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.
The carrier segment consists of Landstar Ranger, Inc. ("Landstar Ranger"),
Landstar Inway, Inc., Landstar Ligon, Inc. ("Landstar Ligon") and Landstar
Gemini, Inc. 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 historically has contributed
approximately 80% of Landstar's consolidated revenue.
The multimodal segment is comprised of Landstar Logistics, Inc. 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
historically has contributed approximately 18% of Landstar's consolidated
revenue.
The insurance segment is comprised of Signature Insurance Company
("Signature"), a wholly-owned offshore insurance subsidiary,
and Risk Management Claim Services, Inc. The insurance segment
provides risk and claims management services to 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 historically has
contributed approximately 2% of Landstar's consolidated revenue.
36
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 cost and rent
expense.
Depreciation and amortization primarily relates to depreciation of trailers
and management information services equipment.
37
The following table sets forth the percentage relationships of expense items to
revenue for the periods indicated:
Fiscal Years
------------------------
2000 1999 1998
------ ------ ------
Revenue 100.0% 100.0% 100.0%
Investment income 0.3 0.2 0.1
Costs and expenses:
Purchased transportation 73.8 73.6 74.0
Commissions to agents 8.0 8.0 7.9
Other operating costs 2.1 2.2 2.1
Insurance and claims 2.2 2.5 3.1
Selling, general and administrative 7.1 7.2 7.4
Depreciation and amortization 0.9 0.8 0.8
Non-recurring costs 0.4
------ ------ ------
Total costs and expenses 94.5 94.3 95.3
------ ------ ------
Operating income 5.8 5.9 4.8
Interest and debt expense 0.6 0.3 0.3
------ ------ ------
Income from continuing operations
before income taxes 5.2 5.6 4.5
Income taxes 2.0 2.3 1.8
------ ------ ------
Income from continuing operations 3.2 3.3 2.7
Discontinued operations, net of
income taxes (1.8)
------ ------ ------
Net income 3.2% 3.3% 0.9%
====== ====== ======
FISCAL YEAR ENDED DECEMBER 30, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 25,
1999
Revenue for the fiscal year 2000 was $1,418,492,000, an increase of
$30,409,000, or 2.2%, over revenue for the 1999 fiscal year. The increase
was attributable to higher revenue at the carrier and multimodal
segments of $5,130,000 and $26,692,000, respectively, partially offset by
decreased revenue of $1,413,000 at the insurance segment. Overall,
revenue per revenue mile (price) increased approximately 3%,
partially offset by decreased revenue miles (volume) of approximately
1%. The decrease in revenue from the prior year at the insurance segment was
primarily attributable to reduced independent contractor participation in the
insurance programs reinsured by Signature. Investment income at the insurance
segment was $4,317,000 and $2,502,000 for fiscal year 2000 and 1999,
respectively.
Purchased transportation was 73.8% of revenue in 2000 compared with 73.6% in
1999. The increase in purchased transportation as a percentage of revenue was
primarily attributable to
38
increased revenue contributed by the multimodal segment which tends to have
a higher cost of purchased transportation and decreased premium revenue
at the insurance segment. In addition, purchased transportation costs at
the multimodal segment were generally higher due to increased fuel costs
incurred by its capacity providers. Commissions to agents were 8.0% of
revenue in 2000 and 1999. Other operating costs were 2.1% of revenue in 2000
compared with 2.2% in 1999. The decrease in other operating costs as a
percentage of revenue was primarily attributable to the increase in the
percentage of revenue contributed by the multimodal segment which does not
incur trailer rent or trailer maintenance costs. Insurance and claims were 2.2%
of revenue in 2000 compared with 2.5% in 1999 primarily due to increased
revenue at the multimodal segment, which has a lower claims risk profile, and
lower overall accident frequency and severity in 2000. Selling, general and
administrative costs were 7.1% of revenue in 2000 and 7.2% in 1999. The
decrease in selling, general and administrative costs as a percentage of
revenue was primarily due to a decrease in the provision for bonuses under
the Company's incentive compensation plan. Depreciation and amortization was
0.9% of revenue in 2000 and 0.8% of revenue in 1999. The increase in
depreciation and amortization as a percent of revenue was due to an increase
in company-owned trailing equipment.
