LANDSTAR SYSTEM INC - Quarter Report: 2011 March (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| (Mark One) | ||
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 26, 2011
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 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
(Registrant’s 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
(Registrant’s 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 registrant’s common stock, par value $0.01 per share, outstanding
as of the close of business on April 18, 2011 was 47,882,197.
Index
| PART I — Financial Information | ||||||||
| Page 4 | ||||||||
| Page 5 | ||||||||
| Page 6 | ||||||||
| Page 7 | ||||||||
| Page 8 | ||||||||
| Page 13 | ||||||||
| Page 22 | ||||||||
| Page 23 | ||||||||
| PART II — Other Information | ||||||||
| Page 23 | ||||||||
| Page 24 | ||||||||
| Page 24 | ||||||||
| Page 25 | ||||||||
| Page 27 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
| EX-32.2 | ||||||||
| EX-101 INSTANCE DOCUMENT | ||||||||
| EX-101 SCHEMA DOCUMENT | ||||||||
| EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
| EX-101 LABELS LINKBASE DOCUMENT | ||||||||
| EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
| EX-101 DEFINITION LINKBASE DOCUMENT | ||||||||
2
Table of Contents
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 thirteen weeks ended March 26, 2011, are
not necessarily indicative of the results that may be expected for the entire fiscal year ending
December 31, 2011.
These interim financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company’s 2010 Annual Report on Form 10-K.
3
Table of Contents
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
| March 26, | December 25, | |||||||
| 2011 | 2010 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 45,230 | $ | 44,706 | ||||
Short-term investments |
30,756 | 23,266 | ||||||
Trade accounts receivable, less allowance of $5,525 and $5,324 |
344,459 | 307,350 | ||||||
Other receivables, including advances to independent contractors, less allowance
of $5,018 and $5,511 |
30,972 | 23,943 | ||||||
Deferred income taxes and other current assets |
15,218 | 21,652 | ||||||
Total current assets |
466,635 | 420,917 | ||||||
Operating property, less accumulated depreciation and amortization of $142,330
and $137,830 |
127,957 | 132,649 | ||||||
Goodwill |
57,470 | 57,470 | ||||||
Other assets |
62,373 | 72,846 | ||||||
Total assets |
$ | 714,435 | $ | 683,882 | ||||
LIABILITIES AND EQUITY |
||||||||
Current Liabilities |
||||||||
Cash overdraft |
$ | 23,407 | $ | 24,877 | ||||
Accounts payable |
160,704 | 137,297 | ||||||
Current maturities of long-term debt |
19,878 | 22,172 | ||||||
Insurance claims |
43,027 | 40,215 | ||||||
Other current liabilities |
55,072 | 53,785 | ||||||
Total current liabilities |
302,088 | 278,346 | ||||||
Long-term debt, excluding current maturities |
95,710 | 99,439 | ||||||
Insurance claims |
31,627 | 31,468 | ||||||
Deferred income taxes |
22,573 | 23,662 | ||||||
Equity |
||||||||
Landstar System, Inc. and subsidiary shareholders’ equity |
||||||||
Common
stock, $0.01 par value, authorized 160,000,000 shares, issued
66,554,156
and 66,535,169 shares |
666 | 665 | ||||||
Additional paid-in capital |
161,543 | 169,268 | ||||||
Retained earnings |
862,357 | 844,132 | ||||||
Cost of
18,675,959 and 18,674,902 shares of common stock in treasury |
(763,223 | ) | (763,182 | ) | ||||
Accumulated other comprehensive income |
1,094 | 881 | ||||||
Total Landstar System, Inc. and subsidiary shareholders’ equity |
262,437 | 251,764 | ||||||
Noncontrolling interest |
— | (797 | ) | |||||
Total equity |
262,437 | 250,967 | ||||||
Total liabilities and equity |
$ | 714,435 | $ | 683,882 | ||||
See accompanying notes to consolidated financial statements.
4
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
| Thirteen Weeks Ended | ||||||||
| March 26, | March 27, | |||||||
| 2011 | 2010 | |||||||
Revenue |
$ | 571,986 | $ | 548,088 | ||||
Investment income |
528 | 285 | ||||||
Costs and expenses: |
||||||||
Purchased transportation |
431,378 | 417,201 | ||||||
Commissions to agents |
44,171 | 40,408 | ||||||
Other operating costs |
7,944 | 7,536 | ||||||
Insurance and claims |
11,266 | 12,298 | ||||||
Selling, general and administrative |
37,264 | 36,843 | ||||||
Depreciation and amortization |
6,399 | 5,792 | ||||||
Total costs and expenses |
538,422 | 520,078 | ||||||
Operating income |
34,092 | 28,295 | ||||||
Interest and debt expense |
828 | 854 | ||||||
Income before income taxes |
33,264 | 27,441 | ||||||
Income taxes |
12,707 | 10,484 | ||||||
Net income |
20,557 | 16,957 | ||||||
Less: Net loss attributable to
noncontrolling interest |
(62 | ) | (219 | ) | ||||
Net income attributable to Landstar
System, Inc. and subsidiary |
$ | 20,619 | $ | 17,176 | ||||
Earnings per common share
attributable to Landstar System,
Inc. and subsidiary |
$ | 0.43 | $ | 0.34 | ||||
Diluted earnings per share
attributable to Landstar System,
Inc. and subsidiary |
$ | 0.43 | $ | 0.34 | ||||
Average number of shares outstanding: |
||||||||
Earnings per common share |
47,870,000 | 50,207,000 | ||||||
Diluted earnings per share |
47,900,000 | 50,318,000 | ||||||
Dividends paid per common share |
$ | 0.050 | $ | 0.045 | ||||
See accompanying notes to consolidated financial statements.
