31
EXHIBIT 13.1
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Introduction
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc.
("Landstar" or the "Company"), provide transportation services to a variety
of market niches throughout the United States and to a lesser extent in Canada
and between the United States and Canada and Mexico through its operating
subsidiaries. The Company has three reportable business segments. These are the
carrier, multimodal and insurance segments. In 2000, the Company made a
decision to realign the operations of Landstar Gemini, Inc. ("Landstar
Gemini"), formerly a wholly-owned subsidiary of Landstar Logistics, Inc.
("Landstar Logistics"), with the operations of the carrier segment.
Accordingly, Landstar Gemini is now included as part of the carrier segment and
is no longer included in the multimodal segment. All historical segment
information included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and footnote 11 - Segment Information in
the accompanying consolidated financial statements has been restated to reflect
this change.
In addition to Landstar Gemini, the carrier segment consists of Landstar
Ranger, Inc. ("Landstar Ranger"), Landstar Inway, Inc. ("Landstar Inway") and
Landstar Ligon, Inc. ("Landstar Ligon"). The carrier segment provides truckload
transportation for a wide range of general commodities over irregular routes
with its fleet of dry and specialty vans and unsided trailers, including
flatbed, drop deck and specialty. It also provides short-to-long haul movement
of containers by truck and dedicated power only truck capacity. The carrier
segment markets its services primarily through independent commission sales
agents and utilizes tractors provided by independent contractors. The nature
of the carrier segment's business is such that a significant portion of its
operating costs varies directly with revenue. The carrier segment typically
contributes approximately 80% of Landstar's consolidated revenue.
The multimodal segment is comprised of Landstar Logistics and Landstar
Express America, Inc. ("Landstar Express America"). Transportation services
provided by the multimodal segment include the arrangement of intermodal
moves, contract logistics, truck brokerage and emergency and expedited air
freight. The multimodal segment markets its services through independent
commission sales agents and utilizes capacity provided by independent
contractors, including railroads and air cargo carriers. The nature of the
multimodal segment's business is such that a significant portion of its
operating costs also varies directly with revenue. The multimodal segment
typically contributes approximately 18% of Landstar's consolidated revenue.
32
The insurance segment is comprised of Signature Insurance Company
("Signature"), a wholly-owned offshore insurance subsidiary that was formed
in March 1997, and Risk Management Claim Services, Inc. The insurance segment
provides risk and claims management services to Landstar's operating companies.
In addition, it reinsures certain property, casualty and occupational accident
risks of certain independent contractors who have contracted to haul freight
for Landstar and provides certain property and casualty insurance directly to
Landstar's operating subsidiaries. The insurance segment typically contributes
approximately 2% of Landstar's consolidated revenue.
On August 22, 1998, Landstar Poole, Inc. ("Landstar Poole"), a wholly-owned
subsidiary of Landstar which comprised the entire company-owned tractor
segment, completed the sale of all of its tractors and trailers, certain
operating assets and the Landstar Poole business to Schneider National, Inc.
for $40,435,000 in cash. Accordingly, the historical financial results
of this segment have been reported as discontinued operations in the
accompanying financial statements.
Purchased transportation represents the amount an independent contractor
is paid to haul freight and is primarily based on a contractually agreed-
upon percentage of revenue generated by the haul for truck capacity provided by
independent contractors. Purchased transportation for the intermodal services
operations and the air freight operations of the multimodal segment is based on
a contractually agreed-upon fixed rate. Purchased transportation as a
percentage of revenue for the intermodal services operations is normally higher
than that of Landstar's other transportation operations. Purchased
transportation is the largest component of costs and expenses and, on a
consolidated basis, increases or decreases in proportion to the revenue
generated through independent contractors. Commissions to agents
are primarily based on contractually agreed-upon percentages of revenue at the
carrier segment and of gross profit at the multimodal segment. Commissions to
agents as a percentage of consolidated revenue will vary directly
with the percentage of consolidated revenue generated through independent
commission sales agents. Both purchased transportation and commissions to
agents generally will also increase or decrease as a percentage of the
Company's consolidated revenue if there is a change in the percentage of
revenue contributed by Signature or by the intermodal services operations or
the air freight operations of the multimodal segment.
Trailer rent and maintenance costs are the largest components of other
operating costs.
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. A material increase in the
frequency or severity of accidents or workers' compensation claims or the
unfavorable development of existing claims can be expected to adversely affect
Landstar's operating income.
Employee compensation and benefits account for over half of the Company's
selling, general and administrative expense. Other significant components of
selling, general and administrative expense are communications costs and rent
expense.
Depreciation and amortization primarily relates to depreciation of trailers
and management information services equipment.
33
The following table sets forth the percentage relationships of expense items to
revenue for the periods indicated:
Fiscal Years
------------------------
1999 1998 1997
------ ------ ------
Revenue 100.0% 100.0% 100.0%
Investment income 0.2 0.1
Costs and expenses:
Purchased transportation 73.6 74.0 73.7
Commissions to agents 8.0 7.9 8.1
Other operating costs 2.2 2.1 2.7
Insurance and claims 2.5 3.1 3.5
Selling, general and administrative 7.2 7.4 7.0
Depreciation and amortization 0.8 0.8 0.9
Restructuring costs 0.3
------ ------ ------
Total costs and expenses 94.3 95.3 96.2
------ ------ ------
Operating income 5.9 4.8 3.8
Interest and debt expense 0.3 0.3 0.2
------ ------ ------
Income from continuing operations
before income taxes 5.6 4.5 3.6
Income taxes 2.3 1.8 1.5
------ ------ ------
Income from continuing operations 3.3 2.7 2.1
Discontinued operations, net of
income taxes (1.8) (0.1)
------ ------ ------
Net income 3.3% 0.9% 2.0%
====== ====== ======
FISCAL YEAR ENDED DECEMBER 25, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 26,
1998
Revenue for the fiscal year 1999 was $1,388,083,000, an increase of
$104,476,000, or 8.1%, over revenue for the 1998 fiscal year. The increase
was attributable to higher revenue at the carrier, multimodal and insurance
segments of $82,480,000, $20,401,000 and $1,595,000, respectively. Overall,
revenue per revenue mile (price) increased approximately 3%, which reflected
improved freight quality, and revenue miles (volume) increased approximately
6%. The increase in revenue over the prior year at the insurance segment was
attributable to increased independent contractor participation in the insurance
programs reinsured by Signature.
Purchased transportation was 73.6% of revenue in 1999 compared with 74.0% in
1998. The decrease in purchased transportation as a percentage of revenue was
primarily attributable to
34
reduced intermodal and air freight revenue which tend to have a higher cost
of purchased transportation and increased utilization of company-owned
or leased trailers as opposed to those supplied by independent contractors.