Approximately 100 Landstar Ranger drivers are represented by the International
Brotherhood of Teamsters (the "Teamsters"). The vast majority of these
unionized drivers participate in the Teamsters' Central States Southeast and
Southwest Areas Pension Fund (the "Fund"). Under a prior collective bargaining
agreement, Landstar Ranger was required to make contributions to various
Teamster pension funds for 205 drivers regardless of the actual number
of unionized drivers. Effective April 1, 2000, a new collective
bargaining agreement required Landstar Ranger to make pension
contributions for only the actual number of unionized drivers.
As a result of the elimination of the requirement to make contributions
for more than the actual number of unionized drivers, the Trustees of the
Fund have terminated participation in the Fund by Landstar Ranger effective
October 1, 2000. The Trustees of the Fund regard this action as a withdrawal
by Landstar Ranger. Landstar Ranger recorded a charge in the amount of
$2,230,000 for the estimated cost of withdrawal from the Fund. Management
estimates the elimination of the requirement to make contributions for more
than the actual number of unionized drivers will result in annual savings of
approximately $800,000.
On March 28, 2000, the Company announced a plan to restructure the operations
of Landstar Ligon and to relocate its headquarters from Madisonville,
Kentucky to Jacksonville, Florida in June of 2000. As a result of the
restructuring and relocation, a one-time charge in the amount of $3,040,000 was
recorded during the second quarter of 2000 representing approximately
$1,370,000 of employee and office relocation costs, $1,000,000 of severance
costs and $670,000 of other costs. The restructuring and relocation were
substantially completed by September 23, 2000. Management anticipates future
savings of selling, general and administrative costs as a result of this
restructuring to approximate $1,000,000 per annum.
39
Interest and debt expense was 0.6% of revenue in 2000 and 0.3% of revenue in
1999. This increase was primarily attributable to increased average borrowings
on the senior credit facility, which were used to finance a portion of the
Company's stock repurchase program, increased capital lease obligations for
trailing equipment and higher interest rates.
The provisions for income taxes for the 2000 and 1999 fiscal years were based
on an effective income tax rate of 38.5% and 40.5%, respectively, 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. The decrease in the effective income tax rate was
attributable to state income tax planning strategies. At December 30, 2000,
the valuation allowance of $615,000 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
$587,000 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.
Net income was $45,194,000, or $5.15 per common share ($5.03 per diluted
share), in 2000 compared with $45,937,000, or $4.60 per common share ($4.55
per diluted share), in 1999. After deducting related income tax benefits of
$2,105,000, the non-recurring costs reduced net income by $3,165,000 in 2000.
Excluding non-recurring costs, net income would have been $48,359,000, or
$5.51 per common share ($5.38 per diluted share) in 2000.
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 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. 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
40
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.
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.
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 30, 2000, Landstar had commitments for letters of
credit outstanding in the amount of $20,452,000, primarily as
collateral for estimated insurance claims, $10,080,000 of which were
supported by the Second Amended and Restated Credit Agreement and $10,372,000
secured by assets deposited with a financial institution. The Second Amended
and Restated Credit Agreement expires on October 10, 2002.
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 30, 2000, the margin was equal to 37.5/100 of 1%. The unused portion
41
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 30, 2000, the commitment fee for the unused portion of the Second
Amended and Restated Credit Agreement was 0.125%. At December 30, 2000, the
weighted average interest rate on borrowings outstanding under the Second
Amended and Restated Credit Agreement was 7.06%.
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 $11,019,000 at
December 30, 2000.
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 $107,859,000, or 53% of total capitalization,
at December 30, 2000, compared with $106,884,000, or 61% of total
capitalization, at December 25, 1999. The reduction in shareholders' equity
as a percentage of total capitalization was primarily a result of the purchase
of 864,000 shares of the Company's common stock at a total cost of $46,185,000,
partially offset by fiscal year's 2000 net income. As of December 30, 2000, the
Company may purchase an additional 500,000 shares of its common stock under its
authorized stock repurchase program. Long-term debt including current
maturities was $94,643,000 at December 30, 2000, $27,345,000 higher than at
December 25, 1999, primarily as a result of financing a portion of 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 $94,718,000 and 1.61 to 1, respectively, at December 30, 2000,
compared with $81,589,000 and 1.48 to 1, respectively, at December 25, 1999.
