None.
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 as of the end of the three most recent fiscal years:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Dec. 29,
| | Dec. 30,
| | Dec. 31,
| | | Dec. 26,
| | Dec. 27,
| | Dec. 29,
| |
| | | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 | |
| |
| BCO Independent Contractors | | | 8,403 | | | | 8,516 | | | | 8,011 | | | | 7,926 | | | | 8,455 | | | | 8,403 | |
| Truck Brokerage Carriers: | | | | | | | | | | | | | | | | | | | | | | | | |
| Approved and active(1) | | | 16,053 | | | | 15,247 | | | | 14,014 | | | | 14,887 | | | | 16,135 | | | | 16,053 | |
| Other approved | | | 9,362 | | | | 8,574 | | | | 8,497 | | | | 9,886 | | | | 10,036 | | | | 9,362 | |
| | | | | | | | | | | | | | | |
| | | | 25,415 | | | | 23,821 | | | | 22,511 | | | | 24,773 | | | | 26,171 | | | | 25,415 | |
| | | | | | | | | | | | | | | |
| Total available truck capacity providers | | | 33,818 | | | | 32,337 | | | | 30,522 | | | | 32,699 | | | | 34,626 | | | | 33,818 | |
| | | | | | | | | | | | | | | |
| Number of trucks provided by BCO Independent Contractors | | | 8,993 | | | | 9,205 | | | | 8,728 | | | | 8,519 | | | | 9,039 | | | | 8,993 | |
| | | | | | | | | | | | | | | |
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| | |
| (1) | | Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal year 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 contractuallyagreed-upon percentage of revenue generated by the haul. Purchased transportation for the brokerage services operations of the carrier segment is based onpaid to a negotiated rate for each load hauled. Purchased transportation for the brokerage services operations of the global logistics segmentTruck Brokerage Carrier is based on either a negotiated rate for each load hauled or a contractuallyagreed-upon rate. Purchased transportation for thepaid to rail intermodal, air andcargo or ocean freight operations of the global logistics segmentcargo carriers is based on a contractuallyagreed-upon fixed rate. Included in revenue in 2007, 2006 and 2005 was revenue related to bus services provided for disaster relief under the FAA contract. Purchased transportation for bus services provided under the FAA contract was based upon a negotiated rate per mile or per day.rates. Purchased transportation as a percentage of revenue for truck brokerage, services, rail intermodal operations and busocean cargo services is normally higher than that of Landstar’s other transportation operations.BCO Independent Contractor and air cargo services. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases in proportion to the revenue generated through BCO Independent Contractors and other third party capacity providers, transportation management fees and revenue from the insurance segment. Purchased transportation as a percent of revenue also increases or decreases in relation to the 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 contractuallyagreed-upon percentages of revenue or gross profit, defined as revenue less the cost of purchased transportation, at the carrier segment and ofor gross profit at the global logistics segment.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 carrier segment, the global logistics segmentvarious modes of transportation, transportation management fees and the insurance segment and with changes in gross profit aton services provided by Truck Brokerage Carriers, rail intermodal, air cargo and ocean cargo carriers. Commissions to agents are recognized upon the global logistics segmentcompletion of freight delivery.
Revenue less the cost of purchased transportation and commissions to agents is referred to as net revenue. Net revenue over revenue is referred to as net margin. In general, net 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, net margin is either fixed or variable as a percent of revenue, depending on the contract with each individual independent commission sales agent. Under certain
24
contracts with independent commission sales agents, the Company retains a fixed percentage of revenue and the truck brokerage operationsagent retains the amount remaining less the cost of purchased transportation (the “retention contracts”). Net margin on revenue hauled by rail, air cargo carriers, ocean cargo carriers and Truck Brokerage Carriers, other than those under retention contracts, are variable in nature as the Company’s contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of gross profit, representing revenue less the cost of purchased transportation. In general, approximately 75% of the carrier segment.Company’s revenue in 2009 had a fixed net margin.
Rent and maintenanceMaintenance 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. Landstar’s retained liability for individual commercial trucking claims varies depending on when such claims are incurred. For commercial trucking claims, incurred prior to June 19, 2003 and subsequent to March 30, 2004, Landstar retains liability up to $5,000,000 per occurrence. For commercial trucking claims incurred from June 19, 2003 through March 30, 2004, Landstar retains liability up to $10,000,000 per occurrence. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. The Company’s exposure to liability associated with accidents incurred by other third partyTruck Brokerage Carriers, rail intermodal capacity providers and air cargo and ocean cargo carriers who haultransport 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 attributed to the acquisitions in 2009 and management information services equipment.
22
The following table sets forth the percentage relationships of income and expense items to revenue for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | Fiscal Year | |
| | | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 | |
| |
| Revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| Investment income | | | 0.2 | | | | 0.2 | | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | 0.2 | |
| Costs and expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Purchased transportation | | | 75.8 | | | | 75.2 | | | | 74.7 | | | | 74.8 | | | | 76.9 | | | | 75.8 | |
| Commissions to agents | | | 8.1 | | | | 8.0 | | | | 8.1 | | | | 8.0 | | | | 7.7 | | | | 8.1 | |
| Other operating costs | | | 1.1 | | | | 1.8 | | | | 1.5 | | | | 1.5 | | | | 1.0 | | | | 1.1 | |
| Insurance and claims | | | 2.0 | | | | 1.6 | | | | 2.0 | | | | 2.3 | | | | 1.4 | | | | 2.0 | |
| Selling, general and administrative | | | 5.0 | | | | 5.3 | | | | 5.5 | | | | 6.6 | | | | 5.2 | | | | 5.0 | |
| Depreciation and amortization | | | 0.8 | | | | 0.7 | | | | 0.6 | | | | 1.2 | | | | 0.8 | | | | 0.8 | |
| | | | | | | | | | | | | | | |
| Total costs and expenses | | | 92.8 | | | | 92.6 | | | | 92.4 | | | | 94.4 | | | | 93.0 | | | | 92.8 | |
| | | | | | | | | | | | | | | |
| Operating income | | | 7.4 | | | | 7.6 | | | | 7.7 | | | | 5.7 | | | | 7.1 | | | | 7.4 | |
| Interest and debt expense | | | 0.3 | | | | 0.3 | | | | 0.2 | | | | 0.2 | | | | 0.3 | | | | 0.3 | |
| | | | | | | | | | | | | | | |
| Income before income taxes | | | 7.1 | | | | 7.3 | | | | 7.5 | | | | 5.5 | | | | 6.8 | | | | 7.1 | |
| Income taxes | | | 2.7 | | | | 2.8 | | | | 2.9 | | | | 2.0 | | | | 2.6 | | | | 2.7 | |
| | | | | | | | | | | | | | | |
| Net income | | | 4.4 | % | | | 4.5 | % | | | 4.6 | % | | | 3.5 | % | | | 4.2 | % | | | 4.4 | % |
| | | | | | | | | | | | | | | |
Fiscal Year Ended December 29, 200726, 2009 Compared to Fiscal Year Ended December 30, 200627, 2008
Revenue for the fiscal year 20072009 was $2,487,277,000,$2,008,796,000, a decrease of $26,479,000,$634,273,000, or 1.1%24.0%, compared to revenue for the 2006 fiscal year. The decrease in revenue was primarily attributable to lower disaster relief revenue provided under the FAA contract in fiscal year 2007 compared to fiscal year 2006.2008. Revenue for disaster relief services provided under the FAA contract in 2007 and 2006 was $8,511,000 and $100,655,000, respectively, including trailer rental revenue of $2,235,000 and $18,778,000, respectively. Revenue increased $11,775,000 and $2,268,000decreased $633,353,000, or 24.3%, at the carrier and insurance segments, respectively, while revenue at the globaltransportation logistics segment decreased $40,522,000. With respect to the carrier segment, revenue per load, the number of loads delivered, the average length of haul and revenue per revenue mile were all approximately the same in 2007 as compared to 2006.segment. The overall decrease in
25
revenue at the global logistics segment was primarily due to the significant downturn in the economy. Revenue hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers and ocean cargo carriers in 2009 decreased 18%, 30%, 44% and 20%, respectively, compared to 2008 while revenue hauled by air cargo carriers increased 18%. The number of loads in 2009 hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers and air cargo carriers decreased 7%, 12%, 35% and 6%, respectively, compared to 2008, while the number of loads hauled by ocean cargo carriers was flat. Revenue per load in 2009 for disaster relief services provided under the FAA contract. Excludingloads hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal carriers and ocean cargo carriers decreased approximately 12%, 21%, 14% and 20%, respectively, compared to 2008, while revenue per load for loads hauled by air cargo carriers increased 26%. The decrease in the number of loads and revenue relatedper load hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal and ocean cargo carriers was primarily attributable to disaster relief services provided bylower demand due to the global logistics segmentoverall weak economic conditions which caused increased pressure on price. In addition, the decrease in 2007 and 2006, the number of loads delivered by the global logistics segment in fiscal year 2007 increased approximately 6% over 2006 and average revenue per load increased approximately 3% over 2006.on Truck Brokerage Carrier revenue was partly attributable to decreased fuel surcharges identified separately in billings to customers in 2009 compared to 2008. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $48,095,000 and $134,230,000 in 2009 and 2008, respectively. Fuel surcharges billed to customers on revenue hauled by BCO Independent Contractors are excluded from revenue and paid in entirety to the BCO Independent Contractors.
Investment income at the insurance segment was $5,347,000$1,268,000 and $4,250,000 for fiscal years 2007$3,339,000 in 2009 and 2006,2008, respectively. The increasedecrease in investment income was primarily due to an increaseda decreased rate of return, attributable to a general increasedecrease in interest rates, on investments held by the insurance segment and an increase in average investments held at the insurance segment.2009.
Purchased transportation was 75.8%74.8% and 76.9% of revenue in 2007 compared with 75.2% in 2006.2009 and 2008, respectively. The increasedecrease in purchased transportation as a percentage of revenue was primarily attributable to decreased rates of purchased transportation paid to Truck Brokerage Carriers, due to lower cost of fuel and excess truck capacity industry wide, and an increase in the effectpercentage of decreased revenue under the FAA contract,hauled by BCO Independent Contractors, which tends to have a lower cost of purchased transportation, and increased rates for purchased transportation paid to rail intermodal carriers, partially offset by decreased rates for purchased transportation paid to Truck Brokerage Carriers.transportation. Commissions to agents were 8.1% of revenue in 2007 and 8.0% of revenue in 2006.2009 and 7.7% of revenue in 2008. The increase in commissions to agents as a percentage of revenue was primarily attributable to decreased revenue for disaster relief services provided under the FAA contract, which tends to have a lower agent commission rate, and increased commissions to agents primarily attributable to increased gross profit on revenue less the cost of purchased transportation, on truck brokerage revenue.hauled by Truck Brokerage Carriers. Other
23
operating costs were 1.1%1.5% and 1.0% of revenue in 20072009 and 1.8% of revenue in 2006.2008, respectively. The decreaseincrease in other operating costs as a percentage of revenue was primarily attributable to reduced trailerthe effect of decreased revenue, $1,702,000 of other operating costs from the Acquired Entities, increased trailing equipment maintenance costs and an increased provision for contractor bad debt, partially offset by decreased trailing equipment rental costs incurred in support of disaster relief services under the FAA contract.costs. Insurance and claims were 2.0%2.3% of revenue in 20072009 and 1.6%1.4% of revenue in 2006.2008. The increase in insurance and claims as a percentage of revenue was primarily attributabledue to a $5,000,000 charge foran increase in the estimated costseverity of one severe accident that occurred during the first quartercommercial trucking claims incurred in 2009 and decreased favorable development of 2007 and increased cargoprior year claims expensereported in 2007.2009. Selling, general and administrative costs were 5.0%6.6% of revenue in 20072009 and 5.3%5.2% of revenue in 2006.2008. The decreaseincrease in selling, general and administrative costs as a percentage of revenue was primarily attributable to the effect of decreased revenue, $2,005,000 of one-time acquisition related costs and $7,138,000 of selling, general and administrative costs from the Acquired Entities in 2009, partially offset by a decreased provision for bonuses under the Company’s incentive compensation programs.programs in 2009. Depreciation and amortization was 0.8%1.2% of revenue in 2007 and 0.7% of revenue2009 compared with 0.8% in 2006.2008. The increase in depreciation and amortization as a percentage of revenue was primarily due to an increase inthe effect of decreased revenue, depreciation on Company-owned trailing equipment.equipment and amortization of identifiable intangible assets attributed to the Acquired Entities.
Interest and debt expense was 0.3%0.2% of revenue in both 20072009, compared to 0.3% in 2008. The decrease in interest and 2006.debt expense as a percentage of revenue was primarily attributable to lower average borrowings on the Company’s senior credit facility, a lower average rate on borrowings under the Company’s senior credit facility and lower average capital lease obligations during 2009, partially offset by the effect of decreased revenue in 2009.
The provisions for income taxes for the 20072009 and 2006 fiscal years2008 were based on estimated full year combined effective income tax rates of approximately 38.4%36.2% and 38.7%38.2%, respectively, which arewere higher than the statutory federal income tax rate primarily as a result of state income taxes, the meals and entertainment exclusion and non-deductible stock compensation expense. The decrease in the effective income tax rate was primarily attributable to changes in the mix
26
recognition of income apportionedbenefits relating to the states in which the Company generates revenue and previously unrecognized tax benefits forseveral uncertain tax positions that were recognized in 2007 that had reachedfor which the applicable statute of limitations. limitations passed in 2009.
The Company believes that deferred income tax benefits are more likely than notnet loss attributable to be realized becausenoncontrolling interest of $445,000 represents the noncontrolling investor’s 25 percent share of the Company’s ability to generate future taxable earnings.net loss incurred by A3i during the 2009 period.
Net income forattributable to the 2007 fiscal yearCompany was $109,653,000,$70,395,000, or $2.01$1.38 per common share ($1.991.37 per diluted share), which included approximately $2,153,000 of operatingin 2009. Net income relatedattributable to the $8,511,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $2,153,000 of operating income, net of related income taxes, increased net income approximately $1,325,000,Company was $110,930,000, or $0.02$2.11 per common share ($0.02 per diluted share). Net income for the 2006 fiscal year was $113,085,000, or $1.95 per common share ($1.932.10 per diluted share), which included approximately $14,590,000 of operating income related to the $100,655,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $14,590,000 of operating income, net of related income taxes, increased net income approximately $8,944,000, or $0.15 per common share ($0.15 per diluted share).in 2008.
Fiscal Year Ended December 30, 200627, 2008 Compared to Fiscal Year Ended December 31, 200529, 2007
Revenue for the fiscal year 20062008 was $2,513,756,000,$2,643,069,000, an increase of $155,792,000, or 6.3%, compared to revenue of $2,517,828,000 for the 2005 fiscal year.2007. Revenue increased $104,948,000 and $3,574,000$155,805,000, or 6.4%, at the carrier and insurance segments, respectively, and decreased $112,594,000 at the globaltransportation logistics segment primarily attributabledue to lower disaster reliefa 13% increase in revenue hauled by Truck Brokerage Carriers, increased revenue hauled by ocean cargo carriers and increased revenue for bus capacity provided under the FAA contract in fiscal year 2006 compared to fiscal year 2005. With respectfor evacuation assistance related to the carrier segment,storms that impacted the Gulf Coast in September 2008 (“Bus Revenue”), partially offset by lower revenue per load increased approximately 5% whilehauled by air cargo carriers. The number of loads in 2008 hauled by BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal and air cargo carriers, decreased 4%, 3%, 7% and 29% , respectively, compared to the number of loads deliveredhauled in 20062007. Loads hauled by ocean cargo carriers increased approximately 1%16% over the number of loads delivered in 2005. The average length of haul2007. Revenue per load at the carrier segment remained approximately the same as prior year, however, revenue per revenue milefor loads hauled by Truck Brokerage Carriers, BCO Independent Contractors and rail intermodal, air cargo and ocean cargo carriers increased approximately16%, 5%. Included, 9%, 6% and 37%, respectively, over 2007. The increase in disaster relief revenue at the global logistics segment for the 2006 and 2005 fiscal years was $100,655,000 and $275,929,000, respectively, of disaster relief revenue provided primarily under the FAA contract. Excluding the number of loads and revenue related to the disaster relief efforts provided by the global logistics segment in 2006 and 2005, the number of loads delivered by the global logistics segment in fiscal year 2006 increased approximately 16% over 2005, however, average revenue per load decreased approximately 3%.hauled by Truck Brokerage Carriers and rail intermodal, air cargo and ocean cargo carriers was partly attributable to increased fuel surcharges identified separately in billings to customers in 2008 compared to 2007. Fuel surcharges on truck brokerage revenue identified separately in billings to customers and included as a component of truck brokerage revenue were $134,230,000 and $85,256,000 in 2008 and 2007, respectively. Fuel surcharges billed to customers on revenue hauled by BCO Independent Contractors are excluded from revenue.
Investment income at the insurance segment was $4,250,000$3,339,000 and $2,695,000 for fiscal years 2006$5,347,000 in 2008 and 2005,2007, respectively. The increasedecrease in investment income was primarily due to an increaseda decreased rate of return, attributable to a general increasedecrease in interest rates, on investments held by the insurance segment.segment in 2008.
Purchased transportation was 75.2%76.9% and 75.8% of revenue in 2006 compared with 74.7% in 2005.2008 and 2007, respectively. The increase in purchased transportation as a percentage of revenue was primarily attributable to an increase in the portion of revenue generated under the FAA contract attributable to bus, air and fuel delivery services, which have a
24
higher costincreased rates of purchased transportation paid to Truck Brokerage Carriers and ocean cargo carriers, partially attributable to the increased truck brokeragecost of fuel in 2008, increased revenue hauled by Truck Brokerage Carriers and rail intermodal revenue,ocean cargo carriers, both of which tend to have a higher cost of purchased transportation, compared toand the effect of disaster relief services revenue, generated through BCO Independent Contractors, partially offset by lower rates forwhich also had a higher rate of purchased transportation paid to Truck Brokerage Carriers.transportation. Commissions to agents were 8.0%7.7% of revenue in 20062008 and 8.1% of revenue in 2005.2007. The decrease in commissions to agents as a percentage of revenue was primarily attributable to the change in the mix ofdecreased gross profit on revenue generated under the FAA contract in 2006 towards transportation services which have a lower commission rate.hauled by Truck Brokerage Carriers. Other operating costs were 1.8%1.0% and 1.1% of revenue in 20062008 and 1.5%2007, respectively. The decrease in other operating costs as a percentage of revenue in 2005. The increase was primarily attributable to trailer rentalthe effect of increased revenue hauled by Truck Brokerage Carriers and ocean cargo carriers in 2008, neither of which incur significant other operating costs, incurred in support of disaster relief services provided under the FAA contract, partially offset by reduced other trailer rent expense and maintenance costs, as a resultlower gains on the sales of the Company’s on-going efforttrailing equipment in 2008 compared to reduce the cost of Company provided trailing equipment.2007. Insurance and claims were 1.6%1.4% of revenue in 2006 and2008, compared with 2.0% of revenue in 2005.2007. The decrease in insurance and claims as a percentage of revenue was primarily attributabledue to a $5,000,000 charge for the estimated cost of one severe accident that occurred during the first quarter of 2007, favorable development of prior year claims in 2006, lower frequency2008 and severity of commercial trucking accidents in 2006, and increased truck brokerage revenue, which has a lower cost of cargo claims risk profile than revenue hauled by BCO Independent Contractors.in 2008. Selling, general and administrative costs were 5.3%5.2% of revenue in 2006 and 5.5%2008, compared with 5.0% of revenue in 2005.2007. The decreaseincrease in selling, general and administrative costs as a percentage of revenue was primarily attributable to a decreasedan increased provision for bonuses under the Company’s incentive compensation programs.programs and an increased provision for customer bad debt, partially offset by the effect of increased revenue. Depreciation and amortization was 0.7%0.8% of revenue in 2006both 2008 and 0.6% of revenue in 2005. The increase in depreciation and amortization as a percentage of revenue was primarily due to an increase in Company owned trailing equipment as opposed to trailing equipment obtained through operating leases.2007.
Interest and debt expense was 0.3% of revenue in 2006both 2008 and 0.2% of revenue in 2005. This increase in interest and debt expense was primarily attributable to increased interest rates on the Company’s revolving credit facility, increased capital lease obligations and increased borrowings under the Company’s credit facility during the first half of 2006, which were used to fund a portion of the December 31, 2005 receivable from the FAA and to fund purchases of the Company’s common stock under its authorized share repurchase program.2007.
27
The provisions for income taxes for the 20062008 and 2005 fiscal years2007 were based on an estimated full year combined effective income tax raterates of approximately 38.7% for each annual period,38.2% and 38.4%, respectively, which iswere higher than the statutory federal income tax rate primarily as a result of state income taxes, the meals and entertainment exclusion and non-deductible stock compensation expense.
Net income forattributable to the 2006 fiscal yearCompany was $113,085,000,$110,930,000, or $1.95$2.11 per common share ($1.932.10 per diluted share), which included approximately $14,590,000 of operating income relatedin 2008, compared to the $100,655,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $14,590,000 of operating income, net of related income taxes, increased net income approximately $8,944,000,$109,653,000, or $0.15$2.01 per common share ($0.15 per diluted share). Net income for the 2005 fiscal year was $115,598,000, or $1.95 per common share ($1.911.99 per diluted share), which included approximately $51,945,000 of operating income related to the $275,929,000 of revenue related to emergency transportation services provided primarily under the FAA contract. The $51,945,000 of operating income, net of related income taxes, increased net income approximately $31,626,000, or $0.53 per common share ($0.52 per diluted share).in 2007.