Commissions to agents were 8.0% of revenue in 1999 compared with 7.9% in 1998
primarily due to an increase in the percentage of revenue generated through
independent commission sales agents which reflected the conversion of
company-owned sales locations to independent commission sales agent locations.
Other operating costs were 2.2% of revenue in 1999 compared with 2.1% in 1998.
The increase in other operating costs as a percentage of revenue was primarily
attributable to a higher provision for contractor bad debts, higher net trailer
costs and increased contractor recruiting costs, partially offset by a one-time
reduction in the cost of fuel taxes which resulted from a favorable fuel tax
audit. Insurance and claims were 2.5% of revenue in 1999 compared with 3.1% in
1998 primarily due to the favorable development of prior year claims in 1999.
Excluding the effects of the insurance programs available to the Company's
independent contractors which Signature reinsures, insurance and claims were
1.8% of revenue in 1999 and 2.2% in 1998. Selling, general and administrative
costs were 7.2% of revenue in 1999 and 7.4% in 1998. The decrease in selling,
general and administrative costs as a percentage of revenue was due to the
effect of the increase in revenue, a decrease in the provision for customer bad
debts and one-time costs of $560,000 attributable to the relocation in 1998 of
Landstar Express America from Charlotte, North Carolina to Jacksonville,
Florida, partially offset by increased wages and benefits, increased
information services costs and a higher provision for bonuses under the
Company's incentive compensation plan.
Interest and debt expense was 0.3% of revenue in 1999 and 1998.
The provisions for income taxes from continuing operations for the 1999 and
1998 fiscal years were based on an effective income tax rate of 40.5%, which
is higher than the statutory federal income tax rate primarily as a result of
state income taxes, amortization of certain goodwill and the meals and
entertainment exclusion. At December 25, 1999, the valuation allowance of
$658,000 was attributable to deferred state income tax benefits, which
primarily represented state operating loss carryforwards at one subsidiary.
The valuation allowance and goodwill will be reduced by $630,000
when realization of deferred state income tax benefits becomes likely.
The Company believes that deferred income tax benefits, net of the valuation
allowance, are more likely than not to be realized because of the Company's
ability to generate future taxable earnings.
35
Net income was $45,937,000, or $4.60 per common share, in 1999 compared with
income from continuing operations of $34,481,000, or $3.13 per common share,
in 1998. Including the dilutive effect of the Company's stock options,
diluted earnings per share was $4.55 in 1999 and diluted earnings per share
from continuing operations was $3.10 in 1998.
The loss from discontinued operations of $22,589,000, or $2.05 per common share
($2.03 diluted loss per share), in 1998 included a loss on sale of
$21,489,000, net of income tax benefits of $2,511,000, and a loss from
operations of $1,100,000, net of income tax benefits of $597,000.
Net income was $11,892,000, or $1.08 per common share, in 1998. Including the
dilutive effect of the Company's stock options, diluted earnings per share was
$1.07 in 1998.
FISCAL YEAR ENDED DECEMBER 26, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 27,
1997
Revenue for the fiscal year 1998 was $1,283,607,000, an increase of
$64,296,000, or 5.3%, over revenue for the 1997 fiscal year. The increase
was attributable to higher revenue at the carrier, multimodal and insurance
segments of $31,793,000, $27,262,000 and $5,241,000, respectively. Overall,
revenue per revenue mile increased approximately 3%, which reflected
improved freight quality, and revenue miles increased approximately
1%. The increase in revenue over the prior year at the insurance segment was
primarily attributable to the establishment of Signature in March 1997.
Purchased transportation was 74.0% of revenue in 1998 compared with 73.7% in
1997. Other operating costs were 2.1% of revenue in 1998 compared with 2.7% in
1997. The increase in purchased transportation and decrease in other operating
costs as a percentage of revenue was primarily attributable to the elimination
of company-owned tractors as part of the Landstar T.L.C., Inc. ("Landstar
T.L.C.") restructuring. Commissions to agents were 7.9% of revenue in 1998
compared with 8.1% in 1997 primarily due to a decrease in the percentage of
revenue contributed by the intermodal services operations of the multimodal
segment and increased premium revenue at the insurance segment. Insurance and
claims were 3.1% of revenue in 1998 compared with 3.5% in 1997 primarily due to
the favorable development of prior year claims in 1998 and favorable frequency
and severity of accidents. Excluding the effects of the insurance programs
available to the Company's independent contractors which Signature reinsures,
insurance and claims were 2.2% of revenue in 1998 and 2.7% in 1997. Selling,
general and administrative costs were 7.4% of revenue in 1998 and 7.0% in 1997.
The increase in selling, general and administrative costs as a percentage of
revenue was due to a higher provision for bonuses under the Company's incentive
compensation plan, increased management information services costs, an
increased provision for customer bad debts and one-time costs of $560,000
attributable to the relocation of Landstar Express America from Charlotte,
North Carolina to Jacksonville, Florida.
On December 18, 1996, the Company announced a plan to restructure its Landstar
T.L.C. operations, in addition to the relocation of its Shelton, Connecticut
corporate office headquarters to Jacksonville, Florida in 1997. Accordingly,
the Company recorded $3,247,000 of restructuring costs during the 1997 period.
The restructuring was completed during 1997.
36
Interest and debt expense was 0.3% of revenue in 1998 and 0.2% in 1997.
This increase was primarily attributable to the effect of higher average
borrowings on the senior credit facility, which were used to finance a portion
of the Company's stock repurchase program, partially offset by reduced capital
lease obligations.
The provisions for income taxes from continuing operations for the 1998 and
1997 fiscal years were based on effective income tax rates of approximately
40.5% and 41.7%, respectively, which are higher than the statutory federal
income tax rate primarily as a result of state income taxes, amortization of
certain goodwill and the meals and entertainment exclusion. At December 26,
1998, the valuation allowance of $658,000 was attributable to deferred state
income tax benefits, which primarily represented state operating loss
carryforwards at one subsidiary. The valuation allowance and goodwill were
reduced by $52,000 for state operating loss carryforwards utilized in 1998.
Income from continuing operations was $34,481,000, or $3.13 per common share,
in 1998 compared with $25,428,000, or $2.03 per common share, in 1997.
Including the dilutive effect of the Company's stock options, diluted earnings
per share from continuing operations was $3.10 in 1998 and $2.02 in 1997.
Excluding restructuring costs, income from continuing operations for 1997
would have been $27,321,000, or $2.18 per common share ($2.17 diluted earnings
per share).
The loss from discontinued operations of $22,589,000, or $2.05 per common share
($2.03 diluted loss per share), in 1998, included a loss on sale of
$21,489,000, net of income tax benefits of $2,511,000, and a loss from
operations of $1,100,000, net of income tax benefits of $597,000. The loss
from discontinued operations for 1997 was $738,000, net of income tax benefits
of $310,000, or $0.06 per common share ($0.06 diluted loss per share).
