UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 29, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to _____________________
Commission File Number: 0-21238
LANDSTAR SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1313069
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
13410 Sutton Park Drive South, Jacksonville, Florida
(Address of principal executive offices)
32224
(Zip Code)
(904) 390-1234
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ( X ) No ( )
The number of shares of the registrant's Common Stock, par value $.01 per
share, outstanding as of the close of business on August 1, 2002 was
8,121,653, not adjusted for the two-for-one stock-split announced
July 18, 2002.
PART I
FINANCIAL INFORMATION
Index
Item 1
Consolidated Balance Sheets as of June 29, 2002
and December 29, 2001 ............................................... Page 3
Consolidated Statements of Income for the Twenty-Six and Thirteen Weeks
Ended June 29, 2002 and June 30, 2001 ............................. Page 4
Consolidated Statements of Cash Flows for the Twenty-Six Weeks
Ended June 29, 2002 and June 30, 2001 ............................. Page 5
Consolidated Statement of Changes in Shareholders'
Equity for the Twenty-Six Weeks Ended June 29, 2002 .................. Page 6
Notes to Consolidated Financial Statements............................. Page 7
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ Page 9
Item 3
Quantitative and Qualitative Disclosures About Market Risk............. Page 15
Item 1. Financial Statements
The interim consolidated financial statements contained herein reflect
all adjustments (all of a normal, recurring nature) which, in the opinion of
management, are necessary for a fair statement of the financial condition,
results of operations, cash flows and changes in shareholders' equity
for the periods presented. They have been prepared in accordance with Rule
10-01 of Regulation S-X and do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the twenty-six weeks ended June 29,
2002 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 28, 2002.
These interim financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
2001 Annual Report on Form 10-K.
2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
June 29, Dec 29,
2002 2001
---------- ------------
ASSETS
Current assets:
Cash $ 47,877 $ 47,886
Short-term investments 1,305 2,982
Trade accounts receivable, less allowance of $4,009
and $4,416 203,344 185,206
Other receivables, including advances to independent
contractors, less allowance of $6,008 and $4,740 14,710 13,779
Prepaid expenses and other current assets 6,250 4,020
---------- -----------
Total current assets 273,486 253,873
---------- -----------
Operating property, less accumulated depreciation
and amortization of $49,218 and $44,455 64,243 68,532
Goodwill 31,134 31,134
Other assets 21,141 11,112
---------- -----------
Total assets $ 390,004 $ 364,651
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 17,638 $ 13,018
Accounts payable 67,326 55,813
Current maturities of long-term debt 10,070 9,965
Insurance claims 24,631 21,602
Other current liabilities 38,707 31,667
---------- -----------
Total current liabilities 158,372 132,065
---------- -----------
Long-term debt, excluding current maturities 62,439 91,909
Insurance claims 24,552 21,585
Deferred income taxes 2,206 1,652
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 16,255,606 and 13,328,834 shares 163 133
Additional paid-in capital 75,036
Retained earnings 145,332 258,162
Cost of 5,241,841 shares of common stock in
treasury at December 29, 2001 (209,926)
Notes receivable arising from exercise of stock options (3,060) (5,965)
---------- -----------
Total shareholders' equity 142,435 117,440
---------- -----------
Total liabilities and shareholders' equity $ 390,004 $ 364,651
========== ===========
See accompanying notes to consolidated financial statements.