Use of Non-GAAP Financial Measures
In this annual report onForm 10-K, Landstar provides the following information that may be deemed non-GAAP financial measures for the 2007, 2006 and 2005 fiscal years: (1) revenue per load for the global logistics segment excluding revenue and loads related to disaster relief transportation services provided under the FAA contract and (2) the percentage change in revenue per load for the global logistics segment excluding revenue and loads related to disaster relief transportation services provided under the FAA contract as compared to revenue per load for the global logistics segment for the corresponding prior year periods. Each of the foregoing financial measures should be considered as additional information and not as a substitute for the GAAP financial information presented in thisForm 10-K.
Management believes that it is appropriate to present this financial information for the following reasons: (1) a significant portion of the disaster relief transportation services were provided under the FAA contract on
25
the basis of a daily rate for the use of transportation equipment in question, and therefore load and per load information is not necessarily available or appropriate for a significant portion of the related revenue, (2) disclosure of the effect of the transportation services provided by Landstar relating to disaster relief efforts will allow investors to better understand the underlying trends in Landstar’s financial condition and results of operations, (3) this information will facilitate comparisons by investors of Landstar’s results as compared to the results of peer companies and (4) management considers this financial information in its decision making.
Capital Resources and Liquidity
Shareholders’ equityEquity was $180,786,000,$268,151,000, or 52%74% of total capitalization (defined as total debt plus equity), at December 29, 2007,26, 2009, compared with $230,274,000,$253,136,000, or 64%65% of total capitalization, at December 30, 2006.27, 2008. The decreaseincrease in shareholders’ equity was primarily a result of the purchase of 4,093,100 shares of the Company’s common stock at a total cost of $176,590,000 and dividends paid of $7,389,000, partially offset by net income and the effect of the exercises of stock options during the period.period, partially offset by the purchase of 1,624,547 shares of the Company’s common stock at a total cost of $55,757,000.
The Company paid $0.17 per share, or $8,686,000, in cash dividends during 2009. It is the intention of the Board of Directors to continue to pay a quarterly dividend. As of December 29, 2007,26, 2009, the Company may purchase an additional 734,4011,375,453 shares of its common stock under its authorized stock purchase program. Long-term debt, including current maturities, was $164,753,000$92,898,000 at December 29, 2007,26, 2009, compared to $129,321,000$136,445,000 at December 30, 2006. 27, 2008.
Working capital and the ratio of current assets to current liabilities were $184,078,000$167,977,000 and 1.71.6 to 1, respectively, at December 29, 2007,26, 2009, compared with $221,168,000$238,817,000 and 1.92.0 to 1, respectively, at December 30, 2006.27, 2008. 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 $140,608,000$144,964,000 and $119,689,000 in 2007 compared with cash provided by operating activities of $292,168,000 in 2006.2009 and 2008, respectively. The decreaseincrease in cash flow provided by operating activities was primarily attributable to the collectiontiming of the 2005 fiscal year end receivable from the FAA for disaster relief transportation services during 2006.collections of trade receivables.
On July 8, 2004,June 27, 2008, Landstar renegotiated its existingentered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Fourth Amended and Restated Credit“Credit Agreement”). The Fourth Amended and Restated Credit Agreement, which expires on July 8, 2009,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.
At December 29, 2007, the Company had $80,000,000 in borrowings outstanding and $26,868,000 of letters of credit outstanding under the Fourth Amended and Restated Credit Agreement. At December 29, 2007, there was $118,132,000 available for future borrowings under the Company’s Fourth Amended and Restated Credit Agreement. In addition, the Company has $43,254,000 in letters of credit outstanding as collateral for insurance claims that are secured by investments and cash equivalents totaling $45,630,000.
Borrowings under the Fourth Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar, either (i) the greatest of (a) the prime rate as publicly announced from time to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC assessment costs plus 1% and (c) the federal funds effective rate plus1/2%, or, (ii) the rate at the time offered to JPMorgan Chase Bank in the Eurodollar market for amounts and periods comparable to the relevant loan plus a margin that is determined based on the level of the Company’s Leverage Ratio, as defined in the Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity. As of December 29, 2007, the margin was equal to 62.5/100 of 1%.
The unused portion of the Fourth Amended and Restated Credit Agreement carries a commitment fee determined based on the level of the Leverage Ratio, as therein defined. As of December 29, 2007, the commitment fee for the unused portion of the Fourth Amended and Restated Credit Agreement was 0.20%. At December 29, 2007, the weighted average interest rate on borrowings outstanding under the Fourth Amended and Restated Credit Agreement was 5.92%.
The Fourth Amended and Restated Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness, the incurrence of operating or capital lease obligations and the purchase of operating property.indebtedness. The Fourth Amended and Restated Credit Agreement also requires Landstar to meet certain financial tests. LandstarCompany is required to, among other things, maintain a minimum levels
26
of Consolidated Net Worth and Fixed Charge Coverage and limit its borrowings to a specified ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (the “Leverage Ratio”),Ratio, as each is defined in the Fourth AmendedCredit Agreement, and Restatedmaintain 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 Fourth Amended and Restated Credit Agreement. The Fourth Amended and Restated Credit Agreement provides that the Company maintain a minimum Consolidated Net Worth of $80,000,000. Under the most restrictive covenant, the Fixed Charge Coverage, fixed charges were $74,580,000 lower than the maximum amount allowed at December 29, 2007.
The Fourth Amended and Restated Credit Agreement provides for an event of default related to a person or group acquiring 25% or more of the outstanding capital stock of the Company or obtaining the power to elect a majority of the Company’s directors.
Borrowings under the Fourth Amended and Restated Credit Agreement are unsecured, however, Landstar System, Inc., LSHI and all but two subsidiaries guarantee the obligations under the Fourth Amended and Restated Credit Agreement.
The Fourth AmendedAt December 26, 2009, the Company had $40,000,000 in borrowings outstanding and Restated Credit Agreement provides for a restriction on cash dividends on the Company’s capital stock only to the extent there is an event$33,857,000 of defaultletters of credit outstanding under the Fourth AmendedCredit Agreement. At December 26, 2009, there was $151,143,000 available for future borrowings under the Credit Agreement. In addition, the Company has $45,008,000 in letters of credit outstanding, as collateral for insurance claims, that are secured by investments and Restated Credit Agreement.cash equivalents totaling $49,817,000. Investments, all of which are carried at fair value, consist of investment-grade bonds having maturities of up to five years. Fair value of investments is based primarily on quoted market prices.
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Historically, the Company has generated sufficient operating cash flow to meet its debt service requirements, fund continued growth, both internal and through acquisitions, complete or execute share purchases of its common stock under authorized share purchase programs, pay dividends and meet working capital needs. As a non-asset based provider of transportation capacityservices and logistics services,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 2007, 20062009, 2008 and 2005,2007, the Company purchased $6,514,000, $4,173,000$2,715,000, $8,289,000 and $3,857,000,$6,514,000, respectively, of operating property and acquired $36,046,000, $36,594,000$12,284,000, $4,802,000 and $28,512,000,$36,046,000, respectively, of trailing equipment by entering into capital leases. The Company’s primary facility in Jacksonville, Florida (the “Jacksonville Facility”) is leased under a lease agreement that provides the Company with an option to purchase the Jacksonville Facility, including the land and fixtures located thereon, at a fixed price of $21,135,000 in the first quarter of 2010. In January 2010, the Company has entered into a contract of sale with its landlord to purchase the Jacksonville Facility in the first quarter of 2010, as is, subject to the satisfaction of certain customary conditions under the terms of the contract of sale. It is expected the purchase will be funded from the Company’s existing cash and cash equivalents or from available funds under the Company’s senior credit facility. In addition, Landstar anticipates acquiring approximately $20,000,000 of$27,000,000 in operating property, primarily new trailing equipment to replace older trailing equipment, and information technology equipment during fiscal year 20082010 either by purchase or by lease financing. Prior to 2003, the Company historically funded its acquisition of Company provided fixed cost trailing equipment using capital leases. During 2004 and 2003, the Company acquired van trailing equipment under a long-term operating lease at a fixed monthly rental price per trailer. The Company does not currently anticipate any other significant capital requirements in 2008.2010.
In the Company’s 2009 fiscal third quarter, the Company completed the Recent Acquisitions. Consideration paid plus net liabilities assumed for the Recent Acquisitions was approximately $35,300,000 in the aggregate. As it relates to the noncontrolling interest of A3i Acquisition, the Company has the option, during the period commencing on the fourth anniversary of June 29, 2009, (the “Closing Date”), and ending on the sixth anniversary of the Closing Date, to purchase at fair value all but not less than all of the noncontrolling interest (the “A3i Call Right”). The noncontrolling interest is also subject to customary restrictions on transfer, including a right of first refusal in favor of the Company, and drag-along rights. If the Company does not exercise the A3i Call Right, the owner of the noncontrolling interest has the right, but not the obligation, for a specified period following each of the sixth, seventh and eighth anniversaries of the Closing Date, to sell at fair value to the Company up to one third annually of the investment then held by such owner. The owner of the noncontrolling interest also has certain preemptive rights and tag-along rights. In addition, as it relates to NLM, the Company may be required to pay additional consideration to the prior owner of NLM contingent on NLM achieving certain levels of earnings through December 2014.
Since January 1997, the Company has purchased $764,810,000over $872,000,000 of its common stock under programs authorized by the Board of Directors of the Company in open market and private block transactions. The Company has used cash provided by operating activities and borrowings on the Company’s revolving credit facilities to fund the purchases.
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 requirement, fund continued growth, both internal and through acquisitions, pay dividends, complete the authorized share purchase program and meet working capital needs.
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Contractual Obligations and Commitments
At December 29, 2007,26, 2009, the Company’s obligations and commitments to make future payments under contracts, such as debt and lease agreements, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due By Period | | | Payments Due by Period | |
| | | | | Less Than
| | 1-3
| | 4-5
| | More Than
| | | | | Less Than
| | 1-3
| | 4-5
| | More Than
| |
Contractual Obligation | | Total | | 1 Year | | Years | | Years | | 5 Years | | | Total | | 1 Year | | Years | | Years | | 5 Years | |
| |
| Long-term debt | | $ | 80,000 | | | | | | | $ | 80,000 | | | | | | | | | | |
| Long-term debt obligations | | | $ | 40,000 | | | | | | | | | | | $ | 40,000 | | | | | |
| Capital lease obligations | | | 93,732 | | | $ | 27,079 | | | | 46,876 | | | $ | 19,777 | | | | | | | | 56,226 | | | $ | 26,661 | | | $ | 28,244 | | | | 1,321 | | | | | |
| Operating leases | | | 23,411 | | | | 7,633 | | | | 7,564 | | | | 4,313 | | | $ | 3,901 | | |
| Operating lease obligations | | | | 14,232 | | | | 4,134 | | | | 5,688 | | | | 4,410 | | | | | |
| Purchase obligations | | | | 19,094 | | | | 16,756 | | | | 2,304 | | | | 34 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | $ | 197,143 | | | $ | 34,712 | | | $ | 134,440 | | | $ | 24,090 | | | $ | 3,901 | | | $ | 129,552 | | | $ | 47,551 | | | $ | 36,236 | | | $ | 45,765 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
27
Long-term debt represents borrowings under the Fourth Amended and Restated Credit Agreement and does not include interest. Capital lease obligations above include $8,979,000$3,328,000 of imputed interest. Operating leases primarily include $13,710,000 related to the Company’s main office facility located in Jacksonville, Florida and $5,198,000 related to a long-term operating lease for trailing equipment. At December 29, 2007,26, 2009, the Company has gross unrecognized tax benefits of $16,401,000.$11,966,000. This amount is excluded from the table above as the Company cannot reasonably estimate the period of cash settlement with the respective taxing authorities. At December 26, 2009, the Company has insurance claims liabilities of $72,307,000. This amount is excluded from the table above as the Company cannot reasonably estimate the period of cash settlement on these liabilities. The short term portion of the insurance claims liability is reported on an actuarially determined basis. Included in purchase obligations in the table above is $14,134,000 of obligations related to trailing equipment to replace older trailing equipment.
In January 2010, the Company entered into a contract of sale with the landlord of its Jacksonville, FL facility to purchase its headquarters in the first quarter of 2010. The purchase price of the facility, including the land and fixtures located thereon, is $21,135,000. Included above under operating lease obligations is $10,006,000 of rental payments for the Jacksonville Facility. If the purchase is completed, the remaining operating lease obligations on this facility will no longer be payable.
Off-Balance Sheet Arrangements
As of December 29, 2007,26, 2009, the Company had no off-balance sheet arrangements, other than operating leases as disclosed in the table of Contractual Obligations and Commitments above, that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Legal Matters
On November 1, 2002,As further described in periodic and current reports previously filed by Landstar System, Inc. (the “Company”) with the Securities and Exchange Commission, the Company and certain of its subsidiaries (the “Defendants”) are defendants in a suit (the “Litigation”) brought in the United States District Court for the Middle District of Florida (the “District Court”) by the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and certainfour former BCO Independent Contractors (as defined below) (collectively(the “Named Plaintiffs” and, with OOIDA, the “Plaintiffs”) filed a putative class action complaint on behalf of all independent contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease arrangements (“BCO(the “BCO Independent Contractors”) in the United States District Court for the Middle District of Florida (the “District Court”) in Jacksonville, Florida, against the Company and certain of its subsidiaries. The complaint was amended on April 7, 2005 (as amended, the “Amended Complaint”). The Amended Complaint allegedPlaintiffs 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 soughtseek injunctive relief, an unspecified amount of damages and attorney’sattorneys’ fees. On August 30, 2005, the District Court granted a motion by the Plaintiffs to certify the case as a class action.
On January 16, 2007, the District Court ordered the decertification of the class of BCO Independent Contractors for purposes of determining remedies. Immediately thereafter, the trial commenced for purposes of determining what remedies, if any, would be awarded to the remaining named BCO Independent Contractor Plaintiffs against the following subsidiaries of the Company: Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc. (the “Defendants”). On March 29, 2007, the District Court denied Plaintiffs’the request by Plaintiffs for injunctive relief, entered a Judgmentjudgment 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 denial of Plaintiffs requests for damagesLitigation relating to liability, injunctive relief and injunctivemonetary relief. The Plaintiffs and the Defendants have each filed motions with the District Court concerning an award of attorney fees from the other party.
The Plaintiffs have filed an appeal with the United States Court of Appeals for
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the Eleventh Circuit (the “Appellate Court”) with respect toof certain of the District Court’s rulings including the judgments entered by the District Court in favor of the Defendants on the issues of damages and injunctive relief.Defendants. The Defendants have asked the Appellate Court to affirm thesuch rulings of the District Court that have been appealed by the Plaintiffs. The Defendants have alsoand filed a cross-appeal with the Appellate Court with respect to certain other rulings of the District Court.
On September 3, 2008, the Appellate Court issued its ruling, which, among other things, affirmed the District Court’s rulings that (i) the Defendants are not prohibited by the applicable federal leasing regulations from charging administrative or other fees to BCO Independent Contractors in connection with voluntary programs offered by the Defendants through which a BCO Independent Contractor may purchase discounted products and services for a charge that is deducted against the compensation payable to the BCO Independent Contractor (a “Charge-back Deduction”), (ii) the Plaintiffs are not entitled to restitution or disgorgement with respect to violations by Defendants of the applicable federal leasing regulations but instead may recover only actual damages, if any, which they sustained as a result of any such violations and (iii) the claims of BCO Independent Contractors may not be handled on a class action basis for purposes of determining the amount of actual damages, if any, they sustained as a result of any violations. Further, the analysis of the Appellate Court confirmed the absence of any violations alleged by the Plaintiffs of the federal leasing regulations with respect to the written terms of all leases currently in use between the Defendants and BCO Independent Contractors.
However, the ruling of the Appellate Court reversed the District Court’s rulings (i) that an old version of the lease formerly used by Defendants but not in use with any current BCO Independent Contractor complied with applicable disclosure requirements under the federal leasing regulations with respect to adjustments to compensation payable to BCO Independent Contractors on certain loads sourced from the U.S. Dept. of Defense, and (ii) that the Defendants had provided sufficient documentation to BCO Independent Contractors under the applicable federal leasing regulations relating to how the component elements of Charge-back Deductions were computed. The Appellate Court then remanded the case to the District Court to permit the Plaintiffs to seek injunctive relief with respect to these violations of the federal leasing regulations and to hold an evidentiary hearing to give the Named Plaintiffs an opportunity to produce evidence of any damages they actually sustained as a result of such violations.
Each of the parties to the Litigation has filed a petition with the Appellate Court seeking rehearing of the Appellate Court’s ruling; however, there can be no assurance that any petition for rehearing will be granted.
Although no assurances can be given with respect to the outcome of the appeal orLitigation, including any proceedingspossible 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 conducted thereafter,granted by the Company believes it has meritorious defenses and it intendsDistrict Court on remand is unlikely to continue asserting these defenses vigorously.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 thereof,therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
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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. Recently, the Company has experienced a higher level of customer bad debt expense than typically experienced in the past. Management believes this resulted from the difficult economic environment experienced by the Company’s customers. 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 December 29, 200726, 2009 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.
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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 year claims estimates. During fiscal years 2007, 20062009, 2008 and 2005,2007, insurance and claims costs included $8,296,000, $7,739,000$4,113,000, $9,968,000 and $1,525,000,$8,296,000, respectively, of favorable adjustments to prior yearsyears’ 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 December 29, 2007.26, 2009.
The Company utilizes certain income tax planning strategies to reduce its overall cost of income taxes. Upon audit, it is possible that certain strategies might be disallowed resulting in an increased liability for income taxes. Certain of these tax planning strategies result in a level of uncertainty as to whether the related tax positions taken by the Company will result in a recognizable benefit. The Company has provided for its estimated exposure attributable to such tax positions due to the corresponding level of uncertainty with respect to the amount of income tax benefit that may ultimately be realized. Management believes that the provision for liabilities resulting from the uncertainty in such income tax positions is appropriate. To date, the Company has not experienced an examination by governmental revenue authorities that would lead management to believe that the Company’s past provisions for exposures related to the uncertainty of such income tax positions are not appropriate.
Significant variances from management’s estimates for the amount of uncollectible receivables, the ultimate resolution of self-insured claims or the provision for uncertainty in income tax positions can all be expected to positively or negatively 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 higher than that experienced in the past five yearsexcess of historical 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.
Recently Issued Accounting Standards Not Currently Effective
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157,Fair Value Measurements(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2007, the FASB issued
29
Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”). SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the adoption of SFAS 157 or SFAS 159 to have a significant effect on the Company’s financial condition or results of operations.
| |
Item 7A.7a. | Quantitative and Qualitative Disclosures about Market Risk |
The Company is exposed to changes in interest rates as a result of its financialfinancing activities, primarily its borrowings on the revolving credit facility, and investing activities with respect to investments held by the insurance segment.
On July 8, 2004,June 27, 2008, Landstar entered into a new senior credit facilityagreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Fourth Amended and Restated Credit“Credit Agreement”). The Fourth Amended and Restated Credit Agreement, which expires on July 8, 2009,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 Fourth Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar,the Company, either (i) the greatestgreater of (a) the prime rate as publicly announced from time to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reservesN.A. and FDIC assessment costs plus 1% and (c)(b) the federal funds effective rate plus1/2% .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
32
case, a margin that is determined based on the level of the Company’s Leverage Ratio, as defined in the Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the borrowing capacity. As of December 29, 2007,26, 2009 and December 27, 2008, the weighted average interest rate on borrowings outstanding was 5.92%.1.12% and 2.63%, respectively. During fiscal 2007,the fourth quarter of 2009 and 2008, the average outstanding balance under the Fourth Amended and Restated Credit Agreement was approximately $55,420,000.$33,120,000 and $84,500,000, respectively. Based on the borrowing rates in the Fourth Amended and Restated Credit Agreement and the repayment terms, the fair value of the outstanding borrowings as of December 29, 200726, 2009 was estimated to approximate carrying value. The balance outstanding under the Credit Agreement was $40,000,000 and $70,000,000 at December 26, 2009 and December 27, 2008, respectively. Assuming that debt levels on the Fourth Amended and Restated Credit Agreement remain at $80,000,000,$40,000,000, the balance at December 29, 2007,26, 2009, a hypothetical increase of 100 basis points in current rates provided for under the Fourth Amended and Restated Credit Agreement is estimated to result in an increase in interest expense of $800,000$400,000 on an annualized basis.
All amounts outstanding on the Fourth Amended and Restated Credit Agreement are payable on July 8, 2009, the expiration of the Fourth Amended and Restated Credit Agreement.
Long-term investments, all of which areavailable-for-sale, consist of investment gradeinvestment-grade bonds having maturities of up to five years. The balance of the long-term portion of investments in bonds was $28,603,000 and $14,431,000 at December 26, 2009 and December 27, 2008, respectively. Assuming that the long-term portion of investments in bonds remains at $14,939,000,$28,603,000, the balance at December 29, 2007,26, 2009, 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 gradeinvestment-grade instruments and the current maturities of investment gradeinvestment-grade bonds. Accordingly, any future interest rate risk on these short-term investments would not be material.
