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,
dedicated power-only truck capacity and truck brokerage. 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 79% of Landstar's consolidated revenue.
The multimodal segment is comprised of Landstar Logistics, Inc. and Landstar
Express America, Inc. Transportation services provided by the
multimodal segment include the arrangement of intermodal
moves, contract logistics, truck brokerage and emergency and expedited ground
and 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 19% 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 typically contributes
approximately 2% of Landstar's consolidated revenue.
32
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 brokerage services
operations of the carrier segment and multimodal segment are based on a
negotiated rate for each load hauled. 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 and brokerage services 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,
revenue less the cost of purchased transportation, at the multimodal segment.
Commissions to agents as a percentage of consolidated revenue will vary
directly with the percentage of consolidated revenue contributed by the carrier
segment, multimodal segment and Signature and increases or decreases in gross
profit at the multimodal segment.
Trailing equipment 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. Landstar retains liability for each individual
commercial trucking claim up to $1,000,000 per occurrence through
April 30, 2001 and $5,000,000 per occurrence thereafter. The Company also
retains liability for each general liability claim up to $1,000,000, $250,000
for each workers' compensation claim and $250,000 for each cargo claim.
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 trailing
equipment 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
------------------------
2001 2000 1999
------ ------ ------
Revenue 100.0% 100.0% 100.0%
Investment income 0.3 0.3 0.2
Costs and expenses:
Purchased transportation 74.0 73.8 73.6
Commissions to agents 7.9 8.0 8.0
Other operating costs 2.3 2.1 2.2
Insurance and claims 2.4 2.2 2.5
Selling, general and administrative 7.2 7.1 7.2
Depreciation and amortization 1.0 0.9 0.8
Non-recurring costs 0.4
------ ------ ------
Total costs and expenses 94.8 94.5 94.3
------ ------ ------
Operating income 5.5 5.8 5.9
Interest and debt expense 0.5 0.6 0.3
------ ------ ------
Income before income taxes 5.0 5.2 5.6
Income taxes 1.9 2.0 2.3
------ ------ ------
Net income 3.1% 3.2% 3.3%
====== ====== ======
FISCAL YEAR ENDED DECEMBER 29, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 30,
2000
Revenue for the fiscal year 2001 was $1,392,771,000, a decrease of
$25,721,000, or 1.8%, compared to revenue for the 2000 fiscal year. Revenue
decreased $18,774,000, $6,238,000 and $709,000 at the carrier,
multimodal and insurance segments, respectively. The decrease was primarily
attributable to the extra week in the 53-week fiscal year 2000
compared to the 52-week fiscal year 2001. As a result, revenue miles
(volume) decreased approximately 3% compared to fiscal year 2000, which was
partially offset by an increase in revenue per revenue mile (price) of
approximately 1%, which reflected improved freight quality primarily at the
multimodal segment.
Investment income at the insurance segment was $3,567,000 and $4,317,000
for fiscal year 2001 and 2000, respectively. The decrease in investment income
was primarily due to a reduced rate of return, attributable to the decline in
interest rates, on investments held by the insurance segment.
Purchased transportation was 74.0% of revenue in 2001 compared with 73.8% in
2000. The increase in purchased transportation as a percentage of revenue was
primarily attributable to
34
increased rates charged by third party capacity providers at the multimodal
segment as a result of higher fuel costs, increased brokerage revenue at the
carrier segment and decreased premium revenue at the insurance segment.
Commissions to agents were 7.9% of revenue in 2001 and 8.0% of revenue in 2000.