Net income was $11,892,000, or $1.08 per common share, in 1998 compared with
$24,690,000, or $1.97 per common share, in the prior year. Including the
dilutive effect of the Company's stock options, diluted earnings per share was
$1.07 in 1998 and $1.96 in 1997.
CAPITAL RESOURCES AND LIQUIDITY
On October 10, 1997, Landstar renegotiated its existing Credit Agreement with a
syndicate of banks and The Chase Manhattan Bank, as administrative agent (the
"Second Amended and Restated Credit Agreement"). The Second Amended and
Restated Credit Agreement provides $200,000,000 of borrowing capacity,
consisting of $150,000,000 of revolving credit (the "Working Capital Facility")
and $50,000,000 of revolving credit available to finance acquisitions (the
"Acquisition Facility"). $50,000,000 of the total borrowing capacity under the
Working Capital Facility may be utilized in the form of letter of credit
guarantees. At December 25, 1999, Landstar had commitments for letters of
credit outstanding in the amount of $22,229,000, primarily as
collateral for estimated insurance claims, $12,480,000 of which were
supported by the Second Amended and Restated Credit Agreement and $9,749,000
secured by assets deposited with a financial institution. The Second Amended
and Restated Credit Agreement expires on October 10, 2002.
37
Borrowings under the Second 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 The Chase Manhattan
Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%,
or, (ii) the rate at the time offered to The Chase Manhattan 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 Second Amended and Restated Credit Agreement. As of
December 25, 1999, the margin was equal to 32/100 of 1%. The unused portion of
the Second Amended and Restated Credit Agreement carries a commitment fee
determined based on the level of the Leverage Ratio, as therein defined. As of
December 25, 1999, the commitment fee for the unused portion of the Second
Amended and Restated Credit Agreement was 0.100%. At December 25, 1999, the
weighted average interest rate on borrowings outstanding under the Second
Amended and Restated Credit Agreement was 6.54%.
The Second 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. The Second Amended and Restated Credit Agreement also
requires Landstar to meet certain financial tests. Landstar is required to,
among other things, maintain minimum levels of Net Worth, as defined in the
Second Amended and Restated Credit Agreement, and Interest and Fixed Charge
Coverages, as therein defined. Under the most restrictive covenant, Landstar
exceeded the required Interest Coverage level by $15,467,000 at
December 25, 1999.
The Second Amended and Restated Credit Agreement provides a number of events 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 Second Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of Landstar System Holdings,
Inc.'s ("LSHI") subsidiaries guarantee LSHI's obligations under the Second
Amended and Restated Credit Agreement.
Shareholders' equity was $106,884,000, or 61% of total capitalization,
at December 25, 1999, compared with $111,848,000, or 76% of total
capitalization, at December 26, 1998. The reduction in shareholders' equity
was primarily a result of the purchase of 1,291,000 shares of the Company's
common stock at a total cost of $51,384,000, partially offset by fiscal year's
1999 net income. As of December 25, 1999, the Company may purchase an
additional 864,000 shares of its common stock under its current authorized
stock repurchase program. Long-term debt including current maturities was
$67,298,000 at December 25, 1999, $32,858,000 higher than at December 26, 1998,
primarily as a result of financing the stock repurchase program with borrowings
under the Second Amended and Restated Credit Agreement. Working capital and the
ratio of current assets to current liabilities were $81,589,000 and 1.48 to 1,
respectively, at December 25, 1999, compared with $75,670,000 and 1.53 to 1,
respectively, at December 26, 1998. Landstar has historically operated with
current ratios approximating 1.5 to 1. Cash provided by operating activities
from continuing operations was $43,392,000 in 1999 compared with $53,363,000
in 1998. The decrease in cash provided by operating activities is attributable
38
to an increase in trade accounts receivable which resulted from the increase in
revenue during the 1999 fourth quarter. During the 1999 fiscal year, Landstar
purchased $12,716,000 of operating property and acquired $17,445,000 of revenue
equipment by entering into capital leases. Landstar anticipates it will acquire
approximately $26,000,000 of operating property during fiscal year 2000 either
by purchase or by lease financing.
Landstar is involved in certain claims and pending litigation arising from the
normal conduct of business. Based on the 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 claims and pending litigation and that the ultimate outcome, after
provisions thereof, will not have a material adverse effect on the financial
condition of Landstar, but could have a material effect on the results of
operations in a given quarter or year.
Landstar Ranger is subject to the Multi Employer Pension Plan Amendments Act of
1980 ("MEPPA"), which could require Landstar Ranger, in the event of
withdrawal, to fund its proportionate share of the union sponsored plans'
unfunded benefit obligation. However, management believes that the liability,
if any, for withdrawal from any or all of these plans would not have a material
adverse effect on the financial condition of Landstar, but could have a
material adverse effect on the results of operations in a given quarter or
year.
The Company did not experience any disruptions in its operations as a result
of the year changing to 2000. The vast majority of the changes necessary to
make the Company's information technology systems year 2000 compliant were
incurred as part of ongoing system development or as part of a company-wide
strategy to standardize computer systems. As such, management has not
separately quantified the cost of year 2000 compliance. However, management
estimates the total cost of third party assistance for year 2000 compliance
approximated $700,000.
Management believes that cash flow from operations combined with its borrowing
capacity under the Second Amended and Restated Credit Agreement will be
adequate to meet Landstar's debt service requirements, fund continued growth,
both internal and through acquisitions, complete its announced stock purchase
program and meet working capital needs.
Management does not believe inflation has had a material impact on the results
of operations or financial condition of Landstar in the past five years.
However, inflation higher than that experienced in the past five years might
have an adverse effect on the Company's results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." This Statement,
effective for fiscal years beginning after June 15, 2000, establishes standards
for reporting and display of derivative investments and for hedging activities.
Management believes that upon adoption of this Statement, Landstar's financial
statements will not be affected, considering the nature of the transactions the
Company routinely enters into.
39
FORWARD-LOOKING STATEMENTS
The Company has included various statements in Management's Discussion and
Analysis of Financial Condition and Results of Operations which may be
considered as forward-looking statements of expected future results of
operations or events. Such statements, based upon management's interpretation
of currently available information, are subject to risks and uncertainties that
could cause future financial results or events to differ materially from those
which are presented. Such risks and factors which are outside of the Company's
control include general economic conditions, competition in the transportation
industry, governmental regulation, the Company's ability to recruit and retain
qualified independent contractors, fuel prices and adverse weather conditions.
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 due to reduced
shipments and higher operating costs in the winter months.