Assets and liabilities of the Company’s Canadian operation 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 Landstar’s Canadian subsidiary at December 26, 2009 was, 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 8. | Financial Statements and Supplementary Data |
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
(Dollars in thousands, except per share amounts)
| | | | | | | | | |
| | | Dec. 29, 2007 | | | Dec. 30, 2006 | |
| |
ASSETS |
| Current Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 60,750 | | | $ | 91,491 | |
| Short-term investments | | | 22,921 | | | | 21,548 | |
| Trade accounts receivable, less allowance of $4,469 and $4,834 | | | 310,258 | | | | 318,983 | |
| Other receivables, including advances to independent contractors, less allowance of $4,792 and $4,512 | | | 11,170 | | | | 14,198 | |
| Deferred income taxes and other current assets | | | 28,554 | | | | 25,142 | |
| | | | | | | | | |
| Total current assets | | | 433,653 | | | | 471,362 | |
| | | | | | | | | |
| Operating property, less accumulated depreciation and amortization of $88,284 and $77,938 | | | 132,369 | | | | 110,957 | |
| Goodwill | | | 31,134 | | | | 31,134 | |
| Other assets | | | 31,845 | | | | 33,198 | |
| | | | | | | | | |
| Total assets | | $ | 629,001 | | | $ | 646,651 | |
| | | | | | | | | |
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current Liabilities | | | | | | | | |
| Cash overdraft | | $ | 25,769 | | | $ | 25,435 | |
| Accounts payable | | | 117,122 | | | | 122,313 | |
| Current maturities of long-term debt | | | 23,155 | | | | 18,730 | |
| Insurance claims | | | 28,163 | | | | 25,238 | |
| Accrued income taxes | | | 14,865 | | | | 10,023 | |
| Other current liabilities | | | 40,501 | | | | 48,455 | |
| | | | | | | | | |
| Total current liabilities | | | 249,575 | | | | 250,194 | |
| | | | | | | | | |
| Long-term debt, excluding current maturities | | | 141,598 | | | | 110,591 | |
| Insurance claims | | | 37,631 | | | | 36,232 | |
| Deferred income taxes | | | 19,411 | | | | 19,360 | |
| Shareholders’ Equity | | | | | | | | |
| Common stock, $0.01 par value, authorized 160,000,000 shares, issued 65,630,383 and 64,993,143 shares | | | 656 | | | | 650 | |
| Additional paid-in capital | | | 132,788 | | | | 108,020 | |
| Retained earnings | | | 601,537 | | | | 499,273 | |
| Cost of 13,121,109 and 9,028,009 shares of common stock in treasury | | | (554,252 | ) | | | (377,662 | ) |
| Accumulated other comprehensive gain (loss) | | | 57 | | | | (7 | ) |
| | | | | | | | | |
| Total shareholders’ equity | | | 180,786 | | | | 230,274 | |
| | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 629,001 | | | $ | 646,651 | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | Dec. 29,
| | | Dec. 30,
| | | Dec. 31,
| |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Revenue | | $ | 2,487,277 | | | $ | 2,513,756 | | | $ | 2,517,828 | |
| Investment income | | | 5,347 | | | | 4,250 | | | | 2,695 | |
| Costs and expenses: | | | | | | | | | | | | |
| Purchased transportation | | | 1,884,207 | | | | 1,890,755 | | | | 1,880,431 | |
| Commissions to agents | | | 200,630 | | | | 199,775 | | | | 203,730 | |
| Other operating costs | | | 28,997 | | | | 45,700 | | | | 36,709 | |
| Insurance and claims | | | 49,832 | | | | 39,522 | | | | 50,166 | |
| Selling, general and administrative | | | 125,177 | | | | 134,239 | | | | 140,345 | |
| Depreciation and amortization | | | 19,088 | | | | 16,796 | | | | 15,920 | |
| | | | | | | | | | | | | |
| Total costs and expenses | | | 2,307,931 | | | | 2,326,787 | | | | 2,327,301 | |
| | | | | | | | | | | | | |
| Operating income | | | 184,693 | | | | 191,219 | | | | 193,222 | |
| Interest and debt expense | | | 6,685 | | | | 6,821 | | | | 4,744 | |
| | | | | | | | | | | | | |
| Income before income taxes | | | 178,008 | | | | 184,398 | | | | 188,478 | |
| Income taxes | | | 68,355 | | | | 71,313 | | | | 72,880 | |
| | | | | | | | | | | | | |
| Net income | | $ | 109,653 | | | $ | 113,085 | | | $ | 115,598 | |
| | | | | | | | | | | | | |
| Earnings per common share | | $ | 2.01 | | | $ | 1.95 | | | $ | 1.95 | |
| | | | | | | | | | | | | |
| Diluted earnings per share | | $ | 1.99 | | | $ | 1.93 | | | $ | 1.91 | |
| | | | | | | | | | | | | |
| Average number of shares outstanding: | | | | | | | | | | | | |
| Earnings per common share | | | 54,681,000 | | | | 57,854,000 | | | | 59,199,000 | |
| | | | | | | | | | | | | |
| Diluted earnings per share | | | 55,156,000 | | | | 58,654,000 | | | | 60,413,000 | |
| | | | | | | | | | | | | |
| Dividends paid per common share | | $ | 0.135 | | | $ | 0.110 | | | $ | 0.050 | |
| | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
32
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | Dec. 29,
| | | Dec. 30,
| | | Dec. 31,
| |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| OPERATING ACTIVITIES | | | | | | | | | | | | |
| Net income | | $ | 109,653 | | | $ | 113,085 | | | $ | 115,598 | |
| Adjustments to reconcile net income to net cash provided (used) by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization of operating property | | | 19,088 | | | | 16,796 | | | | 15,920 | |
| Non-cash interest charges | | | 174 | | | | 174 | | | | 174 | |
| Provisions for losses on trade and other accounts receivable | | | 4,100 | | | | 5,349 | | | | 5,939 | |
| Gains on sales and disposals of operating property, net | | | (1,648 | ) | | | (475 | ) | | | (340 | ) |
| Deferred income taxes, net | | | 521 | | | | 3,297 | | | | (2,019 | ) |
| Stock-based compensation | | | 8,288 | | | | 7,173 | | | | 6,453 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Decrease (increase) in trade and other accounts receivable | | | 7,653 | | | | 207,128 | | | | (198,894 | ) |
| Decrease (increase) in other assets | | | (3,207 | ) | | | (7,761 | ) | | | 686 | |
| Increase (decrease) in accounts payable | | | (5,191 | ) | | | (42,196 | ) | | | 44,312 | |
| Increase (decrease) in other liabilities | | | (3,147 | ) | | | (6,145 | ) | | | 10,979 | |
| Increase (decrease) in insurance claims | | | 4,324 | | | | (4,257 | ) | | | 685 | |
| | | | | | | | | | | | | |
| NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES | | | 140,608 | | | | 292,168 | | | | (507 | ) |
| | | | | | | | | | | | | |
| INVESTING ACTIVITIES | | | | | | | | | | | | |
| Net change in other short-term investments | | | 3,272 | | | | (4,462 | ) | | | (1,747 | ) |
| Sales and maturities of investments | | | 44,224 | | | | 42,334 | | | | 4,977 | |
| Purchases of investments | | | (48,266 | ) | | | (41,239 | ) | | | (6,450 | ) |
| Purchases of operating property | | | (6,514 | ) | | | (4,173 | ) | | | (3,857 | ) |
| Proceeds from sales of operating property | | | 3,708 | | | | 2,620 | | | | 4,492 | |
| | | | | | | | | | | | | |
| NET CASH USED BY INVESTING ACTIVITIES | | | (3,576 | ) | | | (4,920 | ) | | | (2,585 | ) |
| | | | | | | | | | | | | |
| FINANCING ACTIVITIES | | | | | | | | | | | | |
| Increase (decrease) in cash overdraft | | | 334 | | | | (4,394 | ) | | | 6,282 | |
| Proceeds from repayment of notes receivable arising from exercises of stock options | | | — | | | | 47 | | | | 423 | |
| Dividends paid | | | (7,389 | ) | | | (6,361 | ) | | | (2,922 | ) |
| Proceeds from exercises of stock options | | | 12,862 | | | | 10,533 | | | | 9,216 | |
| Excess tax benefit on stock option exercises | | | 3,624 | | | | 5,758 | | | | 7,036 | |
| Borrowings on revolving credit facility | | | 58,000 | | | | 5,000 | | | | 57,000 | |
| Purchases of common stock | | | (176,590 | ) | | | (156,492 | ) | | | (95,600 | ) |
| Principal payments on long-term debt and capital lease obligations | | | (58,614 | ) | | | (79,246 | ) | | | (10,629 | ) |
| | | | | | | | | | | | | |
| NET CASH USED BY FINANCING ACTIVITIES | | | (167,773 | ) | | | (225,155 | ) | | | (29,194 | ) |
| | | | | | | | | | | | | |
| Increase (decrease) in cash and cash equivalents | | | (30,741 | ) | | | 62,093 | | | | (32,286 | ) |
| Cash and cash equivalents at beginning of period | | | 91,491 | | | | 29,398 | | | | 61,684 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 60,750 | | | $ | 91,491 | | | $ | 29,398 | |
| | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
33
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Fiscal Years Ended December 29, 2007,
December 30, 2006 and December 31, 2005
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Notes
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Receivable
| | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Arising
| | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated
| | | from
| | | | |
| | | | | | | | | Add’l
| | | | | | Treasury Stock
| | | Other
| | | Exercises
| | | | |
| | | Common Stock | | | Paid-In
| | | Retained
| | | at Cost | | | Comprehensive
| | | of Stock
| | | | |
| | | Shares | | | Amount | | | Capital | | | Earnings | | | Shares | | | Amount | | | Income (Loss) | | | Options | | | Total | |
| |
| Balance December 25, 2004 | | | 63,154,190 | | | $ | 632 | | | $ | 62,198 | | | $ | 279,873 | | | | 2,490,930 | | | $ | (127,151 | ) | | $ | 47 | | | $ | (470 | ) | | $ | 215,129 | |
| Net income | | | | | | | | | | | | | | | 115,598 | | | | | | | | | | | | | | | | | | | | 115,598 | |
| Dividends paid ($0.050 per share) | | | | | | | | | | | | | | | (2,922 | ) | | | | | | | | | | | | | | | | | | | (2,922 | ) |
| Purchases of common stock | | | | | | | | | | | | | | | | | | | 2,873,053 | | | | (95,600 | ) | | | | | | | | | | | (95,600 | ) |
| Exercises of stock options, including excess tax benefit | | | 991,712 | | | | 10 | | | | 16,242 | | | | | | | | | | | | | | | | | | | | | | | | 16,252 | |
| Director compensation paid in common stock | | | 6,000 | | | | | | | | 193 | | | | | | | | | | | | | | | | | | | | | | | | 193 | |
| Stock-based compensation expense | | | | | | | | | | | 6,260 | | | | | | | | | | | | | | | | | | | | | | | | 6,260 | |
| Repayment of notes receivable arising from exercises of stock options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 423 | | | | 423 | |
| Incentive compensation paid in common stock | | | | | | | | | | | (361 | ) | | | | | | | (19,100 | ) | | | 975 | | | | | | | | | | | | 614 | |
Unrealized loss onavailable-for-sale investments, net of income taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | (258 | ) | | | | | | | (258 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance December 31, 2005 | | | 64,151,902 | | | | 642 | | | | 84,532 | | | | 392,549 | | | | 5,344,883 | | | | (221,776 | ) | | | (211 | ) | | | (47 | ) | | | 255,689 | |
| Net income | | | | | | | | | | | | | | | 113,085 | | | | | | | | | | | | | | | | | | | | 113,085 | |
| Dividends paid ($0.110 per share) | | | | | | | | | | | | | | | (6,361 | ) | | | | | | | | | | | | | | | | | | | (6,361 | ) |
| Purchases of common stock | | | | | | | | | | | | | | | | | | | 3,697,726 | | | | (156,492 | ) | | | | | | | | | | | (156,492 | ) |
| Exercises of stock options, including excess tax benefit | | | 835,241 | | | | 8 | | | | 16,283 | | | | | | | | | | | | | | | | | | | | | | | | 16,291 | |
| Director compensation paid in common stock | | | 6,000 | | | | | | | | 265 | | | | | | | | | | | | | | | | | | | | | | | | 265 | |
| Stock-based compensation expense | | | | | | | | | | | 6,908 | | | | | | | | | | | | | | | | | | | | | | | | 6,908 | |
| Repayment of note receivable arising from exercise of stock options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 47 | | | | 47 | |
| Incentive compensation paid in common stock | | | | | | | | | | | 32 | | | | | | | | (14,600 | ) | | | 606 | | | | | | | | | | | | 638 | |
Unrealized gain onavailable-for-sale investments, net of income taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | 204 | | | | | | | | 204 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance December 30, 2006 | | | 64,993,143 | | | | 650 | | | | 108,020 | | | | 499,273 | | | | 9,028,009 | | | | (377,662 | ) | | | (7 | ) | | | 0 | | | | 230,274 | |
| Net income | | | | | | | | | | | | | | | 109,653 | | | | | | | | | | | | | | | | | | | | 109,653 | |
| Dividends paid ($0.135 per share) | | | | | | | | | | | | | | | (7,389 | ) | | | | | | | | | | | | | | | | | | | (7,389 | ) |
| Purchases of common stock | | | | | | | | | | | | | | | | | | | 4,093,100 | | | | (176,590 | ) | | | | | | | | | | | (176,590 | ) |
| Exercises of stock options, including excess tax benefit | | | 623,663 | | | | 6 | | | | 16,480 | | | | | | | | | | | | | | | | | | | | | | | | 16,486 | |
| Director compensation paid in common stock | | | 13,577 | | | | | | | | 678 | | | | | | | | | | | | | | | | | | | | | | | | 678 | |
| Stock-based compensation expense | | | | | | | | | | | 7,610 | | | | | | | | | | | | | | | | | | | | | | | | 7,610 | |
Unrealized gain onavailable-for-sale investments, net of income taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | 64 | | | | | | | | 64 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance December 29, 2007 | | | 65,630,383 | | | $ | 656 | | | $ | 132,788 | | | $ | 601,537 | | | | 13,121,109 | | | $ | (554,252 | ) | | $ | 57 | | | $ | 0 | | | $ | 180,786 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | Dec. 26,
| | | Dec. 27,
| |
| | | 2009 | | | 2008 | |
| |
ASSETS |
| Current Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 85,719 | | | $ | 98,904 | |
| Short-term investments | | | 24,325 | | | | 23,479 | |
| Trade accounts receivable, less allowance of $5,547 and $6,230 | | | 278,854 | | | | 315,065 | |
| Other receivables, including advances to independent contractors, less allowance of $5,797 and $4,298 | | | 18,149 | | | | 10,083 | |
| Deferred income taxes and other current assets | | | 19,565 | | | | 27,871 | |
| | | | | | | | | |
| Total current assets | | | 426,612 | | | | 475,402 | |
| | | | | | | | | |
| Operating property, less accumulated depreciation and amortization of $124,810 and $106,635 | | | 116,656 | | | | 124,178 | |
| Goodwill | | | 57,470 | | | | 31,134 | |
| Other assets | | | 48,054 | | | | 32,816 | |
| | | | | | | | | |
| Total assets | | $ | 648,792 | | | $ | 663,530 | |
| | | | | | | | | |
| |
LIABILITIES AND EQUITY |
| Current Liabilities | | | | | | | | |
| Cash overdraft | | $ | 28,919 | | | $ | 32,065 | |
| Accounts payable | | | 121,030 | | | | 105,882 | |
| Current maturities of long-term debt | | | 24,585 | | | | 24,693 | |
| Insurance claims | | | 41,627 | | | | 23,545 | |
| Accrued income taxes | | | 9,957 | | | | 12,239 | |
| Other current liabilities | | | 32,517 | | | | 38,161 | |
| | | | | | | | | |
| Total current liabilities | | | 258,635 | | | | 236,585 | |
| | | | | | | | | |
| Long-term debt, excluding current maturities | | | 68,313 | | | | 111,752 | |
| Insurance claims | | | 30,680 | | | | 38,278 | |
| Deferred income taxes | | | 23,013 | | | | 23,779 | |
| Equity | | | | | | | | |
| Landstar System, Inc. and subsidiary shareholders’ equity: | | | | | | | | |
| Common stock, $0.01 par value, authorized 160,000,000 shares, issued 66,255,358 and 66,109,547 shares | | | 663 | | | | 661 | |
| Additional paid-in capital | | | 161,261 | | | | 154,533 | |
| Retained earnings | | | 766,040 | | | | 704,331 | |
| Cost of 16,022,111 and 14,424,887 shares of common stock in treasury | | | (660,446 | ) | | | (605,828 | ) |
| Accumulated other comprehensive income (loss) | | | 498 | | | | (561 | ) |
| | | | | | | | | |
| Total Landstar System, Inc. and subsidiary shareholders’ equity | | | 268,016 | | | | 253,136 | |
| | | | | | | | | |
| Noncontrolling interest | | | 135 | | | | — | |
| | | | | | | | | |
| Total equity | | | 268,151 | | | | 253,136 | |
| | | | | | | | | |
| Total liabilities and equity | | $ | 648,792 | | | $ | 663,530 | |
| | | | | | | | | |
See accompanying notes to consolidated financial statements.