The decrease in commissions to agents as a percentage of revenue was
primarily due to the increased purchased transportation costs incurred at
the multimodal segment which negatively impacted gross profit, and resulted
in lower agent commissions. Other operating costs were 2.3% of revenue in 2001
compared with 2.1% in 2000. The increase in other operating costs as a
percentage of revenue was primarily due to higher net trailer costs, an
increased provision for contractor bad debts and increased independent
contractor recruiting and qualification costs. Insurance and claims were 2.4%
of revenue in 2001 compared with 2.2% in 2000 primarily due to greater
favorable development of prior year claims in 2000 than realized in 2001,
partially offset by reduced premiums for commercial trucking liability
insurance and increased brokerage revenue as a percentage of total revenue,
which has a lower claims risk profile. The reduction in premiums for
commercial trucking liability insurance was attributable to the increase
in the level of self-insured retention from $1,000,000 to
$5,000,000 per occurrence effective May 1, 2001. Selling, general and
administrative costs were 7.2% of revenue in 2001 and 7.1% in 2000. The
increase in selling, general and administrative costs as a percentage of
revenue was primarily due to an increased provision for customer bad debts
and increased wages and benefits, partially offset by a decrease in the
provision for bonuses under the Company's management incentive compensation
plan. Depreciation and amortization was 1.0% of revenue in 2001 and 0.9% of
revenue in 2000. The increase in depreciation and amortization as a percentage
of revenue was due to an increase in Company-owned trailing equipment.
Interest and debt expense was 0.5% of revenue in 2001 and 0.6% of revenue in
2000. This decrease was primarily attributable to lower interest rates.
At December 25, 1999, approximately 100 Landstar Ranger
drivers were represented by the International Brotherhood of Teamsters
(the "Teamsters"). The vast majority of these unionized drivers participated
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 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 third quarter of
2000 in the amount of $2,230,000 for the cost of withdrawal from the Fund.
35
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.
The provisions for income taxes for the 2001 and 2000 fiscal years were based
on an effective income tax rate of 38.5%, 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 29, 2001, the valuation allowance of
$491,000 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 $463,000
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 $42,794,000, or $5.13 per common share ($5.01 per diluted
share), in 2001 compared with $45,194,000, or $5.15 per common share ($5.03
per diluted share), in 2000. 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 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 a
decrease in revenue of $1,413,000 at the insurance segment. The increase was
36
primarily attributable to the extra week in the 53-week fiscal year 2000
compared to the 52-week fiscal year 1999. Overall, revenue per revenue
mile increased approximately 3%, partially offset by a decrease in revenue
miles 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 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 rates charged by its third party capacity providers as a result of
higher fuel costs. 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 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.
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 the implementation of certain state income tax
planning strategies.
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.
37
CAPITAL RESOURCES AND LIQUIDITY
On December 20, 2001, Landstar renegotiated its existing credit agreement with
a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the
"Third Amended and Restated Credit Agreement"). The Third Amended and
Restated Credit Agreement provides $175,000,000 of borrowing capacity in the
form of a revolving credit facility, $50,000,000 of which may be utilized in
the form of letter of credit guarantees. At December 29, 2001, Landstar had
commitments for letters of credit outstanding in the amount of $19,929,000,
primarily as collateral for estimated insurance claims, $9,080,000 of which
were supported by the Third Amended and Restated Credit Agreement and
$10,849,000 secured by assets deposited with a financial institution. The
Third Amended and Restated Credit Agreement expires on January 5, 2005.
Borrowings under the Third Amended and Restated Credit Agreement bear interest
at rates equal to, at the option of Landstar, either (i) the greatest of (a)
the prime rate as publicly announced from time to time by JPMorgan Chase
Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%,
or, (ii) the rate at the time offered to JPMorgan Chase Bank in the
Eurodollar market for amounts and periods comparable to the relevant loan plus
a margin that is determined based on the level of the Company's Leverage Ratio,
as defined in the Third Amended and Restated Credit Agreement. The margin is
subject to an increase of .125% if the aggregate amount outstanding under the
Third Amended and Restated Credit Agreement exceeds 50% of the total
borrowing capacity. As of December 29, 2001, the margin was equal to 87.5/100
of 1%. The unused portion
38
of the Third Amended and Restated Credit Agreement carries a commitment fee
determined based on the level of the Leverage Ratio, as therein defined. As of
December 29, 2001, the commitment fee for the unused portion of the Third
Amended and Restated Credit Agreement was 0.250%. At December 29, 2001, the
weighted average interest rate on borrowings outstanding under the Third
Amended and Restated Credit Agreement was 2.81%.
The Third 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 Third 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
Third 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 $11,719,000 at
December 29, 2001.
The Third Amended and Restated Credit Agreement provides for an event of
default related to a person or group acquiring 25% or more of the outstanding
capital stock of the Company or obtaining the power to elect a majority of the
Company's directors.
Borrowings under the Third 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 Third
Amended and Restated Credit Agreement.
