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 Inway, Inc.,
Landstar Ligon, Inc. and Landstar Gemini, Inc. The carrier segment primarily
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 independent
contractors who provide truck capacity to the Company under exclusive lease
arrangements (the "Independent Contractors") and other third party truck
capacity providers. Historically, the Company's carrier segment has primarily
relied on capacity provided by Independent Contractors. Pursuant to a plan to
augment its available capacity and increase its revenue, the Company has begun
to increase the carrier segment's use of capacity provided by other third party
truck capacity providers. A significant decrease in available capacity provided
by either the Company's Independent Contractors or other third party capacity
providers could have a material adverse effect on Landstar, including its
results of operations and revenue. 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 78% 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 and other third party
capacity providers, including truck brokerage carriers, 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 20% 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 subsidiaries. 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.
41
Purchased transportation represents the amount an Independent Contractor or
other third party capacity provider is paid to haul freight. The amount of
purchased transportation paid to an Independent Contractor is primarily based
on a contractually agreed-upon percentage of revenue generated by the haul.
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 brokerage services and rail intermodal operations
is normally higher than that of Landstar's other transportation operations.
Purchased transportation is the largest component of costs and expenses and,
on a consolidated basis, increases or decreases in proportion to the revenue
generated through Independent Contractors and other third party capacity
providers. Commissions to agents are primarily based on contractually
agreed-upon percentages of revenue at the carrier segment and of gross profit,
defined as 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
with changes 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. Landstar retains liability
for individual commercial trucking claims up to $5,000,000 per occurrence.
For commercial trucking claims incurred prior to May 1, 2001, Landstar
retains liability up to $1,000,000 per occurrence. To reduce its
exposure to unladen liability claims (claims incurred while a vehicle
is being operated without a trailer attached or is being operated with an
attached trailer which does not contain or carry any cargo), Landstar
requires its Independent Contractors to maintain unladen truckers liability
coverage of $1,000,000 per occurrence. Under the Company's unladen truckers
liability program, Independent Contractors purchase unladen truckers liability
coverage from a third party insurance company. Signature then reinsures unladen
liability coverage for Independent Contractors who participate in the
Company's unladen program up to $1,000,000 per occurrence. For unladen claims
incurred prior to January 1, 2002, Landstar retains liability up to $25,000
per occurrence. The Company also retains liability for each general liability
claim up to $1,000,000, $250,000 for each workers' compensation claim and
$250,000 for each cargo claim. The Company's exposure to liability associated
with accidents incurred by other third party capacity providers who haul
freight on behalf of the Company is reduced by various factors including the
extent to which they maintain their own insurance coverage. A material
increase in the frequency or severity of accidents, cargo or workers'
compensation claims or the unfavorable development of existing claims could be
expected to materially adversely affect Landstar's results of operations.
Employee compensation and benefits account for over half of the Company's
selling, general and administrative 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.
On July 17, 2002, Landstar 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 received one additional share of common stock for
each share held. The additional shares were distributed on August 12, 2002.
All share and per share amounts have been restated to give retroactive
effect to this stock split.
42
The following table sets forth the percentage relationships of expense items to
revenue for the periods indicated:
Fiscal Years
------------------------
2002 2001 2000
------ ------ ------
Revenue 100.0% 100.0% 100.0%
Investment income 0.1 0.3 0.3
Costs and expenses:
Purchased transportation 74.1 74.0 73.8
Commissions to agents 7.9 7.9 8.0
Other operating costs 2.3 2.3 2.1
Insurance and claims 2.8 2.4 2.2
Selling, general and administrative 6.7 7.2 7.1
Depreciation and amortization 0.7 1.0 0.9
Non-recurring costs 0.4
------ ------ ------
Total costs and expenses 94.5 94.8 94.5
------ ------ ------
Operating income 5.6 5.5 5.8
Interest and debt expense 0.3 0.5 0.6
------ ------ ------
Income before income taxes 5.3 5.0 5.2
Income taxes 2.0 1.9 2.0
------ ------ ------
Net income 3.3% 3.1% 3.2%
====== ====== ======
FISCAL YEAR ENDED DECEMBER 28, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 29,
2001
Revenue for the fiscal year 2002 was $1,506,555,000, an increase of
$113,784,000, or 8.2%, compared to revenue for the 2001 fiscal year.
Revenue increased $79,995,000, $29,867,000 and $3,922,000 at the carrier,
multimodal and insurance segments, respectively. Overall, revenue miles
(volume) increased approximately 11%. Revenue per load increased approximately
5% while revenue per revenue mile (price) decreased approximately 3%,
reflecting changes in freight mix, including an 8% increase in the average
length of haul at the carrier segment. Revenue at the insurance segment
increased primarily due to an increase in the level of reinsurance underwritten
for unladen truckers liability for certain of the Company's Independent
Contractors from $25,000 per occurrence to $1,000,000 per occurrence effective
January 1, 2002.
Investment income at the insurance segment was $1,950,000 and $3,567,000
for fiscal year 2002 and 2001, 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 74.1% of revenue in 2002 compared with 74.0% in
2001. The increase in purchased transportation as a percentage of revenue was
primarily attributable to increased brokerage revenue at the carrier segment
and increased rail intermodal revenue at the multimodal segment. Commissions
to agents were 7.9% of revenue in both 2002 and 2001, as increased agent
commissions at the multimodal segment were offset by reduced agent commissions
on brokerage revenue at the carrier segment and increased premium revenue at
the insurance segment.