34
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | Dec. 26,
| | | Dec. 27,
| | | Dec. 29,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Revenue | | $ | 2,008,796 | | | $ | 2,643,069 | | | $ | 2,487,277 | |
| Investment income | | | 1,268 | | | | 3,339 | | | | 5,347 | |
| Costs and expenses: | | | | | | | | | | | | |
| Purchased transportation | | | 1,503,520 | | | | 2,033,384 | | | | 1,884,207 | |
| Commissions to agents | | | 160,571 | | | | 203,058 | | | | 200,630 | |
| Other operating costs | | | 29,173 | | | | 28,033 | | | | 28,997 | |
| Insurance and claims | | | 45,918 | | | | 36,374 | | | | 49,832 | |
| Selling, general and administrative | | | 133,612 | | | | 137,758 | | | | 125,177 | |
| Depreciation and amortization | | | 23,528 | | | | 20,960 | | | | 19,088 | |
| | | | | | | | | | | | | |
| Total costs and expenses | | | 1,896,322 | | | | 2,459,567 | | | | 2,307,931 | |
| | | | | | | | | | | | | |
| Operating income | | | 113,742 | | | | 186,841 | | | | 184,693 | |
| Interest and debt expense | | | 4,030 | | | | 7,351 | | | | 6,685 | |
| | | | | | | | | | | | | |
| Income before income taxes | | | 109,712 | | | | 179,490 | | | | 178,008 | |
| Income taxes | | | 39,762 | | | | 68,560 | | | | 68,355 | |
| | | | | | | | | | | | | |
| Net income | | $ | 69,950 | | | $ | 110,930 | | | $ | 109,653 | |
| | | | | | | | | | | | | |
| Less: Net loss attributable to noncontrolling interest | | | (445 | ) | | | — | | | | — | |
| | | | | | | | | | | | | |
| Net income attributable to Landstar System, Inc. and subsidiary | | $ | 70,395 | | | $ | 110,930 | | | $ | 109,653 | |
| | | | | | | | | | | | | |
| Earnings per common share attributable to Landstar System, Inc. and subsidiary | | $ | 1.38 | | | $ | 2.11 | | | $ | 2.01 | |
| | | | | | | | | | | | | |
| Diluted earnings per share attributable to Landstar System, Inc. and subsidiary | | $ | 1.37 | | | $ | 2.10 | | | $ | 1.99 | |
| | | | | | | | | | | | | |
| Average number of shares outstanding: | | | | | | | | | | | | |
| Earnings per common share | | | 51,095,000 | | | | 52,503,000 | | | | 54,681,000 | |
| | | | | | | | | | | | | |
| Diluted earnings per share | | | 51,280,000 | | | | 52,854,000 | | | | 55,156,000 | |
| | | | | | | | | | | | | |
| Dividends paid per common share | | $ | 0.170 | | | $ | 0.155 | | | $ | 0.135 | |
| | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
35
| | | | | | | | | | | | | |
| | | Fiscal Years Ended | |
| | | Dec. 26,
| | | Dec. 27,
| | | Dec. 29,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| OPERATING ACTIVITIES | | | | | | | | | | | | |
| Net income | | $ | 69,950 | | | $ | 110,930 | | | $ | 109,653 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
| Depreciation and amortization of operating property and intangible assets | | | 23,528 | | | | 20,960 | | | | 19,088 | |
| Non-cash interest charges | | | 218 | | | | 196 | | | | 174 | |
| Provisions for losses on trade and other accounts receivable | | | 7,986 | | | | 6,937 | | | | 4,100 | |
| Losses (gains) on sales and disposals of operating property, net | | | (55 | ) | | | 176 | | | | (1,648 | ) |
| Deferred income taxes, net | | | 2,419 | | | | 3,873 | | | | 521 | |
| Stock-based compensation | | | 4,968 | | | | 6,636 | | | | 7,610 | |
| Director compensation paid in common stock | | | — | | | | 634 | | | | 678 | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Decrease (increase) in trade and other accounts receivable | | | 32,780 | | | | (10,657 | ) | | | 7,653 | |
| Decrease (increase) in other assets | | | 8,068 | | | | 28 | | | | (3,207 | ) |
| Decrease in accounts payable | | | (1,634 | ) | | | (11,240 | ) | | | (5,191 | ) |
| Decrease in other liabilities | | | (13,748 | ) | | | (4,813 | ) | | | (3,147 | ) |
| Increase (decrease) in insurance claims | | | 10,484 | | | | (3,971 | ) | | | 4,324 | |
| | | | | | | | | | | | | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 144,964 | | | | 119,689 | | | | 140,608 | |
| | | | | | | | | | | | | |
| INVESTING ACTIVITIES | | | | | | | | | | | | |
| Net change in other short-term investments | | | 28,024 | | | | (7,887 | ) | | | 3,272 | |
| Sales and maturities of investments | | | 15,932 | | | | 13,801 | | | | 44,224 | |
| Purchases of investments | | | (49,965 | ) | | | (6,921 | ) | | | (48,266 | ) |
| Purchases of operating property | | | (2,715 | ) | | | (8,289 | ) | | | (6,514 | ) |
| Proceeds from sales of operating property | | | 841 | | | | 146 | | | | 3,708 | |
| Consideration paid for acquisitions | | | (14,888 | ) | | | — | | | | — | |
| | | | | | | | | | | | | |
| NET CASH USED BY INVESTING ACTIVITIES | | | (22,771 | ) | | | (9,150 | ) | | | (3,576 | ) |
| | | | | | | | | | | | | |
| FINANCING ACTIVITIES | | | | | | | | | | | | |
| Increase (decrease) in cash overdraft | | | (3,146 | ) | | | 6,296 | | | | 334 | |
| Dividends paid | | | (8,686 | ) | | | (8,136 | ) | | | (7,389 | ) |
| Proceeds from exercises of stock options | | | 1,128 | | | | 12,249 | | | | 12,862 | |
| Excess tax benefit on stock option exercises | | | 773 | | | | 2,231 | | | | 3,624 | |
| Borrowings on revolving credit facility | | | 40,000 | | | | 87,000 | | | | 58,000 | |
| Purchases of common stock | | | (55,757 | ) | | | (51,576 | ) | | | (176,590 | ) |
| Capital contribution from noncontrolling interest | | | 580 | | | | — | | | | — | |
| Principal payments on long-term debt and capital lease obligations | | | (110,817 | ) | | | (120,110 | ) | | | (58,614 | ) |
| | | | | | | | | | | | | |
| NET CASH USED BY FINANCING ACTIVITIES | | | (135,925 | ) | | | (72,046 | ) | | | (167,773 | ) |
| | | | | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | 547 | | | | (339 | ) | | | — | |
| | | | | | | | | | | | | |
| Increase (decrease) in cash and cash equivalents | | | (13,185 | ) | | | 38,154 | | | | (30,741 | ) |
| Cash and cash equivalents at beginning of period | | | 98,904 | | | | 60,750 | | | | 91,491 | |
| | | | | | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 85,719 | | | $ | 98,904 | | | $ | 60,750 | |
| | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
36
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Landstar System, Inc. and Subsidiary Shareholders | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | Accumulated
| | | | | | | |
| | | | | | | | | Additional
| | | | | | Treasury
| | | Other
| | | Non-
| | | | |
| | | Common Stock | | | Paid-In
| | | Retained
| | | Stock at Cost | | | Comprehensive
| | | Controlling
| | | | |
| | | Shares | | | Amount | | | Capital | | | Earnings | | | Shares | | | Amount | | | Income (Loss) | | | Interest | | | Total | |
| |
| Balance December 30, 2006 | | | 64,993,143 | | | $ | 650 | | | $ | 108,020 | | | $ | 499,273 | | | | 9,028,009 | | | $ | (377,662 | ) | | $ | (7 | ) | | $ | 0 | | | $ | 230,274 | |
| Net income | | | | | | | | | | | | | | | 109,653 | | | | | | | | | | | | | | | | | | | | 109,653 | |
| Dividends paid ($0.135 per share) | | | | | | | | | | | | | | | (7,389 | ) | | | | | | | | | | | | | | | | | | | (7,389 | ) |
| Purchases of common stock | | | | | | | | | | | | | | | | | | | 4,093,100 | | | | (176,590 | ) | | | | | | | | | | | (176,590 | ) |
| Exercises of stock options, including excess tax benefit | | | 623,663 | | | | 6 | | | | 16,480 | | | | | | | | | | | | | | | | | | | | | | | | 16,486 | |
| Director compensation paid in common stock | | | 13,577 | | | | | | | | 678 | | | | | | | | | | | | | | | | | | | | | | | | 678 | |
| Stock-based compensation | | | | | | | | | | | 7,610 | | | | | | | | | | | | | | | | | | | | | | | | 7,610 | |
Unrealized gain onavailable-for-sale investments, net of income taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | 64 | | | | | | | | 64 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance December 29, 2007 | | | 65,630,383 | | | $ | 656 | | | $ | 132,788 | | | $ | 601,537 | | | | 13,121,109 | | | $ | (554,252 | ) | | $ | 57 | | | $ | 0 | | | $ | 180,786 | |
| Net income | | | | | | | | | | | | | | | 110,930 | | | | | | | | | | | | | | | | | | | | 110,930 | |
| Dividends paid ($0.155 per share) | | | | | | | | | | | | | | | (8,136 | ) | | | | | | | | | | | | | | | | | | | (8,136 | ) |
| Purchases of common stock | | | | | | | | | | | | | | | | | | | 1,303,778 | | | | (51,576 | ) | | | | | | | | | | | (51,576 | ) |
| Exercises of stock options, including excess tax benefit | | | 467,164 | | | | 5 | | | | 14,475 | | | | | | | | | | | | | | | | | | | | | | | | 14,480 | |
| Director compensation paid in common stock | | | 12,000 | | | | | | | | 634 | | | | | | | | | | | | | | | | | | | | | | | | 634 | |
| Stock-based compensation | | | | | | | | | | | 6,636 | | | | | | | | | | | | | | | | | | | | | | | | 6,636 | |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | | | | | (339 | ) | | | | | | | (339 | ) |
Unrealized loss onavailable-for-sale investments, net of income taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | (279 | ) | | | | | | | (279 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance December 27, 2008 | | | 66,109,547 | | | $ | 661 | | | $ | 154,533 | | | $ | 704,331 | | | | 14,424,887 | | | $ | (605,828 | ) | | $ | (561 | ) | | $ | 0 | | | $ | 253,136 | |
| Net income (loss) | | | | | | | | | | | | | | | 70,395 | | | | | | | | | | | | | | | | (445 | ) | | | 69,950 | |
| Dividends paid ($0.170 per share) | | | | | | | | | | | | | | | (8,686 | ) | | | | | | | | | | | | | | | | | | | (8,686 | ) |
| Purchases of common stock | | | | | | | | | | | | | | | | | | | 1,624,547 | | | | (55,757 | ) | | | | | | | | | | | (55,757 | ) |
| Exercises of stock options and issuance of non-vested stock, including excess tax benefit | | | 145,811 | | | | 2 | | | | 1,899 | | | | | | | | | | | | | | | | | | | | | | | | 1,901 | |
| Capital contribution from noncontrolling interest | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 580 | | | | 580 | |
| Consideration for acquisition paid in common stock | | | | | | | | | | | (139 | ) | | | | | | | (27,323 | ) | | | 1,139 | | | | | | | | | | | | 1,000 | |
| Stock-based compensation | | | | | | | | | | | 4,968 | | | | | | | | | | | | | | | | | | | | | | | | 4,968 | |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | | | | | | | | 547 | | | | | | | | 547 | |
Unrealized gain onavailable-for-sale investments, net of income taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | 512 | | | | | | | | 512 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance December 26, 2009 | | | 66,255,358 | | | $ | 663 | | | $ | 161,261 | | | $ | 766,040 | | | | 16,022,111 | | | $ | (660,446 | ) | | $ | 498 | | | $ | 135 | | | $ | 268,151 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
37
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
| |
| (1) | Significant Accounting Policies |
Consolidation
The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary Landstar System Holdings, Inc. (“LSHI”). Landstar System, Inc. and its subsidiary are herein referred to as “Landstar” or the “Company.” Landstar owns, through various subsidiaries, a controlling interest in A3i Acquisition LLC, which in turn owns 100% of A3 Integration, LLC (A3i Acquisition LLC, A3 Integration, LLC and its subsidiaries are collectively referred to herein as “A3i”), a supply chain transportation integration company acquired in the Company’s 2009 fiscal third quarter. Given Landstar’s controlling interest in A3i Acquisition, the accounts of A3i have been consolidated herein and a noncontrolling interest has been recorded for the noncontrolling investor’s interests in the net assets and operations of A3i. Significant inter-company accounts have been eliminated in consolidation.
Estimates
The preparation of the consolidated financial statements requires the use of management’s estimates. Actual results could differ from those estimates.
Fiscal Year
Landstar’s fiscal year is the 52 or 53 week period ending the last Saturday in December.
Revenue Recognition
TheWhen providing the physical transportation of freight, the Company is the primary obligor with respect to freight delivery and assumes the related credit risk. Accordingly, transportation services revenue billed to customers for the physical transportation of freight and the related direct freight expenses of the carrier and global logistics segments are recognized on a gross basis upon completion of freight delivery. In general, when providing transportation management services under afee-for-service basis, the Company does not assume credit risk for billings related to the physical transportation of freight. Accordingly, transportation management fee revenue is recognized net of freight expenses upon completion of freight delivery. Insurance premiums of the insurance segment are recognized over the period earned, which is usually on a monthly basis. Fuel surcharges billed to customers for freight hauled by independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “Business Capacity Owner Independent Contractors” or “BCO Independent Contractors”) are excluded from revenue and paid in entirety to the BCO Independent Contractors.
Insurance Claim Costs
Landstar provides, primarily on an actuarially determined basis, for the estimated costs of cargo, property, casualty, general liability and workers’ compensation claims both reported and for claims incurred but not reported. Landstar retains liability for individual commercial trucking claims incurred prior to June 19, 2003 or subsequent to March 30, 2004, up to $5,000,000 per occurrence. For commercial trucking claims incurred from June 19, 2003 through March 30, 2004, Landstar retains liability up to $10,000,000 per occurrence. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim.
Tires
Tires purchased as part of trailing equipment are capitalized as part of the cost of the equipment. Replacement tires are charged to expense when placed in service.
38
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash and Cash Equivalents
Included in cash and cash equivalents are all investments, except those provided for collateral, with an original maturity of 3 months or less.
InvestmentsTrade and Other Receivables
Investments, all of which areavailable-for-sale, consist of investment-grade bonds having maturities of up to five years. Investments are carried at fair value, with unrealized gainsThe allowance for doubtful accounts for both trade and losses, net of related income taxes, reported as accumulated other comprehensive income. Short-term investments include $8,823,000 in current maturities of investment grade bonds and $14,098,000 of cash equivalents held by the Company’s insurance segment at December 29, 2007. These short-term investments together with $14,939,000receivables represents management’s estimate of the non-current portionamount of investment grade bondsoutstanding receivables that will not be collected. Estimates are used to determine the allowance for doubtful accounts for both trade and $7,770,000 of cash equivalents includedother receivables and are generally based on historical collection results, current economic trends and changes in other assets at
35
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 29, 2007, provide collateral for the $43,254,000 of letters of credit issued to guarantee payment of insurance claims. Based upon quoted market prices, the unrealized gain on these bonds was $88,000 at December 29, 2007 and the unrealized loss on these bonds was $11,000 at December 30, 2006.
Investment income represents the earnings on the insurance segment’s assets. Investment income earned from the assets of the insurance segment are included as a component of operating income as the investing activities and earnings thereon generally comprise a significant portion of the insurance segment’s profitability.terms.
Operating Property
Operating property is recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Trailing equipment is being depreciated over 7 years. Hardware and software included in management information services equipment is generally being depreciated over 3 to 7 years.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price paid over the fair value of the net assets of acquired businesses. The Company has two reporting units within the transportation logistics segment that report goodwill. Goodwill is subject to impairment testing which the Company performs annually. Other intangible assets, which consist primarily of non-contractual customer relationships, developed technology, trademarks and non-compete agreements, are included in other assets on the consolidated balance sheets and are amortized over their estimated useful lives, which range from five to ten years.
Income Taxes
Income tax expense is equal to the current year’s liability for income taxes and a provision for deferred income taxes. Deferred tax assets and liabilities are recorded for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company adopted FIN 48 on January 1, 2007.
Earnings Per Share
Earnings per common share amountsattributable 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 amountsattributable 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 to the average number of common shares and common share equivalents outstanding used to calculate diluted earnings per share (in thousands):
| | | | | | | | | | | | | |
| | | Fiscal Year | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Average number of common shares outstanding | | | 54,681 | | | | 57,854 | | | | 59,199 | |
| Incremental shares from assumed exercises of stock options | | | 475 | | | | 800 | | | | 1,214 | |
| | | | | | | | | | | | | |
| Average number of common shares and common share equivalents outstanding | | | 55,156 | | | | 58,654 | | | | 60,413 | |
| | | | | | | | | | | | | |
For the fiscal years ended December 29, 2007, December 30, 2006 and December 31, 2005, there were 9,000, 5,000 and 470,000, respectively, options outstanding to purchase shares of common stock excluded from the calculation of diluted earnings per share because they were antidilutive.
3639
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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):
| | | | | | | | | | | | | |
| | | Fiscal Year | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Average number of common shares outstanding | | | 51,095 | | | | 52,503 | | | | 54,681 | |
| Incremental shares from assumed exercises of stock options | | | 185 | | | | 351 | | | | 475 | |
| | | | | | | | | | | | | |
| Average number of common shares and common share equivalents outstanding | | | 51,280 | | | | 52,854 | | | | 55,156 | |
| | | | | | | | | | | | | |
For the fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007, there were 1,895,742, 90,000 and 9,000 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.
Share-Based Payments
On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R (“FAS 123R”), Share-Based Payment. The Company adopted FAS 123Restimates the fair value of stock option awards on the date of grant using the modified retrospective method. Under the modified retrospective method, compensation cost is recognized in the financial statements for all share-based payments granted after January 1, 2006 based on the requirements of FAS 123RBlack-Scholes pricing model and based on the requirements of FAS 123 for all unvested awards granted prior to January 1, 2006. The Company recognizes compensation cost for stock option awards expected to vest on a straight linestraight-line basis over the requisite service period for the entire award. Forfeitures are estimated at grant date based on historical experience and anticipated employee turnover. The fair value of each share of non-vested restricted stock is based on the fair value of such share on the date of grant and compensation costs for non-vested restricted stock is recognized on a straight-line basis over the requisite service period for the award.
Foreign Currency Translation
The following table includesAssets and liabilities of the componentsCompany’s Canadian operation 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 comprehensivebusiness that are denominated in a currency other than the functional currency of the operation are recorded in the statements of income for the fiscal years ended December 29, 2007, December 30, 2006 and December 31, 2005 (in thousands):when they occur.
| | | | | | | | | | | | | |
| | | Fiscal Year | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Net income | | $ | 109,653 | | | $ | 113,085 | | | $ | 115,598 | |
Unrealized holding gains/(losses) onavailable-for-sale investments, net of income taxes | | | 64 | | | | 204 | | | | (258 | ) |
| | | | | | | | | | | | | |
| Comprehensive income | | $ | 109,717 | | | $ | 113,289 | | | $ | 115,340 | |
| | | | | | | | | | | | | |
Subsequent Events
The unrealized holding gainCompany has evaluated the impact of subsequent events through February 23, 2010, the date onavailable-for-sale investments during 2007 represents which themark-to-market adjustment of $99,000 net of related income taxes of $35,000. The unrealized holding gain onavailable-for-sale investments during 2006 represents financial statements were available to be issued, and has determined that all subsequent events have been appropriately reflected in themark-to-market adjustment of $316,000 net of related income taxes of $112,000. The unrealized holding loss onavailable-for-sale investments during 2005 represents themark-to-market adjustment of $400,000 net of related income tax benefits of $142,000. accompanying financial statements.
The provisions for income taxes consistedCompany’s primary facility in Jacksonville, Florida (the “Jacksonville Facility”) is leased under a lease agreement that provides the Company with an option to purchase the Jacksonville Facility, including the land and fixtures located thereon, at a fixed price of $21,135,000 in the first quarter of 2010. In January 2010, the Company entered into a contract of sale with its landlord to purchase the Jacksonville Facility in the first quarter of 2010, as is, subject to the satisfaction of certain customary conditions under the terms of the following (in thousands):
| | | | | | | | | | | | | |
| | | Fiscal Year | |
| | | 2007 | | | 2006 | | | 2005 | |
| |
| Current: | | | | | | | | | | | | |
| Federal | | $ | 61,266 | | | $ | 60,599 | | | $ | 65,804 | |
| State | | | 6,568 | | | | 7,417 | | | | 9,095 | |
| | | | | | | | | | | | | |
| | | | 67,834 | | | | 68,016 | | | | 74,899 | |
| Deferred: | | | | | | | | | | | | |
| Federal | | | 296 | | | | 2,650 | | | | (2,104 | ) |
| State | | | 225 | | | | 647 | | | | 85 | |
| | | | | | | | | | | | | |
| | | | 521 | | | | 3,297 | | | | (2,019 | ) |
| | | | | | | | | | | | | |
| Income taxes | | $ | 68,355 | | | $ | 71,313 | | | $ | 72,880 | |
| | | | | | | | | | | | | |
contract of sale. It is expected the purchase will be funded from the Company’s existing cash and cash equivalents or from available funds under the Company’s senior credit facility.
3740
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In the Company’s 2009 fiscal third quarter, the Company completed the acquisitions of (i) National Logistics Management Co. (together with a limited liability company and certain corporate subsidiaries and affiliates, “NLM”) and (ii) A3i. Consideration paid with respect to the acquisitions, net of cash acquired of $2.4 million, was approximately $15.9 million, which included 27,323 shares, or $1.0 million, of common stock of Landstar, subject to certain vesting and other restrictions including restrictions on transfer. Net liabilities acquired were approximately $17.0 million. Identified in the allocation of purchase price was approximately $9.0 million of identifiable intangible assets which are included in other assets on the consolidated balance sheets. The resulting goodwill arising from the acquisitions was approximately $26.3 million, all of which is expected to be deductible for income tax purposes. The results of operations from NLM and A3i are presented as part of the Company’s transportation logistics segment. During 2009, the Company incurred $2,005,000, or $0.02 per common share ($0.02 per diluted share), in one-time costs related to the completion of these acquisitions.
The following table includes the components of comprehensive income for the fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007 (in thousands):
| | | | | | | | | | | | | |
| | | Fiscal Year | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Net income attributable to Landstar System, Inc. and subsidiary | | $ | 70,395 | | | $ | 110,930 | | | $ | 109,653 | |
Unrealized holding gains (losses) onavailable-for-sale investments, net of income taxes | | | 512 | | | | (279 | ) | | | 64 | |
| Foreign currency translation gains (losses) | | | 547 | | | | (339 | ) | | | — | |
| | | | | | | | | | | | | |
| Comprehensive income attributable to Landstar System, Inc. and subsidiary | | $ | 71,454 | | | $ | 110,312 | | | $ | 109,717 | |
| | | | | | | | | | | | | |
The unrealized holding gain onavailable-for-sale investments during 2009 represents themark-to-market adjustment of $791,000 net of related income taxes of $279,000. The unrealized holding loss onavailable-for-sale investments during 2008 represents themark-to-market adjustment of $431,000 net of related income taxes of $152,000. The unrealized holding gain onavailable-for-sale investments during 2007 represents themark-to-market adjustment of $99,000 net of related income taxes of $35,000. The foreign currency translation gain during 2009 represents the unrealized net gain on the translation of the financial statements of the Company’s Canadian operations. The foreign currency translation loss during 2008 represents the unrealized net loss 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 December 26, 2009 of $498,000 represents the unrealized net gain on the translation of the financial statements of the Company’s Canadian operations of $208,000 and the cumulative unrealized holding gains onavailable-for-sale investments, net of income taxes, of $290,000.
Investments consist of investment-grade bonds having maturities of up to five years (the “bond portfolio”). Bonds in the bond portfolio are reported asavailable-for-sale and are carried at fair value. Bonds maturing less than one year from the balance sheet date are included in short-term investments and bonds maturing more than one year from the balance sheet date are included in other assets in the consolidated balance sheets. Management has performed an analysis of the nature of the unrealized losses onavailable-for-sale investments to determine whether such losses areother-than-temporary. Unrealized losses, representing the excess of the
41
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
purchase price of an investment over its market value as of the end of a period, considered to beother-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 illiquidityand/or non-transferability, which are generally based on available market information. Fair value of the bond portfolio was determined using Level 1 inputs related to U.S. Treasury obligations and Level 2 inputs related to investment-grade corporate bonds and direct obligations of U.S. government agencies. Unrealized gains on the bonds in the bond portfolio were $448,000 at December 26, 2009, while unrealized losses on the bonds in the bond portfolio were $343,000 at December 27, 2008. The accumulated unrealized loss onavailable-for-sale investments as of December 27, 2008 was considered by management to be temporary and therefore was reported as a component of equity.
The amortized cost and fair market values of investments are as follows at December 26, 2009 and December 27, 2008 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | | Gross
| | | Gross
| | | Fair
| |
| | | Amortized
| | | Unrealized
| | | Unrealized
| | | Market
| |
| | | Cost | | | Gains | | | Losses | | | Value | |
| |
December 26, 2009 | | | | | | | | | | | | | | | | |
| Corporate bonds and direct obligations of U.S. government agencies | | $ | 39,261 | | | $ | 668 | | | $ | 226 | | | $ | 39,703 | |
| U.S. Treasury obligations | | | 11,489 | | | | 6 | | | | — | | | | 11,495 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 50,750 | | | $ | 674 | | | $ | 226 | | | $ | 51,198 | |
| | | | | | | | | | | | | | | | | |
December 27, 2008 | | | | | | | | | | | | | | | | |
| Corporate bonds and direct obligations of U.S. government agencies | | $ | 15,135 | | | $ | 166 | | | $ | 599 | | | $ | 14,702 | |
| U.S. Treasury obligations | | | 1,642 | | | | 90 | | | | — | | | | 1,732 | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 16,777 | | | $ | 256 | | | $ | 599 | | | $ | 16,434 | |
| | | | | | | | | | | | | | | | | |
For thoseavailable-for-sale investments with unrealized losses at December 26, 2009 and December 27, 2008, the following table summarizes the duration of the unrealized loss (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less Than 12 Months | | 12 Months or Longer | | Total |
| | | Fair Market
| | Unrealized
| | Fair Market
| | Unrealized
| | Fair Market
| | | | Unrealized
|
| | | Value | | Loss | | Value | | Loss | | Value | | | | Loss |
| |
December 26, 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate bonds and direct obligations of U.S. government agencies | | $ | 1,989 | | | $ | 10 | | | $ | 1,192 | | | $ | 216 | | | $ | 3,181 | | | | | | | $ | 226 | |
December 27, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate bonds and direct obligations of U.S. government agencies | | $ | 5,473 | | | $ | 139 | | | $ | 2,491 | | | $ | 460 | | | $ | 7,964 | | | | | | | $ | 599 | |
Short-term investments include $22,595,000 in current maturities of investment-grade bonds and $1,730,000 of cash equivalents held by the Company’s insurance segment at December 26, 2009. These short-term investments together with $25,492,000 of the non-current portion of investment-grade bonds at
42
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 26, 2009, provide collateral for the $45,008,000 of letters of credit issued to guarantee payment of insurance claims.
Investment income represents the earnings on the insurance segment’s assets. Investment income earned from the assets of the insurance segment are included as a component of operating income as the investing activities and earnings thereon generally comprise a significant portion of the insurance segment’s profitability.