5
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
(Dollars in thousands)
(Unaudited)
| Thirteen Weeks Ended | ||||||||
| March 26, | March 27, | |||||||
| 2011 | 2010 | |||||||
OPERATING ACTIVITIES |
||||||||
Net income |
$ | 20,557 | $ | 16,957 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization of operating property and intangible assets |
6,399 | 5,792 | ||||||
Non-cash interest charges |
55 | 55 | ||||||
Provisions for losses on trade and other accounts receivable |
1,226 | 1,027 | ||||||
Losses on sales/disposals of operating property, net |
63 | 20 | ||||||
Deferred income taxes, net |
(1,068 | ) | (805 | ) | ||||
Stock-based compensation |
1,205 | 1,185 | ||||||
Changes in operating assets and liabilities: |
||||||||
Increase in trade and other accounts receivable |
(45,364 | ) | (22,882 | ) | ||||
Decrease in other assets |
5,870 | 5,977 | ||||||
Increase in accounts payable |
23,407 | 12,475 | ||||||
Increase in other liabilities |
1,283 | 7,490 | ||||||
Increase (decrease) in insurance claims |
2,971 | (3,182 | ) | |||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
16,604 | 24,109 | ||||||
INVESTING ACTIVITIES |
||||||||
Net change in other short-term investments |
— | (1,237 | ) | |||||
Sales and maturities of investments |
23,870 | 6,082 | ||||||
Purchases of investments |
(20,650 | ) | (6,275 | ) | ||||
Purchases of operating property |
(1,808 | ) | (22,239 | ) | ||||
Proceeds from sales of operating property |
300 | 55 | ||||||
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES |
1,712 | (23,614 | ) | |||||
FINANCING ACTIVITIES |
||||||||
Decrease in cash overdraft |
(1,470 | ) | (5,628 | ) | ||||
Dividends paid |
(2,394 | ) | (2,262 | ) | ||||
Proceeds from exercises of stock options |
70 | 159 | ||||||
Excess (shortfall) tax effect on stock option exercises |
(181 | ) | 9 | |||||
Borrowings on revolving credit facility |
— | 15,000 | ||||||
Purchases of common stock |
— | (4,507 | ) | |||||
Principal payments on capital lease obligations |
(6,023 | ) | (6,592 | ) | ||||
Purchase of noncontrolling interest |
(8,000 | ) | — | |||||
NET CASH USED BY FINANCING ACTIVITIES |
(17,998 | ) | (3,821 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
206 | 100 | ||||||
Increase (decrease) in cash and cash equivalents |
524 | (3,226 | ) | |||||
Cash and cash equivalents at beginning of period |
44,706 | 85,719 | ||||||
Cash and cash equivalents at end of period |
$ | 45,230 | $ | 82,493 | ||||
See accompanying notes to consolidated financial statements.
6
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Thirteen Weeks Ended March 26, 2011
(Dollars in thousands)
(Unaudited)
Thirteen Weeks Ended March 26, 2011
(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 25, 2010 |
66,535,169 | $ | 665 | $ | 169,268 | $ | 844,132 | 18,674,902 | $ | (763,182 | ) | $ | 881 | $ | (797 | ) | $ | 250,967 | ||||||||||||||||||
Net income (loss) |
20,619 | (62 | ) | 20,557 | ||||||||||||||||||||||||||||||||
Dividends paid ($0.05 per share) |
(2,394 | ) | (2,394 | ) | ||||||||||||||||||||||||||||||||
Purchase of noncontrolling interest |
(8,859 | ) | 859 | (8,000 | ) | |||||||||||||||||||||||||||||||
Stock-based compensation |
1,205 | 1,205 | ||||||||||||||||||||||||||||||||||
Exercises of stock options and issuance
of non-vested stock,
including shortfall tax effect |
18,987 | 1 | (71 | ) | 1,057 | (41 | ) | (111 | ) | |||||||||||||||||||||||||||
Foreign currency translation |
206 | 206 | ||||||||||||||||||||||||||||||||||
Unrealized gain on available-for-sale investments, net of income
taxes |
7 | 7 | ||||||||||||||||||||||||||||||||||
Balance March 26, 2011 |
66,554,156 | $ | 666 | $ | 161,543 | $ | 862,357 | 18,675,959 | $ | (763,223 | ) | $ | 1,094 | $ | — | $ | 262,437 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
7
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LANDSTAR
SYSTEM, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System, Inc. and its
subsidiary, Landstar System Holdings, Inc., and reflect all adjustments (all of a normal, recurring
nature) which are, in the opinion of management, necessary for a fair statement of the results for
the periods presented. The preparation of the consolidated financial statements requires the use of
management’s 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.
(1) Noncontrolling Interest
In the Company’s 2009 fiscal third quarter, the Company completed the acquisition of A3
Integration, LLC and its subsidiaries through A3i Acquisition LLC, an entity in which the Company
owned 100% of the non-voting, preferred interests and, from the date of acquisition to January
2011, 75% of the voting, common equity interests. A subsidiary of the Company purchased the
remaining 25% of the voting, common equity interests in A3i Acquisition, LLC in January 2011.
(2) Significant Accounting Policies
Financial Instruments
The Company’s financial instruments include cash equivalents, short and long term investments,
trade and other accounts receivable, accounts payable, other accrued liabilities, current and
non-current insurance claims and long term debt plus current maturities (“Debt”). The carrying
value of cash equivalents, trade and other accounts receivable, accounts payable, current insurance
claims and other accrued liabilities approximate fair value as the assets and liabilities are short
term in nature. Short and long term investments are carried at fair value as further described in
the “Investments” footnote below. The carrying value of non-current insurance claims approximate
fair value as the Company generally has the ability to, but is not required to, settle claims in a
short term. The Company’s Debt includes borrowings under the Company’s revolving credit facility
plus borrowings relating to capital lease obligations used to finance trailing equipment. The
interest rates on borrowings under the revolving credit facility are typically tied to short-term
LIBOR rates that adjust monthly and, as such, carrying value approximates fair value. Interest
rates on borrowings under capital leases approximate the interest rates that would currently be
available to the Company under similar terms and, as such, carrying value approximates fair value.