43
Other operating costs were 2.3% of revenue in both 2002 and 2001, as increased
trailer maintenance costs were offset by reductions in Independent Contractor
recruiting, qualification and incentive costs and reduced net costs of plates
and permits. Insurance and claims were 2.8% of revenue in 2002 compared with
2.4% in 2001. The increase in insurance and claims as a percentage of revenue
was primarily due to increased commercial trucking claims in the $4 million
excess of $1 million layer and increased unladen truckers liability claims due
to the increased level of risk assumed by Signature under the Company's unladen
truckers liability program effective January 1, 2002. These increases were
partially offset by a reduction in insurance claims resulting from increased
revenue hauled by other third party capacity providers. Selling, general and
administrative costs were 6.7% of revenue in 2002 and 7.2% in 2001. The
decrease in selling, general and administrative costs as a percentage of
revenue was primarily due to decreased wages, travel and entertainment expenses
and communication costs, as a result of implementation of certain cost
reduction initiatives, and a decreased provision for customer bad debt,
partially offset by an increased provision for bonuses under the Company's
incentive compensation plans, increased costs for the Company's employee
benefit programs and increased legal fees. Depreciation and amortization was
0.7% of revenue in 2002 and 1.0% of revenue in 2001. The decrease in
depreciation and amortization as a percentage of revenue was primarily due to
the January 1, 2002 implementation of Statement of Financial Accounting
Standards ("SFAS") No. 142, which eliminated the amortization of goodwill, and
reduced depreciation expense for company-owned trailing equipment and
information technology assets.
Interest and debt expense was 0.3% of revenue in 2002 and 0.5% of revenue in
2001. This decrease was primarily attributable to lower interest rates, reduced
average borrowings on the Company's senior credit facility and decreased
average capital lease obligations for trailing equipment.
The provisions for income taxes for the 2002 and 2001 fiscal years were based
on effective income tax rates of 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 amortization of certain goodwill in 2001. At December 28, 2002, 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. The decrease in the effective
income tax rate was primarily attributable to the elimination of goodwill
amortization in 2002.
Net income was $49,221,000, or $3.05 per common share ($2.94 per diluted
share), in 2002 compared with $42,794,000, or $2.57 per common share ($2.50
per diluted share), in 2001.
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 decreased approximately 3% compared to fiscal year
2000, which was partially offset by an increase in revenue per revenue mile of
approximately 1%, which reflected improved freight quality primarily at the
multimodal segment.
44
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 increased rates charged by other 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, 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"). As a result of the terms of a new collective bargaining
agreement, the Trustees of the Fund terminated participation in the Fund by
Landstar Ranger effective October 1, 2000. The Trustees of the Fund regarded
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. At December 28, 2002, 43 Landstar Ranger drivers
were represented by the Teamsters and neither Landstar nor any of its
subsidiaries participates in any multi-employer pension plans.
45
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 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.
Net income was $42,794,000, or $2.57 per common share ($2.50 per diluted
share), in 2001 compared with $45,194,000, or $2.57 per common share ($2.52
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
$2.75 per common share ($2.69 per diluted share), in 2000.
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 28, 2002, Landstar had
commitments for letters of credit outstanding in the amount of $18,060,000,
primarily as collateral for estimated insurance claims, $9,080,000 of which
were supported by the Third Amended and Restated Credit Agreement and
$8,980,000 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 28, 2002, the margin was equal to 87.5/100
of 1%.
46
The unused portion 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 28, 2002, the commitment fee for the unused portion of
the Third Amended and Restated Credit Agreement was 0.250%. At December 28,
2002, the weighted average interest rate on borrowings outstanding under the
Third Amended and Restated Credit Agreement was 2.27%.
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, Interest
Coverage, earnings before interest and taxes exceeded the required minimum by
approximately $64,000,000 for the fiscal year ended December 28, 2002.
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 $149,093,000, or 66% of total capitalization,
at December 28, 2002, compared with $117,440,000, or 54% of total
capitalization, at December 29, 2001. The increase in shareholders' equity
was a result of current year net income, repayment of notes receivable
arising from exercises of stock options and exercises of stock options,
partially offset by the purchase of 554,879 shares of the Company's
common stock at a total cost of $26,306,000. As of December 28, 2002, the
Company may purchase an additional 445,121 shares of its common stock under its
authorized stock purchase program. Long-term debt including current maturities
was $77,360,000 at December 28, 2002, $24,514,000 lower than at December 29,
2001. Working capital and the ratio of current assets to current liabilities
were $120,630,000 and 1.78 to 1, respectively, at December 28, 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 $84,313,000
in 2002 compared with $49,794,000 in 2001. The increase in cash provided by
operating activities was primarily attributable to increased earnings and
timing of payments. During the 2002 fiscal year, Landstar purchased $4,421,000
of operating property and acquired $16,370,000 of revenue equipment by
entering into capital leases. Landstar anticipates it will acquire between
$18,000,000 to $30,000,000 of operating property during fiscal year 2003 either
by purchase or by lease financing.