The provisions for income taxes consisted of the following (in thousands):
| | | | | | | | | | | | | |
| | | Fiscal Year | |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Current: | | | | | | | | | | | | |
| Federal | | $ | 35,878 | | | $ | 57,249 | | | $ | 61,266 | |
| State | | | 656 | | | | 6,267 | | | | 6,568 | |
| Canadian | | | 809 | | | | 1,171 | | | | — | |
| | | | | | | | | | | | | |
| | | $ | 37,343 | | | $ | 64,687 | | | $ | 67,834 | |
| | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| Federal | | $ | 2,035 | | | $ | 3,438 | | | $ | 296 | |
| State | | | 384 | | | | 435 | | | | 225 | |
| | | | | | | | | | | | | |
| | | | 2,419 | | | | 3,873 | | | | 521 | |
| | | | | | | | | | | | | |
| Income taxes | | $ | 39,762 | | | $ | 68,560 | | | $ | 68,355 | |
| | | | | | | | | | | | | |
Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities consisted of the following (in thousands):
| | | | | | | | | | |
| | | | | | | | | | | Dec. 26,
| | Dec. 27,
| |
| | | Dec. 29, 2007 | | Dec. 30, 2006 | | | 2009 | | 2008 | |
| |
| Deferred tax assets: | | | | | | | | | | | | | | | | |
| Receivable valuations | | $ | 3,927 | | | $ | 3,847 | | | $ | 4,787 | | | $ | 5,401 | |
| Share-based payments | | | 4,554 | | | | 3,989 | | | | 5,426 | | | | 5,050 | |
| Self-insured claims | | | 7,358 | | | | 4,081 | | | | 5,288 | | | | 6,782 | |
| Other | | | 3,201 | | | | 4,562 | | | | 5,938 | | | | 2,807 | |
| | | | | | | | | | | |
| | | $ | 19,040 | | | $ | 16,479 | | | $ | 21,439 | | | $ | 20,040 | |
| | | | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | | | | | | | | | |
| Operating property | | $ | 21,273 | | | $ | 18,718 | | | $ | 27,433 | | | $ | 25,758 | |
| Goodwill | | | 5,509 | | | | 4,982 | | |
| Other | | | | 8,040 | | | | 5,897 | |
| | | | | | | | | | | |
| | | $ | 26,782 | | | $ | 23,700 | | | $ | 35,473 | | | $ | 31,655 | |
| | | | | | | | | | | |
| Net deferred tax liability | | $ | 7,742 | | | $ | 7,221 | | | $ | 14,034 | | | $ | 11,615 | |
| | | | | | | | | | | |
43
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the differences between income taxes calculated at the federal income tax rate of 35% on income before income taxes and the provisions for income taxes (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Year | | | Fiscal Year | |
| | | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 | |
| |
| Income taxes at federal income tax rate | | $ | 62,303 | | | $ | 64,539 | | | $ | 65,967 | | | $ | 38,399 | | | $ | 62,822 | | | $ | 62,303 | |
| State income taxes, net of federal income tax benefit | | | 4,415 | | | | 5,234 | | | | 5,967 | | | | 676 | | | | 4,356 | | | | 4,415 | |
| Meals and entertainment exclusion | | | 802 | | | | 720 | | | | 229 | | | | 870 | | | | 493 | | | | 802 | |
| Share-based payments | | | 598 | | | | 443 | | | | 457 | | | | 636 | | | | 515 | | | | 598 | |
| Other, net | | | 237 | | | | 377 | | | | 260 | | | | (819 | ) | | | 374 | | | | 237 | |
| | | | | | | | | | | | | | | |
| Income taxes | | $ | 68,355 | | | $ | 71,313 | | | $ | 72,880 | | | $ | 39,762 | | | $ | 68,560 | | | $ | 68,355 | |
| | | | | | | | | | | | | | | |
As of December 29, 2007,26, 2009, the Company had $12,326,000$8,761,000 of net unrecognized tax benefits representing the provision for the uncertainty of certain tax positions plus a component of interest and penalties. The implementation of FIN 48 did not have a significant impact on the provision for unrecognized tax benefits as of December 31, 2006. Estimated interest and penalties on the provision for the uncertainty of certain tax positions is included in income tax expense. At December 29, 200726, 2009 and December 27, 2008 there was $6,331,000$3,852,000 and $6,186,000, respectively, accrued for estimated interest and penalties related to the uncertainty of certain tax positions. During fiscal year 2007, the Company recognized $1,190,000 of expense for estimated interest and penalties related to the uncertainty of certain tax positions. The Company does not currently anticipate any significant increase or decrease to the unrecognized tax benefit during 2008.2010.
The Company files a consolidated U.S. federal income tax return. The Company or its subsidiaries file state tax returns in the majority of the U.S. state tax jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to U.S. federal or state income tax examinations by tax authorities for 2005 and prior years. At the end of 2007, the Company formed a wholly owned Canadian subsidiary, Landstar Canada, Inc. which is subject to Canadian income and other taxes.
The following table summarizes the rollforward of the total amounts of gross unrecognized tax benefits for fiscal years prior to 2003.2009 and 2008 (in thousands):
| | | | | | | | | |
| | | Fiscal Year | |
| | | 2009 | | | 2008 | |
| |
| Gross unrecognized tax benefits — beginning of the year | | $ | 16,110 | | | $ | 16,401 | |
| Gross increases related to current year tax positions | | | 635 | | | | 2,161 | |
| Gross increases related to prior year tax positions | | | 2,570 | | | | 1,759 | |
| Gross decreases related to prior year tax positions | | | (3,420 | ) | | | (1,163 | ) |
| Settlements | | | (381 | ) | | | (352 | ) |
| Lapse of statute of limitations | | | (3,548 | ) | | | (2,696 | ) |
| | | | | | | | | |
| Gross unrecognized tax benefits — end of the year | | $ | 11,966 | | | $ | 16,110 | |
| | | | | | | | | |
Landstar paid income taxes of $32,913,000 in 2009, $63,712,000 in 2008 and $64,366,000 in 2007.
3844
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the rollforward of the total amounts of gross unrecognized tax benefits (in thousands):
| | | | | | | | | |
| Gross unrecognized tax benefits January 1, 2007 | | | | | | $ | 15,175 | |
| Gross increases related to current year tax positions | | | | | | | 2,036 | |
| Gross increases related to prior year tax positions | | | | | | | 1,957 | |
| Gross decreases related to prior year tax positions | | | | | | | (1,511 | ) |
| Lapse of statute of limitations | | | | | | | (1,256 | ) |
| | | | | | | | | |
| Gross unrecognized tax benefits December 29, 2007 | | | | | | $ | 16,401 | |
| | | | | | | | | |
Landstar paid income taxes of $64,366,000 in 2007, $67,062,000 in 2006 and $65,367,000 in 2005.
| |
(4)(6) | Operating Property |
Operating property is summarized as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Dec. 29,
| | Dec. 30,
| | | Dec. 26,
| | Dec. 27,
| |
| | | 2007 | | 2006 | | | 2009 | | 2008 | |
| |
| Land | | $ | 1,921 | | | $ | 1,921 | | | $ | 1,921 | | | $ | 1,921 | |
| Leasehold improvements | | | 9,384 | | | | 8,955 | | | | 9,749 | | | | 9,654 | |
| Buildings and improvements | | | 8,181 | | | | 7,741 | | | | 8,218 | | | | 8,206 | |
| Trailing equipment | | | 167,207 | | | | 140,426 | | | | 183,247 | | | | 173,254 | |
| Other equipment | | | 33,960 | | | | 29,852 | | | | 38,331 | | | | 37,778 | |
| | | | | | | | | | | |
| | | | 220,653 | | | | 188,895 | | | | 241,466 | | | | 230,813 | |
| Less accumulated depreciation and amortization | | | 88,284 | | | | 77,938 | | | | 124,810 | | | | 106,635 | |
| | | | | | | | | | | |
| | | $ | 132,369 | | | $ | 110,957 | | | $ | 116,656 | | | $ | 124,178 | |
| | | | | | | | | | | |
Included above is $132,456,000$127,684,000 in 20072009 and $99,107,000$123,733,000 in 20062008 of operating property under capital leases, $102,680,000$81,722,000 and $80,707,000,$88,054,000, respectively, net of accumulated amortization. Landstar acquired operating property by entering into capital leases in the amount of $12,284,000 in 2009, $4,802,000 in 2008 and $36,046,000 in 2007, $36,594,000 in 2006 and $28,512,000 in 2005.2007.
Landstar sponsors an Internal Revenue Code section 401(k) defined contribution plan for the benefit of full-time employees who have completed one year of service. Eligible employees make voluntary contributions up to 75% of their base salary, subject to certain limitations. Landstar contributes an amount equal to 100% of the first 3% and 50% of the next 2% of such contributions, subject to certain limitations.
The expense for the Company-sponsored defined contribution plan included in selling, general and administrative expense was $1,598,000 in 2009, $1,571,000 in 2008 and $1,461,000 in 2007, $1,367,0002007.
Long-term debt is summarized as follows (in thousands):
| | | | | | | | | |
| | | Dec. 26,
| | | Dec. 27,
| |
| | | 2009 | | | 2008 | |
| |
| Capital leases | | $ | 52,898 | | | $ | 66,445 | |
| Revolving credit facility | | | 40,000 | | | | 70,000 | |
| | | | | | | | | |
| | | | 92,898 | | | | 136,445 | |
| Less current maturities | | | 24,585 | | | | 24,693 | |
| | | | | | | | | |
| Total long-term debt | | $ | 68,313 | | | $ | 111,752 | |
| | | | | | | | | |
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 2006 and $1,312,000the form of a revolving credit facility, $75,000,000 of which may be utilized in 2005.the form of letter of credit guarantees. Borrowings under the Credit Agreement are unsecured, however, all but two of the Company’s subsidiaries guarantee the obligations under the Credit Agreement. All amounts outstanding under the Credit Agreement are payable on June 27, 2013, the expiration of the Credit Agreement.
3945
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Long-term debt is summarized as follows (in thousands):
| | | | | | | | | |
| | | Dec. 29,
| | | Dec. 30,
| |
| | | 2007 | | | 2006 | |
| |
| Capital leases | | $ | 84,753 | | | $ | 69,321 | |
| Revolving credit facility | | | 80,000 | | | | 60,000 | |
| | | | | | | | | |
| | | | 164,753 | | | | 129,321 | |
| Less current maturities | | | 23,155 | | | | 18,730 | |
| | | | | | | | | |
| Total long-term debt | | $ | 141,598 | | | $ | 110,591 | |
| | | | | | | | | |
On July 8, 2004, Landstar renegotiated its existing credit agreement with a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the “Fourth Amended and Restated Credit Agreement”). The Fourth Amended and Restated Credit Agreement, which expires on July 8, 2009, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees.
Borrowings under the Fourth Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar,the Company, either (i) the greatestgreater of (a) the prime rate as publicly announced from time to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reservesN.A. and FDIC assessment costs plus 1% and (c)(b) the federal funds effective rate plus1/2% 0.5%, or, (ii) the rate at the time offered to JPMorgan Chase Bank, N.A. in the Eurodollar market for amounts and periods comparable to the relevant loan plus, in either case, a margin that is determined based on the level of the Company’s Leverage Ratio, as defined in the Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity. As of December 29, 2007, the margin was equal to 62.5/100 of 1%.
The unused portion of the Fourth Amended and Restatedrevolving credit facility under the Credit Agreement carries a commitment fee determined based on the level of the Company’s Leverage Ratio, as therein defined. As of December 29, 2007, theThe commitment fee for the unused portion of the Fourth Amended and Restatedrevolving credit facility under the Credit Agreement was 0.20%. Atranges from .175% to .350%, based on achieving certain levels of the Leverage Ratio. As of December 29, 2007,26, 2009, the weighted average interest rate on borrowings outstanding under the Fourth Amended and Restated Credit Agreement was 5.92%1.12%. Based on the borrowing rates in the Fourth Amended and Restated Credit Agreement and the repayment terms, the fair value of the outstanding borrowings under the Fourth Amended and Restated Credit Agreement was estimated to approximate carrying value.
The Fourth Amended and Restated Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness, the incurrence of operating or capital lease obligations and the purchase of operating property.indebtedness. The Fourth Amended and Restated Credit Agreement also requires Landstar to meet certain financial tests. LandstarCompany is required to, among other things, maintain a minimum levels of Consolidated Net Worth and Fixed Charge Coverage and limit its borrowings to a specified ratio of indebtedness to earnings before interest, taxes, depreciation and amortization (the “Leverage Ratio”),Ratio, as each is defined in the Fourth AmendedCredit Agreement, and Restatedmaintain a Leverage Ratio 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 Fourth Amended and Restated Credit Agreement. The Fourth Amended and Restated
Interest on borrowings under the Credit Agreement providesis based on interest rates that vary with changes in the Company maintain a minimum Consolidated Net Worthrate offered to JPMorgan Chase Bank, N.A. in the Eurodollar market for amounts and periods comparable to the relevant loan and, therefore, borrowings under the Company’s senior credit facility approximate fair value. Interest on the Company’s capital lease obligations is based on interest rates that approximate currently available interest rates and, therefore, indebtedness under the Company’s capital lease obligations approximates fair value.
Landstar paid interest of $80,000,000. Under the most restrictive covenant, the Fixed Charge Coverage, fixed charges were $74,580,000 lower than the maximum amount allowed at December 29,$4,398,000 in 2009, $7,904,000 in 2008 and $7,518,000 in 2007.
4046
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s Fourth Amended and Restated Credit Agreement provides for a restriction on cash dividends on the Company’s capital stock only to the extent there is an event of default under the Fourth Amended and Restated Credit Agreement.
The Fourth Amended and Restated Credit Agreement provides for an event of default related to a person or group acquiring 25% or more of the outstanding capital stock of the Company or obtaining the power to elect a majority of the Company’s directors.
Borrowings under the Fourth Amended and Restated Credit Agreement are unsecured, however, Landstar System, Inc., LSHI and all but two subsidiaries guarantee the obligations under the Fourth Amended and Restated Credit Agreement.
Landstar paid interest of $7,518,000 in 2007, $8,135,000 in 2006 and $5,040,000 in 2005.
The future minimum lease payments under all noncancelable leases at December 29, 2007,26, 2009, principally for trailing equipment and the Company’s headquarters facility in Jacksonville, Florida, are shown in the following table (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Capital
| | Operating
| | | Capital
| | Operating
| |
| | | Leases | | Leases | | | Leases | | Leases | |
| |
| 2008 | | $ | 27,079 | | | $ | 7,633 | | |
| 2009 | | | 26,150 | | | | 4,377 | | |
| 2010 | | | 20,726 | | | | 3,187 | | | $ | 26,661 | | | $ | 4,134 | |
| 2011 | | | 14,393 | | | | 2,278 | | | | 20,274 | | | | 3,060 | |
| 2012 | | | 5,384 | | | | 2,035 | | | | 7,970 | | | | 2,628 | |
| 2013 | | | | 1,022 | | | | 2,392 | |
| 2014 | | | | 299 | | | | 2,018 | |
| Thereafter | | | | | | | 3,901 | | | | — | | | | — | |
| | | | | | | | | | | |
| | | | 93,732 | | | $ | 23,411 | | | | 56,226 | | | $ | 14,232 | |
| | | | | | | |
| | | |
| Less amount representing interest (4.3% to 5.9%) | | | 8,979 | | | | | | |
| Less amount representing interest (3.1% to 5.9%) | | | | 3,328 | | | | | |
| | | | | | | |
| Present value of minimum lease payments | | $ | 84,753 | | | | | | | $ | 52,898 | | | | | |
| | | | | | | |
Total rent expense, net of sublease income, was $2,664,000 in 2009, $5,744,000 in 2008 and $9,893,000 in 2007, $27,624,0002007.
In January 2010, the Company entered into a contract of sale with the landlord of its Jacksonville, FL facility to purchase its headquarters in 2006the first quarter of 2010. The purchase price of the facility, including the land and $17,969,000 in 2005.fixtures located thereon, is $21,135,000. Included above under operating leases is $10,006,000 of rental payments for the Jacksonville Facility. If the purchase is completed, the remaining operating lease obligations on this facility will no longer be payable.
| |
(8)(10) | Stock Compensation PlansShare-Based Payment Arrangements |
Share-Based Payment ArrangementsEmployee and Director Equity Plans
As of December 29, 2007, the Company had two employee stock option plans and one stock option plan for members of itsThe Company’s Board of Directors amended and restated the Company’s 2002 Employee Stock Option Plan. As amended and restated, the 2002 Employee Stock Option Plan is now called the Amended and Restated 2002 Employee Stock Option and Stock Incentive Plan (the “Plans”“ESOSIP”). Amounts recognizedThe ESOSIP was approved by vote of the Company’s shareholders at the Annual Meeting of Stockholders on April 30, 2009. The amendment and restatement of the ESOSIP, among other things, provides the Compensation Committee of the Company’s Board of Directors the power to grant equity and equity-based awards in addition to stock options, including restricted stock, stock appreciation rights, performance shares and other stock-based awards. It also extended the financial statementsterm of the ESOSIP to 10 years after the date it was amended and restated by the Company’s Board of Directors for all awards, except for incentive stock options which may not be granted after the tenth anniversary of the date the 2002 Employee Stock Option Plan was originally adopted by the Board.
In revising the ESOSIP, the Company did not increase the number of shares available for grant under the 2002 Employee Stock Option Plan. As originally adopted, 800,000 shares were authorized for issuance. Through the adjustment provisions of the 2002 Employee Stock Option Plan, to reflect stock splits with respect to these Plans are as follows (in thousands):
| | | | | | | | | | | | | |
| | | Fiscal Years | |
| | | Dec. 29, 2007 | | | Dec. 30, 2006 | | | Dec. 31, 2005 | |
| |
| Total cost of the Plans during the period | | $ | 7,610 | | | $ | 6,908 | | | $ | 6,260 | |
| Amount of related income tax benefit recognized during the period | | | 2,187 | | | | 2,169 | | | | 1,902 | |
| | | | | | | | | | | | | |
| Net cost of the Plans during the period | | $ | 5,423 | | | $ | 4,739 | | | $ | 4,358 | |
| | | | | | | | | | | | | |
the Company’s common stock, the number of shares authorized for issuance had been adjusted to be 6,400,000 shares. Awards of restricted stock, performance shares or other stock-based awards now authorized under the ESOSIP will be made from the existing pool of shares available under the 2002 Employee Stock Option Plan. Moreover, to the extent that the awards of restricted stock, performance shares or other stock-based awards provide the recipient with the “full value” of the shares, and the settlement of an existing
4147
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Employee and Director Stock Option Plansobligation is not otherwise payable in cash, each share granted will count as two shares against the share limit in the ESOSIP. Certain provisions in the agreements for awards of stock options allow for the automatic vesting of outstanding stock options if there is a change in control for the Company.
UnderAs of December 26, 2009, the 1993 Stock Option Plan, as amended,Company had an employee stock option plan, the Compensation CommitteeESOSIP and one stock option plan for members of theits Board of Directors was authorized to grant(the “Plans”). No further grants can be made under the employee stock option plan as its term for granting stock options to Company employees to purchase up to 4,460,000 shares of common stock. Under the 2002 Employee Stock Option Plan, the Compensation Committee of the Board of Directors is authorized to grant options to Company employees to purchase up to 6,400,000 shares of common stock. Under the 1994 Directors’ Stock Option Plan, as amended (the “DSOP”), options to purchase up to 420,000 shares of common stock were authorizedhas expired. In addition, no further grants are to be granted to outsidemade under the stock option plan for members of the Board of Directors upon election or re-electionDirectors. Amounts recognized in the financial statements with respect to the Board of Directors. Effective May 15, 2003, no further grants will be made under the DSOP. Also, no further grants will be made under the 1993 Stock Option Planthese Plans are as it has expired.follows (in thousands):
| | | | | | | | | | | | | |
| | | Fiscal Years | |
| | | Dec. 26,
| | | Dec. 27,
| | | Dec. 29,
| |
| | | 2009 | | | 2008 | | | 2007 | |
| |
| Total cost of the Plans during the period | | $ | 4,968 | | | $ | 6,636 | | | $ | 7,610 | |
| Amount of related income tax benefit recognized during the period | | | 1,163 | | | | 1,973 | | | | 2,187 | |
| | | | | | | | | | | | | |
| Net cost of the Plans during the period | | $ | 3,805 | | | $ | 4,663 | | | $ | 5,423 | |
| | | | | | | | | | | | | |
Options granted under the Plans generally become exercisable in either three or five equal annual installments commencing on the first anniversary of the date of grant or vest 100% four and one-half years from the date of grant or 100% on the third or fifth anniversary from the date of grant, subject to acceleration in certain circumstances. All options granted under the Plans expire on the tenth anniversary of the date of grant. Under the Plans, the exercise price of each option equals the fair market value of the Company’s common stock on the date of grant. As of December 29, 2007,26, 2009, there were 5,839,7085,142,202 shares of the Company’s common stock reserved for issuance upon exercise of options granted and to be granted under the Plans.
The fair value of each option grant on its grant date was calculated using the Black-Scholes option pricing model with the following weighted average assumptions for grants made in 2007, 20062009, 2008 and 2005:2007:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 | |
| |
| Expected volatility | | | 33.0 | % | | | 34.0 | % | | | 31.0 | % | | | 38.0 | % | | | 33.0 | % | | | 33.0 | % |
| Expected dividend yield | | | 0.3 | % | | | 0.3 | % | | | 0.0 | % | | | 0.400 | % | | | 0.375 | % | | | 0.300 | % |
| Risk-free interest rate | | | 4.75 | % | | | 4.75 | % | | | 4.50 | % | | | 1.50 | % | | | 3.00 | % | | | 4.75 | % |
| Expected lives (in years) | | | 4.2 | | | | 4.5 | | | | 5.0 | | | | 4.4 | | | | 4.1 | | | | 4.2 | |
The Company utilizes historical data, including exercise patterns and employee departure behavior, in estimating the term options will be outstanding. Expected volatility was based on historical volatility and other factors, such as expected changes in volatility arising from planned changes to the 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 2009, 2008 and 2007 2006was $12.30, $12.60 and 2005 was $14.26, $15.33 and $12.76, respectively.