40
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 25, December 26,
1999 1998
----------- -----------
ASSETS
Current assets:
Cash $ 23,721 $ 26,681
Short-term investments 1,000
Trade accounts receivable, less allowance
of $4,002 and $6,428 207,024 172,471
Other receivables, including advances to independent
contractors, less allowance of $5,033
and $4,007 14,318 13,980
Prepaid expenses and other current assets 6,190 5,428
-------- --------
Total current assets 252,253 218,560
-------- --------
Operating property, less accumulated depreciation
and amortization of $34,283 and $29,603 63,797 46,958
Goodwill, less accumulated amortization of $7,777
and $6,561 33,733 34,949
Deferred income taxes and other assets 15,658 13,198
-------- --------
Total assets $365,441 $313,665
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 19,471 $ 14,746
Accounts payable 67,322 50,624
Current maturities of long-term debt 6,769 4,708
Insurance claims 27,207 29,873
Accrued compensation 12,113 9,881
Other current liabilities 37,782 33,058
-------- --------
Total current liabilities 170,664 142,890
-------- --------
Long-term debt, excluding current maturities 60,529 29,732
Insurance claims 27,364 29,195
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 13,063,974 and
13,041,574 shares 131 130
Additional paid-in capital 65,833 65,198
Retained earnings 170,174 124,237
Cost of 3,909,041 and 2,618,041 shares of common
stock in treasury (127,560) (76,176)
Notes receivable arising from exercise of stock options (1,694) (1,541)
-------- --------
Total shareholders' equity 106,884 111,848
-------- --------
Total liabilities and shareholders' equity $365,441 $313,665
======== ========
See accompanying notes to consolidated financial statements.
41
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Fiscal Years Ended
December 25, December 26, December 27,
1999 1998 1997
------------ ------------ ------------
Revenue $ 1,388,083 $ 1,283,607 $ 1,219,311
Investment income 2,502 1,689
Costs and expenses:
Purchased transportation 1,022,203 950,343 898,746
Commissions to agents 111,666 101,409 98,425
Other operating costs 30,000 27,516 32,747
Insurance and claims 34,064 39,388 42,885
Selling, general and administrative 99,240 95,028 85,586
Depreciation and amortization 11,698 10,158 11,354
Restructuring costs 3,247
------------ ------------ ------------
Total costs and expenses 1,308,871 1,223,842 1,172,990
------------ ------------ ------------
Operating income 81,714 61,454 46,321
Interest and debt expense 4,509 3,503 2,705
------------ ------------ ------------
Income from continuing operations before
income taxes 77,205 57,951 43,616
Income taxes 31,268 23,470 18,188
------------ ------------ ------------
Income from continuing operations 45,937 34,481 25,428
Discontinued operations, net of
income taxes (22,589) (738)
------------ ------------ ------------
Net income $ 45,937 $ 11,892 $ 24,690
============ ============ ============
Earnings per common share:
Income from continuing operations $ 4.60 $ 3.13 $ 2.03
Loss from discontinued operations (2.05) (0.06)
------------ ------------ ------------
Earnings per common share $ 4.60 $ 1.08 $ 1.97
============ ============ ============
Diluted earnings per share:
Income from continuing operations $ 4.55 $ 3.10 $ 2.02
Loss from discontinued operations (2.03) (0.06)
------------ ------------ ------------
Diluted earnings per share $ 4.55 $ 1.07 $ 1.96
============ ============ ============
Average number of shares outstanding:
Earnings per common share 9,982,000 11,022,000 12,541,000
Diluted earnings per share 10,102,000 11,123,000 12,580,000
See accompanying notes to consolidated financial statements.
42
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended
December 25, December 26, December 27,
1999 1998 1997
(Dollars in thousands) ------------ ------------ ------------
OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Net income $ 45,937 $ 11,892 $ 24,690
Adjustments to reconcile net income to net cash
provided by operating activities of continuing operations:
Discontinued operations 22,589 738
Depreciation and amortization of operating property 10,482 8,892 9,737
Amortization of goodwill and non-competition agreements 1,216 1,266 1,617
Non-cash interest charges 324 324 264
Provisions for losses on trade and other receivables 2,643 4,276 4,232
Losses (gains) on sales of operating property 708 (253) (600)
Deferred income taxes, net 1,788 (423) 5,670
Non-cash charge in lieu of income taxes 52 106
Changes in operating assets and liabilities,
net of discontinued operations:
Increase in trade and other accounts receivable (37,534) (7,167) (13,672)
Increase in prepaid expenses and other assets (1,329) (2,066) (195)
Increase in accounts payable 16,698 2,482 11,978
Increase (decrease) in insurance claims (4,497) 4,531 8,492
Increase in other liabilities 6,956 6,968 5,423
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 43,392 53,363 58,480
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of investments (5,005) (4,799)
Maturities of short-term investments 3,012 1,787
Purchases of operating property (12,716) (7,185) (8,944)
Proceeds from sales of operating property 2,132 2,716 13,373
Proceeds from sale of discontinued operations 40,435
------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (15,589) 38,978 1,417
------------ ------------ ------------
FINANCING ACTIVITIES OF CONTINUING OPERATIONS
Increase (decrease) in cash overdraft 4,725 2,598 (483)
Borrowings on revolving credit facility 21,500 15,000
Principal payments on long-term debt and capital lease obligations (6,087) (23,040) (29,338)
Proceeds from exercise of stock options and related income tax benefit 483 1,489 429
Purchases of common stock (51,384) (53,229) (20,980)
------------ ------------ ------------
NET CASH USED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS (30,763) (57,182) (50,372)
------------ ------------ ------------
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS (26,472) 4,282
------------ ------------ ------------
Increase (decrease) in cash (2,960) 8,687 13,807
Cash at beginning of period 26,681 17,994 4,187
------------ ------------ ------------
Cash at end of period $ 23,721 $ 26,681 $ 17,994
============ ============ ============
See accompanying notes to consolidated financial statements.
43
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Fiscal Years Ended December 25, 1999,
December 26, 1998 and December 27, 1997
(Dollars in thousands)
Notes
Treasury Stock Receivable
Common Stock Additional at Cost Arising from
----------------- Paid-In Retained ------------------- Exercise of
Shares Amount Capital Earnings Shares Amount Stock Options Total
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 28, 1996 12,882,874 $ 129 $61,740 $ 87,655 94,041 $ (1,967) $147,557
Net income 24,690 24,690
Purchases of common stock 821,400 (20,980) (20,980)
Exercises of stock options
and related income tax
benefit 18,100 429 429
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 27, 1997 12,900,974 129 62,169 112,345 915,441 (22,947) 151,696
Net income 11,892 11,892
Purchases of common stock 1,702,600 (53,229) (53,229)
Exercises of stock options
and related income tax
benefit 140,600 1 3,029 $ (1,541) 1,489
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 26, 1998 13,041,574 130 65,198 124,237 2,618,041 (76,176) (1,541) 111,848
Net income 45,937 45,937
Purchases of common stock 1,291,000 (51,384) (51,384)
Exercises of stock options
and related income tax
benefit 22,400 1 635 (153) 483
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 25, 1999 13,063,974 $ 131 $65,833 $170,174 3,909,041 $(127,560) $ (1,694) $106,884
========== ====== ======= ======== ========= ========= ============= ========
See accompanying notes to consolidated financial statements.