Shareholders' equity was $117,440,000, or 54% of total capitalization,
at December 29, 2001, compared with $107,859,000, or 53% of total
capitalization, at December 30, 2000. The increase in shareholders' equity
as a percentage of total capitalization was primarily a result of current
year net income, partially offset by the purchase of 500,000 shares of the
Company's common stock at a total cost of $37,199,000. As of December 29, 2001,
the Company may purchase an additional 500,000 shares of its common stock
under its authorized stock purchase program. Long-term debt including current
maturities was $101,874,000 at December 29, 2001, $7,231,000 higher than at
December 30, 2000, primarily as a result of financing a portion of the stock
purchase program with borrowings under the Company's credit agreement. Working
capital and the ratio of current assets to current liabilities were
$121,808,000 and 1.92 to 1, respectively, at December 29, 2001, compared with
$94,718,000 and 1.61 to 1, respectively, at December 30, 2000. Landstar has
historically operated with current ratios approximating 1.5 to 1. Cash provided
by operating activities was $49,794,000 in 2001 compared with $54,047,000 in
2000. The decrease in cash provided by operating activities was primarily
attributable to the timing of collection of accounts receivable and reduced
earnings. During the 2001 fiscal year, Landstar purchased $5,443,000 of
operating property. Landstar anticipates it will acquire approximately
$28,000,000 of operating property during fiscal year 2002 either by purchase
or by lease financing.
39
Management believes that cash flow from operations combined with its borrowing
capacity under the Third Amended and Restated Credit Agreement will be
adequate to meet Landstar's debt service requirements, fund continued growth,
both internal and through acquisitions, complete any purchases under 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.
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.
SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
The allowance for doubtful accounts for both trade and other receivables
represents management's estimate of the amount of outstanding receivables
that will not be collected. During 2001, the Company experienced an
abnormally high level of bad debt expense. Management believes this
resulted from the difficult economic environment experienced by the Company's
customers and independent contractors. Although management believes the amount
of the allowance for both trade and other receivables at December 29, 2001
is appropriate, a prolonged period of low or no economic growth may adversely
affect the collection of these receivables. Correspondingly, a more robust
economic environment may result in the realization of some portion of the
estimated uncollectible receivables.
As described in the accounting policy footnote to the financial statements,
Landstar provides for the estimated costs of self-insured claims primarily
on an actuarial basis. The amount recorded for the estimated liability for
claims incurred is based upon the facts and circumstances known on the
balance sheet date. The ultimate resolution of these claims may be for an
amount greater or less than the amount estimated by management.
Significant variances from management's estimates for the amount of
uncollectible receivables or for the ultimate resolution of claims can
be expected to positively or negatively affect Landstar's operating income
in a given quarter or year. However, management believes that the ultimate
resolution of these items, given a range of reasonably likely outcomes, will
not significantly affect the long-term financial condition of Landstar or its
ability to fund its continuing operations.
In June 2001, the Financial Accounting Standards Board issued statement of
financial accounting standard (SFAS) No. 142, "Goodwill and Other Intangible
Assets." This Statement, effective for fiscal years beginning after
December 15, 2001, establishes standards for recognizing and measuring
goodwill and other intangible assets. Management believes other
than the elimination of amortization expense for goodwill currently reflected
on the Company's balance sheet, the adoption of this Statement will not
materially affect the financial position or results of operations of the
Company.
40
In August 2001, the Financial Accounting Standards Board issued SFAS No.143,
"Accounting for Asset Retirement Obligations." This Statement, effective
for fiscal years beginning after June 15, 2002, requires an enterprise to
record the fair value of an asset retirement obligation as a liability in
the period in which it incurs a legal obligation associated with the
retirement of a tangible long-lived asset. The enterprise is also to record
a corresponding increase to the carrying amount of the long-lived asset.
Management believes that this Statement will not have a material effect on the
financial position or results of operations of the Company.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This
Statement, effective for fiscal years beginning after December 15, 2001,
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
to be Disposed Of," and addresses the financial accounting and reporting for
the impairment or disposal of long-lived assets. Management believes that the
adoption of this Statement will not have a material effect on the financial
position or results of operations of the Company.
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 by nature 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 SEC 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.