Landstar has historically operated with current ratios approximating 1.5 to 1.
Cash provided by operating activities was $54,047,000 in 2000 compared with
$43,582,000 in 1999. The increase in cash provided by operating activities was
attributable to the timing of collection of accounts receivable. During the
2000 fiscal year, Landstar purchased $7,305,000 of operating property and
acquired $18,448,000 of revenue equipment by entering into capital leases.
Landstar anticipates it will acquire approximately $12,000,000 of operating
property during fiscal year 2001 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
42
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.
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
repurchase 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.
FORWARD-LOOKING STATEMENTS
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995. Statements contained in this document that are
not based on historical facts are "forward-looking statements." This
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-K statement contain forward-
looking statements, such as statements which relate to Landstar's business
objectives, plans, strategies and expectations. Terms such as "anticipates,"
"believes," "estimates," "plans," "predicts," "may," "should," "will," the
negative thereof and similar expressions are intended to identify forward-
looking statements. Such statements are subject to uncertainties and
risks, including but not limited to; an increase in the frequency or severity
of accidents or workers' compensation claims; unfavorable development of
existing accident claims; a downturn in domestic economic growth or
growth in the transportation sector; and other operational, financial or legal
risks or uncertainties detailed in Landstar's Securities and Exchange
Commission filings from time to time. These risks and uncertainties could
cause actual results or events to differ materially from historical results
or those anticipated. Investors should not place undue reliance on such
forward-looking statements, and the Company undertakes no obligation to
publicly update or revise any forward-looking statements.
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.
43
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 30, December 25,
2000 1999
----------- -----------
ASSETS
Current assets:
Cash $ 32,926 $ 23,721
Short-term investments 1,500 1,000
Trade accounts receivable, less allowance
of $4,450 and $4,002 195,398 207,024
Other receivables, including advances to independent
contractors, less allowance of $5,089
and $5,033 13,122 14,318
Prepaid expenses and other current assets 6,062 6,190
-------- --------
Total current assets 249,008 252,253
-------- --------
Operating property, less accumulated depreciation
and amortization of $37,497 and $34,283 76,049 63,797
Goodwill, less accumulated amortization of $8,993
and $7,777 32,474 33,733
Deferred income taxes and other assets 12,831 15,658
-------- --------
Total assets $370,362 $365,441
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 17,496 $ 19,471
Accounts payable 63,002 67,322
Current maturities of long-term debt 9,766 6,769
Insurance claims 23,364 27,207
Accrued compensation 8,277 12,113
Other current liabilities 32,385 37,782
-------- --------
Total current liabilities 154,290 170,664
-------- --------
Long-term debt, excluding current maturities 84,877 60,529
Insurance claims 23,336 27,364
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 13,233,874 and
13,063,974 shares 132 131
Additional paid-in capital 71,325 65,833
Retained earnings 215,368 170,174
Cost of 4,741,841 and 3,909,041 shares of common
stock in treasury (172,727) (127,560)
Notes receivable arising from exercise of stock options (6,239) (1,694)
-------- --------
Total shareholders' equity 107,859 106,884
-------- --------
Total liabilities and shareholders' equity $370,362 $365,441
======== ========
See accompanying notes to consolidated financial statements.