(3) Share-based Payment Arrangements
As
of March 26, 2011, the Company had an employee stock option plan
(the “1993 Plan”), an employee stock option
and stock incentive plan (the “ESOSIP”), and a stock compensation plan for members of its Board of
Directors (the “Directors Stock Compensation Plan”) (each, a “Plan,” and collectively, the
“Plans”). No further grants can be made under the 1993 Plan as its term for
granting stock options has expired. Amounts recognized in the financial statements with respect to
these Plans are as follows (in thousands):
| Thirteen Weeks Ended | ||||||||
| March 26, | March 27, | |||||||
| 2011 | 2010 | |||||||
Total cost of the Plans during the period |
$ | 1,205 | $ | 1,185 | ||||
Amount of related income tax benefit
recognized during the period |
305 | 299 | ||||||
Net cost of the Plans during the period |
$ | 900 | $ | 886 | ||||
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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 2011 and 2010 thirteen-week periods:
| 2011 | 2010 | |||||||
Expected volatility |
35.0 | % | 37.0 | % | ||||
Expected dividend yield |
0.450 | % | 0.400 | % | ||||
Risk-free interest rate |
1.75 | % | 2.50 | % | ||||
Expected lives (in years) |
4.0 | 4.2 | ||||||
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 Company’s 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
thirteen-week periods ended March 26, 2011 and March 27, 2010 was $12.05 and $11.98, respectively.
The following table summarizes information regarding the Company’s stock options granted
under the Plans:
| Weighted Average | ||||||||||||||||
| Weighted Average | Remaining | |||||||||||||||
| Number of | Exercise Price | Contractual | Aggregate Intrinsic | |||||||||||||
| Options | per Share | Term (years) | Value (000s) | |||||||||||||
Options outstanding at December 25, 2010 |
2,295,831 | $ | 39.73 | |||||||||||||
Granted |
271,000 | $ | 41.81 | |||||||||||||
Exercised |
(69,348 | ) | $ | 37.40 | ||||||||||||
Forfeited |
(112,500 | ) | $ | 41.65 | ||||||||||||
Options outstanding at March 26, 2011 |
2,384,983 | $ | 39.94 | 6.7 | $ | 11,799 | ||||||||||
Options exercisable at March 26, 2011 |
1,142,950 | $ | 39.38 | 5.4 | $ | 6,302 | ||||||||||
The total intrinsic value of stock options exercised during the thirteen-week periods
ended March 26, 2011 and March 27, 2010 was $410,000 and $532,000, respectively.
As of March 26, 2011, there was $11,624,000 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 3.2 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 Company’s common stock on the date of grant.
The following table summarizes information regarding the Company’s non-vested restricted stock
under the Plans:
| Weighted Average | ||||||||
| Number of | Grant Date | |||||||
| Shares | Fair Value | |||||||
Non-vested restricted stock outstanding at December 25, 2010 |
29,854 | $ | 39.49 | |||||
Granted |
6,900 | $ | 41.43 | |||||
Vested |
(2,772 | ) | $ | 39.10 | ||||
Forfeited |
(2,938 | ) | $ | 37.13 | ||||
Non-vested restricted stock outstanding at March 26, 2011 |
31,044 | $ | 40.18 | |||||
As of March 26, 2011, there was $959,000 of total unrecognized compensation cost
related to non-vested shares of restricted stock granted under the ESOSIP. The unrecognized
compensation cost related to these non-vested shares of restricted stock is expected to be
recognized over a weighted average period of 2.5 years.
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As of March 26, 2011, there were 128,469 shares of the Company’s common stock reserved for
issuance under the Directors’ Stock Compensation Plan and 4,617,900 shares of the Company’s common
stock reserved for issuance in the aggregate under the Company’s other Plans.
(4) Income Taxes
The provisions for income taxes for the 2011 and 2010 thirteen-week periods were each based on
an estimated full year combined effective income tax rate of approximately 38.2%, which was 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.
(5) 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, including outstanding restricted stock,
and diluted earnings per share attributable to Landstar System, Inc. and subsidiary are based on
the weighted average number of common shares outstanding, including outstanding restricted stock,
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):
| Thirteen Weeks Ended | ||||||||
| March 26, | March 27, | |||||||
| 2011 | 2010 | |||||||
Average number of common shares outstanding |
47,870 | 50,207 | ||||||
Incremental shares from assumed exercises of stock options |
30 | 111 | ||||||
Average number of common shares and common share
equivalents outstanding |
47,900 | 50,318 | ||||||
For the thirteen-week periods ended March 26, 2011 and March 27, 2010, there were 584,813 and
1,653,913 options outstanding, respectively, to purchase shares of common stock excluded from the
calculation of diluted earnings per share attributable to Landstar System, Inc. and subsidiary
because they were antidilutive.
(6) Additional Cash Flow Information
During the 2011 thirteen-week period, Landstar paid income taxes and interest of $1,269,000
and $838,000, respectively. During the 2010 thirteen-week period, Landstar paid income taxes and
interest of $1,795,000 and $895,000, respectively. Landstar did not enter into any capital leases
in the 2011 thirteen-week period. Landstar acquired operating property by entering into capital
leases in the amount of $6,897,000 in the 2010 thirteen-week period.