41
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 29, December 30,
2001 2000
----------- -----------
ASSETS
Current assets:
Cash $ 47,886 $ 32,926
Short-term investments 2,982 1,500
Trade accounts receivable, less allowance
of $4,416 and $4,450 185,206 195,398
Other receivables, including advances to independent
contractors, less allowance of $4,740
and $5,089 13,779 13,122
Prepaid expenses and other current assets 4,020 6,062
-------- --------
Total current assets 253,873 249,008
-------- --------
Operating property, less accumulated depreciation
and amortization of $44,455 and $37,497 68,532 76,049
Goodwill, less accumulated amortization of $10,209
and $8,993 31,134 32,474
Deferred income taxes and other assets 11,112 12,831
-------- --------
Total assets $364,651 $370,362
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 13,018 $ 17,496
Accounts payable 55,813 63,002
Current maturities of long-term debt 9,965 9,766
Insurance claims 21,602 23,364
Accrued compensation 2,091 8,277
Other current liabilities 29,576 32,385
-------- --------
Total current liabilities 132,065 154,290
-------- --------
Long-term debt, excluding current maturities 91,909 84,877
Insurance claims 21,585 23,336
Deferred income taxes 1,652
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 13,328,834 and
13,233,874 shares 133 132
Additional paid-in capital 75,036 71,325
Retained earnings 258,162 215,368
Cost of 5,241,841 and 4,741,841 shares of common
stock in treasury (209,926) (172,727)
Notes receivable arising from exercise of stock options (5,965) (6,239)
-------- --------
Total shareholders' equity 117,440 107,859
-------- --------
Total liabilities and shareholders' equity $364,651 $370,362
======== ========
See accompanying notes to consolidated financial statements.
42
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Fiscal Years Ended
December 29, December 30, December 25,
2001 2000 1999
------------ ------------ ------------
Revenue $ 1,392,771 $ 1,418,492 $ 1,388,083
Investment income 3,567 4,317 2,502
Costs and expenses:
Purchased transportation 1,030,454 1,046,183 1,022,203
Commissions to agents 110,513 113,721 111,666
Other operating costs 32,750 29,568 30,000
Insurance and claims 32,930 31,935 34,064
Selling, general and administrative 99,762 100,516 99,240
Depreciation and amortization 13,543 13,003 11,698
Non-recurring costs 5,270
------------ ------------ ------------
Total costs and expenses 1,319,952 1,340,196 1,308,871
------------ ------------ ------------
Operating income 76,386 82,613 81,714
Interest and debt expense 6,802 9,127 4,509
------------ ------------ ------------
Income before income taxes 69,584 73,486 77,205
Income taxes 26,790 28,292 31,268
------------ ------------ ------------
Net income $ 42,794 $ 45,194 $ 45,937
============ ============ ============
Earnings per common share $ 5.13 $ 5.15 $ 4.60
============ ============ ============
Diluted earnings per share $ 5.01 $ 5.03 $ 4.55
============ ============ ============
Average number of shares outstanding:
Earnings per common share 8,336,000 8,781,000 9,982,000
Diluted earnings per share 8,546,000 8,981,000 10,102,000
See accompanying notes to consolidated financial statements.
43
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended
December 29, December 30, December 25,
2001 2000 1999
(Dollars in thousands) ------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 42,794 $ 45,194 $ 45,937
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of operating property 12,327 11,787 10,482
Amortization of goodwill 1,216 1,216 1,216
Non-cash interest charges 97 324 324
Provisions for losses on trade and other accounts receivable 8,153 4,592 2,643
Losses (gains) on sales of operating property (273) (244) 708
Deferred income taxes, net 1,776 3,911 1,788
Non-cash charge in lieu of income taxes 124 43
Changes in operating assets and liabilities:
Decrease (increase) in trade and other accounts receivable 1,382 8,230 (37,534)
Decrease (increase) in prepaid expenses and other assets 1,194 (1,405) (1,329)
Increase (decrease) in accounts payable (7,189) (4,320) 16,698
Increase (decrease) in other liabilities (8,294) (7,410) 7,146
Decrease in insurance claims (3,513) (7,871) (4,497)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 49,794 54,047 43,582
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of investments (496) (1,435) (5,005)
Maturities of investments 1,484 1,060
Purchases of operating property (5,443) (7,305) (12,716)
Proceeds from sales of operating property 906 1,958 2,132
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (3,549) (5,722) (15,589)
------------ ------------ ------------
FINANCING ACTIVITIES
Increase (decrease) in cash overdraft (4,478) (1,975) 4,725
Borrowings on revolving credit facility 135,500 27,500 21,500
Principal payments on long-term debt and capital lease obligations (128,269) (18,603) (6,087)
Proceeds from exercise of stock options 3,161 143 293
Purchases of common stock (37,199) (46,185) (51,384)
------------ ------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (31,285) (39,120) (30,953)
------------ ------------ ------------
Increase (decrease) in cash 14,960 9,205 (2,960)
Cash at beginning of period 32,926 23,721 26,681
------------ ------------ ------------
Cash at end of period $ 47,886 $ 32,926 $ 23,721
============ ============ ============
See accompanying notes to consolidated financial statements.