3
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Twenty-Six Weeks Ended Thirteen Weeks Ended
----------------------- -----------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenue $ 726,909 $ 689,299 $ 391,216 $ 358,018
Investment income 1,078 1,959 515 903
Costs and expenses:
Purchased transportation 536,422 510,037 289,234 265,882
Commissions to agents 56,905 54,007 30,817 27,890
Other operating costs 17,814 16,895 9,708 8,792
Insurance and claims 24,384 17,025 13,477 9,222
Selling, general and administrative 50,723 50,975 24,675 24,113
Depreciation and amortization 5,700 7,026 2,821 3,536
---------- ---------- ---------- ----------
Total costs and expenses 691,948 655,965 370,732 339,435
---------- ---------- ---------- ----------
Operating income 36,039 35,293 20,999 19,486
Interest and debt expense 2,552 3,932 1,244 1,710
---------- ---------- ---------- ----------
Income before income taxes 33,487 31,361 19,755 17,776
Income taxes 12,725 12,074 7,507 6,843
---------- ---------- ---------- ----------
Net income $ 20,762 $ 19,287 $ 12,248 $ 10,933
========== ========== ========== ==========
Earnings per common share (1) $ 1.28 $ 1.13 $ 0.75 $ 0.64
========== ========== ========== ==========
Diluted earnings per share (1) $ 1.23 $ 1.11 $ 0.72 $ 0.63
========== ========== ========== ==========
Average number of shares outstanding:
Earnings per common share (1) 16,223,000 17,007,000 16,252,000 16,989,000
========== ========== ========== ==========
Diluted earnings per share (1) 16,829,000 17,437,000 16,914,000 17,415,000
========== ========== ========== ==========
(1) All earnings per share amounts and average number of shares outstanding have been restated to give
retroactive effect to a two-for-one stock split effected in the form of a 100% stock dividend
announced July 18, 2002.
See accompanying notes to consolidated financial statements.
4
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Twenty-Six Weeks Ended
---------------------------
June 29, June 30,
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net income $ 20,762 $ 19,287
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of operating property 5,700 6,417
Amortization of goodwill 609
Non-cash interest charges 136 86
Provisions for losses on trade and other accounts receivable 3,769 3,406
Losses (gains) on sales of operating property 12 (195)
Deferred income taxes, net 554 (120)
Changes in operating assets and liabilities:
Increase in trade and other accounts receivable (22,838) (2,445)
Increase in prepaid expenses and other assets (6,996) (3,412)
Increase in accounts payable 11,513 6,151
Increase (decrease) in other liabilities 7,040 (8,352)
Increase (decrease) in insurance claims 5,996 (3,097)
----------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 25,648 18,335
----------- ------------
INVESTING ACTIVITIES
Maturities of short-term investments 2,000 499
Purchases of short-term investments (5,722)
Purchases of operating property (1,697) (2,825)
Proceeds from sales of operating property 274 557
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (5,145) (1,769)
----------- -----------
FINANCING ACTIVITIES
Increase (decrease) in cash overdraft 4,620 (2,095)
Proceeds from exercise of stock options 4,233 1,224
Purchases of common stock (7,875)
Principal payments on long-term debt and capital lease obligations (29,365) (12,907)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (20,512) (21,653)
----------- -----------
Decrease in cash (9) (5,087)
Cash at beginning of period 47,886 32,926
----------- -----------
Cash at end of period $ 47,877 $ 27,839
=========== ===========
See accompanying notes to consolidated financial statements.
5
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
Twenty-Six Weeks Ended June 29, 2002
(Dollars in thousands)
(Unaudited)
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 29, 2001 13,328,834 $ 133 $ 75,036 $ 258,162 5,241,841 $(209,926) $ (5,965) $ 117,440
Net income 20,762 20,762
Exercises of stock options 46,960 1 1,327 2,905 4,233
Retirement of treasury
stock (5,241,841) (52) (76,363) (133,511)(5,241,841) 209,926 -
Stock split effected
in the form of a
100% stock dividend 8,121,653 81 (81) -
---------- ------- --------- --------- --------- --------- ------------- ---------
Balance June 29, 2002 16,255,606 $ 163 $ - $ 145,332 - $ - $ (3,060) $ 142,435
========== ======= ========= ========= ========= ========= ============= =========
See accompanying notes to consolidated financial statements.
6
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System,
Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all
adjustments (all of a normal, recurring nature) which are, in the opinion of
management, necessary for a fair statement of the results for the periods
presented. The preparation of the consolidated financial statements requires
the use of management's estimates. Actual results could differ from those
estimates. Landstar System, Inc. and its subsidiary are herein referred to as
"Landstar" or the "Company."