The total intrinsic value of stock options exercised during 2009, 2008 and 2007 2006was $3,816,000, $11,587,000 and 2005 was $16,616,000, $26,411,000 and $27,162,000, respectively. At December 29, 2007,26, 2009, the total intrinsic value of stock options outstanding was $25,853,000.$7,331,000. At December 29, 2007,26, 2009, the total intrinsic value of options outstanding and exercisable was $13,554,000.$8,954,000.
As of December 29, 2007,26, 2009, there was $8,795,000$11,321,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The unrecognized compensation cost related to these non-vested options is expected to be recognized over a weighted average period of 2.43.1 years.
4248
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
InformationThe following table summarizes information regarding the Company’s stock option plans is as follows:options under the Plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | | Options Exercisable | | | Options Outstanding | | Options Exercisable | |
| | | | | Weighted Average
| | | | Weighted Average
| | | | | Weighted Average
| | | | Weighted Average
| |
| | | | | Exercise Price
| | | | Exercise price
| | | | | Exercise Price
| | | | Exercise Price
| |
| | | Shares | | per Share | | Shares | | Per Share | | | Shares | | per Share | | Shares | | per Share | |
| | |
| Options at December 25, 2004 | | | 3,115,764 | | | $ | 12.31 | | | | 664,324 | | | $ | 8.56 | | |
| Granted | | | 683,000 | | | $ | 35.77 | | | | | | | | | | |
| Exercised | | | (991,712 | ) | | $ | 9.29 | | | | | | | | | | |
| Forfeited | | | (12,400 | ) | | $ | 22.31 | | | | | | | | | | |
| | | | | |
| Options at December 31, 2005 | | | 2,794,652 | | | $ | 19.07 | | | | 855,816 | | | $ | 10.37 | | |
| Granted | | | 650,000 | | | $ | 43.61 | | | | | | | | | | |
| Exercised | | | (835,241 | ) | | $ | 12.61 | | | | | | | | | | |
| Forfeited | | | (42,840 | ) | | $ | 21.14 | | | | | | | | | | |
| | | | |
| Options at December 30, 2006 | | | 2,566,571 | | | $ | 27.35 | | | | 779,739 | | | $ | 16.29 | | | | 2,566,571 | | | $ | 27.35 | | | | 779,739 | | | $ | 16.29 | |
| Granted | | | 275,500 | | | $ | 43.00 | | | | | | | | | | | | 275,500 | | | $ | 43.00 | | | | | | | | | |
| Exercised | | | (623,663 | ) | | $ | 20.62 | | | | | | | | | | | | (623,663 | ) | | $ | 20.62 | | | | | | | | | |
| Forfeited | | | (20,100 | ) | | $ | 39.96 | | | | | | | | | | | | (19,100 | ) | | $ | 39.73 | | | | | | | | | |
| | | | | | | |
| Options at December 29, 2007 | | | 2,198,308 | | | $ | 31.10 | | | | 747,626 | | | $ | 24.73 | | | | 2,199,308 | | | $ | 31.11 | | | | 747,626 | | | $ | 24.73 | |
| Granted | | | | 777,500 | | | $ | 42.30 | | | | | | | | | |
| Exercised | | | | (467,164 | ) | | $ | 26.22 | | | | | | | | | |
| Forfeited | | | | (4,000 | ) | | $ | 44.63 | | | | | | | | | |
| | | | | | | |
| Options at December 27, 2008 | | | | 2,505,644 | | | $ | 35.47 | | | | 822,211 | | | $ | 30.75 | |
| Granted | | | | 367,000 | | | $ | 38.20 | | | | | | | | | |
| Exercised | | | | (207,342 | ) | | $ | 19.31 | | | | | | | | | |
| Forfeited | | | | (107,500 | ) | | $ | 42.77 | | | | | | | | | |
| | | | | |
| Options at December 26, 2009 | | | | 2,557,802 | | | $ | 36.86 | | | | 1,225,802 | | | $ | 32.43 | |
| | | | | |
The following tables summarize stock options outstanding and exercisable at December 29, 2007:26, 2009:
| | | | | | | | | | | | | |
| | | Options Outstanding | |
| | | Number
| | | Weighted Average
| | | Weighted Average
| |
| | | Outstanding
| | | Remaining Contractual
| | | Exercise Price
| |
Range of Exercise Prices per Share | | Dec. 29, 2007 | | | Life (Years) | | | per Share | |
| |
| $ 7.11 — $10.00 | | | 223,000 | | | | 3.1 | | | $ | 7.82 | |
| $10.01 — $15.00 | | | 252,960 | | | | 4.9 | | | $ | 13.55 | |
| $15.01 — $25.00 | | | 236,000 | | | | 6.0 | | | $ | 19.25 | |
| $25.01 — $35.00 | | | 292,001 | | | | 6.9 | | | $ | 29.79 | |
| $35.01 — $40.00 | | | 370,001 | | | | 7.3 | | | $ | 37.47 | |
| $40.01 — $44.00 | | | 617,846 | | | | 8.1 | | | $ | 43.57 | |
| $44.01 — $46.83 | | | 206,500 | | | | 9.1 | | | $ | 44.40 | |
| | | | | | | | | | | | | |
| | | | 2,198,308 | | | | 6.8 | | | $ | 31.10 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Options Outstanding | |
| | | Number
| | | Weighted Average
| | | Weighted Average
| |
| | | Outstanding
| | | Remaining Contractual
| | | Exercise Price
| |
Range of Exercise Prices Per Share | | Dec. 26, 2009 | | | Life (Years) | | | per Share | |
| |
| $ 8.08 - $10.00 | | | 73,800 | | | | 1.4 | | | $ | 8.25 | |
| $10.01 - $15.00 | | | 122,776 | | | | 2.9 | | | $ | 13.67 | |
| $15.01 - $25.00 | | | 191,000 | | | | 4.0 | | | $ | 19.37 | |
| $25.01 - $35.00 | | | 166,979 | | | | 5.0 | | | $ | 31.29 | |
| $35.01 - $40.00 | | | 600,167 | | | | 7.7 | | | $ | 37.96 | |
| $40.01 - $44.00 | | | 1,134,580 | | | | 7.3 | | | $ | 42.36 | |
| $44.01 - $48.15 | | | 268,500 | | | | 7.4 | | | $ | 45.56 | |
| | | | | | | | | | | | | |
| | | | 2,557,802 | | | | 6.6 | | | $ | 36.86 | |
| | | | | | | | | | | | | |
| | | | | | | | | |
| | | Options Exercisable | |
| | | Number
| | | Weighted Average
| |
| | | Exercisable
| | | Exercise Price
| |
Range of Exercise Prices per Share | | Dec. 29, 2007 | | | per Share | |
| |
| $ 7.11 — $10.00 | | | 223,000 | | | $ | 7.82 | |
| $10.01 — $15.00 | | | 150,240 | | | $ | 13.47 | |
| $15.01 — $25.00 | | | 2,000 | | | $ | 20.21 | |
| $25.01 — $35.00 | | | 55,268 | | | $ | 32.74 | |
| $35.01 — $40.00 | | | 153,334 | | | $ | 37.31 | |
| $40.01 — $43.66 | | | 163,784 | | | $ | 43.65 | |
| | | | | | | | | |
| | | | 747,626 | | | $ | 24.73 | |
| | | | | | | | | |
| | | | | | | | | | | | | |
| | | Options Exercisable | |
| | | Number
| | | Weighted Average
| | | Weighted Average
| |
| | | Exercisable
| | | Remaining Contractual
| | | Exercise Price
| |
Range of Exercise Prices Per Share | | Dec. 26, 2009 | | | Life (Years) | | | per Share | |
| |
| $ 8.08 - $10.00 | | | 73,800 | | | | 1.4 | | | $ | 8.25 | |
| $10.01 - $15.00 | | | 122,776 | | | | 2.9 | | | $ | 13.67 | |
| $15.01 - $25.00 | | | 191,000 | | | | 4.0 | | | $ | 19.37 | |
| $25.01 - $35.00 | | | 139,779 | | | | 5.0 | | | $ | 31.13 | |
| $35.01 - $40.00 | | | 178,667 | | | | 5.0 | | | $ | 37.33 | |
| $40.01 - $44.00 | | | 415,780 | | | | 6.3 | | | $ | 43.44 | |
| $44.01 - $48.15 | | | 104,000 | | | | 7.3 | | | $ | 44.97 | |
| | | | | | | | | | | | | |
| | | | 1,225,802 | | | | 5.1 | | | $ | 32.43 | |
| | | | | | | | | | | | | |
4349
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 26, 2009, there were 11,500 shares of common stock of the Company, subject to certain vesting and other restrictions including restrictions on transfer, issued under the ESOSIP and outstanding. The fair value of each share of non-vested restricted stock issued under the ESOSIP is based on the fair value of a share of the Company’s common stock on the date of grant. During 2009, 11,500 shares of restricted stock were issued under the ESOSIP with a grant date fair value of $400,000, or $34.82 per share. None of these shares vested or forfeited during 2009. As of December 26, 2009, there was $366,000 of total unrecognized compensation cost related to non-vested shares 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 4.6 years.
Directors’ Stock Compensation Plan
Under the Directors’ Stock Compensation Plan, outside members of the Board of Directors who are elected or re-elected to the Board will receive 6,000 shares of common stock of the Company, subject to certain restrictions including restrictions on transfer. The Company issued 12,000 6,000 and 6,000,13,577, respectively, shares of the Company’s common stock to members of the Board of Directors upon such members’ re-election at the 2007, 20062008 and 20052007 annual stockholders’ meetings. On July 19,During 2008 and 2007, 1,577 shares of the Company’s common stock were issued to a member of the Board of Directors upon such member’s election to the Board of Directors. During 2007, 2006 and 2005, the Company reported $678,000, $265,000$634,000 and $193,000,$678,000, respectively, in compensation expense representing the fair market value of these share awards. There were no such shares issued in 2009. As of December 29, 2007,26, 2009, there were 150,423138,423 shares of the Company’s common stock reserved for issuance upon the grant of common stock under the Directors’ Stock Compensation Plan.
| |
(9)(11) | Shareholders’ Equity |
On August 3, 2006,July 16, 2008, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to 2,000,000 shares of its common stock from time to time in the open market and in privately negotiated transactions. During its 2007 second2009 fourth quarter, the Company completed the purchase of shares authorized for purchase under this program. On April 19, 2007, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase an additional 2,000,000 shares of its common stock from time to time in the open market and in privately negotiated transactions. During its third fiscal quarter, the Company completed the purchase of shares authorized for purchase under this program. On August 27, 2007,January 28, 2009, Landstar System, Inc. announced that it had been authorized by its Board of Directors to purchase up to 2,000,000an additional 1,569,377 shares of its common stock from time to time in the open market and in privately negotiated transactions. As of December 29, 2007,26, 2009, Landstar may purchase an additional 734,4011,375,453 shares of its common stock under its most recently authorized stock purchase program. During 2007,2009, Landstar purchased a total of 4,093,1001,624,547 shares of its common stock at a total cost of $176,590,000$55,757,000 pursuant to its previously announced stock purchase programs.
The Company has 2,000,000 shares of preferred stock authorized and unissued.
| |
(10)(12) | Segment InformationCommitments and Contingencies |
TheAt December 26, 2009, in addition to the $45,008,000 letters of credit secured by investments, Landstar had $33,857,000 of letters of credit outstanding under the Company’s Credit Agreement.
In the Company’s 2009 fiscal third quarter, the Company completed the acquisitions of NLM and A3i. As it relates to NLM, the Company may be required to pay additional consideration to the prior owner of NLM contingent on NLM achieving certain levels of earnings through December 2014. As it relates to the noncontrolling interest of A3i Acquisition, the Company has three reportable business segments. These are the carrier, global logisticsoption, during the period commencing on the fourth anniversary of June 29, 2009, the closing date of the acquisition (the “Closing Date”), and insurance segments.ending on the sixth anniversary of the Closing Date, to purchase at fair value all but not less than all of the noncontrolling interest. The carrier segment primarily provides transportation servicesnoncontrolling interest is also subject to customary restrictions on transfer, including a right of first refusal in favor of the truckload market forCompany, and drag-along rights. For a wide rangespecified period following each of general commodities over irregular or non-repetitive routes utilizing drythe sixth, seventh and specialty vans and unsided trailers, including flatbed, drop deck and specialty. It also providesshort-to-long haul movementeighth anniversaries of containers by truck and dedicated power-only truck capacity. The carrier segment markets its services primarily through independent commission sales agents and utilizes independent contractors who provide truck capacitythe Closing Date, the owner of the noncontrolling interest shall have the right, but not the obligation, to sell at fair value to the Company under exclusive lease arrangements (the “Business Capacity Owner Independent Contractors” or “BCO Independent Contractors”) and other third party truck capacity providers under non-exclusive contractual arrangements (“Truck Brokerage Carriers”). Transportation and logistics services provided by the global logistics segment include the arrangement of multimodal (ground, air, ocean and rail) moves, contract logistics, truck brokerage, emergency and expedited ground, air and ocean freight and warehousing. The global logistics segment markets its services primarily through independent commission sales agents and utilizes capacity provided by BCO Independent Contractors and other third party capacity providers, including Truck Brokerage Carriers, railroads, air and ocean cargo carriers and warehouse capacity owners. The nature of the carrier and global logistics segments’ businesses is such that a significant portion of their operating costs varies directly with revenue. The insurance segment provides risk and claims management servicesup to 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 Landstar’s operating subsidiaries.
4450
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The accounting policiesone third annually of the segments areinvestment then held by such owner. The owner of the same as thosenon-controlling interest also has certain preemptive rights and tag-along rights.
As further described in periodic and current reports previously filed by Landstar System, Inc. (the “Company”) with the summarySecurities and Exchange Commission, the Company and certain of significant accounting policies. The Company evaluatesits subsidiaries (the “Defendants”) are defendants in a segment’s performance based on operating income.
Internal revenue for transactions between the carrier and global logistics segments is based on quoted rates which are believed to approximate the cost that would have been incurred had similar services been obtained from an unrelated third party. Internal revenue for premiums billed by the insurance segment to the carrier and global logistics segments is calculated each fiscal period based primarily on an actuarial calculation of historical loss experience and is believed to approximate the cost that would have been incurred by the carrier and global logistics segments had similar insurance been obtained from an unrelated third party.
During 2007, 2006 and 2005, revenue derived from various departments ofsuit (the “Litigation”) brought in the United States Government represented 6%, 9%District Court for the Middle District of Florida (the “District Court”) by the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and 17%, respectively,four former BCO Independent Contractors (the “Named Plaintiffs” and, with OOIDA, the “Plaintiffs”) on behalf of consolidated revenue. Includedall 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 consolidated revenue derived fromfavor of the various departmentsDefendants 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 Government in 2007, 2006 and 2005 was $8,511,000, $100,655,000 and $275,929,000, respectively,Court of revenue related to disaster relief services. These disaster relief services were provided primarily under a contract between Landstar Express America, Inc. andAppeals for the United States DepartmentEleventh Circuit (the “Appellate Court”) of Transportation/Federal Aviation Administration and were reflected in revenuecertain of the global logistics segment. No other single customer accounted for more than 10% of consolidated revenueDistrict Court’s rulings in 2007, 2006 or 2005. In addition, during 2007 approximately 10%favor of the Company’s revenue was attributableDefendants. The Defendants asked the Appellate Court to affirm such rulings and filed a cross-appeal with the Appellate Court with respect to certain other rulings of the District Court.
On September 3, 2008, the Appellate Court issued its ruling, which, among other things, affirmed the District Court’s rulings that (i) the Defendants are not prohibited by the applicable federal leasing regulations from charging administrative or other fees to BCO Independent Contractors in connection with voluntary programs offered by the Defendants through which a BCO Independent Contractor may purchase discounted products and services for a charge that is deducted against the compensation payable to the automotive industry. One agent inBCO Independent Contractor (a “Charge-back Deduction”), (ii) the global logistics segment contributed approximately $197,000,000Plaintiffs are not entitled to restitution or disgorgement with respect to violations by Defendants of the Company’s revenue in 2007. Substantially allapplicable federal leasing regulations but instead may recover only actual damages, if any, which they sustained as a result of any such violations and (iii) the claims of BCO Independent Contractors may not be handled on a class action basis for purposes of determining the amount of actual damages, if any, they sustained as a result of any violations. Further, the analysis of the Company’s revenue is generatedAppellate 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 United States.Defendants and BCO Independent Contractors.
However, the ruling of the Appellate Court reversed the District Court’s rulings (i) that an old version of the lease formerly used by Defendants but not in use with any current BCO Independent Contractor complied with applicable disclosure requirements under the federal leasing regulations with respect to adjustments to compensation payable to BCO Independent Contractors on certain loads sourced from the U.S. Dept. of Defense, and (ii) that the Defendants had provided sufficient documentation to BCO Independent Contractors under the applicable federal leasing regulations relating to how the component elements of Charge-back Deductions were computed. The Appellate Court then remanded the case to the District Court to permit the Plaintiffs to seek injunctive relief with respect to these violations of the federal leasing regulations and to hold an evidentiary hearing to give the Named Plaintiffs an opportunity to produce evidence of any damages they actually sustained as a result of such violations.
Each of the parties to the Litigation has filed a petition with the Appellate Court seeking rehearing of the Appellate Court’s ruling; however, there can be no assurance that any petition for rehearing will be granted.
Although no assurances can be given with respect to the outcome of the Litigation, including any possible award of attorneys’ fees to the Plaintiffs, the Company believes that (i) no Plaintiff has sustained any actual damages as a result of any violations by the Defendants of the federal leasing regulations and (ii) injunctive
4551
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables summarize information about the Company’s reportable business segments as of and for the fiscal years ending December 29, 2007, December 30, 2006 and December 31, 2005 (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Global
| | | | | | | | | | |
| | | Carrier | | | Logistics | | | Insurance | | | Other | | | Total | |
| |
2007 | | | | | | | | | | | | | | | | | | | | |
| External revenue | | $ | 1,808,391 | | | $ | 642,020 | | | $ | 36,866 | | | | | | | $ | 2,487,277 | |
| Internal revenue | | | 46,132 | | | | 3,602 | | | | 29,217 | | | | | | | | 78,951 | |
| Investment income | | | | | | | | | | | 5,347 | | | | | | | | 5,347 | |
| Interest and debt expense | | | | | | | | | | | | | | $ | 6,685 | | | | 6,685 | |
| Depreciation and amortization | | | 14,848 | | | | 78 | | | | | | | | 4,162 | | | | 19,088 | |
| Operating income | | | 180,247 | | | | 21,397 | | | | 34,055 | | | | (51,006 | ) | | | 184,693 | |
| Expenditures on long-lived assets | | | 829 | | | | | | | | | | | | 5,685 | | | | 6,514 | |
| Goodwill | | | 20,496 | | | | 10,638 | | | | | | | | | | | | 31,134 | |
| Capital lease additions | | | 36,046 | | | | | | | | | | | | | | | | 36,046 | |
| Total assets | | | 382,344 | | | | 102,782 | | | | 89,383 | | | | 54,492 | | | | 629,001 | |
2006 | | | | | | | | | | | | | | | | | | | | |
| External revenue | | $ | 1,796,616 | | | $ | 682,542 | | | $ | 34,598 | | | | | | | $ | 2,513,756 | |
| Internal revenue | | | 54,837 | | | | 2,478 | | | | 28,293 | | | | | | | | 85,608 | |
| Investment income | | | | | | | | | | | 4,250 | | | | | | | | 4,250 | |
| Interest and debt expense | | | | | | | | | | | | | | $ | 6,821 | | | | 6,821 | |
| Depreciation and amortization | | | 12,814 | | | | 152 | | | | | | | | 3,830 | | | | 16,796 | |
| Operating income | | | 181,550 | | | | 31,433 | | | | 35,673 | | | | (57,437 | ) | | | 191,219 | |
| Expenditures on long-lived assets | | | 637 | | | | 174 | | | | | | | | 3,362 | | | | 4,173 | |
| Goodwill | | | 20,496 | | | | 10,638 | | | | | | | | | | | | 31,134 | |
| Capital lease additions | | | 36,594 | | | | | | | | | | | | | | | | 36,594 | |
| Total assets | | | 357,575 | | | | 115,729 | | | | 106,322 | | | | 67,025 | | | | 646,651 | |
2005 | | | | | | | | | | | | | | | | | | | | |
| External revenue | | $ | 1,691,668 | | | $ | 795,136 | | | $ | 31,024 | | | | | | | $ | 2,517,828 | |
| Internal revenue | | | 95,872 | | | | 2,222 | | | | 31,036 | | | | | | | | 129,130 | |
| Investment income | | | | | | | | | | | 2,695 | | | | | | | | 2,695 | |
| Interest and debt expense | | | | | | | | | | | | | | $ | 4,744 | | | | 4,744 | |
| Depreciation and amortization | | | 11,262 | | | | 309 | | | | | | | | 4,349 | | | | 15,920 | |
| Operating income | | | 169,882 | | | | 60,115 | | | | 19,374 | | | | (56,149 | ) | | | 193,222 | |
| Expenditures on long-lived assets | | | 798 | | | | 20 | | | | | | | | 3,039 | | | | 3,857 | |
| Goodwill | | | 20,496 | | | | 10,638 | | | | | | | | | | | | 31,134 | |
| Capital lease additions | | | 28,512 | | | | | | | | | | | | | | | | 28,512 | |
| Total assets | | | 360,083 | | | | 304,727 | | | | 58,379 | | | | 42,625 | | | | 765,814 | |
| |
(11) | Commitments and Contingencies |
At December 29, 2007, in addition to the $43,254,000 letters of credit secured by investments, Landstar had $26,868,000 of letters of credit outstanding under the Company’s revolving credit facility.