44
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Fiscal Years Ended December 29, 2001,
December 30, 2000 and December 25, 1999
(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 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
Net income 42,794 42,794
Purchases of common stock 500,000 (37,199) (37,199)
Exercises of stock options
and related income tax
benefit 94,960 1 3,711 274 3,986
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 29, 2001 13,328,834 $ 133 $75,036 $258,162 5,241,841 $(209,926) $ (5,965) $117,440
========== ====== ======= ======== ========= ========= ============= ========
See accompanying notes to consolidated financial statements.
45
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, primarily on an actuarially determined basis, for the
estimated costs of cargo, property, casualty, general liability and workers'
compensation claims both reported and for claims incurred but not reported.
Landstar retains liability for each individual commercial trucking claim up to
$1,000,000 per occurrence through April 30, 2001 and $5,000,000 per occurrence
thereafter. The Company also retains liability for each general liability
claim up to $1,000,000, $250,000 for each workers' compensation claim and
$250,000 for each cargo claim.
Tires
Tires purchased as part of trailing equipment are capitalized as part of the
cost of the equipment. Replacement tires are charged to expense when placed in
service.
Investments
Investments, all of which are intended to be held to maturity, consist of
investment grade bonds having maturities of up to five years and are carried
at amortized cost, which approximates fair value. Short-term investments
represent the current portion of these bonds. There are $1,407,000 and
$3,877,000 of these bonds included in other assets at December 29, 2001 and
December 30, 2000, 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.
Trailing equipment is 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.
46
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
At December 25, 1999, approximately 100 Landstar Ranger, Inc.
("Landstar Ranger") drivers were represented by the International Brotherhood
of Teamsters (the "Teamsters"). The vast majority of these unionized drivers
participated 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 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 the 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).
47
(3) Income Taxes
The provisions for income taxes consisted of the following (in thousands):
Fiscal Years
------------------------------
2001 2000 1999
---- ---- ----
Current:
Federal $23,636 $21,525 $24,931
State 1,254 2,813 4,549
------- ------- -------
24,890 24,338 29,480
Deferred:
Federal 1,454 4,208 1,019
State 322 (297) 769
------ ------- -------
1,776 3,911 1,788
Non-cash charge in lieu of income taxes 124 43
------- ------- -------
Income taxes $26,790 $28,292 $31,268
======= ======= =======
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities consisted of the following (in thousands):
Dec. 29, 2001 Dec. 30, 2000
------------- -------------
Deferred tax assets:
Receivable valuations $ 4,128 $ 4,221
Deferred state income tax benefits 1,700 1,587
State net operating loss carryforwards 1,933 1,885
Self-insured claims 3,252 4,881
Other 5,052 3,530
--------- ---------
16,065 16,104
Valuation allowance (491) (615)
--------- ---------
$ 15,574 $ 15,489
========= =========
Deferred tax liabilities:
Operating property $ 11,378 $ 9,731
Other 5,848 5,634
--------- ---------
$ 17,226 $ 15,365
========= =========
48
At December 29, 2001, the valuation allowance of $491,000 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 $463,000 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 before income taxes
and the provisions for income taxes (in thousands):
Fiscal Years
----------------------------
2001 2000 1999
---- ---- ----
Income taxes at federal income tax rate $24,354 $25,720 $27,022
State income taxes, net of federal income
tax benefit 1,024 1,635 3,457
Amortization of goodwill 258 258 258
Meals and entertainment exclusion 892 597 472
Other, net 262 82 59
------- -------- --------
Income taxes $26,790 $28,292 $31,268
======= ======= =======
Landstar paid income taxes of $24,778,000 in 2001, $25,089,000 in 2000 and
$28,659,000 in 1999.