(7) Segment Information
The following tables summarize information about Landstar’s reportable business segments as of
and for the thirteen-week periods ended March 26, 2011 and March 27, 2010 (in thousands):
| Thirteen Weeks Ended | ||||||||||||||||||||||||
| March 26, 2011 | March 27, 2010 | |||||||||||||||||||||||
| Transportation | Transportation | |||||||||||||||||||||||
| Logistics | Insurance | Total | Logistics | Insurance | Total | |||||||||||||||||||
External revenue |
$ | 563,467 | $ | 8,519 | $ | 571,986 | $ | 539,615 | $ | 8,473 | $ | 548,088 | ||||||||||||
Investment income |
528 | 528 | 285 | 285 | ||||||||||||||||||||
Internal revenue |
5,865 | 5,865 | 5,903 | 5,903 | ||||||||||||||||||||
Operating income |
28,183 | 5,909 | 34,092 | 22,527 | 5,768 | 28,295 | ||||||||||||||||||
Expenditures on long-lived assets |
1,808 | 1,808 | 22,239 | 22,239 | ||||||||||||||||||||
Goodwill |
57,470 | 57,470 | 57,470 | 57,470 | ||||||||||||||||||||
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In the thirteen-week period ended March 26, 2011, there were no customers who accounted
for 10 percent or more of the Company’s revenue. In the thirteen-week period ended March 27, 2010,
there was one customer who accounted for approximately 14 percent of the Company’s revenue.
(8) Comprehensive Income
The following table includes the components of comprehensive income attributable to Landstar
System, Inc. and subsidiary for the thirteen-week periods ended March 26, 2011 and March 27, 2010
(in thousands):
| Thirteen Weeks Ended | ||||||||
| March 26, | March 27, | |||||||
| 2011 | 2010 | |||||||
Net income attributable to Landstar System, Inc. and subsidiary |
$ | 20,619 | $ | 17,176 | ||||
Unrealized holding gains on available-for-sale investments, net of income taxes |
7 | 86 | ||||||
Foreign currency translation gains |
206 | 100 | ||||||
Comprehensive income attributable to Landstar System, Inc. and subsidiary |
$ | 20,832 | $ | 17,362 | ||||
The unrealized holding gain on available-for-sale investments during the 2011
thirteen-week period represents the mark-to-market adjustment of $11,000, net of related income
taxes of $4,000. The unrealized holding gain on available-for-sale investments during the 2010
thirteen-week period represents the mark-to-market adjustment of $133,000, net of related income
taxes of $47,000. The foreign currency translation gain represents the unrealized net gain on the
translation of the financial statements of the Company’s Canadian operations. Accumulated other
comprehensive income as reported as a component of equity at March 26, 2011 of $1,094,000
represents the unrealized net gain on the translation of the financial statements of the Company’s
Canadian operations of $596,000 and the cumulative unrealized holding gains on available-for-sale
investments, net of income taxes, of $498,000.
(9) Investments
Investments include investment-grade bonds and mortgage-backed securities having maturities of
up to five years (the “bond portfolio”). Investments in the bond portfolio are reported as
available-for-sale and are carried at fair value. Investments maturing less than one year from the
balance sheet date are included in short-term investments and investments 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 government agencies. Net unrealized gains on the investments
in the bond portfolio were $771,000 and $760,000 at March 26, 2011 and December 25, 2010,
respectively.
The amortized cost and fair market values of available-for-sale investments are as follows at
March 26, 2011 and December 25, 2010 (in thousands):
| Gross | Gross | Fair | ||||||||||||||
| Amortized | Unrealized | Unrealized | Market | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
March 26, 2011 |
||||||||||||||||
Money market investments |
$ | 1,226 | $ | — | $ | — | $ | 1,226 | ||||||||
Mortgage-backed securities |
3,425 | 85 | 4 | 3,506 | ||||||||||||
Corporate
bonds and direct obligations of government agencies |
54,409 | 773 | 65 | 55,117 | ||||||||||||
U.S. Treasury obligations |
14,591 | 3 | 21 | 14,573 | ||||||||||||
Total |
$ | 73,651 | $ | 861 | $ | 90 | $ | 74,422 | ||||||||
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| Gross | Gross | Fair | ||||||||||||||
| Amortized | Unrealized | Unrealized | Market | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
December 25, 2010
|
||||||||||||||||
Money market investments |
$ | 535 | $ | — | $ | — | $ | 535 | ||||||||
Mortgage-backed securities |
3,458 | 64 | 8 | 3,514 | ||||||||||||
Corporate bonds and direct obligations of
government agencies |
60,330 | 872 | 151 | 61,051 | ||||||||||||
U.S. Treasury obligations |
12,584 | 6 | 23 | 12,567 | ||||||||||||
Total |
$ | 76,907 | $ | 942 | $ | 182 | $ | 77,667 | ||||||||
For those available-for-sale investments with unrealized losses at March 26, 2011 and
December 25, 2010, the following table summarizes the duration of the unrealized loss (in
thousands):
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
| Fair | Fair | Fair | ||||||||||||||||||||||
| Market | Unrealized | Market | Unrealized | Market | Unrealized | |||||||||||||||||||
| Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
March 26, 2011
|
||||||||||||||||||||||||
Mortgage-backed securities |
$ | 516 | $ | 4 | $ | — | $ | — | $ | 516 | $ | 4 | ||||||||||||
Corporate bonds and
direct obligations of
government agencies |
9,801 | 65 | — | — | 9,801 | 65 | ||||||||||||||||||
U.S. Treasury obligations |
774 | 21 | — | — | 774 | 21 | ||||||||||||||||||
Total |
$ | 11,091 | $ | 90 | $ | — | $ | — | $ | 11,091 | $ | 90 | ||||||||||||
December 25, 2010
|
||||||||||||||||||||||||
Mortgage-backed securities |
$ | 225 | $ | 8 | $ | — | $ | — | $ | 225 | $ | 8 | ||||||||||||
Corporate bonds and
direct obligations of
government agencies |
11,615 | 151 | — | — | 11,615 | 151 | ||||||||||||||||||
U.S. Treasury obligations |
774 | 23 | — | — | 774 | 23 | ||||||||||||||||||
Total |
$ | 12,614 | $ | 182 | $ | — | $ | — | $ | 12,614 | $ | 182 | ||||||||||||
(10)
Commitments and Contingencies
Short-term investments include $30,756,000 in current maturities of investments held by the
Company’s insurance segment at March 26, 2011. These short-term investments together with
$19,427,000 of the non-current portion of investments included in other assets at March 26, 2011
provide collateral for the $45,165,000 of letters of credit issued to guarantee payment of
insurance claims. As of March 26, 2011, Landstar also had $33,699,000 of letters of credit
outstanding under the Company’s credit agreement.