At December 28, 2002, the Company's obligations and commitments to make future
payments under contracts, such as debt and lease agreements, were as follows
(in thousands):
Payments Due By Period
Contractual Less than 1-3 4-5 After 5
Obligation Total 1 Year Years Years Years
Long-term debt $44,000 $44,000
Capital lease
obligations 36,285 $13,631 19,511 $3,143
Operating
leases 25,724 2,784 6,546 2,087 $14,307
-------- ------- ------- ------ -------
$106,009 $16,415 $70,057 $5,230 $14,307
======== ======= ======= ====== =======
Capital lease obligations above include $2,925,000 of imputed interest.
Operating leases include $22,488,000 related to the Company's main office
facility located in Jacksonville, Florida.
47
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.
The Company and Ford Motor Co., Inc. are defendants in a suit alleging breach
of contract, misrepresentation and certain other causes of action arising out
of a contract between Landstar Logistics, Inc. and the plaintiff involving a
trans-Gulf of Mexico roll-on/roll-off shipping venture developed by the
plaintiff, Gulf Bridge RoRo, Inc. The suit makes claim for $25,000,000
damages for breach of contract and $50,000,000 punitive and other damages
related to the misrepresentation counts. The Company has filed motions
for summary judgment with the court seeking, in addition to a judgment in its
favor, to dismiss Landstar System, Inc. from the litigation, to limit the
amount of damages obtainable by the plaintiff, to preclude fraud and other
theories upon which plaintiff seeks to obtain damages, and to exclude certain
evidence concerning damages sought to be introduced at trial by plaintiff,
among other things. Subject to the outcome of these motions, which is
anticipated in March 2003, discovery has been substantially completed in this
matter, and the Company anticipates that the matter will be tried in April
2003. The Company believes it has meritorious defenses to this litigation and
intends to continue to defend it vigorously. The Company also believes that
if this litigation were determined adversely to it, the liability of the
Company, exclusive of any available insurance recoveries, would not be
reasonably likely to have a material adverse effect on the financial condition
of the Company but that it could have a material adverse effect on the results
of operations in a given quarter or year. The Company has notified its
third party insurance carrier that it believes that a portion of the claims
made in this lawsuit are covered under insurance provided by that carrier, and
the carrier has agreed to pay the fees and expenses and to participate in the
defense of this litigation, subject to a reservation of rights. The Company
also intends to pursue its rights with respect to this coverage vigorously.
No assurances can be given as to the outcome of this litigation or any related
matter, however.
On November 1, 2002, the Owner Operator Independent Drivers Association, Inc.
("OOIDA") and six individual Independent Contractors filed a putative class
action suit in the U.S. Court in Jacksonville, Florida, against the Company.
The suit alleges that certain aspects of Landstar's motor carrier's leases
with owner operators violate the federal leasing regulations. OOIDA seeks
injunctive relief, damages and attorney's fees. On December 17, 2002, the
Company filed a Motion to Dismiss and a Motion to Stay and Compel Arbitration
with respect to all of the leases that contain arbitration clauses. Landstar
believes it has meritorious defenses to this litigation and intends to defend
it vigorously. Landstar also believes that it treats its Independent
Contractors fairly and in a manner which reflects the important role they play
in the Company's operations.
48
The Company is involved in certain other claims and pending litigation arising
from the normal conduct of business. Based on knowledge of the facts and, in
certain cases, opinions of outside counsel, management believes that adequate
provisions have been made for probable losses with respect to the resolution of
all such other claims and pending litigation and that the ultimate outcome,
after provisions thereof, 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 2002, the Company experienced its second
consecutive year with 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 28, 2002 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.
The Company utilizes certain income tax planning strategies to reduce its
overall cost of income taxes. Upon audit, it is possible that certain
strategies might be disallowed resulting in an increased liability for
income taxes. The Company has provided for its estimated exposure attributable
to income tax planning strategies. Management believes that the provision
for liabilities resulting from the implementation of income tax planning
strategies is appropriate.
Significant variances from management's estimates for the amount of
uncollectible receivables, for the ultimate resolution of claims or the
provision for liabilities for income tax planning strategies can be expected to
positively or negatively affect Landstar's earnings in a given quarter or year.
However, management believes that the ultimate resolution of these items, given
a range of reasonably likely outcomes, will not significantly affect the
long-term financial condition of Landstar or its ability to fund its continuing
operations.
49
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.
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; dependence on independent sales agents; dependence
on third party capacity providers; disruptions or failures in our computer
systems; a downturn in domestic economic growth or growth in the
transportation sector; substantial industry competition; and other operational,
financial or legal risks or uncertainties detailed in this and Landstar's other
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.
50
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
December 28, December 29,
2002 2001
----------- -----------
ASSETS
Current assets:
Cash $ 65,447 $ 47,886
Short-term investments 3,130 2,982
Trade accounts receivable, less allowance
of $3,953 and $4,416 190,052 185,206
Other receivables, including advances to independent
contractors, less allowance of $5,331
and $4,740 12,640 13,779
Prepaid expenses and other current assets 3,338 4,020
-------- --------
Total current assets 274,607 253,873
-------- --------
Operating property, less accumulated depreciation
and amortization of $52,841 and $44,455 76,774 68,532
Goodwill 31,134 31,134
Other assets 18,233 11,112
-------- --------
Total assets $400,748 $364,651
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 16,545 $ 13,018
Accounts payable 60,297 55,813
Current maturities of long-term debt 12,123 9,965
Insurance claims 24,419 21,602
Other current liabilities 40,593 31,667
-------- --------
Total current liabilities 153,977 132,065
-------- --------
Long-term debt, excluding current maturities 65,237 91,909
Insurance claims 25,276 21,585
Deferred income taxes 7,165 1,652
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 16,337,506 and
13,328,834 shares 163 133
Additional paid-in capital 2,609 75,036
Retained earnings 173,817 258,162
Cost of 554,879 and 5,241,841 shares of common
stock in treasury (26,306) (209,926)
Notes receivable arising from exercise of stock options (1,190) (5,965)
-------- --------
Total shareholders' equity 149,093 117,440
-------- --------
Total liabilities and shareholders' equity $400,748 $364,651
======== ========
See accompanying notes to consolidated financial statements.