(1) Stock-Split
On July 18, 2002, Landstar announced that its Board of Directors
had declared a two-for-one stock-split of its common stock to be
effected in the form of a 100% stock dividend. Stockholders of
record on August 2, 2002 will receive one additional share of
common stock for each share held. The additional shares will be
distributed on or about August 12, 2002. All share and per share
amounts have been restated to give retroactive effect to this stock-
split.
(2) Income Taxes
The provisions for income taxes for the 2002 and 2001 twenty-six-week
and thirteen-week periods were based on estimated full year combined
effective income tax rates of approximately 38.0% and 38.5%,
respectively, which are higher than the statutory federal income tax
rate primarily as a result of state income taxes and the meals and
entertainment exclusion in both years and the amortization of certain
goodwill in the 2001 period.
(3) 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. All earnings
per share amounts have been restated to give retroactive effect to the
two-for-one stock split announced July 18, 2002.
(4) Goodwill
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets" in the first quarter
of fiscal year 2002. SFAS No. 142 eliminated the requirement to amortize
goodwill and requires that it be tested for impairment on an annual basis.
During the first quarter of 2002, the Company completed the transitional
goodwill impairment test and determined that the fair value of each
reporting unit exceeded the carrying value of the net assets of each
reporting unit. Accordingly, no impairment loss was recognized. Adoption
of SFAS No. 142 resulted in the elimination of goodwill amortization
expense beginning with the first quarter of 2002. During the twenty-six-
week and thirteen-week periods ended June 30, 2001, the Company recorded
goodwill amortization expense of $609,000 and $305,000, respectively.
Elimination of this amortization expense would have resulted in net
income of $19,896,000, or an increase of $0.04 in earnings per share
($0.03 per diluted share), and $11,238,000, or an increase of $0.02
in earnings per share ($0.02 per diluted share), in the 2001 twenty-six
and thirteen-week periods, respectively. The Company has no
other intangible assets subject to the provisions of SFAS No. 142.
(5) Additional Cash Flow Information
During the 2002 period, Landstar paid income taxes and interest of
$14,259,000 and $2,216,000, respectively. During the 2001 period,
Landstar paid income taxes and interest of $15,232,000 and $4,450,000,
respectively.
7
(6) Segment Information
The following tables summarize information about Landstar's reportable
business segments for the twenty-six and thirteen weeks ended
June 29, 2002 and June 30, 2001 (in thousands):
Twenty-Six Weeks Ended June 29, 2002
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 579,964 $ 133,059 $ 13,886 $ 726,909
Investment income 1,078 1,078
Internal revenue 11,505 1,160 15,473 28,138
Operating income 41,459 2,785 7,560 $(15,765) 36,039
Goodwill 20,496 10,638 31,134
Twenty-Six Weeks Ended June 30, 2001
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 543,559 $ 134,019 $ 11,721 $ 689,299
Investment income 1,959 1,959
Internal revenue 14,431 1,121 13,054 28,606
Operating income 37,603 2,121 13,708 $(18,139) 35,293
Goodwill 20,954 10,911 31,865
Thirteen Weeks Ended June 29, 2002
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 310,001 $ 74,340 $ 6,875 $ 391,216
Investment income 515 515
Internal revenue 6,359 645 8,864 15,868
Operating income 24,603 1,645 2,238 $ (7,487) 20,999
Thirteen Weeks Ended June 30, 2001
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 280,174 $ 72,190 $ 5,654 $ 358,018
Investment income 903 903
Internal revenue 7,792 639 7,688 16,119
Operating income 20,569 1,535 6,512 $ (9,130) 19,486
8
(7) Commitments and Contingencies
At June 29, 2002, Landstar had commitments for letters of
credit outstanding in the amount of $19,929,000, primarily as
collateral for insurance claims. The commitments for letters of credit
outstanding included $9,080,000 under 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 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
adverse effect on the results of operations in a given quarter or year.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the attached
interim consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the fiscal year
ended December 29, 2001 and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the 2001 Annual Report to
Shareholders.
RESULTS OF OPERATIONS
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 Inway, Inc.,
Landstar Ligon, Inc. 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 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 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 tractors provided by independent contractors, 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.
9
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.