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 Company’s 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.
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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 Court’s 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 Court’s 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 Court’s 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.
On March 8, 2011, the Plaintiffs filed a petition with the United States Supreme Court to
seek to further appeal certain portions of the Appellate Court’s October 4, 2010 ruling. On March
23, 2011, the Plaintiffs requested that the United States Supreme Court consolidate such petition
with a petition OOIDA intends to file to seek to further appeal a decision of the United States
Court of Appeals for the Ninth Circuit on January 20, 2011, in a case not otherwise involving the
Company, Owner-Operator Indep. Drivers Ass’n, Inc., et al v. Swift Transp. Co., Inc.
Although no assurances can be given with respect to the outcome of the Litigation, including
the March 8, 2011 petition to the United States Supreme Court and 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 therefore, 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. Management’s 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 Company’s audited financial statements and
notes thereto for the fiscal year ended December 25, 2010 and Management’s Discussion and Analysis
of Financial Condition and Results of Operations included in the 2010 Annual Report on Form 10-K.
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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 Management’s 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 Landstar’s 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 our 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 Landstar’s Form 10-K for the 2010 fiscal
year, described in Item 1A “Risk Factors”, this report or in Landstar’s other Securities and
Exchange Commission filings from time to time. These risks and uncertainties could cause actual
results or events to differ materially from historical results or those anticipated. Investors
should not place undue reliance on such forward-looking statements and the Company undertakes no
obligation to publicly update or revise any forward-looking statements.
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 customer’s 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
Company’s 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 Company’s
business is such that a significant portion of its operating costs varies directly with revenue.
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 Landstar’s
capacity providers and coordinating the transportation of the freight with customers and capacity
providers. The Company’s 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 Landstar’s
information technology systems, Landstar operates a transportation services and supply chain
solutions business primarily throughout North America with revenue of $2.4 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. In the Company’s 2009 fiscal third quarter, the
Company completed the acquisition of two companies that provide customers with supply chain
solutions. With respect to one of these companies, the Company completed the acquisition of A3
Integration, LLC and its subsidiaries through A3i Acquisition LLC, an entity in which the Company
owned 100% of the non-voting, preferred interests and, from the date of acquisition to January
2011, 75% of the voting, common equity interests. In January 2011, the Company purchased the
remaining 25% of the voting, common equity interests in A3i Acquisition, LLC (“A3i”). 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.
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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 thirteen weeks ended March 26,
2011, transportation services revenue hauled by BCO Independent Contractors, Truck Brokerage
Carriers, rail intermodal, air cargo carriers and ocean cargo carriers represented 55%, 38%, 3%,
1%, and 2%, respectively, of the Company’s transportation logistics segment revenue.
Transportation management fees represented 1% of the Company’s transportation logistics segment
revenue in the thirteen-week period ended March 26, 2011.
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 Landstar’s operating subsidiaries. In addition, it
reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property
and casualty insurance directly to certain of Landstar’s operating subsidiaries. Revenue,
representing premiums on reinsurance programs provided to the Company’s BCO Independent
Contractors, at the insurance segment represented approximately 1% of the Company’s total revenue
for the thirteen weeks ended March 26, 2011.
Changes in Financial Condition and Results of Operations
Management believes the Company’s 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 Company’s 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. Management’s 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 2010 fiscal year, 468 independent commission sales
agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar
Agents. During the 2010 fiscal year, the average revenue generated by a Million Dollar Agent was
$4,576,000 and revenue generated by Million Dollar Agents in the aggregate represented 89% of
consolidated Landstar revenue.