44
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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." Significant inter-company accounts have been eliminated in
consolidation. 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
Revenue and the related direct freight expenses are recognized upon completion
of freight delivery.
Insurance Claim Costs
Landstar provides, 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 up to $1,000,000 for each individual property, casualty and
general liability claim, $500,000 for each workers' compensation claim and
$250,000 for each cargo claim.
Tires
Tires and tubes purchased as part of trailers are capitalized as part
of the cost of the equipment. Replacement tires and tubes are charged to
expense when placed in service.
Investments
Investments, all of which are intended to be held to maturity, consist of
investment grade bonds having maturities of up to three years and are carried
at amortized cost, which approximates fair value. Short-term investments
represent the current portion of these bonds and the $4,002,000 non-current
portion is included in other assets.
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.
Trailers are being depreciated over 7 years.
Goodwill
Goodwill represents the excess of purchase cost over the estimated fair value
of net assets acquired. It is being amortized on a straight-line basis over
periods of twenty and forty years. The Company assesses the recoverability of
goodwill by determining whether the amortization of the goodwill balance over
its remaining useful life can be recovered through projected undiscounted
future operating cash flows. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's current average cost of funds.
45
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.
Stock-Based Compensation
Compensation cost for the Company's stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of grant
over the exercise price of the stock option.
Earnings Per Share
Earnings per common share amounts are based on the weighted average number of
common shares outstanding and diluted earnings per share amounts are based on
the weighted average number of common shares outstanding plus the incremental
shares that would have been outstanding upon the assumed exercise of all
dilutive stock options.
(2) Discontinued Operations
On August 22, 1998, Landstar Poole, Inc. ("Landstar Poole"), a wholly-owned
subsidiary of Landstar which comprised the entire company-owned tractor
segment, completed the sale of all of its tractors and trailers, certain
operating assets and the Landstar Poole business to Schneider National, Inc.
for $40,435,000 in cash. Accordingly, the financial results of this segment
have been reported as discontinued operations in the accompanying financial
statements.
The loss from discontinued operations of $22,589,000 in 1998, included a
loss on sale of $21,489,000, net of income tax benefits of $2,511,000, and a
loss from operations of $1,100,000, net of income tax benefits of $597,000.
The loss from discontinued operations for 1997 was $738,000, net of income tax
benefits of $310,000. Certain liabilities of the company-owned tractor segment
were retained by Landstar, primarily insurance claims, capital lease
obligations and accounts payable.
The company-owned tractor segment had revenue of $58,715,000 and $93,393,000
for 1998 and 1997, respectively.
46
(3) Restructuring Costs
On December 18, 1996, the Company announced a plan to restructure its Landstar
T.L.C., Inc. ("Landstar T.L.C.") operations, in addition to the relocation of
its Shelton, Connecticut corporate office headquarters to Jacksonville,
Florida in the second quarter of 1997.
The plan to restructure Landstar T.L.C. included the merger of the operations
of Landstar T.L.C. into Landstar Inway, Inc., the closing of the Landstar
T.L.C. headquarters in St. Clair, Missouri and the disposal of all of Landstar
T.L.C.'s company-owned tractors.
During the first half of 1997, the Company recorded $3,247,000 of
restructuring costs, which included $1,647,000 for office and employee
relocation and $1,600,000 of other costs. After deducting related income tax
47
benefits of $1,354,000, the restructuring charge reduced net income by
$1,893,000, or $0.15 per common share, in 1997. The restructuring was
completed during 1997.
(4) Income Taxes
The provisions for income taxes from continuing operations consisted of
the following (in thousands):
Fiscal Years
------------------------------
1999 1998 1997
---- ---- ----
Current:
Federal $24,931 $21,185 $10,375
State 4,549 2,656 2,037
------- ------- -------
29,480 23,841 12,412
Deferred:
Federal 1,019 (1,268) 4,465
State 769 845 1,205
------ ------- -------
1,788 (423) 5,670
Non-cash charge in lieu of income taxes 52 106
------- ------- -------
Income taxes $31,268 $23,470 $18,188
======= ======= =======
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities consisted of the following (in thousands):
Dec. 25, 1999 Dec. 26, 1998
------------- -------------
Deferred tax assets:
Receivable valuations $ 3,759 $ 3,263
Deferred state income tax benefits 1,665 1,396
State net operating loss carryforwards 1,439 1,536
Self insured claims 8,044 10,383
Other 3,281 2,025
--------- ---------
18,188 18,603
Valuation allowance (658) (658)
--------- ---------
$ 17,530 $ 17,945
========= =========
Deferred tax liabilities:
Operating property $ 7,321 $ 6,296
All other 6,174 5,826
--------- ---------
$ 13,495 $ 12,122
========= =========
48
The loss from discontinued operations included a deferred tax benefit of
$7,604,000 in 1998.
At December 25, 1999, the valuation allowance of $658,000 was attributable to
deferred state income tax benefits, which primarily represented state
operating loss carryforwards at one subsidiary. The valuation allowance and
goodwill will be reduced by $630,000 when realization of deferred state
income tax benefits becomes likely.
The following table summarizes the differences between income taxes calculated
at the federal income tax rate of 35% on income from continuing operations
before income taxes and the provisions for income taxes (in thousands):
Fiscal Years
----------------------------
1999 1998 1997
---- ---- ----
Income taxes at federal income tax rate $27,022 $20,283 $15,266
State income taxes, net of federal income
tax benefit 3,457 2,309 2,176
Amortization of goodwill 258 258 258
Meals and entertainment exclusion 472 470 425
Other, net 59 150 63
------- -------- --------
Income taxes $31,268 $23,470 $18,188
======= ======= =======
Landstar paid income taxes of $28,659,000 in 1999, $26,110,000 in 1998 and
$10,184,000 in 1997.
(5) Operating Property
Operating property is summarized as follows (in thousands):
Dec. 25, 1999 Dec. 26, 1998
------------- -------------
Land $ 2,280 $ 2,280
Leasehold improvements 5,817 95
Buildings and improvements 8,638 9,589
Trailers 56,966 43,522
Other equipment 24,379 21,075
-------- --------
98,080 76,561
Less accumulated depreciation and amortization 34,283 29,603
-------- --------
$ 63,797 $ 46,958
======== ========
Included above is $50,899,000 in 1999 and $35,438,000 in 1998 of operating
property under capital leases, $35,153,000 and $22,513,000, respectively, net
of accumulated amortization. Landstar acquired operating property by entering
49
into capital leases in the amount of $17,445,000 and $12,902,000 in 1999
and 1998, respectively.
(6) Pension Plans
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 16% 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. In addition, one subsidiary, Landstar Ranger,
Inc. ("Landstar Ranger"), makes contributions in accordance with a negotiated
labor contract (generally based on the number of weeks worked) to union
sponsored multi-employer defined benefit pension plans for the benefit of
approximately 200 union drivers.