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 and multimodal segments is 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 generated by the carrier segment, the multimodal segment
and Signature and increases or decreases in gross profit at 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, cargo or workers' compensation
claims or the unfavorable development of existing claims can be expected to
adversely affect, or materially 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. Landstar retains liability
for each individual unladen truckers liability claim (claims incurred
while the vehicle is being operated without a trailer attached
or is being operated with an attached trailer which does not
contain or carry any cargo) up to $25,000 per occurrence through
December 31, 2001 and $1,000,000 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 trailers
and management information services equipment.
All historical share related financial information presented herein has been
restated to reflect a two-for-one stock-split effected in the form of a 100%
stock dividend to be distributed on or about August 12, 2002 to stockholders
of record on August 2, 2002.
10
The following table sets forth the percentage relationships of
income and expense items to revenue for the periods indicated:
Twenty-Six Weeks Ended Thirteen Weeks Ended
------------------------ ------------------------
June 29, June 30, June 29, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenue 100.0% 100.0% 100.0% 100.0%
Investment income 0.2 0.3 0.1 0.3
Costs and expenses:
Purchased transportation 73.8 74.0 73.9 74.3
Commissions to agents 7.8 7.8 7.9 7.8
Other operating costs 2.4 2.5 2.5 2.4
Insurance and claims 3.4 2.5 3.5 2.6
Selling, general and administrative 7.0 7.4 6.3 6.7
Depreciation and amortization 0.8 1.0 0.7 1.0
------- ------ ------- ------
Total costs and expenses 95.2 95.2 94.8 94.8
------- ------ ------- ------
Operating income 5.0 5.1 5.3 5.5
Interest and debt expense 0.4 0.6 0.3 0.5
------- ------ ------- ------
Income before income taxes 4.6 4.5 5.0 5.0
Income taxes 1.7 1.7 1.9 1.9
------- ------ ------- ------
Net income 2.9% 2.8% 3.1% 3.1%
======= ====== ======= ======
TWENTY-SIX WEEKS ENDED JUNE 29, 2002 COMPARED TO TWENTY-SIX WEEKS
ENDED JUNE 30, 2001
Revenue for the 2002 twenty-six-week period was $726,909,000, an increase of
$37,610,000 over the 2001 twenty-six-week period. The increase was
attributable to increased revenue of $36,405,000 and $2,165,000 at the carrier
and insurance segments, respectively, partially offset by decreased revenue
at the multimodal segment of $960,000. Overall, revenue miles (volume)
increased approximately 6%, while revenue per revenue mile (price) decreased
approximately 1%. The increase in premium revenue at the insurance segment was
primarily attributable to an increase in the level of reinsurance underwritten
for unladen truckers liability from $25,000 per occurrence to $1,000,000 per
occurrence effective January 1, 2002. Investment income at the insurance
segment was $1,078,000 and $1,959,000 in the 2002 and 2001 periods,
respectively. The decrease in investment income was primarily due to a reduced
rate of return, attributable to the decline in interest rates.
Purchased transportation was 73.8% of revenue in 2002 compared with 74.0% in
2001. The decrease in purchased transportation as a percentage of revenue was
primarily due to increased revenue at the insurance and carrier segments.
Commissions to agents were 7.8% of revenue in 2002 and 2001.
11
Other operating costs were 2.4% of revenue in 2002 compared with 2.5% in
2001. The decrease in other operating costs as a percentage of revenue
was primarily due to decreased license, permit and fuel tax costs,
partially offset by increased trailer costs. Insurance and claims were 3.4% of
revenue in 2002 compared with 2.5% in 2001. The increase in insurance
and claims as a percentage of revenue was primarily attributable to
increased trucking claims in the $4 million excess of $1 million layer
as a result of one severe accident in June 2002, the increased level of risk
assumed for the unladen truckers liability program effective
January 1, 2002 and favorable development of prior year claims in
2001, partially offset by reduced property and casualty
insurance premiums. Selling, general and administrative costs
were 7.0% of revenue in 2002 compared with 7.4% of revenue in 2001. Selling,
general and administrative costs, net of an increased provision for bonuses
under the Company's incentive compensation plans, remained approximately the
same as in the prior year. Accordingly, selling, general and administrative
costs as a percentage of revenue declined as revenue increased 5.5%.