44
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Fiscal Years Ended
December 30, December 25, December 26,
2000 1999 1998
------------ ------------ ------------
Revenue $ 1,418,492 $ 1,388,083 $ 1,283,607
Investment income 4,317 2,502 1,689
Costs and expenses:
Purchased transportation 1,046,183 1,022,203 950,343
Commissions to agents 113,721 111,666 101,409
Other operating costs 29,568 30,000 27,516
Insurance and claims 31,935 34,064 39,388
Selling, general and administrative 100,516 99,240 95,028
Depreciation and amortization 13,003 11,698 10,158
Non-recurring costs 5,270
------------ ------------ ------------
Total costs and expenses 1,340,196 1,308,871 1,223,842
------------ ------------ ------------
Operating income 82,613 81,714 61,454
Interest and debt expense 9,127 4,509 3,503
------------ ------------ ------------
Income from continuing operations before
income taxes 73,486 77,205 57,951
Income taxes 28,292 31,268 23,470
------------ ------------ ------------
Income from continuing operations 45,194 45,937 34,481
Discontinued operations, net of
income taxes (22,589)
------------ ------------ ------------
Net income $ 45,194 $ 45,937 $ 11,892
============ ============ ============
Earnings per common share:
Income from continuing operations $ 5.15 $ 4.60 $ 3.13
Loss from discontinued operations (2.05)
------------ ------------ ------------
Earnings per common share $ 5.15 $ 4.60 $ 1.08
============ ============ ============
Diluted earnings per share:
Income from continuing operations $ 5.03 $ 4.55 $ 3.10
Loss from discontinued operations (2.03)
------------ ------------ ------------
Diluted earnings per share $ 5.03 $ 4.55 $ 1.07
============ ============ ============
Average number of shares outstanding:
Earnings per common share 8,781,000 9,982,000 11,022,000
Diluted earnings per share 8,981,000 10,102,000 11,123,000
See accompanying notes to consolidated financial statements.
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended
December 30, December 25, December 26,
2000 1999 1998
(Dollars in thousands) ------------ ------------ ------------
OPERATING ACTIVITIES OF CONTINUING OPERATIONS
Net income $ 45,194 $ 45,937 $ 11,892
Adjustments to reconcile net income to net cash
provided by operating activities of continuing operations:
Discontinued operations 22,589
Depreciation and amortization of operating property 11,787 10,482 8,892
Amortization of goodwill and non-competition agreements 1,216 1,216 1,266
Non-cash interest charges 324 324 324
Provisions for losses on trade and other receivables 4,592 2,643 4,276
Losses (gains) on sales of operating property (244) 708 (253)
Deferred income taxes, net 3,911 1,788 (423)
Non-cash charge in lieu of income taxes 43 52
Changes in operating assets and liabilities,
net of discontinued operations:
Decrease (increase) in trade and other accounts receivable 8,230 (37,534) (7,167)
Increase in prepaid expenses and other assets (1,405) (1,329) (2,066)
Increase (decrease) in accounts payable (4,320) 16,698 2,482
Increase (decrease) in insurance claims (7,871) (4,497) 4,531
Increase (decrease) in other liabilities (7,410) 7,146 7,094
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 54,047 43,582 53,489
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of investments (1,435) (5,005)
Maturities of short-term investments 1,060 3,012
Purchases of operating property (7,305) (12,716) (7,185)
Proceeds from sales of operating property 1,958 2,132 2,716
Proceeds from sale of discontinued operations 40,435
------------ ------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (5,722) (15,589) 38,978
------------ ------------ ------------
FINANCING ACTIVITIES OF CONTINUING OPERATIONS
Increase (decrease) in cash overdraft (1,975) 4,725 2,598
Borrowings on revolving credit facility 27,500 21,500 15,000
Principal payments on long-term debt and capital lease obligations (18,603) (6,087) (23,040)
Proceeds from exercise of stock options 143 293 1,363
Purchases of common stock (46,185) (51,384) (53,229)
------------ ------------ ------------
NET CASH USED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS (39,120) (30,953) (57,308)
------------ ------------ ------------
NET CASH USED BY DISCONTINUED OPERATIONS (26,472)
------------ ------------ ------------
Increase (decrease) in cash 9,205 (2,960) 8,687
Cash at beginning of period 23,721 26,681 17,994
------------ ------------ ------------
Cash at end of period $ 32,926 $ 23,721 $ 26,681
============ ============ ============
See accompanying notes to consolidated financial statements.
46
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Fiscal Years Ended December 30, 2000,
December 25, 1999 and December 26, 1998
(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 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
Net income 45,194 45,194
Purchases of common stock 864,000 (46,185) (46,185)
Exercises of stock options
and related income tax
benefit 169,900 1 5,048 (4,545) 504
Incentive compensation paid
in common stock 444 (31,200) 1,018 1,462
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 30, 2000 13,233,874 $ 132 $71,325 $215,368 4,741,841 $(172,727) $ (6,239) $107,859
========== ====== ======= ======== ========= ========= ============= ========
See accompanying notes to consolidated financial statements.