Landstar Ranger is subject to the Multi Employer Pension Plan Amendments Act
of 1980 ("MEPPA"), which could require Landstar Ranger, in the event of
withdrawal, to fund its proportionate share of these union sponsored plans'
unfunded benefit obligation. Management believes that the liability, if any,
for withdrawal from any or all of these plans would not have a material
adverse effect on the financial condition of Landstar, but could have a
material effect on the results of operations in a given quarter or year.
The expense from continuing operations for the Company sponsored defined
contribution plan and for union sponsored plans was $1,082,000 and $1,351,000
in 1999, respectively, $624,000 and $1,265,000 in 1998, respectively and
$660,000 and $1,193,000 in 1997, respectively.
(7) Debt
Long-term debt is summarized as follows (in thousands):
Dec. 25, 1999 Dec. 26, 1998
------------- -------------
Capital leases $27,298 $15,940
Working Capital Facility 21,500
Acquisition Facility 18,500 18,500
------- -------
67,298 34,440
Less current maturities 6,769 4,708
------- -------
Total long-term debt $60,529 $29,732
======= =======
On October 10, 1997, Landstar renegotiated its existing Credit Agreement with a
syndicate of banks and The Chase Manhattan Bank, as administrative agent (the
"Second Amended and Restated Credit Agreement"). The Second Amended and
Restated Credit Agreement provides $200,000,000 of borrowing capacity,
consisting of $150,000,000 of revolving credit (the "Working Capital Facility")
and $50,000,000 of revolving credit available to finance acquisitions (the
"Acquisition Facility"). $50,000,000 of the total borrowing capacity under the
Working Capital Facility may be utilized in the form of letter of credit
guarantees. The Second Amended and Restated Credit Agreement expires on
October 10, 2002.
50
Borrowings under the Second 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 The Chase Manhattan
Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%,
or, (ii) the rate at the time offered to The Chase Manhattan 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 Second Amended and Restated Credit Agreement. As of
December 25, 1999, the margin was equal to 32/100 of 1%. The unused portion of
the Second Amended and Restated Credit Agreement carries a commitment fee
determined based on the level of the Company's Leverage Ratio, as therein
defined. As of December 25, 1999, the commitment fee for the unused portion
of the Second Amended and Restated Credit Agreement was 0.100%. At December 25,
1999, the weighted average interest rate on borrowings outstanding under the
Second Amended and Restated Credit Agreement was 6.54%. Based on the borrowing
rates in the Second Amended and Restated Credit Agreement and the repayment
terms, the fair value of the outstanding borrowings under the Second Amended
and Restated Credit Agreement was estimated to approximate carrying value.
The Second 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. The Second Amended and Restated Credit Agreement also
requires Landstar to meet certain financial tests. Landstar is required to,
among other things, maintain minimum levels of Net Worth, as defined in the
Second Amended and Restated Credit Agreement, and Interest and Fixed Charge
Coverages, as therein defined. Under the most restrictive covenant, Landstar
exceeded the required Interest Coverage level by approximately
$15,467,000 at December 25, 1999.
The Second Amended and Restated Credit Agreement provides a number of events 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 Second Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of LSHI's subsidiaries
guarantee LSHI's obligations under the Second Amended and Restated Credit
Agreement.
The amounts outstanding on both the Working Capital Facility and the
Acquisition Facility are payable upon the expiration of the Second Amended and
Restated Credit Agreement. There are no other installments of long-term debt,
excluding capital lease obligations, maturing in the next five years.
Landstar paid interest of $4,484,000 in 1999, $4,159,000 in 1998 and
$5,476,000 in 1997. Included in interest paid is $695,000 and $1,936,000 in
1998 and 1997, respectively, related to discontinued operations.
(8) Leases
The future minimum lease payments under all noncancelable leases at
December 25, 1999, principally for trailers and the Company's
headquarters facility in Jacksonville, Florida, are shown in the
following table (in thousands):
51
Capital Operating
Leases Leases
------- ---------
2000 $ 8,370 $ 3,162
2001 7,720 2,532
2002 7,117 2,177
2003 5,691 1,742
2004 2,300 1,680
Thereafter 19,069
------- ---------
31,198 $ 30,362
=========
Less amount representing interest
(5.9% to 7.4%) 3,900
Present value of minimum -------
lease payments $27,298
=======
Total rent expense from continuing operations, net of sublease income, was
$19,322,000 in 1999, $20,548,000 in 1998 and $21,022,000 in 1997.
(9) Stock Option Plans
The Company maintains two stock option plans. Under the 1993 Stock Option Plan,
as amended, (the "Plan"), the Compensation Committee of the Board of Directors
may grant options to Company employees for up to 1,115,000 shares of common
stock. Under the 1994 Directors Stock Option Plan (the "DSOP"), outside members
of the Board of Directors will be granted up to an aggregate of 120,000 options
to purchase common stock. Under the DSOP, as amended, each outside Director
will be granted 9,000 options to purchase common stock upon election or
re-election to the Board of Directors.
Options granted become exercisable in five equal annual installments under the
Plan and three equal annual installments under the DSOP, commencing on the
first anniversary of the date of grant, subject to acceleration in certain
circumstances, and expire on the tenth anniversary of the date of grant.
Under the plans, the exercise price of each option equals the market price of
the Company's stock on the date of grant. At December 25, 1999, there were
1,042,700 shares of the Company's stock reserved for issuance upon exercise of
options granted under the plans.
52
Information regarding the Company's stock option plans is as follows:
Options Outstanding Options Exercisable
--------------------------- --------------------------
Weighted Average Weighted Average
Exercise Price Exercise Price
Shares Per Share Shares Per Share
-------- ----------------- -------- ----------------
Options at December 28, 1996 512,900 $ 24.77 201,000 $ 23.10
Granted 23,500 $ 26.38
Exercised (18,100) $ 19.89
Forfeited (36,800) $ 24.95
--------
Options at December 27, 1997 481,500 $ 25.01 276,800 $ 23.90
Granted 219,300 $ 35.02
Exercised (140,600) $ 20.66
Forfeited (39,900) $ 27.36
--------
Options at December 26, 1998 520,300 $ 30.25 203,900 $ 26.40
Granted 71,600 $ 36.33
Exercised (22,400) $ 19.88
Forfeited (300) $ 25.50
--------
Options at December 25, 1999 569,200 $ 31.42 286,520 $ 28.53
=======
The fair value of each option grant on its grant date was calculated using
the Black-Scholes option pricing model with the following assumptions for
grants made in 1999, 1998 and 1997: risk free interest rate of 6.0% in 1999,
5.0% in 1998 and 6.0% in 1997, expected lives of 5 years and no dividend yield.