Depreciation and amortization was 0.8% of revenue in 2002
compared with 1.0% in 2001. The decrease in depreciation and
amortization as a percentage of revenue was primarily due to the
January 1, 2002 implementation of SFAS No. 142, which eliminated
the amortization of goodwill, and reduced depreciation expense
for trailing equipment reflecting a decline in the number
of company-owned trailers in favor of leased trailers with rent
based upon a percentage of revenue.
Interest and debt expense was 0.4% and 0.6% of revenue in 2002 and 2001,
respectively. This decrease was primarily attributable to the decline in
interest rates, decreased average borrowings on the senior
credit facility and decreased capital lease obligations for trailing
equipment.
The provisions for income taxes for the 2002 and 2001 twenty-six-week periods
were based on estimated full year combined effective income tax rates of
approximately 38.0% and 38.5%, respectively, which are greater than the
statutory federal income tax rate primarily as a result of state income taxes
and the meals and entertainment exclusion in both years and the amortization
of certain goodwill in the 2001 period. The decrease in the effective income
tax rate was attributable to the elimination of goodwill amortization in 2002.
Net income was $20,762,000, or $1.28 per common share ($1.23 per diluted
share), in the 2002 period compared with $19,287,000, or $1.13 per common share
($1.11 per diluted share), in the 2001 period.
12
THIRTEEN WEEKS ENDED JUNE 29, 2002 COMPARED TO THIRTEEN WEEKS
ENDED JUNE 30, 2001
Revenue for the 2002 thirteen-week period was $391,216,000, an increase of
$33,198,000 compared to the 2001 thirteen-week period. The increase was
attributable to increased revenue of $29,827,000, $2,150,000 and $1,221,000
at the carrier, multimodal and insurance segments, respectively. Overall,
revenue miles increased approximately 10%, while revenue per revenue mile
decreased approximately 1%. The increase in premium revenue at the insurance
segment was primarily attributable to an increase in the level of reinsurance
underwritten for unladen truckers liability. Investment income at the
insurance segment was $515,000 and $903,000 in the 2002 and 2001 periods,
respectively. The decrease in investment income was primarily due to a
reduced rate of return, attributable to the decline in interest rates.
Purchased transportation was 73.9% of revenue in 2002 compared with 74.3% in
2001. The decrease in purchased transportation as a percentage of revenue was
primarily attributable to increased revenue at the insurance and
carrier segments and improved purchased transportation rates at the multimodal
segment, partially offset by increased brokerage revenue at the carrier
segment. Commissions to agents were 7.9% of revenue in 2002 and 7.8% of
revenue in 2001. The increase in commissions to agents as a percentage of
revenue was primarily due to improved gross profit at the multimodal segment
resulting from lower purchased transportation costs and increased brokerage
revenue at the carrier segment. Other operating costs were 2.5% of revenue
in 2002 compared with 2.4% in 2001. The increase in other operating costs as
a percentage of revenue was primarily due to increased trailer costs,
partially offset by decreased license, permit and fuel tax costs.
Insurance and claims were 3.5% of revenue in 2002 compared with 2.6% in 2001.
The increase in insurance and claims as a percentage of revenue was primarily
attributable to increased trucking claims in the $4 million excess of
$1 million layer as a result of one severe accident in June 2002 and the
increased level of risk assumed for the unladen truckers liability program,
partially offset by reduced property and casualty insurance premiums. Selling,
general and administrative costs were 6.3% of revenue in 2002 compared with
6.7% of revenue in 2001. Selling, general and administrative costs, net of an
increased provision for bonuses under the Company's incentive compensation
plans, remained approximately the same as in the prior year. Accordingly,
selling, general and administrative costs as a percentage of revenue declined
as revenue increased 9.3%. Depreciation and amortization was 0.7% of revenue
in 2002 compared with 1.0% in 2001. The decrease in depreciation and
amortization as a percentage of revenue was primarily due to the
January 1, 2002 implementation of SFAS No. 142, which eliminated the
amortization of goodwill, and reduced depreciation expense for trailing
equipment.