(4) Operating Property
Operating property is summarized as follows (in thousands):
Dec. 29, 2001 Dec. 30, 2000
------------- -------------
Land $ 2,045 $ 2,097
Leasehold improvements 8,307 8,341
Buildings and improvements 7,963 7,963
Trailing equipment 71,957 72,257
Other equipment 22,715 22,888
-------- --------
112,987 113,546
Less accumulated depreciation and amortization 44,455 37,497
-------- --------
$ 68,532 $ 76,049
======== ========
Included above is $57,393,000 in 2001 and $60,811,000 in 2000 of operating
property under capital leases, $37,224,000 and $44,458,000, respectively, net
of accumulated amortization. Landstar did not acquire any property by entering
into capital leases in 2001. Landstar acquired operating property by entering
49
into capital leases in the amount of $18,448,000 in 2000 and $17,445,000
in 1999.
(5) 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 for the Company-sponsored defined contribution plan was
$1,090,000 in 2001, $1,105,000 in 2000 and $1,082,000 in 1999. The expense
for union-sponsored plans, excluding the estimated cost of withdrawal
(see note 2), was $935,000 in 2000 and $1,351,000 in 1999.
(6) Debt
Long-term debt is summarized as follows (in thousands):
Dec. 29, 2001 Dec. 30, 2000
------------- -------------
Capital leases $27,374 $37,143
Revolving credit facility 74,500 57,500
------- -------
101,874 94,643
Less current maturities 9,965 9,766
------- -------
Total long-term debt $91,909 $84,877
======= =======
On December 20, 2001, Landstar renegotiated its existing Credit Agreement with
a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the
"Third Amended and Restated Credit Agreement"). The Third Amended and
Restated Credit Agreement provides $175,000,000 of borrowing capacity in the
form of a revolving credit facility, $50,000,000 of which may be utilized in
the form of letter of credit guarantees. The Third Amended and Restated Credit
Agreement expires on January 5, 2005.
50
Borrowings under the Third Amended and Restated Credit Agreement bear interest
at rates equal to, at the option of Landstar, either (i) the greatest of (a)
the prime rate as publicly announced from time to time by JPMorgan Chase
Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC
assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%,
or, (ii) the rate at the time offered to JPMorgan Chase Bank in the
Eurodollar market for amounts and periods comparable to the relevant loan plus
a margin that is determined based on the level of the Company's Leverage Ratio,
as defined in the Third Amended and Restated Credit Agreement. The margin is
subject to an increase of .125% if the aggregate amount outstanding under the
Third Amended and Restated Credit Agreement exceeds 50% of the total borrowing
capacity. As of December 29, 2001, the margin was equal to 87.5/100 of 1%. The
unused portion of the Third 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 29, 2001, the commitment fee for the unused
portion of the Third Amended and Restated Credit Agreement was 0.250%. At
December 29, 2001, the weighted average interest rate on borrowings outstanding
under the Third Amended and Restated Credit Agreement was 2.81%. Based on the
borrowing rates in the Third Amended and Restated Credit Agreement and the
repayment terms, the fair value of the outstanding borrowings under the Third
Amended and Restated Credit Agreement was estimated to approximate carrying
value.
The Third 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 Third 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
Third 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
$11,719,000 at December 29, 2001.
The Third Amended and Restated Credit Agreement provides for an event of
default related to a person or group acquiring 25% or more of the outstanding
capital stock of the Company or obtaining the power to elect a majority of the
Company's directors.
Borrowings under the Third Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of LSHI's subsidiaries
guarantee LSHI's obligations under the Third Amended and Restated Credit
Agreement.
The amount outstanding on the Third Amended and Restated Credit Agreement
is due and payable on January 5, 2005. There are no other installments of
long-term debt, excluding capital lease obligations, maturing in the next five
years.