51
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Fiscal Years Ended
December 28, December 29, December 30,
2002 2001 2000
------------ ------------ ------------
Revenue $ 1,506,555 $ 1,392,771 $ 1,418,492
Investment income 1,950 3,567 4,317
Costs and expenses:
Purchased transportation 1,116,009 1,030,454 1,046,183
Commissions to agents 118,864 110,513 113,721
Other operating costs 34,325 32,750 29,568
Insurance and claims 42,188 32,930 31,935
Selling, general and administrative 101,918 99,762 100,516
Depreciation and amortization 11,520 13,543 13,003
Non-recurring costs 5,270
------------ ------------ ------------
Total costs and expenses 1,424,824 1,319,952 1,340,196
------------ ------------ ------------
Operating income 83,681 76,386 82,613
Interest and debt expense 4,292 6,802 9,127
------------ ------------ ------------
Income before income taxes 79,389 69,584 73,486
Income taxes 30,168 26,790 28,292
------------ ------------ ------------
Net income $ 49,221 $ 42,794 $ 45,194
============ ============ ============
Earnings per common share (1) $ 3.05 $ 2.57 $ 2.57
============ ============ ============
Diluted earnings per share (1) $ 2.94 $ 2.50 $ 2.52
============ ============ ============
Average number of shares outstanding:
Earnings per common share (1) 16,141,000 16,672,000 17,562,000
Diluted earnings per share (1) 16,767,000 17,092,000 17,962,000
(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 declared July 17, 2002.
See accompanying notes to consolidated financial statements.
52
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended
December 28, December 29, December 30,
2002 2001 2000
(Dollars in thousands) ------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 49,221 $ 42,794 $ 45,194
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of operating property 11,520 12,327 11,787
Amortization of goodwill 1,216 1,216
Non-cash interest charges 273 97 324
Provisions for losses on trade and other accounts receivable 7,514 8,153 4,592
Losses (gains) on sales and disposals of operating property 642 (273) (244)
Deferred income taxes, net 5,513 1,776 3,911
Non-cash charge in lieu of income taxes 124 43
Changes in operating assets and liabilities:
Decrease (increase) in trade and other accounts receivable (11,221) 1,382 8,230
Decrease (increase) in prepaid expenses and other assets 933 1,194 (1,405)
Increase (decrease) in accounts payable 4,484 (7,189) (4,320)
Increase (decrease) in other liabilities 8,926 (8,294) (7,410)
Increase (decrease) in insurance claims 6,508 (3,513) (7,871)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 84,313 49,794 54,047
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of investments (8,889) (496) (1,435)
Maturities of investments 2,500 1,484 1,060
Purchases of operating property (4,421) (5,443) (7,305)
Proceeds from sales of operating property 387 906 1,958
------------ ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (10,423) (3,549) (5,722)
------------ ------------ ------------
FINANCING ACTIVITIES
Increase (decrease) in cash overdraft 3,527 (4,478) (1,975)
Borrowings on revolving credit facility 135,500 27,500
Principal payments on long-term debt and capital lease obligations (40,884) (128,269) (18,603)
Proceeds from repayment of notes receivable arising from
exercises of stock options 4,867 1,372 51
Proceeds from exercises of stock options 2,467 1,789 92
Purchases of common stock (26,306) (37,199) (46,185)
------------ ------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (56,329) (31,285) (39,120)
------------ ------------ ------------
Increase in cash 17,561 14,960 9,205
Cash at beginning of period 47,886 32,926 23,721
------------ ------------ ------------
Cash at end of period $ 65,447 $ 47,886 $ 32,926
============ ============ ============
See accompanying notes to consolidated financial statements.
53
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Fiscal Years Ended December 28, 2002,
December 29, 2001 and December 30, 2000
(Dollars in thousands)
Notes
Treasury Stock Receivable
Common Stock Additional at Cost Arising from
----------------- Paid-In Retained ------------------- Exercises of
Shares Amount Capital Earnings Shares Amount Stock Options Total
---------- ------ ------- -------- --------- --------- ------------- --------
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 (4,596) 453
Repayment of notes
receivable arising from
exercises of stock options 51 51
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 (1,098) 2,614
Repayment of notes
receivable arising from
exercises of stock options 1,372 1,372
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 29, 2001 13,328,834 133 75,036 258,162 5,241,841 (209,926) (5,965) 117,440
Net income 49,221 49,221
Retirement of treasury
stock (5,241,841) (52) (76,389) (133,485) (5,241,841) 209,926 -
Purchases of common stock 554,879 (26,306) (26,306)
Exercises of stock options
and related income tax
benefit 116,160 1 3,962 (92) 3,871
Repayment of notes
receivable arising from
exercises of stock options 4,867 4,867
Stock split effected in
the form of a 100%
stock dividend 8,134,353 81 (81) -
---------- ------ ------- -------- --------- --------- ------------- --------
Balance December 28, 2002 16,337,506 $ 163 $ 2,609 $173,817 554,879 $ (26,306) $ (1,190) $149,093
========== ====== ======= ======== ========= ========= ============= ========
See accompanying notes to consolidated financial statements.
