
recognizable benefit. The Company has provided for its estimated exposure attributable to such tax
positions due to the corresponding level of uncertainty with respect to the amount of income tax
benefit that may ultimately be realized. Management believes that the provision for liabilities
resulting from the uncertainty in 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 such
income tax positions are not appropriate.
The Company tests for impairment of goodwill at least annually based on a two-step impairment
test. The first step compares the fair value of each reporting unit with its carrying amount,
including goodwill. Fair value of each reporting unit is estimated using a discounted cash flow
model and market approach. The model includes a number of significant assumptions and estimates
including future cash flows and discount rates. If the carrying amount exceeds fair value under the
first step of the impairment test, then the second step is performed to measure the amount of any
impairment loss. The goodwill impairment test is typically performed in the fourth quarter of each
fiscal year and when changes in circumstances indicate an impairment event may have occurred. It
has been approximately one year since the Company completed the acquisitions of the Acquired
Entities. Therefore, during the second quarter of 2010, the Company tested the goodwill of the
Acquired Entities. Only the first step of the impairment test was required as the estimated fair
value of this reporting unit significantly exceeded its carrying value.
Significant variances from managements estimates for the amount of uncollectible receivables,
the ultimate resolution of self-insured claims, the provision for uncertainty in income tax
positions and impairment of goodwill can all 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.
22
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 in excess of
historic trends 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. The results of operations in the fourth quarter have been more volatile
than any other quarter over the past five years.
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 25,
2010, the weighted average interest rate on borrowings outstanding was 1.14%. During the third
quarters of 2010 and 2009, the average borrowings outstanding under the Credit Agreement were
approximately $73,732,000 and $12,800,000, respectively. Based on the borrowing rates in the Credit
Agreement and the repayment terms, the fair value of the outstanding borrowings as of September 25,
2010 was estimated to approximate carrying value. Assuming that debt levels on the Credit Agreement
remain at $80,000,000, the balance at September 25, 2010, 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 $800,000 on an annualized basis.
Long-term
investments, all of which are available-for-sale, consist of
investment-grade bonds and mortgage-backed securities having
maturities of up to five years. Assuming that the long-term portion of investments in bonds and mortgage-backed securities
remains at $58,874,000, the balance at September 25, 2010, 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. The balance of the long-term portion of investments in bonds at September 26,
2009 was $30,358,000. 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.
Assets and liabilities of the Companys Canadian operations are translated from their
functional currency to U.S. dollars using exchange rates in effect at the balance sheet date and
revenue and expense accounts are translated at average monthly exchange rates during the period.
Adjustments resulting from the translation process are included in accumulated other comprehensive
income. Transactional gains and losses arising from receivable and payable balances, including
intercompany balances, in the normal course of business that are denominated in a currency other
than the functional currency of the applicable operation are recorded in the statements of income
when they occur. The net assets held at the Companys Canadian subsidiary at September 25, 2010
were, as translated to U.S. dollars, less than 1% of total consolidated net assets. Accordingly,
any translation gain or loss related to the Canadian operation 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
23
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 25, 2010, 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 25, 2010 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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As further described in periodic and current reports previously filed by the Company with the
Securities and Exchange Commission (the SEC), 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 initial ruling. Each of the parties to the Litigation subsequently filed a petition
with the Appellate Court seeking rehearing of the Appellate Courts ruling.
On October 4, 2010, the Appellate Court denied each of the motions for rehearing, withdrew its
initial ruling and substituted a new ruling in its place. The new ruling by 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. In particular, the new ruling, among other things, held 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) in the case of a Charge-back Deduction
expressed as a flat-fee in the lease, the applicable federal leasing regulations do not require
Defendants to do more than disclose the flat-fee Charge-back Deduction in the lease and follow up
with settlement statements that explain the final amount charged back, (iii) 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 (iv) 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.
24
However, the new ruling of the Appellate Court reversed the District Courts ruling 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. Department of Defense. The Appellate Court then remanded the
case to the District Court to permit the Plaintiffs to seek injunctive relief with respect to this
violation 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 violation.
The
Plaintiffs have filed a petition with the Appellate Court seeking
rehearing en banc of the Appellate Courts October 4, 2010
ruling.
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 in respect thereof, will not have a material adverse effect on the
financial condition of the Company, but could have a material effect on the results of operations
in a given quarter or year.
Item 1A. Risk Factors
For a discussion identifying risk factors and other important factors that could cause actual
results to differ materially from those anticipated, see the discussions under Part I, Item 1A,
Risk Factors in the Companys Annual Report on Form 10-K for the fiscal year ended December 26,
2009, and in Managements Discussion and Analysis of Financial Condition and Results of
Operations and Notes to Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
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 27, 2010 to September 25, 2010, the Companys third fiscal quarter:
Total Number of Shares | Maximum Number of | |||||||||||||||
Purchased as Part of | Shares That May Yet | |||||||||||||||
Total Number of | Average Price Paid | Publicly Announced | Be Purchased Under | |||||||||||||
Fiscal Period | Shares Purchased | Per Share | Programs | the Programs | ||||||||||||
June 26, 2010 |
745,220 | |||||||||||||||
June 27, 2010 - July 24, 2010 |
| $ | | | 745,220 | |||||||||||
July 25, 2010 - August 21, 2010 |
745,220 | $ | 39.70 | 745,220 | | |||||||||||
August 22, 2010 - Sept. 25, 2010 |
| $ | | | 2,000,000 | |||||||||||
Total |
745,220 | $ | 39.70 | 745,220 | ||||||||||||
On January 28, 2009, Landstar System, Inc. announced that it had been authorized by its Board
of Directors to purchase up to 1,569,377 shares of its Common Stock from time to time in the open
market and in privately negotiated transactions. During its 2010 third quarter, the Company
completed the purchase of shares authorized for purchase under this program. On August 23, 2010,
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 25, 2010, the Company may purchase 2,000,000
shares of its common stock under this authorization. No specific expiration date has been assigned
to the August 23, 2010 authorization.
During the thirty-nine-week period ended September 25, 2010, Landstar paid dividends as
follows:
25
Dividend Amount | Declaration | Record | Payment | |||
Per Share | Date | Date | Date | |||
$0.045
|
January 26, 2010 | February 5, 2010 | February 26, 2010 | |||
$0.045
|
April 13, 2010 | May 6, 2010 | May 28, 2010 | |||
$0.050
|
July 13, 2010 | August 9, 2010 | August 27, 2010 |
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
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, as defined in the Credit Agreement, would exceed 2.5 to 1 on a pro forma basis as of the end
of the Companys most recently completed fiscal quarter.
Item 3. Defaults Upon Senior Securities
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.
26
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. | |
101.INS
|
** | XBRL Instance Document | |
101.SCH
|
** | XBRL Schema Document | |
101.CAL
|
** | XBRL Calculation Linkbase Document | |
101.LAB
|
** | XBRL Labels Linkbase Document | |
101.PRE
|
** | XBRL Presentation Linkbase Document | |
101.DEF
|
** | XBRL Definition Linkbase Document |
* | Filed herewith | |
** | Furnished herewith |
27
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 29, 2010 | /s/ Henry H. Gerkens | |||
Henry H. Gerkens | ||||
Chairman, President and Chief Executive Officer |
||||
Date: October 29, 2010 | /s/ James B. Gattoni | |||
James B. Gattoni | ||||
Vice President and Chief Financial Officer |
||||
28