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. Those factors include the average length of haul, freight type, special handling
and equipment requirements and delivery time requirements. For shipments involving two or more
modes of transportation, revenue is classified by the mode of transportation having the highest
cost for the load. The following table summarizes this data by mode of transportation:
| Thirteen Weeks Ended | ||||||||
| March 26, | March 27, | |||||||
| 2011 | 2010 | |||||||
Revenue generated through (in thousands): |
||||||||
BCO Independent Contractors |
$ | 306,894 | $ | 286,141 | ||||
Truck Brokerage Carriers |
213,723 | 219,755 | ||||||
Rail intermodal |
16,465 | 14,776 | ||||||
Ocean cargo carriers |
13,833 | 9,135 | ||||||
Air cargo carriers |
7,560 | 4,603 | ||||||
Other (1) |
13,511 | 13,678 | ||||||
| $ | 571,986 | $ | 548,088 | |||||
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Number of loads:
BCO Independent Contractors |
192,040 | 197,750 | ||||||
Truck Brokerage Carriers |
135,740 | 149,350 | ||||||
Rail intermodal |
7,260 | 6,870 | ||||||
Ocean cargo carriers |
1,830 | 1,460 | ||||||
Air cargo carriers |
1,950 | 1,500 | ||||||
| 338,820 | 356,930 | |||||||
Revenue per load:
BCO Independent Contractors |
$ | 1,598 | $ | 1,447 | ||||
Truck Brokerage Carriers |
1,575 | 1,471 | ||||||
Rail intermodal |
2,268 | 2,151 | ||||||
Ocean cargo carriers |
7,559 | 6,257 | ||||||
Air cargo carriers |
3,877 | 3,069 |
| (1) | Includes premium revenue generated by the insurance segment and warehousing revenue and transportation management fees generated by the transportation logistics segment. |
Also critical to the Company’s 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:
| March 26, 2011 | March 27, 2010 | |||||||
BCO Independent Contractors |
7,697 | 7,800 | ||||||
Truck Brokerage Carriers: |
||||||||
Approved and active (1) |
16,773 | 15,644 | ||||||
Other approved |
9,347 | 9,674 | ||||||
| 26,120 | 25,318 | |||||||
Total available truck capacity providers |
33,817 | 33,118 | ||||||
Number of trucks provided by BCO Independent Contractors |
8,226 | 8,384 | ||||||
| (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
16
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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 availability of truck brokerage capacity, the price of
fuel on revenue hauled by Truck Brokerage Carriers and, to a lesser extent, on revenue hauled by
railroads and air and ocean cargo 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 net
revenue, defined as revenue less the cost of purchased transportation, or net revenue 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 revenue from the insurance segment and with changes in net revenue on services provided by
Truck Brokerage Carriers and rail intermodal, air cargo and ocean cargo carriers. Commissions to
agents are recognized upon the completion of freight delivery.
The Company’s gross profit equals revenue less the cost of purchased transportation and
commissions to agents. Gross profit divided by revenue is referred to as gross profit margin. The
Company’s operating margin is defined as operating income divided by gross profit.
In general, gross profit margin on revenue hauled by BCO Independent Contractors represents a
fixed percentage of revenue due to the nature of the contracts that pay a fixed percentage of
revenue to both the BCO Independent Contractors and independent commission sales agents. For
revenue hauled by Truck Brokerage Carriers, gross profit margin is either fixed or variable as a
percent of revenue, depending on the 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”). Gross profit margin on revenue hauled by rail, air
cargo carriers, ocean cargo carriers and Truck Brokerage Carriers, other than those under retention
contracts, is variable in nature as the Company’s contracts with independent commission sales
agents provide commissions to agents at a contractually agreed upon percentage of net revenue.
Approximately 68% of the Company’s revenue in the thirteen-week period ended March 26, 2011 had a
fixed gross profit 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 Company’s 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 Landstar’s results of operations.
Employee compensation and benefits account for over half of the Company’s selling, general and
administrative costs.
Depreciation and amortization primarily relate to depreciation of trailing equipment,
amortization of intangible assets and depreciation of management information services equipment.
The following table sets forth the percentage relationships of purchased transportation and
commissions to agents, both being direct costs, to revenue and indirect costs as a percentage of
gross profit for the periods indicated:
| Thirteen Weeks Ended | ||||||||
| March 26, | March 27, | |||||||
| 2011 | 2010 | |||||||
Revenue |
100.0 | % | 100.0 | % | ||||
Purchased transportation |
75.4 | 76.1 | ||||||
Commissions to agents |
7.7 | 7.4 | ||||||
Gross profit margin |
16.9 | % | 16.5 | % | ||||
Gross profit |
100.0 | % | 100.0 | % | ||||
Investment income |
0.5 | 0.3 | ||||||
Indirect costs and expenses: |
||||||||
Other operating costs |
8.2 | 8.3 | ||||||
Insurance and claims |
11.7 | 13.6 | ||||||
Selling, general and administrative |
38.6 | 40.7 | ||||||
Depreciation and amortization |
6.6 | 6.4 | ||||||
Operating margin |
35.4 | % | 31.3 | % | ||||
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THIRTEEN WEEKS ENDED MARCH 26, 2011 COMPARED TO THIRTEEN WEEKS ENDED MARCH 27, 2010
Revenue for the 2011 thirteen-week period was $571,986,000, an increase of $23,898,000, or 4%,
compared to the 2010 thirteen-week period. Revenue increased $23,852,000, or 4%, at the
transportation logistics segment. Included in the 2011 and 2010 thirteen-week periods was
$4,823,000 and $4,064,000, respectively, of transportation management fees. The increase in revenue
at the transportation logistics segment was primarily attributable to a higher revenue per load of
approximately 10%, partly offset by a 5% decrease in the number of loads hauled.
Truck transportation revenue hauled by BCO Independent Contractors and Truck Brokerage
Carriers (together the “third-party truck capacity providers”), which represented 91% of total
revenue for the thirteen-week period ended March 26, 2011, was $520,617,000, an increase of
$14,721,000, or 3%, compared to the 2010 thirteen-week period. The number of loads hauled by
third-party truck capacity providers in the 2011 thirteen-week period decreased 6% compared to the
2010 thirteen-week period, while revenue per load increased 9% over the same period. The decrease
in the number of loads hauled by third-party truck capacity providers was primarily attributable to
an anticipated reduction of freight hauled on behalf of one customer in the Company’s
less-than-truckload substitute line haul service offering. Less-than-truckload substitute line haul
revenue was $19,350,000 and $77,220,000 in the 2011 and 2010 thirteen-week periods, respectively.
The increase in revenue per load on revenue hauled by third-party truck capacity providers was
primarily attributable to tighter truck capacity in the U.S market during the thirteen weeks ended
March 26, 2011. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in
billings to customers and included as a component of Truck Brokerage Carrier revenue were
$19,308,000 and $18,959,000 in the 2011 and 2010 periods, respectively. Fuel surcharges billed to
customers on revenue hauled by BCO Independent Contractors are excluded from revenue.