54
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. Fuel surcharges billed to customers for freight hauled
by the independent contractors who provide truck capacity to the Company under
exclusive lease arrangements are excluded from revenue and paid in entirety to
the independent contractors.
Insurance Claim Costs
Landstar provides, primarily on an actuarially determined basis, for the
estimated costs of cargo, property, casualty, general liability and workers'
compensation claims both reported and for claims incurred but not reported.
Landstar retains liability for individual commercial trucking claims up to
$5,000,000 per occurrence. For commercial trucking claims incurred prior
to May 1, 2001, Landstar retains liability up to $1,000,000 per occurrence.
The Company also retains liability for each general liability claim up to
$1,000,000, $250,000 for each workers' compensation claim and $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 $7,648,000 and
$1,407,000 of these bonds included in other assets at December 28, 2002 and
December 29, 2001, 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.
55
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. The Company updated its test for impairment for the fiscal
year ended December 28, 2002 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 each of 2001 and
2000, the Company recorded goodwill amortization expense of $1,216,000.
Elimination of this amortization expense would have resulted in net income of
$44,010,000, or an increase of $0.07 in earnings per share ($0.07 per diluted
share), and $46,410,000, or an increase of $0.07 in earnings per share ($0.06
per diluted share), in 2001 and 2000, respectively. The Company has no other
intangible assets subject to the provisions of SFAS No. 142.
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.
56
Stock-Based Compensation
At December 28, 2002, the Company has two stock-based employee compensation
plans and one stock-based plan for members of its Board of Directors, which
are described more fully in footnote 9. The Company accounts for those plans
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. No
stock-based employee compensation is reflected in net income, as all options
granted under those plans had an exercise price equal to the fair market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share as if the Company
had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation.
Fiscal Years
---------------------------------
2002 2001 2000
------- ------- -------
Net income, as reported $49,221 $42,794 $45,194
Deduct: Total stock-based employee
compensation expense determined
under the fair value based
method for all awards, net of
related income tax benefits (3,102) (1,187) (1,469)
------- ------- -------
Pro forma net income $46,119 $41,607 $43,725
======= ======= =======
Earnings per common share:
As reported $ 3.05 $ 2.57 $ 2.57
Pro forma $ 2.86 $ 2.50 $ 2.49
Diluted earnings per share:
As reported $ 2.94 $ 2.50 $ 2.52
Pro forma $ 2.80 $ 2.47 $ 2.46
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) Stock Split
On July 17, 2002, Landstar 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 received one additional share of
common stock for each share held. The additional shares were distributed on
August 12, 2002. All share and per share amounts have been restated to give
retroactive effect to this stock split.
57
(3) 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"). As a result of the terms of a new collective
bargaining agreement, the Trustees of the Fund terminated participation in the
Fund by Landstar Ranger effective October 1, 2000. The Trustees of the Fund
regarded 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 $0.08 per common share ($0.08 per diluted share). At December 28, 2002, 43
Landstar Ranger drivers were represented by the Teamsters and neither Landstar
nor any of its subsidiaries participate in any multi-employer pension plans.
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 $0.10 per common share ($0.10 per
diluted share).
58
(4) Income Taxes
The provisions for income taxes consisted of the following (in thousands):
Fiscal Years
------------------------------
2002 2001 2000
---- ---- ----
Current:
Federal $23,362 $23,636 $21,525
State 1,293 1,254 2,813
------- ------- -------
24,655 24,890 24,338
Deferred:
Federal 4,273 1,454 4,208
State 1,240 322 (297)
------ ------- -------
5,513 1,776 3,911
Non-cash charge in lieu of income taxes 124 43
------- ------- -------
Income taxes $30,168 $26,790 $28,292
======= ======= =======
Temporary differences and carryforwards which gave rise to deferred tax assets
and liabilities consisted of the following (in thousands):
Dec. 28, 2002 Dec. 29, 2001
------------- -------------
Deferred tax assets:
Receivable valuations $ 4,092 $ 4,128
Deferred state income tax benefits 2,134 1,700
State net operating loss carryforwards 1,669 1,933
Self-insured claims 3,023 3,252
Other 2,421 5,052
--------- ----------
13,339 16,065
Valuation allowance (491) (491)
--------- ----------
$ 12,848 $ 15,574
========= ==========
Deferred tax liabilities:
Operating property $ 13,827 $ 11,378
Other 6,186 5,848
--------- ----------
$ 20,013 $ 17,226
========= ==========
59
At December 28, 2002, 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
---------------------------
2002 2001 2000
------- ------- -------
Income taxes at federal income tax rate $27,786 $24,354 $25,720
State income taxes, net of federal income
tax benefit 1,646 1,024 1,635
Amortization of goodwill 258 258
Meals and entertainment exclusion 786 892 597
Other, net (50) 262 82
------- ------- -------
Income taxes $30,168 $26,790 $28,292
======= ======= =======
Landstar paid income taxes of $23,540,000 in 2002, $24,778,000 in 2001 and
$25,089,000 in 2000.