47
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, $250,000 for each workers' compensation claim and
$100,000 for each cargo claim.
Tires
Tires purchased as part of trailers are capitalized as part
of the cost of the equipment. Replacement tires 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. There are $3,877,000 and
$4,002,000 of these bonds included in other assets at December 30, 2000 and
December 25, 1999, respectively.
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.
48
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) Non-recurring Costs
Approximately 100 Landstar Ranger, Inc. ("Landstar Ranger") drivers are
represented by the International Brotherhood of Teamsters (the "Teamsters").
The vast majority of these unionized drivers participate in the Teamsters'
Central States Southeast and Southwest Areas Pension Fund (the "Fund").
Under a prior collective bargaining agreement, Landstar Ranger was required
to make contributions to various Teamster pension funds for 205 drivers
regardless of the actual number of unionized drivers. Effective April 1, 2000,
a new collective bargaining agreement required Landstar Ranger to make pension
contributions for only the actual number of unionized drivers. As a result of
the elimination of the requirement to make contributions for more than the
actual number of unionized drivers, the Trustees of the Fund have terminated
participation in the Fund by Landstar Ranger effective October 1, 2000. The
Trustees of the Fund regard this action as a withdrawal by Landstar Ranger.
In the third quarter of 2000, the Company recorded a charge in the amount of
$2,230,000 for its estimated cost of withdrawal from the Fund. After
deducting related income tax benefits of $880,000, this charge reduced
fiscal year 2000 net income by $1,350,000, or $0.15 per common share ($0.15 per
diluted share).
On March 28, 2000, the Company announced a plan to restructure the operations
of Landstar Ligon, Inc. and to relocate its headquarters from Madisonville,
Kentucky to Jacksonville, Florida in June of 2000. As a result of this
restructuring and relocation, a one-time charge in the amount of $3,040,000
was recorded during the second quarter of 2000 representing approximately
$1,370,000 of employee and office relocation costs, $1,000,000 of severance
costs and $670,000 of other costs. The restructuring and relocation were
substantially completed by September 23, 2000. After deducting related income
tax benefits of $1,225,000, this one-time restructuring charge reduced fiscal
year 2000 net income by $1,815,000, or $0.21 per common share ($0.20 per
diluted share).
49
(3) 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 related income tax benefits of $2,511,000,
and a loss from operations of $1,100,000, net of related income tax benefits
of $597,000. 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 in 1998.
50
(4) Income Taxes
The provisions for income taxes from continuing operations consisted of
the following (in thousands):
Fiscal Years
------------------------------
2000 1999 1998
---- ---- ----
Current:
Federal $21,525 $24,931 $21,185
State 2,813 4,549 2,656
------- ------- -------
24,338 29,480 23,841
Deferred:
Federal 4,208 1,019 (1,268)
State (297) 769 845
------ ------- -------
3,911 1,788 (423)
Non-cash charge in lieu of income taxes 43 52
------- ------- -------
Income taxes $28,292 $31,268 $23,470
======= ======= =======
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities consisted of the following (in thousands):
Dec. 30, 2000 Dec. 25, 1999
------------- -------------
Deferred tax assets:
Receivable valuations $ 4,221 $ 3,759
Deferred state income tax benefits 1,587 1,665
State net operating loss carryforwards 1,885 1,439
Self insured claims 4,881 8,044
Other 3,530 3,281
--------- ---------
16,104 18,188
Valuation allowance (615) (658)
--------- ---------
$ 15,489 $ 17,530
========= =========
Deferred tax liabilities:
Operating property $ 9,731 $ 7,321
Other 5,634 6,174
--------- ---------
$ 15,365 $ 13,495
========= =========
51
The loss from discontinued operations included a deferred tax benefit of
$7,604,000 in 1998.