Transportation revenue hauled by rail intermodal, air cargo and ocean cargo carriers (together
the “multimode capacity providers”), which represented 7% of total revenue for the thirteen-week
period ended March 26, 2011, was $37,858,000, an increase of $9,344,000, or 33%, compared to the
2010 thirteen-week period. The number of loads hauled by multimode capacity providers in the 2011
thirteen-week period increased 12% compared to the 2010 thirteen-week period, while revenue per
load increased 18% over the same period. The increase in revenue per load on revenue hauled by
multimode capacity providers is influenced by many factors including the mode of transportation
used, length of haul, complexity of freight, density of freight lanes and availability of capacity.
Purchased transportation was 75.4% and 76.1% of revenue in the 2011 and 2010 thirteen-week
periods, respectively. The decrease in purchased transportation as a percentage of revenue was
primarily attributable to reduced less-than-truckload substitute line-haul revenue, which typically
has a higher rate of purchased transportation, partially offset by an increased rate of purchased
transportation paid to Truck Brokerage Carriers. Commissions to agents were 7.7% of revenue in the
2011 period and 7.4% of revenue in the 2010 period. The increase in commissions to agents as a
percentage of revenue was primarily attributable to the overall increase in net revenue on freight
hauled by Truck Brokerage Carriers.
Investment income at the insurance segment was $528,000 and $285,000 in the 2011 and 2010
thirteen-week periods, respectively. The increase in investment income was primarily due to an
increased average rate of return on investments held by the insurance segment in the 2011 period.
Other operating costs were 8.2% and 8.3% of gross profit in the 2011 and 2010 periods,
respectively. The decrease in other operating costs as a percentage of gross profit was primarily
attributable to the effect of increased gross profit, partially offset by increased trailing
equipment maintenance costs in the 2011 period. Insurance and claims were 11.7% of gross profit in
the 2011 period and 13.6% of gross profit in the 2010 period. The decrease in insurance and claims
as a percentage of gross profit was primarily due to the effect of increased gross profit and a
decreased cost of cargo claims in the 2011 period. Selling, general and administrative costs were
38.6% of gross profit in the 2011 period and 40.7% of gross profit in the 2010 period. The
decrease in selling, general and administrative costs as a percentage
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of gross profit was primarily
attributable to the effect of increased gross profit and a lower provision for bonuses under the
Company’s incentive compensation plan. Depreciation and amortization was 6.6% of gross profit in
the 2011 period compared with 6.4% in the 2010
period. The increase in depreciation and amortization as a percentage of gross profit was
primarily due to additions of company-owned trailing equipment which were purchased to replace
older, fully depreciated trailing equipment.
The provisions for income taxes for the 2011 and 2010 thirteen-week periods were based on an
estimated full year combined effective income tax rate of approximately 38.2%, which was 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 net losses attributable to noncontrolling interest of $62,000 and $219,000 in the 2011 and
2010 thirteen-week periods, respectively, represent the noncontrolling investor’s 25 percent share
of the net loss incurred by A3i through January 2011. The Company purchased the remaining 25
percent of A3i in January 2011.
Net income attributable to the Company was $20,619,000, or $0.43 per common share ($0.43 per
diluted share), in the 2011 thirteen-week period. Net income attributable to the Company was
$17,176,000, or $0.34 per common share ($0.34 per diluted share), in the 2010 thirteen-week period.
CAPITAL RESOURCES AND LIQUIDITY
Working capital and the ratio of current assets to current liabilities were $164,547,000 and
1.5 to 1, respectively, at March 26, 2011, compared with $142,571,000 and 1.5 to 1, respectively,
at December 25, 2010. 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 $16,604,000 in the 2011
thirteen-week period compared with $24,109,000 in the 2010 thirteen-week period. The decrease in
cash flow provided by operating activities was primarily attributable to the timing of collections
of trade receivables.
The Company paid $0.05 per share, or $2,394,000, in cash dividends during the thirteen-week
period ended March 26, 2011. It is the intention of the Board of Directors to continue to pay a
quarterly dividend. As of March 26, 2011, the Company may purchase up to an additional 722,662
shares of its common stock under its authorized stock purchase program. Long-term debt, including
current maturities, was $115,588,000 at March 26, 2011, $6,023,000 lower than at December 25, 2010.
Equity was $262,437,000, or 69% of total capitalization (defined as long-term debt including
current maturities plus equity), at March 26, 2011, compared to $250,967,000, or 67% of total
capitalization, at December 25, 2010. 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 the noncontrolling interest and dividends paid by the Company.
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 Company’s
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 Company’s 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 Company’s directors. None of these covenants are presently considered by management to be
materially restrictive to the Company’s operations, capital resources or liquidity. The Company is
currently in compliance with all of the debt covenants under the Credit Agreement.
At March 26, 2011, the Company had $80,000,000 in borrowings outstanding and $33,699,000 of
letters of credit outstanding under the Credit Agreement. At March 26, 2011, there was $111,301,000
available for future borrowings under the Credit Agreement. In addition, the Company has
$45,165,000 in letters of credit outstanding as collateral for insurance claims that are secured by
investments
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and cash equivalents totaling $50,183,000. Investments, all of which are carried at
fair value, include investment-grade bonds and mortgage-backed
securities having maturities of up to five years. Fair value of investments is based
primarily on quoted market prices. See Notes to Consolidated Financial Statements for further
discussion on measurement of fair value of investments.
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 Company’s annual capital requirements for operating property are generally for
trailing equipment and management information services equipment. In addition, a significant
portion of the trailing equipment used by the Company is provided by third party capacity
providers, thereby reducing the Company’s capital requirements. During the 2011 thirteen-week
period, the Company purchased $1,808,000 of operating property. Landstar anticipates purchasing
approximately $42,000,000 in operating property, primarily new trailing equipment to replace older
trailing equipment and information technology equipment, during the remainder of fiscal year 2011
either by purchase or lease financing.