Landstar paid interest of $7,874,000 in 2001, $9,658,000 in 2000 and
$4,484,000 in 1999.
(7) Leases
The future minimum lease payments under all noncancelable leases at
December 29, 2001, principally for trailing equipment and the Company's
headquarters facility in Jacksonville, Florida, are shown in the
following table (in thousands):
51
PAGE>
Capital Operating
Leases Leases
------- ---------
2002 $11,581 $ 3,206
2003 10,093 2,687
2004 6,876 2,110
2005 2,178 2,066
2006 2,023
Thereafter 16,183
------- ---------
30,728 $ 28,275
=========
Less amount representing interest
(5.9% to 8.3%) 3,354
Present value of minimum -------
lease payments $27,374
=======
Total rent expense, net of sublease income, was
$19,976,000 in 2001, $19,620,000 in 2000 and $19,322,000 in 1999.
(8) 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.
All options granted under the Plan through December 29, 2001 become exercisable
in five equal annual installments 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 29, 2001, there were 867,840 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 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
Granted 198,100 $ 66.05
Exercised (94,960) $ 30.41
Forfeited (46,520) $ 50.25
--------
Options at December 29, 2001 561,520 $ 46.56 207,680 $ 34.43
========
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 2001, 2000 and 1999: risk-free interest rate of 5.0% in 2001 and
6.0% in both 2000 and 1999, expected lives of 5 years and no dividend yield.
The expected volatility used in calculating the fair market value of stock
options granted was 40% in 2001, 41% in 2000 and 38% in 1999. The weighted
average grant date fair value of stock options granted was $28.32, $21.61 and
$15.71 per share in 2001, 2000 and 1999, respectively.
The following table summarizes stock options outstanding at December 29, 2001:
Options Outstanding
-------------------
Range of Exercise Weighted Average Weighted Average
Prices Number Outstanding Remaining Contractual Exercise Price
Per Share Dec. 29, 2001 Life (years) Per Share
----------------- ------------------ --------------------- ----------------
$22.531 - $35.734 174,280 5.9 $ 30.60
$35.735 - $46.875 197,740 7.4 $ 42.36
$46.876 - $69.266 189,500 9.3 $ 65.63
----------------
$22.531 - $69.266 561,520 7.6 $ 46.56
================
53
Options Exercisable
-------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
Per Share Dec. 29, 2001 Per Share
----------------- ---------------- ----------------
$22.531 - $38.900 121,620 $ 29.67
$38.901 - $56.891 86,060 $ 41.16
----------------
$22.531 - $56.891 207,680 $ 34.43
================
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 No. 123,
"Accounting for Stock-Based Compensation," the effect on net income and
earnings per common share for the fiscal year would have been $1,274,000, or
$0.15 per common share, in 2001, $1,145,000, or $0.13 per common share, in 2000
and $966,000, or $0.10 per common share, in 1999.
(9) Shareholders' Equity
During 2001, Landstar purchased 500,000 shares of its common stock at a total
cost of $37,199,000 pursuant to a previously announced stock purchase program.
As of December 29, 2001, Landstar may purchase an additional 500,000 shares of
its common stock under its authorized stock purchase 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 2001, 2000 and 1999, $1,098,000, $4,596,000 and
$384,000 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.