The expected volatility used in calculating the fair market value of stock
options granted was 38% in 1999, 40% in 1998 and 37% in 1997. The weighted
average grant date fair value of stock options granted was $15.71, $15.02 and
$11.23 per share in 1999, 1998 and 1997, respectively.
The following table summarizes stock options outstanding at December 25, 1999:
Options Outstanding
-------------------
Range of Exercise Weighted Average Weighted Average
Prices Number Outstanding Remaining Contractual Exercise Price
Per Share Dec. 25, 1999 Life (years) Per Share
----------------- ------------------ --------------------- ----------------
$22.531 - $33.800 370,500 6.3 $ 27.89
$33.801 - $40.500 198,700 9.0 $ 38.01
----------------
$22.531 - $40.500 569,200 7.3 $ 31.42
================
53
Options Exercisable
-------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
Per Share Dec. 25, 1999 Per Share
----------------- ---------------- ----------------
$22.531 - $33.800 261,100 $ 27.51
$33.801 - $38.953 25,420 $ 38.95
----------------
$22.531 - $38.953 286,520 $ 28.53
================
The Company accounts for its stock option plans using the intrinsic value
method as prescribed in Accounting Principal Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Had compensation cost for the Company's stock
option plans been determined using the fair value at grant date method as
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the effect on net income and
earnings per common share for the fiscal year would have been $966,000, or
$0.10 per common share, in 1999, $484,000, or $0.04 per common share, in 1998
and $378,000, or $0.03 per common share, in 1997.
(10) Shareholders' Equity
During 1999, Landstar purchased 1,291,000 shares of its common stock at a total
cost of $51,384,000 pursuant to previously announced stock repurchase programs.
As of December 25, 1999, Landstar may purchase an additional 864,000 shares of
its common stock under its current authorized stock repurchase program.
During 1998, the Company established an employee stock option loan program.
Under the terms of the program, the Company will provide employees
financing in order for them to exercise fully vested stock options. The
loans are full recourse with the principal repayable in lump sum on the fifth
anniversary of the loan. During 1999 and 1998, $384,000 and $1,541,000 of such
loans were issued, respectively.
The Company has 2,000,000 shares of preferred stock authorized and unissued.
Under the terms of a Shareholder Rights Agreement (the "Agreement"), a
preferred stock purchase right (the "Right") accompanies each outstanding
share of common stock. Each Right entitles the holder to purchase from the
Company one one-hundredth of a share of preferred stock at an exercise price
of $60. Within the time limits and under the circumstances specified in the
Agreement, the Rights entitle the holder to acquire shares of common stock in
the Company, or the surviving Company in a business combination, having a
value of two times the exercise price. The Rights may be redeemed prior to
becoming exercisable by action of the Board of Directors at a redemption price
of $.01 per Right. The Rights expire February 10, 2003. Until a Right is
exercised, it has no rights including, without limitation, the right to vote
or to receive dividends.
54
(11) Segment Information
The Company has three reportable business segments. These are the carrier,
multimodal and insurance segments. In 2000, the Company made a decision
to realign the operations of Landstar Gemini, Inc. ("Landstar Gemini"),
formerly a wholly-owned subsidiary of Landstar Logistics, Inc. ("Landstar
Logistics"), with the operations of the carrier segment. Accordingly, Landstar
Gemini is now included as part of the carrier segment and is no longer included
in the multimodal segment. All segment information included herein has been
restated to reflect this change.
The carrier segment provides truckload transportation for a wide
range of general commodities over irregular routes with its fleet of dry and
specialty vans and unsided trailers, including flatbed, drop deck and
specialty. It also provides short-to-long haul movement of containers by truck
and dedicated power only truck capacity. The carrier segment markets its
services primarily through independent commission sales agents and utilizes
tractors provided by independent contractors. Transportation services provided
by the multimodal segment include the arrangement of intermodal moves, contract
logistics, truck brokerage and emergency and expedited air freight. The
multimodal segment markets its services through independent commission sales
agents and utilizes capacity provided by independent contractors, including
railroads and air cargo carriers. The nature of the carrier and multimodal
segments' business is such that a significant portion of their operating costs
varies directly with revenue. The insurance segment provides risk and claims
management services to Landstar's operating companies. In addition, it
reinsures certain property, casualty, and occupational accident risks of
certain independent contractors who have contracted to haul freight for
Landstar and provides certain property and casualty insurance directly to
Landstar's operating subsidiaries. Signature Insurance Company, which
comprises the majority of the insurance segment, began operations in March
1997.
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.
Inter-segment revenue for transactions between the carrier and multimodal
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. Inter-segment revenue between the insurance segment
and the carrier and multimodal segments is calculated at the beginning of
each fiscal period based on an actuarial calculation of historical loss
experience and is believed to approximate the cost that would have been
incurred had similar insurance been obtained from an unrelated third party.
No single customer accounts for more than 10% of consolidated revenue.
However, during 1999 approximately 15% of the Company's revenue was
attributable to the automotive industry. Substantially all of the Company's
revenue is generated in the United States.
55
The following tables summarize information about the Company's reportable
business segments as of and for the fiscal years ending December 25, 1999,
December 26, 1998 and December 27, 1997 (in thousands):
1999
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $1,111,912 $ 250,395 $ 25,776 $1,388,083
Internal revenue 35,194 196 21,790 57,180
Investment income 2,502 2,502
Interest and debt expense $ 4,509 4,509
Depreciation and
amortization 7,107 982 3,609 11,698
Operating income 86,282 7,949 27,141 (39,658) 81,714
Expenditures on
long-lived assets 374 137 12,205 12,716
Capital lease additions 17,445 17,445
Total assets 251,922 57,337 28,180 28,002 365,441
1998
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $1,029,432 $ 229,994 $ 24,181 $1,283,607
Internal revenue 38,302 169 20,716 59,187
Investment income 1,689 1,689
Interest and debt expense $ 3,503 3,503
Depreciation and
amortization 6,072 1,064 3,022 10,158
Operating income 69,401 6,407 19,479 (33,833) 61,454
Expenditures on
long-lived assets 2,240 717 4,228 7,185
Capital lease additions 12,902 12,902
Total assets 210,200 55,207 24,179 24,079 313,665
1997
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 997,639 $ 202,732 $ 18,940 $1,219,311
Internal revenue 39,530 610 15,452 55,592
Interest income 468 468
Interest and debt expense $ 3,173 3,173
Depreciation and
amortization 6,473 1,146 3,735 11,354
Restructuring costs 1,355 43 1,849 3,247
Operating income 63,172 4,463 7,863 (29,177) 46,321
Expenditures on
long-lived assets 6,314 629 2,001 8,944
Total assets 204,974 51,224 22,101 78,880 357,179
56
Included in total assets in the other segment at December 27, 1997 are assets
of $68,791,000 from the discontinued company-owned tractor segment.