At December 30, 2000, the valuation allowance of $615,000 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 $587,000 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
----------------------------
2000 1999 1998
---- ---- ----
Income taxes at federal income tax rate $25,720 $27,022 $20,283
State income taxes, net of federal income
tax benefit 1,635 3,457 2,309
Amortization of goodwill 258 258 258
Meals and entertainment exclusion 597 472 470
Other, net 82 59 150
------- -------- --------
Income taxes $28,292 $31,268 $23,470
======= ======= =======
Landstar paid income taxes of $25,089,000 in 2000, $28,659,000 in 1999 and
$26,110,000 in 1998.
(5) Operating Property
Operating property is summarized as follows (in thousands):
Dec. 30, 2000 Dec. 25, 1999
------------- -------------
Land $ 2,097 $ 2,280
Leasehold improvements 8,199 5,817
Buildings and improvements 8,105 8,638
Trailers 72,257 56,966
Other equipment 22,888 24,379
-------- --------
113,546 98,080
Less accumulated depreciation and amortization 37,497 34,283
-------- --------
$ 76,049 $ 63,797
======== ========
Included above is $60,811,000 in 2000 and $50,899,000 in 1999 of operating
property under capital leases, $44,458,000 and $35,153,000, respectively, net
of accumulated amortization. Landstar acquired operating property by entering
52
into capital leases in the amount of $18,448,000 in 2000, $17,445,000
in 1999 and $12,902,000 in 1998.
(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.
Prior to the October 1, 2000 withdrawal (see note 2), Landstar Ranger made
contributions in accordance with a negotiated labor contract (generally based
on the number of weeks worked) to union sponsored multi-employer pension plans.
The expense from continuing operations for the Company sponsored defined
contribution plan and for union sponsored plans, excluding the estimated cost
of withdrawal (see note 2), was $1,105,000 and $935,000 in 2000,
respectively, $1,082,000 and $1,351,000 in 1999, respectively, and $624,000 and
$1,265,000 in 1998, respectively.
(7) Debt
Long-term debt is summarized as follows (in thousands):
Dec. 30, 2000 Dec. 25, 1999
------------- -------------
Capital leases $37,143 $27,298
Working Capital Facility 39,000 21,500
Acquisition Facility 18,500 18,500
------- -------
94,643 67,298
Less current maturities 9,766 6,769
------- -------
Total long-term debt $84,877 $60,529
======= =======
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.
53
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 30, 2000, the margin was equal to 37.5/100 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 30, 2000, the commitment fee for the unused portion
of the Second Amended and Restated Credit Agreement was 0.125%. At December 30,
2000, the weighted average interest rate on borrowings outstanding under the
Second Amended and Restated Credit Agreement was 7.06%. 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
$11,019,000 at December 30, 2000.
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 $9,658,000 in 2000, $4,484,000 in 1999 and
$4,159,000 in 1998. Included in interest paid in 1998 was $695,000 related to
discontinued operations.
(8) Leases
The future minimum lease payments under all noncancelable leases at
December 30, 2000, principally for trailers and the Company's
headquarters facility in Jacksonville, Florida, are shown in the
following table (in thousands):
54
Capital Operating
Leases Leases
------- ---------
2001 $12,139 $ 2,671
2002 11,455 2,262
2003 10,144 1,784
2004 6,881 1,681
2005 2,122 1,827
Thereafter 17,242
------- ---------
42,741 $ 27,467
=========
Less amount representing interest
(5.9% to 8.3%) 5,598
Present value of minimum -------
lease payments $37,143
=======
Total rent expense from continuing operations, net of sublease income, was
$19,620,000 in 2000, $19,322,000 in 1999 and $20,548,000 in 1998.
(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, as amended, (the "DSOP"),
outside members of the Board of Directors will be granted up to an aggregate of
210,000 options to purchase common stock. Under the DSOP, 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 30, 2000, there were
962,800 shares of the Company's stock reserved for issuance upon exercise of
options granted under the plans.
55
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 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
Granted 107,400 $ 47.79
Exercised (169,900) $ 27.59
Forfeited (1,800) $ 25.50
--------
Options at December 30, 2000 504,900 $ 36.21 212,060 $ 31.19
=======
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 2000, 1999 and 1998: risk free interest rate of 6.0% in 2000 and
1999 and 5.0% in 1998, expected lives of 5 years and no dividend yield.