(5) Operating Property
Operating property is summarized as follows (in thousands):
Dec. 28, 2002 Dec. 29, 2001
------------- -------------
Land $ 1,999 $ 2,045
Leasehold improvements 8,353 8,307
Buildings and improvements 8,168 7,963
Trailing equipment 85,034 71,957
Other equipment 26,061 22,715
-------- --------
129,615 112,987
Less accumulated depreciation and amortization 52,841 44,455
-------- --------
$ 76,774 $ 68,532
======== ========
Included above is $64,278,000 in 2002 and $48,795,000 in 2001 of operating
property under capital leases, $45,465,000 and $35,613,000, respectively, net
of accumulated amortization. Landstar acquired operating property by entering
into capital leases in the amount of $16,370,000 in 2002 and $18,448,000
in 2000. Landstar did not acquire any property by entering
into capital leases in 2001.
60
(6) Retirement 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 75% of their
base salary, subject to certain limitations. Landstar contributes an amount
equal to 100% of the first 3% and 50% of the next 2% of such contributions,
subject to certain limitations.
Prior to the October 1, 2000 withdrawal (see note 3), 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
$1,093,000 in 2002, $1,090,000 in 2001 and $1,105,000 in 2000. The expense
for union-sponsored plans, excluding the estimated cost of withdrawal
(see note 3), was $935,000 in 2000.
(7) Debt
Long-term debt is summarized as follows (in thousands):
Dec. 28, 2002 Dec. 29, 2001
------------- -------------
Capital leases $ 33,360 $ 27,374
Revolving credit facility 44,000 74,500
-------- --------
77,360 101,874
Less current maturities 12,123 9,965
-------- --------
Total long-term debt $ 65,237 $ 91,909
======== ========
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.
61
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 28, 2002, 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 28, 2002, the commitment fee for the unused
portion of the Third Amended and Restated Credit Agreement was 0.250%. At
December 28, 2002, the weighted average interest rate on borrowings outstanding
under the Third Amended and Restated Credit Agreement was 2.27%. 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, Interest
Coverage, earnings before interest and taxes exceeded the required minimum by
approximately $64,000,000 for the fiscal year ended December 28, 2002.
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 $4,480,000 in 2002, $7,874,000 in 2001 and
$9,658,000 in 2000.
(8) Leases
The future minimum lease payments under all noncancelable leases at
December 28, 2002, principally for trailing equipment and the Company's
headquarters facility in Jacksonville, Florida, are shown in the
following table (in thousands):
62
Capital Operating
Leases Leases
------- ---------
2003 $13,631 $ 2,784
2004 10,222 2,260
2005 5,698 2,192
2006 3,591 2,094
2007 3,143 2,087
Thereafter 14,307
------- ---------
36,285 $ 25,724
=========
Less amount representing interest
(3.6% to 8.3%) 2,925
Present value of minimum -------
lease payments $33,360
=======
Total rent expense, net of sublease income, was
$19,250,000 in 2002, $19,976,000 in 2001 and $19,620,000 in 2000.
(9) Stock Option Plans
All of the share and per share amounts that follow have been adjusted to
reflect a two-for-one stock split effected in the form of a 100% stock
dividend distributed on August 12, 2002 to stockholders of record on
August 2, 2002.
The Company maintains three stock option plans. Under the 1993 Stock Option
Plan, as amended, the Compensation Committee of the Board of Directors may
grant options to Company employees for up to 2,230,000 shares of common stock.
Under the 2002 Employee Stock Option Plan, the Compensation Committee of the
Board of Directors may grant options to Company employees for up to 1,600,000
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 420,000 options to purchase common stock. Under the DSOP, each
outside Director will be granted 18,000 options to purchase common stock upon
election or re-election to the Board of Directors. Subject to approval of its
shareholders at the Company's 2003 annual meeting, the DSOP will be replaced by
a new Directors Stock Compensation Plan. Under the terms of the proposed plan,
each Director, upon election or re-election to the Board, will receive 1,500
shares of the Company's common stock subject to certain restrictions.
Options granted under the existing plans become exercisable in either three or
five equal annual installments, 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 existing plans, the
exercise price of each option equals the fair market price of the Company's
common stock on the date of grant. At December 28, 2002, there were 3,172,160
shares of the Company's common stock reserved for issuance upon exercise of
options granted under the plans.
63
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 25, 1999 1,138,400 $ 15.71 573,040 $ 14.26
Granted 214,800 $ 23.90
Exercised (339,800) $ 13.80
Forfeited (3,600) $ 12.75
---------
Options at December 30, 2000 1,009,800 $ 18.11 424,120 $ 15.59
Granted 396,200 $ 33.02
Exercised (189,920) $ 15.20
Forfeited (93,040) $ 25.13
---------
Options at December 29, 2001 1,123,040 $ 23.28 415,360 $ 17.22
Granted 414,000 $ 36.88
Exercised (163,520) $ 15.67
---------
Options at December 28, 2002 1,373,520 $ 28.28 465,438 $ 21.17
=========
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 2002, 2001 and 2000: risk-free interest rate of 3.5% in 2002,
5.0% in 2001 and 6.0% in 2000, 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 2002 and 2001 and 41% in 2000. The weighted
average grant date fair value of stock options granted was $14.88, $14.16
and $10.81 per share in 2002, 2001 and 2000, respectively.