Management believes that cash flow from operations combined with the Company’s borrowing
capacity under the Credit Agreement will be adequate to meet Landstar’s 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 Company’s 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 Court’s 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 Court’s 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 Court’s 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
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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.
On March 8, 2011, the Plaintiffs filed a petition with the United States Supreme Court to
seek to further appeal certain portions of the Appellate Court’s October 4, 2010 ruling. On March
23, 2011, the Plaintiffs requested that the United States Supreme Court consolidate such petition
with a petition OOIDA intends to file to seek to further appeal a decision of the United States
Court of Appeals for the Ninth Circuit on January 20, 2011, in a case not otherwise involving the
Company, Owner-Operator Indep. Drivers Ass’n, Inc., et al v. Swift Transp. Co., Inc.
Although no assurances can be given with respect to the outcome of the Litigation, including
the March 8, 2011 petition to the United States Supreme Court and 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The allowance for doubtful accounts for both trade and other receivables represents
management’s estimate of the amount of outstanding receivables that will not be collected.
Historically, management’s estimates for uncollectible receivables have been materially correct.
Although management believes the amount of the allowance for both trade and other receivables at
March 26, 2011 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 2011 and 2010 thirteen-week periods,
insurance and claims costs included $722,000 and $418,000, respectively, of unfavorable 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 March 26, 2011.
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 Company’s 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, typically in the fourth
quarter, 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. Only the first step of the
impairment test was required in 2010 as the estimated fair value of the reporting units
significantly exceeded carrying value.
Significant variances from management’s 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
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affect Landstar’s earnings in a given quarter or year. However, management believes that the
ultimate resolution of these items, given a range of reasonably likely outcomes, will not
significantly affect the long-term financial condition of Landstar or its ability to fund its
continuing operations.
EFFECTS OF INFLATION
Management does not believe inflation has had a material impact on the results of operations
or financial condition of Landstar in the past five years. However, inflation in excess of
historic trends might have an adverse effect on the Company’s results of operations.
SEASONALITY
Landstar’s 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.
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 Company’s Leverage Ratio, as defined in the Credit Agreement. As of both March 26,
2011 and December 25, 2010, the weighted average interest rate on borrowings outstanding was 1.14%.
During the first quarter of 2011, the average outstanding balance under the Credit Agreement was
approximately $80,741,000. Assuming that debt levels on the Credit Agreement remain at $80,000,000,
the balance at March 26, 2011, 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. Based on the borrowing rates in the Credit Agreement and the
repayment terms, the fair value of the outstanding borrowings as of March 26, 2011 was estimated to
approximate carrying value.
Long-term investments, all of which are available-for-sale and are carried at fair value,
include investment-grade bonds and mortgage-backed securities having maturities of up to five
years. Assuming that the long-term portion of investments remains at $43,666,000, the balance at
March 26, 2011, a hypothetical increase or decrease in interest rates of 100 basis points would not
have a material impact on future earnings on an annualized basis. Short-term investments consist of
short-term investment-grade instruments and the current maturities of investment-grade bonds and
mortgage-backed securities. Accordingly, any future interest rate risk on these short-term
investments would not be material.
Assets and liabilities of the Company’s 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 operation are recorded in the statements of income when they
occur. The net assets held at the Company’s Canadian subsidiary at March 26, 2011 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.
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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 Company’s management,
including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the
effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the
CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of
March 26, 2011, 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 Company’s internal controls over financial reporting
during the Company’s fiscal quarter ended March 26, 2011 that have materially affected, or are
reasonably likely to materially affect, the Company’s 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 Company’s 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 Court’s 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 Court’s 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.
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However, the new ruling of the Appellate Court reversed the District Court’s 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.
On March 8, 2011, the Plaintiffs filed a petition with the United States Supreme Court to
seek to further appeal certain portions of the Appellate Court’s October 4, 2010 ruling. On March
23, 2011, the Plaintiffs requested that the United States Supreme Court consolidate such petition
with a petition OOIDA intends to file to seek to further appeal a decision of the United States
Court of Appeals for the Ninth Circuit on January 20, 2011, in a case not otherwise involving the
Company, Owner-Operator Indep. Drivers Ass’n, Inc., et al v. Swift Transp. Co., Inc.
Although no assurances can be given with respect to the outcome of the Litigation, including
the March 8, 2011 petition to the United States Supreme Court and 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 Company’s Annual Report on Form 10-K for the fiscal year ended December 25,
2010, and in “Management’s 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 Company did not purchase any shares of its common stock during the period from December
26, 2010 to March 26, 2011, the Company’s first fiscal quarter. On August 23, 2010, Landstar
System, Inc. announced that it had been authorized by its Board of Directors to purchase up to
2,000,000 shares of its common stock from time to time in the open market and in privately
negotiated transactions. As of March 26, 2011, the Company may purchase 722,662 shares of its
common stock under this authorization. No specific expiration date has been assigned to the August
23, 2010 authorization.
During the thirteen-week period ended March 26, 2011, Landstar paid dividends as follows:
| Dividend Amount | Declaration | Record | Payment | |||||||||
| per share | Date | Date | Date | |||||||||
$0.05 |
January 25, 2011 | February 14, 2011 | March 11, 2011 | |||||||||
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 Company’s 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,
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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 Company’s 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.
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EXHIBIT INDEX
Registrant’s 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 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LANDSTAR SYSTEM, INC. |
||||
| Date: April 29, 2011 | /s/ Henry H. Gerkens | |||
| Henry H. Gerkens | ||||
| Chairman, President and Chief Executive Officer |
||||
| Date: April 29, 2011 | /s/ James B. Gattoni | |||
| James B. Gattoni | ||||
| Vice President and Chief Financial Officer |
||||
27