(12) Commitments and Contingencies
At December 25, 1999, Landstar had commitments for letters of
credit outstanding in the amount of $22,229,000, primarily as
collateral for estimated insurance claims, $12,480,000 of which were
supported by the Second Amended and Restated Credit Agreement and
$9,749,000 secured by assets deposited with a financial institution.
Landstar is involved in certain 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 claims and pending litigation and that the ultimate outcome, after
provisions thereof, will not have a material adverse effect on the financial
condition of Landstar, but could have a material effect on the results of
operations in a given quarter or year.
57
Independent Auditors' Report
- ----------------------------
Landstar System, Inc. and Subsidiary
The Board of Directors and Shareholders
Landstar System, Inc.:
We have audited the accompanying consolidated balance sheets of Landstar
System, Inc. and subsidiary as of December 25, 1999 and December 26, 1998, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the fiscal years ended December 25, 1999, December 26, 1998
and December 27, 1997. 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 generally accepted auditing
standards. 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 25, 1999 and December 26, 1998, and the
results of their operations and their cash flows for the fiscal years ended
December 25, 1999, December 26, 1998 and December 27, 1997 in conformity with
generally accepted accounting principles.
KPMG LLP
Stamford, Connecticut
February 1, 2000
58
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
1999 1999 1999 1999
---------- ---------- ---------- ----------
Revenue $ 380,124 $ 351,460 $ 345,064 $ 311,435
========== ========== ========== ==========
Operating income $ 27,800 $ 21,616 $ 18,995 $ 13,303
---------- ---------- ---------- ----------
Income before income taxes $ 26,272 $ 20,295 $ 18,074 $ 12,564
Income taxes 10,639 8,221 7,319 5,089
---------- ---------- ---------- ----------
Net income $ 15,633 $ 12,074 $ 10,755 $ 7,475
========== ========== ========== ==========
Earnings per common share (1) $ 1.65 $ 1.21 $ 1.06 $ 0.72
========== ========== ========== ==========
Diluted earnings per share (1) $ 1.63 $ 1.20 $ 1.05 $ 0.71
========== ========== ========== ==========
59
Fourth Third Second First
Quarter Quarter Quarter Quarter
1998 1998 1998 1998
---------- ---------- ---------- ----------
Revenue $ 333,865 $ 324,033 $ 327,525 $ 298,184
========== ========== ========== ==========
Operating income $ 19,954 $ 16,516 $ 16,047 $ 8,937
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes $ 19,035 $ 15,528 $ 15,104 $ 8,284
Income taxes 7,709 6,289 6,117 3,355
---------- ---------- ---------- ----------
Income from continuing operations 11,326 9,239 8,987 4,929
Discontinued operations,
net of income taxes (22,152) (437)
---------- ---------- ---------- ----------
Net income (loss) $ 11,326 $ 9,239 $ (13,165) $ 4,492
========== ========== ========== ==========
Earnings (loss) per common share: (1)
Income from continuing operations $ 1.09 $ 0.86 $ 0.80 $ 0.42
Loss from discontinued operations (1.97) (0.04)
---------- ---------- ---------- ----------
Earnings (loss) per common share $ 1.09 $ 0.86 $ (1.17) $ 0.38
========== ========== ========== ==========
Diluted earnings (loss) per share: (1)
Income from continuing operations $ 1.07 $ 0.85 $ 0.79 $ 0.42
Loss from discontinued operations (1.95) (0.04)
---------- ---------- ---------- ----------
Diluted earnings (loss) per share $ 1.07 $ 0.85 $ (1.16) $ 0.38
========== ========== ========== ==========
(1) Due to the changes in the number of average common shares and common
stock equivalents outstanding during the year, earnings per share amounts for
each quarter do not necessarily add to the earnings per share amounts for the
full year.
60
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Fiscal Years
1999 1998 1997 1996 1995
------------------------------------------------------------
Income Statement Data:
Revenue $1,388,083 $1,283,607 $1,219,311 $1,129,856 $1,054,648
Investment income 2,502 1,689
Costs and expenses:
Purchased transportation 1,022,203 950,343 898,746 826,822 773,300
Commissions to agents 111,666 101,409 98,425 84,768 73,095
Other operating costs 30,000 27,516 32,747 51,385 43,369
Insurance and claims 34,064 39,388 42,885 29,774 26,722
Selling, general and administrative 99,240 95,028 85,586 79,002 81,448
Depreciation and amortization 11,698 10,158 11,354 13,814 11,287
Restructuring costs 3,247 5,937
--------- --------- --------- --------- ---------
Total costs and expenses 1,308,871 1,223,842 1,172,990 1,091,502 1,009,221
--------- --------- --------- --------- ---------
Operating income 81,714 61,454 46,321 38,354 45,427
Interest and debt expense 4,509 3,503 2,705 5,032 5,166
--------- --------- --------- --------- ---------
Income from continuing operations
before income taxes 77,205 57,951 43,616 33,322 40,261
Income taxes 31,268 23,470 18,188 13,675 16,489
--------- --------- --------- --------- ---------
Income from continuing operations 45,937 34,481 25,428(1) 19,647(2) 23,772
Discontinued operations, net of
income taxes (22,589) (738) (722) 1,190
--------- --------- --------- --------- ---------
Net income $ 45,937 $ 11,892 $ 24,690 $ 18,925 $ 24,962
========= ========= ========= ========= =========
Earnings per common share:
Income from continuing operations $ 4.60 $ 3.13 $ 2.03(1) $ 1.54(2) $ 1.86
Income (loss) from discontinued
operations (2.05) (0.06) (0.06) 0.09
--------- --------- --------- --------- ---------
Earnings per common share $ 4.60 $ 1.08 $ 1.97 $ 1.48 $ 1.95
========= ========= ========= ========= =========
Diluted earnings per share:
Income from continuing operations $ 4.55 $ 3.10 $ 2.02(1) $ 1.53(2) $ 1.85
Income (loss) from discontinued
operations (2.03) (0.06) (0.06) 0.09
--------- --------- --------- --------- ---------
Diluted earnings per share $ 4.55 $ 1.07 $ 1.96 $ 1.47 $ 1.94
========= ========= ========= ========= =========
61
Dec. 25, Dec. 26, Dec. 27, Dec. 28, Dec. 30,
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Balance Sheet Data:
Total assets $ 365,441 $ 313,665 $ 357,179 $ 370,801 $ 353,079
Long-term debt, including
current maturities 67,298 34,440 50,446 90,396 93,867
Shareholders' equity 106,884 111,848 151,696 147,557 128,396
(1) After deducting related income tax benefits of $1,354, the
restructuring costs reduced income from continuing operations by $1,893, or
$0.15 per common share ($0.15 per diluted share).
(2) After deducting related income tax benefits of $2,434, the
restructuring costs reduced income from continuing operations by $3,503, or
$0.27 per common share ($0.27 per diluted share).