54
(10) 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, dedicated power-only
truck capacity and truck brokerage. 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 ground and 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 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 2001 approximately 14% 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 29, 2001,
December 30, 2000 and December 25, 1999 (in thousands):
2001
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $1,098,268 $ 270,849 $ 23,654 $1,392,771
Internal revenue 28,587 2,367 27,313 58,267
Investment income 3,567 3,567
Interest and debt expense $ 6,802 6,802
Depreciation and
amortization 8,382 783 4,378 13,543
Operating income 76,105 5,343 30,644 (35,706) 76,386
Expenditures on
long-lived assets 2,994 159 2,290 5,443
Total assets 234,164 47,795 46,440 36,252 364,651
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
56
(11) Commitments and Contingencies
At December 29, 2001, Landstar had commitments for letters of
credit outstanding in the amount of $19,929,000, primarily as
collateral for estimated insurance claims, $9,080,000 of which were
supported by the Third Amended and Restated Credit Agreement and
$10,849,000 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 29, 2001 and December 30, 2000, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the fiscal years ended December 29, 2001, December 30, 2000
and December 25, 1999. 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 29, 2001 and December 30, 2000, and the
results of their operations and their cash flows for the fiscal years ended
December 29, 2001, December 30, 2000 and December 25, 1999 in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Stamford, Connecticut
February 5, 2002
58
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
2001 2001 2001 2001
---------- ---------- ---------- ----------
Revenue $ 347,788 $ 355,684 $ 358,018 $ 331,281
========== ========== ========== ==========
Operating income $ 20,093 $ 21,000 $ 19,486 $ 15,807
---------- ---------- ---------- ----------
Income before income taxes $ 18,820 $ 19,403 $ 17,776 $ 13,585
Income taxes 7,243 7,473 6,843 5,231
---------- ---------- ---------- ----------
Net income $ 11,577 $ 11,930 $ 10,933 $ 8,354
========== ========== ========== ==========
Earnings per common share (1) $ 1.43 $ 1.45 $ 1.29 $ 0.98
========== ========== ========== ==========
Diluted earnings per share (1) $ 1.40 $ 1.41 $ 1.26 $ 0.96
========== ========== ========== ==========
59
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 2000 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 (1) $ 1.89 $ 1.33 $ 1.06 $ 0.91
========== ========== ========== ==========
Diluted earnings per share (1) $ 1.85 $ 1.30 $ 1.04 $ 0.89
========== ========== ========== ==========
(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
2001 2000 1999 1998 1997
------------------------------------------------------------
Income Statement Data:
Revenue $1,392,771 $1,418,492 $1,388,083 $1,283,607 $1,219,311
Investment income 3,567 4,317 2,502 1,689
Costs and expenses:
Purchased transportation 1,030,454 1,046,183 1,022,203 950,343 898,746
Commissions to agents 110,513 113,721 111,666 101,409 98,425
Other operating costs 32,750 29,568 30,000 27,516 32,747
Insurance and claims 32,930 31,935 34,064 39,388 42,885
Selling, general and administrative 99,762 100,516 99,240 95,028 85,586
Depreciation and amortization 13,543 13,003 11,698 10,158 11,354
Non-recurring costs 5,270 3,247
--------- --------- --------- --------- ---------
Total costs and expenses 1,319,952 1,340,196 1,308,871 1,223,842 1,172,990
--------- --------- --------- --------- ---------
Operating income 76,386 82,613 81,714 61,454 46,321
Interest and debt expense 6,802 9,127 4,509 3,503 2,705
--------- --------- --------- --------- ---------
Income from continuing operations
before income taxes 69,584 73,486 77,205 57,951 43,616
Income taxes 26,790 28,292 31,268 23,470 18,188
--------- --------- --------- --------- ---------
Income from continuing operations 42,794 45,194 45,937 34,481 25,428
Discontinued operations, net of
income taxes (22,589) (738)
--------- --------- --------- --------- ---------
Net income $ 42,794 $ 45,194 $ 45,937 $ 11,892 $ 24,690
========= ========= ========= ========= =========
Earnings per common share:
Income from continuing operations $ 5.13 $ 5.15 $ 4.60 $ 3.13 $ 2.03
Loss from discontinued
operations (2.05) (0.06)
--------- --------- --------- --------- ---------
Earnings per common share $ 5.13 $ 5.15 $ 4.60 $ 1.08 $ 1.97
========= ========= ========= ========= =========
Diluted earnings per share:
Income from continuing operations $ 5.01 $ 5.03 $ 4.55 $ 3.10 $ 2.02
Loss from discontinued
operations (2.03) (0.06)
--------- --------- --------- --------- ---------
Diluted earnings per share $ 5.01 $ 5.03 $ 4.55 $ 1.07 $ 1.96
========= ========= ========= ========= =========
61
Dec. 29, Dec. 30, Dec. 25, Dec. 26, Dec. 27,
2001 2000 1999 1998 1997
--------- --------- -------- --------- ---------
Balance Sheet Data:
Total assets $ 364,651 $ 370,362 $ 365,441 $ 313,665 $ 357,179
Long-term debt, including
current maturities 101,874 94,643 67,298 34,440 50,446
Shareholders' equity 117,440 107,859 106,884 111,848 151,696
62