The following table summarizes stock options outstanding at December 28, 2002:
Options Outstanding
-------------------
Range of Exercise Weighted Average Weighted Average
Prices Number Outstanding Remaining Contractual Exercise Price
Per Share Dec. 28, 2002 Life (years) Per Share
----------------- ------------------ --------------------- ----------------
$14.055 - $20.250 429,000 5.8 $ 17.87
$20.251 - $34.129 416,920 7.8 $ 28.85
$34.130 - $51.895 527,600 8.9 $ 36.31
----------------
$14.055 - $51.895 1,373,520 7.6 $ 28.28
================
64
Options Exercisable
-------------------
Range of Exercise Number Weighted Average
Prices Exercisable Exercise Price
Per Share Dec. 28, 2002 Per Share
----------------- ---------------- ----------------
$14.055 - $17.867 158,280 $ 16.09
$17.868 - $20.250 165,118 $ 19.56
$20.251 - $34.224 142,040 $ 28.69
---------------
$14.055 - $34.224 465,438 $ 21.17
===============
(10) Shareholders' Equity
During 2002, Landstar purchased 554,879 shares of its common stock at a total
cost of $26,306,000 pursuant to a previously announced stock purchase program.
As of December 28, 2002, Landstar may purchase an additional 445,121 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 provided 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 2002, 2001 and 2000, $92,000, $1,098,000 and $4,596,000
of such loans were issued, respectively. Effective May 1, 2002, the Company
ceased making loans under the employee stock option loan program and terminated
the program with respect to future stock option exercises.
The Company has 2,000,000 shares of preferred stock authorized and unissued.
65
(11) Segment Information
The Company has three reportable business segments. These are the carrier,
multimodal and insurance segments. The carrier segment provides truckload
transportation for a wide range of general commodities over irregular
routes with its fleet of dry and specialty vans and unsided trailers,
including flatbed, drop deck and specialty. It also provides short-to-long
haul movement of containers by truck, 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 who provide truck capacity to the Company under
exclusive lease arrangements (the "Independent Contractors") and other third
party truck capacity providers. 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 primarily utilizes capacity provided by Independent
Contractors and other third party capacity providers, including truck brokerage
carriers, 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 subsidiaries. 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.
Internal 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. Internal revenue for premiums billed by the
insurance segment to 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 by the
carrier and multimodal segments had similar insurance been obtained from an
unrelated third party.
No single customer accounts for more than 10% of consolidated revenue.
However, during 2002 approximately 12% of the Company's revenue was
attributable to the automotive industry. Substantially all of the Company's
revenue is generated in the United States.
66
The following tables summarize information about the Company's reportable
business segments as of and for the fiscal years ending December 28, 2002,
December 29, 2001 and December 30, 2000 (in thousands):
2002
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $1,178,263 $ 300,716 $ 27,576 $1,506,555
Internal revenue 23,703 2,483 29,860 56,046
Investment income 1,950 1,950
Interest and debt expense $ 4,292 4,292
Depreciation and
amortization 7,546 126 3,848 11,520
Operating income 87,777 7,793 22,754 (34,643) 83,681
Expenditures on
long-lived assets 329 4,092 4,421
Goodwill 20,496 10,638 31,134
Capital lease additions 16,370 16,370
Total assets 241,068 59,571 70,198 29,911 400,748
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
Goodwill 20,496 10,638 31,134
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
Goodwill 21,291 11,183 32,474
Capital lease additions 18,448 18,448
Total assets 256,690 54,294 33,267 26,111 370,362
67
(12) Commitments and Contingencies
At December 28, 2002, Landstar had commitments for letters of credit
outstanding in the amount of $18,060,000, primarily as collateral for
estimated insurance claims, $9,080,000 of which were supported by the
Third Amended and Restated Credit Agreement and $8,980,000 secured by
assets deposited with a financial institution.
The Company and Ford Motor Co., Inc. are defendants in a suit alleging breach
of contract, misrepresentation and certain other causes of action arising out
of a contract between Landstar Logistics, Inc. and the plaintiff involving a
trans-Gulf of Mexico roll-on/roll-off shipping venture developed by the
plaintiff, Gulf Bridge RoRo, Inc. The suit makes claim for $25,000,000
damages for breach of contract and $50,000,000 punitive and other damages
related to the misrepresentation counts. The Company has filed motions
for summary judgment with the court seeking, in addition to a judgment in its
favor, to dismiss Landstar System, Inc. from the litigation, to limit the
amount of damages obtainable by the plaintiff, to preclude fraud and other
theories upon which plaintiff seeks to obtain damages, and to exclude certain
evidence concerning damages sought to be introduced at trial by plaintiff,
among other things. Subject to the outcome of these motions, which is
anticipated in March 2003, discovery has been substantially completed in this
matter, and the Company anticipates that the matter will be tried in April
2003. The Company believes it has meritorious defenses to this litigation and
intends to continue to defend it vigorously. The Company also believes that
if this litigation were determined adversely to it, the liability of the
Company, exclusive of any available insurance recoveries, would not be
reasonably likely to have a material adverse effect on the financial condition
of the Company but that it could have a material adverse effect on the results
of operations in a given quarter or year. The Company has notified its
third-party insurance carrier that it believes that a portion of the claims
made in this lawsuit are covered under insurance provided by that carrier,
and the carrier has agreed to pay the fees and expenses and to participate
in the defense of this litigation, subject to a reservation of rights. The
Company also intends to pursue its rights with respect to this coverage
vigorously. No assurances can be given as to the outcome of this litigation
or any related matter, however.