Interest and debt expense was 0.3% and 0.5% of revenue in 2002 and 2001,
respectively. The decrease was primarily attributable to the decline in
interest rates, decreased average borrowings on the senior credit facility
and decreased capital lease obligations for trailing equipment.
The provisions for income taxes for the 2002 and 2001 thirteen-week periods
were based on estimated full year combined effective income tax rates of
approximately 38.0% and 38.5%, respectively, which are greater than the
statutory federal income tax rate primarily as a result of state income taxes
and the meals and entertainment exclusion in both years and the amortization
of certain goodwill in the 2001 period. The decrease in the effective income
tax rate was attributable to the elimination of goodwill amortization in 2002.
Net income was $12,248,000, or $0.75 per common share ($0.72 per diluted
share), in the 2002 period compared with $10,933,000, or $0.64 per common
share ($0.63 per diluted share), in the 2001 period.
13
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' equity increased to $142,435,000 at June 29, 2002 compared
with $117,440,000 at December 29, 2001, primarily as a result of net income
for the period. Shareholders' equity was 66% and 54% of total capitalization
at June 29, 2002 and December 29, 2001, respectively. As of August 1, 2002,
the Company may purchase up to 974,600 shares, adjusted for the two-for-one
stock-split, of its common stock under its authorized stock purchase program.
Working capital and the ratio of current assets to current liabilities were
$115,114,000 and 1.73 to 1, respectively, at June 29, 2002, compared with
$121,808,000 and 1.92 to 1, respectively, at December 29, 2001. Landstar has
historically operated with current ratios within the range of 1.5 to 1 to
2.0 to 1. Cash provided by operating activities was $25,648,000 in the 2002
period compared with $18,335,000 in the 2001 period. The increase in cash
flow provided by operating activities was primarily attributable to the
timing of payments. During the 2002 period, Landstar purchased $1,697,000
of operating property. Management anticipates acquiring $25,000,000 of
operating property during the remainder of fiscal year 2002 either by
purchase or lease financing.
Management believes that cash flow from operations combined with the Company's
borrowing capacity under its revolving 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.
14
FORWARD-LOOKING STATEMENTS
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995. Statements contained in this document that are
not based on historical facts are "forward-looking statements." This
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-Q 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, cargo 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company maintains a credit agreement with a syndicate of banks and
JPMorgan Chase Bank, as the administrative agent, (the "Third Amended
and Restated Credit Agreement") that 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.
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. There have
been no significant changes that would affect the information provided
in Item 7a of the 2001 Annual Report on Form 10-K regarding quantitative
and qualitative disclosures about market risk.
15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On September 20, 2001, a suit was filed entitled Gulf Bridge RoRo, Inc. v.
Landstar System, Inc. (hereinafter "Landstar"), Landstar Logistics, Inc.
(hereinafter "Landstar Logistics"), and Ford Motor Co., Inc.
in Federal District Court in Mobile, Alabama. The suit alleges breach
of contract and misrepresentation against Landstar and Landstar Logistics and
certain other courses of action arising out of a contract between Landstar
Logistics and the Plaintiff involving a trans-Gulf of Mexico roll-on/roll-off
shipping venture developed by the Plaintiffs. The complaint and discovery
developed after the filing of the suit would indicate that Plaintiff's
principal claim is that Landstar and Landstar Logistics breached a duty under
the contract to use "best efforts" to aid in the arrangement of freight for
Plaintiff's vessel and that Landstar and Landstar Logistics misrepresented
material facts which induced Plaintiff to enter into the contract with
Landstar Logistics. The suit makes claim for $25,000,000 for damages for
breach of contract and $50,000,000 punitive and other damages related to the
misrepresentation counts. As of August 1, 2002, discovery remains open and
proceeding in this matter. Discovery completion date has been set by the Court
for October 31, 2002. The Court has set a trial date for February of 2003.