The expected volatility used in calculating the fair market value of stock
options granted was 41% in 2000, 38% in 1999 and 40% in 1998. The weighted
average grant date fair value of stock options granted was $21.61, $15.71 and
$15.02 per share in 2000, 1999 and 1998, respectively.
The following table summarizes stock options outstanding at December 30, 2000:
Options Outstanding
-------------------
Range of Exercise Weighted Average Weighted Average
Prices Number Outstanding Remaining Contractual Exercise Price
Per Share Dec. 30, 2000 Life (years) Per Share
----------------- ------------------ --------------------- ----------------
$22.531 - $33.800 198,800 6.0 $ 28.17
$33.801 - $45.538 198,700 8.0 $ 38.01
$45.539 - $56.891 107,400 9.1 $ 47.79
----------------
$22.531 - $56.891 504,900 7.5 $ 36.21
================
56
Options Exercisable
-------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
Per Share Dec. 30, 2000 Per Share
----------------- ---------------- ----------------
$22.531 - $33.800 146,900 $ 28.00
$33.801 - $40.500 65,160 $ 38.38
----------------
$22.531 - $40.500 212,060 $ 31.19
================
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 $1,145,000, or
$0.13 per common share, in 2000, $966,000, or $0.10 per common share, in 1999
and $484,000, or $0.04 per common share, in 1998.
(10) Shareholders' Equity
During 2000, Landstar purchased 864,000 shares of its common stock at a total
cost of $46,185,000 pursuant to previously announced stock repurchase programs.
As of December 30, 2000, Landstar may purchase an additional 500,000 shares of
its common stock under its 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 2000, 1999 and 1998, $4,596,000, $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"), as
amended, 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.
57
(11) Segment Information
The Company has three reportable business segments. These are the carrier,
multimodal and insurance segments. 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.
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 2000 approximately 16% of the Company's revenue was
attributable to the automotive industry. Substantially all of the Company's
revenue is generated in the United States.
58
The following tables summarize information about the Company's reportable
business segments as of and for the fiscal years ending December 30, 2000,
December 25, 1999 and December 26, 1998 (in thousands):
2000
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $1,117,042 $ 277,087 $ 24,363 $1,418,492
Internal revenue 34,669 1,241 21,919 57,829
Investment income 4,317 4,317
Interest and debt expense $ 9,127 9,127
Depreciation and
amortization 7,999 905 4,099 13,003
Non-recurring costs 5,270 5,270
Operating income 88,507 9,346 24,464 (39,704) 82,613
Expenditures on
long-lived assets 687 177 6,441 7,305
Capital lease additions 18,448 18,448
Total assets 256,690 54,294 33,267 26,111 370,362
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
59
(12) Commitments and Contingencies
At December 30, 2000, Landstar had commitments for letters of
credit outstanding in the amount of $20,452,000, primarily as
collateral for estimated insurance claims, $10,080,000 of which were
supported by the Second Amended and Restated Credit Agreement and
$10,372,000 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.
60
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 30, 2000 and December 25, 1999, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the fiscal years ended December 30, 2000, December 25, 1999
and December 26, 1998. 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 auditing standards generally
accepted in the United States of America. 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 30, 2000 and December 25, 1999, and the
results of their operations and their cash flows for the fiscal years ended
December 30, 2000, December 25, 1999 and December 26, 1998 in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Stamford, Connecticut
February 6, 2001
61
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
2000 2000 (1) 2000 (1) 2000
---------- ---------- ---------- ----------
Revenue $ 380,575 $ 352,356 $ 358,555 $ 327,006
========== ========== ========== ==========
Operating income $ 27,953 $ 21,456 $ 17,715 $ 15,489
---------- ---------- ---------- ----------
Income before income taxes $ 25,069 $ 19,036 $ 15,597 $ 13,784
Income taxes 9,167 7,520 6,160 5,445
---------- ---------- ---------- ----------
Net income $ 15,902 $ 11,516 $ 9,437 $ 8,339
========== ========== ========== ==========
Earnings per common share (2) $ 1.89 $ 1.33 $ 1.06 $ 0.91
========== ========== ========== ==========
Diluted earnings per share (2) $ 1.85 $ 1.30 $ 1.04 $ 0.89
========== ========== ========== ==========
62
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 (2) $ 1.65 $ 1.21 $ 1.06 $ 0.72
========== ========== ========== ==========
Diluted earnings per share (2) $ 1.63 $ 1.20 $ 1.05 $ 0.71
========== ========== ========== ==========
(1) Includes a pre-tax charge for the withdrawal from a union-sponsored
pension plan of $2,230 in the third quarter and pre-tax restructuring costs
of $3,040 in the second quarter. After deducting related income tax benefits
of $880 and $1,225 in the third and second quarters, respectively, the
pension plan withdrawal costs reduced net income by $1,350, or $0.16 per
common share ($0.15 per diluted share), in the 2000 third quarter and the
restructuring costs reduced net income by $1,815, or $0.20 per common share
($0.20 per diluted share), in the 2000 second quarter.