On November 1, 2002, the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and certain BCO Independent Contractors (as defined below) (collectively with OOIDA, the “Plaintiffs”) filed a putative
46
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
class action complaint on behalf of independent contractors who provide truck capacity to the Company and its subsidiaries under exclusive lease arrangements (“BCO Independent Contractors”) in the United States District Court for the Middle District of Florida (the “District Court”) in Jacksonville, Florida, against the Company and certain of its subsidiaries. The complaint was amended on April 7, 2005 (as amended, the “Amended Complaint”). The Amended Complaint alleged that certain aspects of the Company’s motor carrier leases and related practices with its BCO Independent Contractors violate certain federal leasing regulations and sought injunctive relief, an unspecified amount of damages and attorney’s fees. On August 30, 2005, the District Court granted a motion by the Plaintiffs to certify the case as a class action.
On January 16, 2007, the District Court ordered the decertification of the class of BCO Independent Contractors for purposes of determining remedies. Immediately thereafter, the trial commenced for purposes of determining what remedies, if any, wouldthat may be awarded to the remaining named BCO Independent Contractor Plaintiffs against the following subsidiaries of the Company: Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Ranger, Inc. (the “Defendants”). On March 29, 2007, the District Court denied Plaintiffs’ request for injunctive relief, entered a Judgment in favor of the Defendants and issued written orders setting forth its rulings related to the decertification of the class and the denial of Plaintiffs requests for damages and injunctive relief. The Plaintiffs and the Defendants have each filed motions with the District Court concerning an award of attorney fees from the other party.
The Plaintiffs have filed an appeal with the United States Court of Appeals for the Eleventh Circuit (the “Appellate Court”) with respect to certain of the District Court’s rulings, including the judgments enteredgranted by the District Court in favor of the Defendantson remand is unlikely to have a material adverse financial effect on the issues of damages and injunctive relief. The Defendants have asked the Appellate Court to affirm the rulings of the District Court that have been appealed by the Plaintiffs. The Defendants have also filed a cross-appeal with the Appellate Court with respect to certain other rulings of the District Court. Although no assurances can be given with respect to the outcome of the appeal or any proceedings that may be conducted thereafter, the Company believes it has meritorious defenses and it intends to continue asserting these defenses vigorously.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 thereof,therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
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 technological applications, Landstar operates a transportation services and supply chain solutions business primarily throughout North America with revenue of approximately $2.0 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.
The transportation logistics segment provides a wide range of transportation services and supply chain solutions. Transportation services offered by the Company include truckload andless-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized,U.S.-Canada andU.S.-Mexico cross-border, project cargo and customs brokerage. Supply chain solutions are based on advanced technology solutions offered by the Company and include integrated multi-modal solutions, outsourced logistics, supply chain engineering and warehousing. Also, supply chain solutions can be delivered through a software-as-a-service model. Industries serviced by the transportation logistics segment include automotive products, paper, lumber and building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics, ammunition and explosives and military hardware. In addition, the transportation logistics segment provides transportation services to other transportation companies, including logistics andless-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight. Supply chain solution customers are generally charged fees for the services provided. Revenue recognized by the transportation logistics segment when providing capacity to customers to haul their freight is referred to herein as “transportation services revenue” and revenue for freight management services recognized on afee-for-service basis is referred to herein as “transportation management fees.”
The insurance 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. Internal revenue for premiums billed by the insurance segment to the transportation logistics segment is calculated each fiscal period based primarily on an actuarial calculation of historical loss experience and is
4752
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
believed to approximate the cost that would have been incurred by the transportation logistics segment had similar insurance been obtained from an unrelated third party.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates a segment’s performance based on operating income.
No single customer accounted for more than 10% of consolidated revenue in 2009, 2008 or 2007. Substantially all of the Company’s revenue is generated in North America, primarily through customers located in the United States.
The following tables summarize information about the Company’s reportable business segments as of and for the fiscal years ending December 26, 2009, December 27, 2008 and December 29, 2007 (in thousands):
| | | | | | | | | | | | | |
| | | Transportation
| | | | |
| | | Logistics | | Insurance | | Total |
| |
2009 | | | | | | | | | | | | |
| External revenue | | $ | 1,972,863 | | | $ | 35,933 | | | $ | 2,008,796 | |
| Internal revenue | | | | | | | 27,179 | | | | 27,179 | |
| Investment income | | | | | | | 1,268 | | | | 1,268 | |
| Interest and debt expense | | | 4,030 | | | | | | | | 4,030 | |
| Depreciation and amortization | | | 23,528 | | | | | | | | 23,528 | |
| Operating income | | | 88,176 | | | | 25,566 | | | | 113,742 | |
| Expenditures on long-lived assets | | | 2,715 | | | | | | | | 2,715 | |
| Goodwill | | | 57,470 | | | | | | | | 57,470 | |
| Capital lease additions | | | 12,284 | | | | | | | | 12,284 | |
| Total assets | | | 524,584 | | | | 124,208 | | | | 648,792 | |
2008 | | | | | | | | | | | | |
| External revenue | | $ | 2,606,216 | | | $ | 36,853 | | | $ | 2,643,069 | |
| Internal revenue | | | | | | | 27,565 | | | | 27,565 | |
| Investment income | | | | | | | 3,339 | | | | 3,339 | |
| Interest and debt expense | | | 7,351 | | | | | | | | 7,351 | |
| Depreciation and amortization | | | 20,960 | | | | | | | | 20,960 | |
| Operating income | | | 148,385 | | | | 38,456 | | | | 186,841 | |
| Expenditures on long-lived assets | | | 8,289 | | | | | | | | 8,289 | |
| Goodwill | | | 31,134 | | | | | | | | 31,134 | |
| Capital lease additions | | | 4,802 | | | | | | | | 4,802 | |
| Total assets | | | 530,163 | | | | 133,367 | | | | 663,530 | |
2007 | | | | | | | | | | | | |
| External revenue | | $ | 2,450,411 | | | $ | 36,866 | | | $ | 2,487,277 | |
| Internal revenue | | | | | | | 29,217 | | | | 29,217 | |
| Investment income | | | | | | | 5,347 | | | | 5,347 | |
| Interest and debt expense | | | 6,685 | | | | | | | | 6,685 | |
| Depreciation and amortization | | | 19,088 | | | | | | | | 19,088 | |
| Operating income | | | 150,638 | | | | 34,055 | | | | 184,693 | |
| Expenditures on long-lived assets | | | 6,514 | | | | | | | | 6,514 | |
| Goodwill | | | 31,134 | | | | | | | | 31,134 | |
| Capital lease additions | | | 36,046 | | | | | | | | 36,046 | |
| Total assets | | | 539,618 | | | | 89,383 | | | | 629,001 | |
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Landstar System, Inc.:
We have audited the accompanying consolidated balance sheets of Landstar System, Inc. and subsidiary (the Company) as of December 29, 200726, 2009 and December 30, 2006,27, 2008, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the fiscal years ended December 29, 2007,26, 2009, December 30, 200627, 2008 and December 31, 2005.29, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Landstar System, Inc. and subsidiary as of December 29, 200726, 2009 and December 30, 2006,27, 2008, and the results of their operations and their cash flows for the fiscal years ended December 29, 2007,26, 2009, December 30, 200627, 2008 and December 31, 2005,29, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, effective December 31, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Landstar System, Inc.’s internal control over financial reporting as of December 29, 2007,26, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 200823, 2010, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
February 25, 200823, 2010
Jacksonville, Florida
Certified Public Accountants
4854
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth
| | Third
| | Second
| | First
| | | Fourth
| | Third
| | Second
| | First
| |
| | | Quarter
| | Quarter
| | Quarter
| | Quarter
| | | Quarter
| | Quarter
| | Quarter
| | Quarter
| |
| | | 2007 | | 2007 | | 2007 | | 2007 | | | 2009 | | 2009 | | 2009 | | 2009 | |
| |
| Revenue | | $ | 642,865 | | | $ | 634,811 | | | $ | 632,952 | | | $ | 576,649 | | | $ | 547,715 | | | $ | 500,670 | | | $ | 491,164 | | | $ | 469,247 | |
| | | | | | | | | | | | | | | | | | | |
| Operating income | | $ | 48,666 | | | $ | 49,648 | | | $ | 49,508 | | | $ | 36,871 | | | $ | 27,570 | | | $ | 32,678 | | | $ | 29,776 | | | $ | 23,718 | |
| | | | | | | | | | | | | | | | | | | |
| Income before income taxes | | $ | 46,445 | | | $ | 47,884 | | | $ | 48,400 | | | $ | 35,279 | | | $ | 26,633 | | | $ | 31,721 | | | $ | 28,803 | | | $ | 22,555 | |
| Income taxes | | | 17,414 | | | | 18,536 | | | | 18,730 | | | | 13,675 | | | | 8,296 | | | | 11,859 | | | | 10,946 | | | | 8,661 | |
| | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 29,031 | | | $ | 29,348 | | | $ | 29,670 | | | $ | 21,604 | | | $ | 18,337 | | | $ | 19,862 | | | $ | 17,857 | | | $ | 13,894 | |
| | | | | | | | | | | | | | | | | | | |
| Earnings per common share(1) | | $ | 0.55 | | | $ | 0.54 | | | $ | 0.53 | | | $ | 0.39 | | |
| Less: Net loss attributable to noncontrolling interest | | | | (231 | ) | | | (214 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Diluted earnings per share(1) | | $ | 0.54 | | | $ | 0.54 | | | $ | 0.53 | | | $ | 0.38 | | |
| Net income attributable to Landstar System, Inc and subsidiary | | | $ | 18,568 | | | $ | 20,076 | | | $ | 17,857 | | | $ | 13,894 | |
| | | | | | | | | | | |
| Earnings per common share attributable to Landstar System, Inc. and subsidiary(1) | | | $ | 0.37 | | | $ | 0.39 | | | $ | 0.35 | | | $ | 0.27 | |
| | | | | | | | | | | |
| Diluted earnings per share attributable to Landstar System, Inc. and subsidiary(1) | | | $ | 0.37 | | | $ | 0.39 | | | $ | 0.35 | | | $ | 0.27 | |
| | | | | | | | | | | | | | | | | | | |
| Dividends paid per common share | | $ | 0.0375 | | | $ | 0.0375 | | | $ | 0.0300 | | | $ | 0.0300 | | | $ | 0.0450 | | | $ | 0.0450 | | | $ | 0.0400 | | | $ | 0.0400 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fourth
| | Third
| | Second
| | First
| | | Fourth
| | Third
| | Second
| | First
| |
| | | Quarter
| | Quarter
| | Quarter
| | Quarter
| | | Quarter
| | Quarter
| | Quarter
| | Quarter
| |
| | | 2006 | | 2006 | | 2006 | | 2006 | | | 2008 | | 2008 | | 2008 | | 2008 | |
| |
| Revenue | | $ | 611,279 | | | $ | 649,197 | | | $ | 643,238 | | | $ | 610,042 | | | $ | 603,837 | | | $ | 732,753 | | | $ | 697,651 | | | $ | 608,828 | |
| | | | | | | | | | | | | | | | | | | |
| Operating income | | $ | 48,652 | | | $ | 51,701 | | | $ | 49,255 | | | $ | 41,611 | | | $ | 40,977 | | | $ | 54,690 | | | $ | 50,185 | | | $ | 40,989 | |
| | | | | | | | | | | | | | | | | | | |
| Income before income taxes | | $ | 46,781 | | | $ | 49,893 | | | $ | 47,963 | | | $ | 39,761 | | | $ | 39,261 | | | $ | 52,933 | | | $ | 48,449 | | | $ | 38,847 | |
| Income taxes | | | 18,091 | | | | 19,313 | | | | 18,498 | | | | 15,411 | | | | 14,656 | | | | 20,116 | | | | 18,684 | | | | 15,104 | |
| | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 28,690 | | | $ | 30,580 | | | $ | 29,465 | | | $ | 24,350 | | | $ | 24,605 | | | $ | 32,817 | | | $ | 29,765 | | | $ | 23,743 | |
| | | | | | | | | | | | | | | | | | | |
| Earnings per common share(1) | | $ | 0.51 | | | $ | 0.53 | | | $ | 0.50 | | | $ | 0.41 | | |
| Less: Net income attributable to noncontrolling interest | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | |
| Diluted earnings per share(1) | | $ | 0.50 | | | $ | 0.53 | | | $ | 0.50 | | | $ | 0.41 | | |
| Net income attributable to Landstar System, Inc and subsidiary | | | $ | 24,605 | | | $ | 32,817 | | | $ | 29,765 | | | $ | 23,743 | |
| | | | | | | | | | | |
| Earnings per common share attributable to Landstar System, Inc. and subsidiary(1) | | | $ | 0.47 | | | $ | 0.62 | | | $ | 0.56 | | | $ | 0.45 | |
| | | | | | | | | | | |
| Diluted earnings per share attributable to Landstar System, Inc. and subsidiary(1) | | | $ | 0.47 | | | $ | 0.62 | | | $ | 0.56 | | | $ | 0.45 | |
| | | | | | | | | | | | | | | | | | | |
| Dividends paid per common share | | $ | 0.0300 | | | $ | 0.0300 | | | $ | 0.0250 | | | $ | 0.0250 | | | $ | 0.0400 | | | $ | 0.0400 | | | $ | 0.0375 | | | $ | 0.0375 | |
| | | | | | | | | | | | | | | | | | | |
| | |
| (1) | | Due to the changes in the number of average common shares and common stock equivalents outstanding during the year, the sum of earnings per share amounts for each quarter do not necessarily sum in the aggregate to the earnings per share amounts for the full year. |
4955
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Landstar System, Inc.:
Under date of February 25, 2008,23, 2010, we reported on the consolidated balance sheets of Landstar System, Inc. and subsidiary (the Company) as of December 29, 200726, 2009 and December 30, 2006,27, 2008, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the fiscal years ended December 29, 2007,26, 2009, December 30, 200627, 2008 and December 31, 2005,29, 2007, which are included in the 20072009 annual report to shareholders. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in Item 15(a)(2). These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, effective December 31, 2006./s/ KPMG LLP
February 25, 200823, 2010
Jacksonville, Florida
Certified Public Accountants
5056
LANDSTAR SYSTEM, INC.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY BALANCE SHEET INFORMATION
(Dollars in thousands, except per share amounts)
| | | | | | | | | |
| | | Dec. 29,
| | | Dec. 30,
| |
| | | 2007 | | | 2006 | |
| |
ASSETS |
| Investment in Landstar System Holdings, Inc., net of advances | | $ | 180,786 | | | $ | 230,274 | |
| | | | | | | | | |
| Total assets | | $ | 180,786 | | | $ | 230,274 | |
| | | | | | | | | |
| |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Shareholders’ equity: | | | | | | | | |
| Common stock, $.01 par value, authorized 160,000,000 shares, issued 65,630,383 and 64,993,143 | | $ | 656 | | | $ | 650 | |
| Additional paid-in capital | | | 132,788 | | | | 108,020 | |
| Retained earnings | | | 601,537 | | | | 499,273 | |
| Cost of 13,121,109 and 9,028,009 shares of common stock in treasury | | | (554,252 | ) | | | (377,662 | ) |
| Accumulated other comprehensive gain/(loss) | | | 57 | | | | (7 | ) |
| | | | | | | | | |
| Total shareholders’ equity | | | 180,786 | | | | 230,274 | |
| | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 180,786 | | | $ | 230,274 | |
| | | | | | | | | |
| | | | | | | | | |
| | | Dec. 26,
| | | Dec. 27,
| |
| | | 2009 | | | 2008 | |
| |
ASSETS |
| Investment in Landstar System Holdings, Inc., net of advances | | $ | 268,151 | | | $ | 253,136 | |
| | | | | | | | | |
| Total assets | | $ | 268,151 | | | $ | 253,136 | |
| | | | | | | | | |
| |
LIABILITIES AND EQUITY |
| Equity: | | | | | | | | |
| Landstar System, Inc. and subsidiary shareholders’ equity | | | | | | | | |
| Common stock, $0.01 par value, authorized 160,000,000 shares, issued 66,255,358 and 66,109,547 | | $ | 663 | | | $ | 661 | |
| Additional paid-in capital | | | 161,261 | | | | 154,533 | |
| Retained earnings | | | 766,040 | | | | 704,331 | |
| Cost of 16,022,111 and 14,424,887 shares of common stock in treasury | | | (660,446 | ) | | | (605,828 | ) |
| Accumulated other comprehensive income/(loss) | | | 498 | | | | (561 | ) |
| | | | | | | | | |
| Total Landstar System, Inc. and subsidiary shareholders’ equity | | | 268,016 | | | | 253,136 | |
| Noncontrolling interest | | | 135 | | | | — | |
| | | | | | | | | |
| Total liabilities and equity | | $ | 268,151 | | | $ | 253,136 | |
| | | | | | | | | |
See Report of Independent Registered Public Accounting Firm.
5157
LANDSTAR SYSTEM, INC.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENT OF INCOME INFORMATION
(Dollars in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | Fiscal Years Ended | |
| | | Dec. 29,
| | Dec. 30,
| | Dec. 31,
| | | Dec. 26,
| | Dec. 27,
| | Dec. 29,
| |
| | | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 | |
| |
| Equity in undistributed earnings of Landstar System Holdings, Inc. | | $ | 109,200 | | | $ | 113,079 | | | $ | 115,020 | | | $ | 70,341 | | | $ | 110,331 | | | $ | 109,200 | |
| Income taxes | | | (453 | ) | | | (6 | ) | | | (578 | ) | | | (54 | ) | | | (599 | ) | | | (453 | ) |
| | | | | | | | | | | | | | | |
| Net income | | $ | 109,653 | | | $ | 113,085 | | | $ | 115,598 | | |
| Net income attributable to Landstar System, Inc. and subsidiary | | | $ | 70,395 | | | $ | 110,930 | | | $ | 109,653 | |
| | | | | | | | | | | | | | | |
| Earnings per common share | | $ | 2.01 | | | $ | 1.95 | | | $ | 1.95 | | |
| Earnings per common share attributable to Landstar System, Inc. and subsidiary | | | $ | 1.38 | | | $ | 2.11 | | | $ | 2.01 | |
| | | | | | | | | | | | | | | |
| Diluted earnings per share | | $ | 1.99 | | | $ | 1.93 | | | $ | 1.91 | | |
| Diluted earnings per share attributable to Landstar System, Inc. and subsidiary | | | $ | 1.37 | | | $ | 2.10 | | | $ | 1.99 | |
| | | | | | | | | | | | | | | |
| Dividends paid per common share | | $ | 0.135 | | | $ | 0.110 | | | $ | 0.050 | | | $ | 0.170 | | | $ | 0.155 | | | $ | 0.135 | |
| | | | | | | | | | | | | | | |
| Average number of shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
| Earnings per common share | | | 54,681,000 | | | | 57,854,000 | | | | 59,199,000 | | | | 51,095,000 | | | | 52,503,000 | | | | 54,681,000 | |
| | | | | | | | | | | | | | | |
| Diluted earnings per share | | | 55,156,000 | | | | 58,654,000 | | | | 60,413,000 | | | | 51,280,000 | | | | 52,854,000 | | | | 55,156,000 | |
| | | | | | | | | | | | | | | |
See Report of Independent Registered Public Accounting Firm.
5258
LANDSTAR SYSTEM, INC.
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY ONLY STATEMENT OF CASH FLOWS INFORMATION
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fiscal Years Ended | | | Fiscal Years Ended | |
| | | Dec. 29,
| | Dec. 30,
| | Dec. 31,
| | | Dec. 26,
| | Dec. 27,
| | Dec. 29,
| |
| | | 2007 | | 2006 | | 2005 | | | 2009 | | 2008 | | 2007 | |
| |
| Operating Activities | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | $ | 109,653 | | | $ | 113,085 | | | $ | 115,598 | | | $ | 70,395 | | | $ | 110,930 | | | $ | 109,653 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity in undistributed earnings of Landstar System Holdings, Inc. | | | (109,200 | ) | | | (113,079 | ) | | | (115,020 | ) | | | (70,341 | ) | | | (110,331 | ) | | | (109,200 | ) |
| | | | | | | | | | | | | | | |
| Net Cash Provided By Operating Activities | | | 453 | | | | 6 | | | | 578 | | | | 54 | | | | 599 | | | | 453 | |
| | | | | | | | | | | | | | | |
| Investing Activities | | | | | | | | | | | | | | | | | | | | | | | | |
| Additional investments in and advances from Landstar System Holdings, Inc., net | | | 167,040 | | | | 146,509 | | | | 81,269 | | | | 61,941 | | | | 44,972 | | | | 167,040 | |
| | | | | | | | | | | | | | | |
| Net Cash Provided By Investing Activities | | | 167,040 | | | | 146,509 | | | | 81,269 | | | | 61,941 | | | | 44,972 | | | | 167,040 | |
| | | | | | | | | | | | | | | |
| Financing Activities | | | | | | | | | | | | | | | | | | | | | | | | |
| Excess tax benefit on stock option exercises | | | 3,624 | | | | 5,758 | | | | 7,036 | | | | 773 | | | | 2,231 | | | | 3,624 | |
| Proceeds from repayment of notes receivable arising from exercises of stock options | | | 0 | | | | 47 | | | | 423 | | |
| Proceeds from exercises of stock options | | | 12,862 | | | | 10,533 | | | | 9,216 | | | | 1,128 | | | | 12,249 | | | | 12,862 | |
| Dividends paid | | | (7,389 | ) | | | (6,361 | ) | | | (2,922 | ) | | | (8,686 | ) | | | (8,136 | ) | | | (7,389 | ) |
| Purchases of common stock | | | (176,590 | ) | | | (156,492 | ) | | | (95,600 | ) | | | (55,757 | ) | | | (51,576 | ) | | | (176,590 | ) |
| | | | | | | | | | | | | | | |
| Net Cash Used By Financing Activities | | | (167,493 | ) | | | (146,515 | ) | | | (81,847 | ) | | | (62,542 | ) | | | (45,232 | ) | | | (167,493 | ) |
| | | | | | | | | | | | | | | |
| Change in cash | | | 0 | | | | 0 | | | | 0 | | |
| Cash at beginning of period | | | 0 | | | | 0 | | | | 0 | | |
| Effect of exchange rate changes on cash and cash equivalents | | | | 547 | | | | (339 | ) | | | 0 | |
| Change in cash and cash equivalents | | | | 0 | | | | 0 | | | | 0 | |
| Cash and cash equivalents at beginning of period | | | | 0 | | | | 0 | | | | 0 | |
| | | | | | | | | | | | | | | |
| Cash at end of period | | $ | 0 | | | $ | 0 | | | $ | 0 | | |
| Cash and cash equivalents at end of period | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | |
See Report of Independent Registered Public Accounting Firm.