The Company believes it has meritorious defenses to this litigation and intends
to defend it vigorously. The Company also believes that if this litigation were
determined adverse to it, the probable liability of the Company, exclusive of
any available insurance recoveries, would not have a material adverse
effect on the financial condition of the Company but could have a material
adverse effect on the results of operations in a given quarter or year. The
Company also believes, however, that any such liability would have no greater
impact on the Company's results of operations for any fiscal quarter or fiscal
year than any previous litigation to which the Company has been a party in the
last three fiscal years. No assurances can be given as to the outcome
of this matter.
The Company is routinely a party to litigation incidental to its business,
primarily involving claims for personal injury and property damage incurred
in the transportation of freight. The Company maintains insurance which covers
liability amounts in excess of retained liabilities from personal injury and
property damages claims.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
16
Item 4. Submission of Matters to a Vote of Security Holders
On May 15, 2002, Landstar System, Inc. (the "Company") held its Annual
Meeting of Shareholders (the "Meeting") at its principal offices in
Jacksonville, FL. The matters voted upon at the Meeting included (i) the
election of two Class III directors for the terms to expire at the 2005
Annual Meeting of Shareholders, (ii) the ratification of appointment of
KPMG LLP as the Company's independent auditors for fiscal year 2002,
(iii) to consider the approval of the Company's 2002 Employee Stock
Option Plan and (iv) to consider approval of the Company's
Executive Incentive Compensation Plan.
The number of shares voted below do not give effect to the two-for-one
stock-split announced on July 18, 2002.
Pursuant to the Company's Restated Certificate of Incorporation, the
Board of Directors has fixed the number of directors at seven: two
Class I directors whose members' terms will expire at the 2003 Annual
Meeting of Shareholders; three Class II directors whose members' terms
will expire at the 2004 Annual Meeting of Shareholders; and two Class III
directors whose members' terms will expire at the 2005 Annual Meeting of
Shareholders. With respect to the election of two Class III directors at
the Meeting, nominee David G. Bannister and nominee Jeffrey C. Crowe were
elected to the Board of Directors of the Company. Mr. Bannister received
6,915,622 votes for election to the Board and 86,216 were withheld. Mr.
Crowe received 6,954,198 votes for election to the Board and 47,640 were
withheld. The names of the other directors whose terms of office as a
director continued after the Meeting are as follows: Henry H. Gerkens
(a Class I director), Ronald W. Drucker (a Class I director), Merritt J.
Mott (a Class II director), William S. Elston (a Class II director) and
Diana M. Murphy (a Class II director).
The proposal to appoint KPMG LLP as the Company's independent auditors
for fiscal year 2002 was ratified by the Company's shareholders. Votes
for the ratification were 6,913,160, votes against were 81,722 and votes
abstaining were 6,956.
The proposal for the approval of the Company's 2002 Employee Stock Option
Plan was approved by a majority of the shareholders with 4,130,629 votes
for the proposal, 2,223,556 votes against the proposal and 86,512 votes
abstained.
The proposal for the approval of the Company's Executive Incentive
Compensation Plan was approved by a majority of the shareholders with
6,105,025 votes for the proposal, 236,758 votes against the proposal
and 98,914 votes abstained.
17
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index are filed as part
of this quarterly report on Form 10-Q.
(b) Form 8-K
None.
18
EXHIBIT INDEX
Registrant's Commission File No.: 0-21238
Exhibit No. Description
- ------------ -----------
(11) Statement re: Computation of Per Share Earnings:
11.1 * Landstar System, Inc. and Subsidiary Calculation of Earnings
Per Common Share for the Twenty-Six and Thirteen Weeks Ended
June 29, 2002 and June 30, 2001
11.2 * Landstar System, Inc. and Subsidiary Calculation of Diluted
Earnings Per Share for the Twenty-Six and Thirteen Weeks
Ended June 29, 2002 and June 30, 2001
__________________
* Filed herewith
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LANDSTAR SYSTEM, INC.
Date: August 5, 2002 /s/ Jeffrey C. Crowe
----------------------------
Jeffrey C. Crowe
Chairman of the Board and
Chief Executive Officer
Date: August 5, 2002 /s/ Robert C. LaRose
----------------------------
Robert C. LaRose
Vice President, Chief Financial
Officer and Secretary
20