(2) 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.
63
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Fiscal Years
2000 1999 1998 1997 1996
----------------------------------------------------------
Income Statement Data:
Revenue $1,418,492 $1,388,083 $1,283,607 $1,219,311 $1,129,856
Investment income 4,317 2,502 1,689
Costs and expenses:
Purchased transportation 1,046,183 1,022,203 950,343 898,746 826,822
Commissions to agents 113,721 111,666 101,409 98,425 84,768
Other operating costs 29,568 30,000 27,516 32,747 51,385
Insurance and claims 31,935 34,064 39,388 42,885 29,774
Selling, general and administrative 100,516 99,240 95,028 85,586 79,002
Depreciation and amortization 13,003 11,698 10,158 11,354 13,814
Non-recurring costs 5,270 3,247 5,937
--------- --------- --------- --------- ---------
Total costs and expenses 1,340,196 1,308,871 1,223,842 1,172,990 1,091,502
--------- --------- --------- --------- ---------
Operating income 82,613 81,714 61,454 46,321 38,354
Interest and debt expense 9,127 4,509 3,503 2,705 5,032
--------- --------- --------- --------- ---------
Income from continuing operations
before income taxes 73,486 77,205 57,951 43,616 33,322
Income taxes 28,292 31,268 23,470 18,188 13,675
--------- --------- --------- --------- ---------
Income from continuing operations 45,194 45,937 34,481 25,428(2) 19,647(3)
Discontinued operations, net of
income taxes (22,589) (738) (722)
--------- --------- --------- --------- ---------
Net income $ 45,194(1) $ 45,937 $ 11,892 $ 24,690 $ 18,925
========= ========= ========= ========= =========
Earnings per common share:
Income from continuing operations $ 5.15 $ 4.60 $ 3.13 $ 2.03(2) $ 1.54(3)
Loss from discontinued
operations (2.05) (0.06) (0.06)
--------- --------- --------- --------- ---------
Earnings per common share $ 5.15(1) $ 4.60 $ 1.08 $ 1.97 $ 1.48
========= ========= ========= ========= =========
Diluted earnings per share:
Income from continuing operations $ 5.03 $ 4.55 $ 3.10 $ 2.02(2) $ 1.53(3)
Loss from discontinued
operations (2.03) (0.06) (0.06)
--------- --------- --------- --------- ---------
Diluted earnings per share $ 5.03(1) $ 4.55 $ 1.07 $ 1.96 $ 1.47
========= ========= ========= ========= =========
64
Dec. 30, Dec. 25, Dec. 26, Dec. 27, Dec. 28,
2000 1999 1998 1997 1996
--------- --------- -------- --------- ---------
Balance Sheet Data:
Total assets $ 370,362 $ 365,441 $ 313,665 $ 357,179 $ 370,801
Long-term debt, including
current maturities 94,643 67,298 34,440 50,446 90,396
Shareholders' equity 107,859 106,884 111,848 151,696 147,557
(1) After deducting related income tax benefits of $2,105, non-recurring
costs reduced net income by $3,165, or $0.36 per common share ($0.35 per
diluted share).
(2) After deducting related income tax benefits of $1,354,
non-recurring costs reduced income from continuing operations by $1,893, or
$0.15 per common share ($0.15 per diluted share).
(3) After deducting related income tax benefits of $2,434,
non-recurring costs reduced income from continuing operations by $3,503, or
$0.27 per common share ($0.27 per diluted share).