5359
| | | | | | | | | | | | | | | | | | | | | |
COL A | | COL B | | | COL C | | | COL D | | | COL E | |
| | | | | | Additions | | | | | | | |
| | | | | | | | | Charged to
| | | | | | | |
| | | Balance at
| | | Charged to
| | | Other
| | | Deductions
| | | Balance at
| |
| | | Beginning of
| | | Costs and
| | | Accounts
| | | Describe
| | | End of
| |
| | | Period | | | Expenses | | | Describe | | | (A) | | | Period | |
| |
| Description | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts: | | | | | | | | | | | | | | | | | | | | |
| Deducted from trade receivables | | $ | 6,230 | | | $ | 3,801 | | | | | | | $ | (4,484 | ) | | $ | 5,547 | |
| Deducted from other receivables | | | 4,866 | | | | 4,182 | | | | | | | | (2,321 | ) | | | 6,727 | |
| Deducted from other non-current receivables | | | 316 | | | | 3 | | | | | | | | | | | | 319 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 11,412 | | | $ | 7,986 | | | | | | | $ | (6,805 | ) | | $ | 12,593 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| (A) | | Write-offs, net of recoveries. |
See Report of Independent Registered Public Accounting Firm.
60
| | | | | | | | | | | | | | | | | | | | | |
COL A | | COL B | | | COL C | | | COL D | | | COL E | |
| | | | | | Additions | | | | | | | |
| | | | | | | | | Charged to
| | | | | | | |
| | | Balance at
| | | Charged to
| | | Other
| | | Deductions
| | | Balance at
| |
| | | Beginning of
| | | Costs and
| | | Accounts
| | | Describe
| | | End of
| |
| | | Period | | | Expenses | | | Describe | | | (A) | | | Period | |
| |
| Description | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts: | | | | | | | | | | | | | | | | | | | | |
| Deducted from trade receivables | | $ | 4,469 | | | $ | 4,641 | | | | | | | $ | (2,880 | ) | | $ | 6,230 | |
| Deducted from other receivables | | | 4,792 | | | | 2,290 | | | | | | | | (2,216 | ) | | | 4,866 | |
| Deducted from other non-current receivables | | | 310 | | | | 6 | | | | | | | | | | | | 316 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 9,571 | | | $ | 6,937 | | | | | | | $ | (5,096 | ) | | $ | 11,412 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| (A) | | Write-offs, net of recoveries. |
See Report of Independent Registered Public Accounting Firm.
61
| | | | | | | | | | | | | | | | | | | | | |
COL A | | COL B | | | COL C | | | COL D | | | COL E | |
| | | | | | Additions | | | | | | | |
| | | | | | | | | Charged to
| | | | | | | |
| | | Balance at
| | | Charged to
| | | Other
| | | Deductions
| | | Balance at
| |
| | | Beginning of
| | | Costs and
| | | Accounts
| | | Describe
| | | End of
| |
| | | Period | | | Expenses | | | Describe | | | (A) | | | Period | |
| |
| Description | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts: | | | | | | | | | | | | | | | | | | | | |
| Deducted from trade receivables | | $ | 4,834 | | | $ | 2,501 | | | | | | | $ | (2,866 | ) | | $ | 4,469 | |
| Deducted from other receivables | | | 4,512 | | | | 1,586 | | | | | | | | (1,306 | ) | | | 4,792 | |
| Deducted from other non-current receivables | | | 297 | | | | 13 | | | | | | | | | | | | 310 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 9,643 | | | $ | 4,100 | | | | | | | $ | (4,172 | ) | | $ | 9,571 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| (A) | | Write-offs, net of recoveries.recoveries |
See Report of Independent Registered Public Accounting Firm.
5462
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 30, 2006
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | |
COL A | | COL B | | | COL C | | | COL D | | | COL E | |
| | | | | | Additions | | | | | | | |
| | | | | | | | | Charged to
| | | | | | | |
| | | Balance at
| | | Charged to
| | | Other
| | | Deductions
| | | Balance at
| |
| | | Beginning of
| | | Costs and
| | | Accounts
| | | Describe
| | | End of
| |
| | | Period | | | Expenses | | | Describe | | | (A) | | | Period | |
| |
| Description | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts: | | | | | | | | | | | | | | | | | | | | |
| Deducted from trade receivables | | $ | 4,655 | | | $ | 3,235 | | | | | | | $ | (3,056 | ) | | $ | 4,834 | |
| Deducted from other receivables | | | 4,342 | | | | 2,099 | | | | | | | | (1,929 | ) | | | 4,512 | |
| Deducted from other non-current receivables | | | 282 | | | | 15 | | | | | | | | | | | | 297 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 9,279 | | | $ | 5,349 | | | | | | | $ | (4,985 | ) | | $ | 9,643 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
(A) | | Write-offs, net of recoveries. |
See Report of Independent Registered Public Accounting Firm.
55
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
For the Fiscal Year Ended December 31, 2005
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | |
COL A | | COL B | | | COL C | | | COL D | | | COL E | |
| | | | | | Additions | | | | | | | |
| | | | | | | | | Charged to
| | | | | | | |
| | | Balance at
| | | Charged to
| | | Other
| | | Deductions
| | | Balance at
| |
| | | Beginning of
| | | Costs and
| | | Accounts
| | | Describe
| | | End of
| |
| | | Period | | | Expenses | | | Describe | | | (A) | | | Period | |
| |
| Description | | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts: | | | | | | | | | | | | | | | | | | | | |
| Deducted from trade receivables | | $ | 4,021 | | | $ | 3,399 | | | | | | | $ | (2,765 | ) | | $ | 4,655 | |
| Deducted from other receivables | | | 4,245 | | | | 2,521 | | | | | | | | (2,424 | ) | | | 4,342 | |
| Deducted from other non-current receivables | | | 263 | | | | 19 | | | | | | | | | | | | 282 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | $ | 8,529 | | | $ | 5,939 | | | | | | | $ | (5,189 | ) | | $ | 9,279 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
(A) | | Write-offs, net of recoveries. |
See Report of Independent Registered Public Accounting Firm.
56
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| |
| Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report onForm 10-K, 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 inRule 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 December 29, 200726, 2009 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.
In designing and evaluating disclosure controls and procedures, Company management recognizes that any disclosure 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.
Internal Control Over Financial Reporting
| |
| (a) | Management’s Report on Internal Control over Financial Reporting |
Management of Landstar System, Inc. (the “Company”) is responsible for establishing and maintaining effective internal controls over financial reporting, as such term is defined inRules 13a-15(f) and15d-15(f) under the Securities Exchange Act, as amended.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
Management, with the participation of the Company’s principal executive and principal financial officers, assessed the effectiveness of the Company’s internal control over financial reporting as of December 29, 2007.26, 2009. This assessment was performed using the criteria established under the Internal Control-Integrated Framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations, including the possibility of human error or circumvention or
57
overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and reporting and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
63
Based on the assessment performed using the criteria established by COSO, management has concluded that the Company maintained effective internal control over financial reporting as of December 29, 2007.26, 2009.
KPMG LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report onForm 10-K for the fiscal year ended December 29, 2007,26, 2009, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. Such report appears immediately below.
58
| |
| (b) | Attestation Report of the Registered Public Accounting Firm |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Landstar System, Inc:
We have audited Landstar System, Inc.’s internal control over financial reporting as of December 29, 2007,26, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Landstar System, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management report on internal control over financial reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Landstar System, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 29, 2007,26, 2009, based on criteria established in Internal Control — Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Landstar System, Inc. and subsidiary as of December 29, 200726, 2009 and December 30, 2006,27, 2008, and the related consolidated statements of income, changes in shareholders’
64
equity, and cash flows for the fiscal years ended December 29, 2007,26, 2009, December 30, 200627, 2008 and December 31, 2005,29, 2007, and our report dated February 25, 2008,23, 2010, expressed an unqualified opinion on those consolidated financial statements.
/s/ S/KPMG LLP
February 25, 200823, 2010
Jacksonville, Florida
Certified Public Accountants
59
| |
| (c) | Changes in Internal Control Over Financial Reporting |
There were no significant changes in the Company’s internal controls over financial reporting during the Company’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| |
| Item 9B. | Other Information |
None
PART III
| |
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this Item concerning the Directors (and nominees for Directors) and Executive Officers of the Company is set forth under the captions “Election of Directors,” “Directors of the Company,” “Information Regarding Board of Directors and Committees,” and “Executive Officers of the Company” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference. The information required by this Item concerning Director Independence, the Company’s Audit Committee and the Audit Committee’s Financial Expert is set forth under the caption “Information Regarding Board of Directors and Committees” and “Report of the Audit Committee” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
The Company has adopted a Code of Ethics and Business Conduct that applies to each of its directors and employees, including its principal executive officer, principal financial officer, controller and all other employees performing similar functions. The Code of Ethics and Business Conduct is available on the Company’s website atwww.landstar.comunder “Investor Relations — Corporate Governance.” The Company intends to satisfy the disclosure requirement under Item 5.05 ofForm 8-K regarding amendments to, or waivers from, a provision or provisions of the Code of Ethics and Business Conduct by posting such information on its website at the web address indicated above.
| |
| Item 11. | Executive Compensation |
The information required by this Item is set forth under the captions “Compensation of Directors,” “Compensation of Executive Officers,” “Compensation Discussion and Analysis,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “Option Exercises and Stock Vested,” “Outstanding Equity Awards at Fiscal Year End,” “Nonqualified Deferred Compensation,” “Report of the Compensation Committee on Executive Compensation,”Compensation” and “Key Executive Employment Protection Agreements” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
65
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this Item pursuant to Item 201(d) ofRegulation S-K is set forth under the caption “Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Part II, Item 5 of this report, and is incorporated by reference herein.
The information required by this Item pursuant to Item 403 ofRegulation S-K is set forth under the caption “Security Ownership by Management and Others” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
60
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
None.None, other than information required to be disclosed under this item in regard to Director Independence, which is set forth under the caption “Independent Directors” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A and incorporated herein by reference.
| |
| Item 14. | Principal Accounting Fees and Services |
The information required by this item is set forth under the caption “Report of the Audit Committee” and “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s definitive Proxy Statement for its annual meeting of stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
PART IV
| |
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1)Financial Statements and Supplementary Data
| | | | | |
| | | Page |
| |
| | | 31 | |
Consolidated Statements of Income | | | 32 | |
Consolidated Statements of Cash Flows | | | 33 | |
Consolidated Statement of Changes in Shareholders’ Equity | | | 34 | |
Notes to | | | 35 | |
| | | 36 | |
| | | 37 | |
| | | 38 | |
| | | 4854 | |
66
(2) Financial Statement Schedules
The report of the Company’s independent registered public accounting firm with respect to the financial statement schedules listed below appears on page 5056 of this Annual Report onForm 10-K.
All other financial statement schedules not listed above have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.
61
(3) Exhibits
| | | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
No. | No. | | Description | No. | | Description |
| |
| | (3) | | | Articles of Incorporation and By-Laws: | (3) | | | Articles of Incorporation and By-Laws: |
| | 3 | .1 | | Restated Certificate of Incorporation of the Company dated March 6, 2006, including Certificate of Designation of Junior Participating Preferred Stock dated February 10, 1993. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 31, 2005 (Commission FileNo. 0-21238)) | 3 | .1 | | Restated Certificate of Incorporation of the Company dated March 6, 2006, including Certificate of Designation of Junior Participating Preferred Stock dated February 10, 1993. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 31, 2005 (Commission FileNo. 0-21238)) |
| | 3 | .2 | | The Company’s Bylaws, as amended and restated on November 1, 2007. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report onForm 10-Q for the fiscal quarter ended September 29, 2007 (Commission FileNo. 0-21238)) | 3 | .2 | | The Company’s Bylaws, as amended and restated on November 1, 2007. (Incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report onForm 10-Q for the fiscal quarter ended September 29, 2007 (Commission FileNo. 0-21238)) |
| | (4) | | | Instruments defining the rights of security holders, including indentures: | (4) | | | Instruments defining the rights of security holders, including indentures: |
| | 4 | .1 | | Specimen of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement onForm S-1 (RegistrationNo. 33-57174)) | 4 | .1 | | Specimen of Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement onForm S-1 (RegistrationNo. 33-57174)) |
| | 4 | .2 | | Fourth Amended and Restated Credit Agreement, dated July 8, 2004, among LSHI, Landstar, the lenders named therein and JPMorgan Chase Bank as administrative agent (including exhibits and schedules thereto). (Incorporated by reference to Exhibit 99.1 to the Registrant’sForm 8-K filed on July 12, 2004 (Commission FileNo. 0-21238)) | 4 | .2 | | Credit Agreement, dated as of June 27, 2008, among LSHI, Landstar, the lenders named therein and JPMorgan Chase Bank, N.A., as administrative agent (including exhibits and schedules thereto). (Incorporated by reference to Exhibit 99.1 to the Registrant’sForm 8-K filed on July 3, 2008 (Commission FileNo. 0-21238)) |
| | (10) | | | Material contracts: | (10) | | | Material contracts: |
| | 10 | .1+ | | Landstar System, Inc. Executive Incentive Compensation Plan (Incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on April 2, 2007 (Commission FileNo. 0-21238)) | 10 | .1+ | | Landstar System, Inc. Executive Incentive Compensation Plan (Incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on April 2, 2007 (CommissionFile No. 0-21238)) |
| | 10 | .2*+ | | Landstar System Holdings, Inc. Supplemental Executive Retirement Plan, as amended and restated on February 25, 2008 | 10 | .2+ | | Amendment to the Landstar System, Inc. Executive Incentive Compensation Plan, effective as of December 3, 2008 (Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 27, 2008 (Commission FileNo. 0-21238)) |
| | 10 | .3+ | | Landstar System, Inc. 1993 Stock Option Plan. (Incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement onForm S-1. (RegistrationNo. 33-67666)) | 10 | .3+* | | Landstar System, Inc. Supplemental Executive Retirement Plan, as amended and restated as of January 1, 2010 |
| | 10 | .4+ | | Amendment to the Landstar System, Inc. 1993 Stock Option Plan (Incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 27, 1997 (Commission FileNo. 0-21238)) | 10 | .4+ | | Landstar System, Inc. 1993 Stock Option Plan, as amended as of December 31, 2008 (Incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report onForm 8-K filed on January 7, 2009 (Commission FileNo. 0-21238)) |
| | 10 | .5+ | | Landstar System, Inc. 2002 Employee Stock Option Plan (Incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on March 22, 2002 (Commission FileNo. 0-21238)) | 10 | .5+ | | Amended and Restated Landstar System, Inc. 2002 Employee Stock Option and Stock Incentive Plan (Incorporated by reference to Exhibit A to the Registrant’s Definitive Proxy Statement filed on March 23, 2009 (Commission FileNo. 0-21238)) |
| | 10 | .6+ | | Landstar System, Inc. 1994 Director’s Stock Option Plan. (Incorporated by reference to Exhibit 99 to the Registrant’s Registration Statement onForm S-8 filed July 5, 1995. (RegistrationNo. 33-94304)) | 10 | .6.1+ | | Landstar System, Inc. 1994 Directors Stock Option Plan. (Incorporated by reference to Exhibit 99 to the Registrant’s Registration Statement onForm S-8 filed July 5, 1995 (RegistrationNo. 33-94304)) |
| | 10 | .7+ | | First Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 30, 2000 (Commission FileNo. 0-21238)) | |
| | 10 | .8+ | | Second Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 30, 2000 (Commission FileNo. 0-21238)) | |
| | 10 | .9+ | | Directors Stock Compensation Plan, dated May 15, 2003 (Incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report onForm 10-Q for the quarter ended June 28, 2003 (Commission FileNo. 0-21238)) | |
| | 10 | .10+ | | Form of Indemnification Agreement between the Company and each of the directors and executive officers of the Company. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 27, 2003 (CommissionNo. 0-21238)) | |
| | 10 | .11+ | | Form of Key Executive Employment Protection Agreement dated January 30, 1998 between Landstar System, Inc. and Robert C. LaRose (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 27, 1997 (Commission FileNo. 0-21238)) | |
6267
| | | | | |
Exhibit
| | |
No. | | Description |
| |
| | 10 | .12+.6.2+ | | First Amendment to Key Executive Employment Protection Agreement, dated August 7, 2002, betweenthe Landstar System, Inc. and Robert C. LaRose1994 Directors Stock Option Plan (Incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 28, 200230, 2000 (Commission FileNo. 0-21238)) |
| | 10 | .13+.6.3+ | | Second Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan (Incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 30, 2000 (Commission FileNo. 0-21238)) |
| 10 | .6.4+* | | Third Amendment to the Landstar System, Inc. 1994 Directors Stock Option Plan |
| 10 | .7+* | | Directors Stock Compensation Plan, as amended and restated as of February 22, 2010 |
| 10 | .8+ | | Form of Indemnification Agreement between the Company and each of the directors and executive officers of the Company. (Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 27, 2003 (CommissionNo. 0-21238)) |
| 10 | .9+ | | Form of Key Executive Employment Protection Agreement between Landstar System, Inc. and each of Joseph J. Beacom, James B. Gattoni, Henry H. Gerkens, Jim M. Handoush, Michael K. Kneller, Patrick J. O’Malley, Jeffrey L. Pundt, Ronald G. Stanley and Larry S. Thomasthe Executive Officers of the Company (Incorporated by reference to Exhibit 10.13 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 30, 2006 (Commission FileNo. 0-21238)) |
| | 10 | .14+.10+ | | Form of Amendment to Key Executive Employment Protection Agreement between Landstar System, Inc. and each of the Executive Officers of the Company |
| 10 | .11+ | | Letter Agreement, dated July 2, 2002 from Jeffrey C. Crowe to Henry H. Gerkens. (Incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report onForm 10-K for the fiscal year ended December 28, 2002 (Commission FileNo. 0-21238)) |
| | 10 | .15+.12+ | | Letter Agreement, dated April 27, 2004, between Landstar System, Inc. and Jeffrey C. Crowe (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report onForm 8-K filed on April 28, 2004 (CommissionNo. 0-21238)) |
| 10 | .16+ | | Letter Agreement, dated January 2, 2007, between Landstar System, Inc. and Robert C. LaRose (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report onForm 8-K filed January 3, 2007 (CommissionNo. 0-21238)) |
| 10 | .17+ | | Letter agreement, dated January 2,December 31, 2008, between Landstar System, Inc. and Henry H. Gerkens (Incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report onForm 8-K filed on January 4,December 31, 2008 (Commission FileNo. 0-21238)) |
| 10 | .13+* | | Consulting Services Agreement, dated as of December 18, 2009, between Landstar System, Inc. and Jeffrey C. Crowe |
| | (21) | | | Subsidiaries of the Registrant: |
| | 21 | .1* | | List of Subsidiary Corporations of the Registrant |
| | (23) | | | Consents of experts and counsel: |
| | 23 | .1* | | Consent of KPMG LLP as Independent Registered Public Accounting Firm of the Registrant |
| | (24) | | | Power of attorney: |
| | 24 | .1* | | Powers of Attorney |
| | (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 |
| | |
| + | | management contract or compensatory plan or arrangement |
| |
| * | | Filed herewith. |
| |
| ** | | Furnished herewith. |
THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO ANY SHAREHOLDER OF THE COMPANY WHO SO REQUESTS IN WRITING, A COPY OF ANY EXHIBITS, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. ANY SUCH REQUEST SHOULD BE DIRECTED TO LANDSTAR SYSTEM, INC., ATTENTION: INVESTOR RELATIONS, 13410 SUTTON PARK DRIVE SOUTH, JACKSONVILLE, FLORIDA 32224.
63
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Henry H. Gerkens
Chairman of the Board, President and
Chief Executive Officer
James B. Gattoni
Vice President and
Chief Financial Officer
Date: February 25, 200823, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | | | | | | |
Signature | | Title | | Date |
| |
| | | | | |
*
Jeffrey C. Crowe | | Chairman of the Board | | February 25, 2008 |
| | | | |
/s/ Henry H. Gerkens
Henry H. Gerkens | | Director,Chairman, President and
Chief Executive Officer;
Principal Executive Officer | | February 25, 200823, 2010 |
| | | | | |
/s/ James B. Gattoni
James B. Gattoni | | Vice President and
Chief Financial Officer;
Principal Accounting Officer | | February 25, 200823, 2010 |
| | | | | |
*
David G. Bannister | | Director | | February 25, 200823, 2010 |
| | | | | |
*
Ronald W. DruckerJeffrey C. Crowe | | Director | | February 25, 200823, 2010 |
| | | | | |
*
William S. Elston | | Director | | February 25, 200823, 2010 |
| | | | | |
*
Michael A. Henning | | Director | | February 25, 200823, 2010 |
| | | | | |
*
Diana M. Murphy | | Director | | February 25, 200823, 2010 |
| | | | | | |
| By: | | /s/ Michael K. Kneller
Michael K. Kneller
Attorney In Fact* | | | | |
Michael K. Kneller
Attorney In Fact*
6469