On November 1, 2002, the Owner Operator Independent Drivers Association, Inc.
("OOIDA") and six individual Independent Contractors filed a putative class
action suit in the U.S. Court in Jacksonville, Florida, against the Company.
The suit alleges that certain aspects of Landstar's motor carrier's leases
with owner operators violate the federal leasing regulations. OOIDA seeks
injunctive relief, damages and attorney's fees. On December 17, 2002, the
Company filed a Motion to Dismiss and a Motion to Stay and Compel Arbitration
with respect to all of the leases that contain arbitration clauses. Landstar
believes it has meritorious defenses to this litigation and intends to defend
it vigorously. Landstar also believes that it treats its Independent
Contractors fairly and in a manner which reflects the important role they play
in the Company's operations.
The Company is involved in certain other claims and pending litigation arising
from the normal conduct of business. Based on knowledge of the facts and, in
certain cases, opinions of outside counsel, management believes that adequate
provisions have been made for probable losses with respect to the resolution of
all such other claims and pending litigation and that the ultimate outcome,
after provisions thereof, 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.
68
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 28, 2002 and December 29, 2001, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for the fiscal years ended December 28, 2002, December 29, 2001
and December 30, 2000. 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 28, 2002 and December 29, 2001, and the
results of their operations and their cash flows for the fiscal years ended
December 28, 2002, December 29, 2001 and December 30, 2000 in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
December 30, 2001, Landstar System, Inc. and subsidiary adopted the provisions
of Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets".
/s/ KPMG LLP
Jacksonville, Florida
February 5, 2003
69
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
QUARTERLY FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Fourth Third Second First
Quarter Quarter Quarter Quarter
2002 2002 2002 2002
---------- ---------- ---------- ----------
Revenue $ 393,986 $ 385,660 $ 391,216 $ 335,693
========== ========== ========== ==========
Operating income $ 24,191 $ 23,451 $ 20,999 $ 15,040
---------- ---------- ---------- ----------
Income before income taxes $ 23,417 $ 22,485 $ 19,755 $ 13,732
Income taxes 8,899 8,544 7,507 5,218
---------- ---------- ---------- ----------
Net income $ 14,518 $ 13,941 $ 12,248 $ 8,514
========== ========== ========== ==========
Earnings per common share (1,2) $ 0.91 $ 0.86 $ 0.75 $ 0.53
========== ========== ========== ==========
Diluted earnings per share (1,2) $ 0.88 $ 0.83 $ 0.72 $ 0.51
========== ========== ========== ==========
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 (1,2) $ 0.72 $ 0.72 $ 0.64 $ 0.49
========== ========== ========== ==========
Diluted earnings per share (1,2) $ 0.70 $ 0.70 $ 0.63 $ 0.48
========== ========== ========== ==========
(1) Due to the changes in the number of average common shares and common
stock equivalents outstanding during the year, the sum of earnings per share
amounts for each quarter do not necessarily add to the earnings per share
amounts for the full year.
(2) All earnings per share amounts have been restated to give retroactive
effect to a two-for-one stock split effected in the form of a 100% stock
dividend declared July 17, 2002.
70
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
Fiscal Years
2002 2001 2000 1999 1998
-------------------------------------------------------------
Income Statement Data:
Revenue $1,506,555 $1,392,771 $1,418,492 $1,388,083 $1,283,607
Investment income 1,950 3,567 4,317 2,502 1,689
Costs and expenses:
Purchased transportation 1,116,009 1,030,454 1,046,183 1,022,203 950,343
Commissions to agents 118,864 110,513 113,721 111,666 101,409
Other operating costs 34,325 32,750 29,568 30,000 27,516
Insurance and claims 42,188 32,930 31,935 34,064 39,388
Selling, general and administrative 101,918 99,762 100,516 99,240 95,028
Depreciation and amortization 11,520 13,543 13,003 11,698 10,158
Non-recurring costs 5,270
--------- --------- --------- --------- ---------
Total costs and expenses 1,424,824 1,319,952 1,340,196 1,308,871 1,223,842
--------- --------- --------- --------- ---------
Operating income 83,681 76,386 82,613 81,714 61,454
Interest and debt expense 4,292 6,802 9,127 4,509 3,503
--------- --------- --------- --------- ---------
Income from continuing operations
before income taxes 79,389 69,584 73,486 77,205 57,951
Income taxes 30,168 26,790 28,292 31,268 23,470
--------- --------- --------- --------- ---------
Income from continuing operations 49,221 42,794 45,194 45,937 34,481
Discontinued operations, net of
income taxes (22,589)
--------- --------- --------- --------- ---------
Net income $ 49,221 $ 42,794 $ 45,194 $ 45,937 $ 11,892
========= ========= ========= ========= =========
Earnings per common share:
Income from continuing operations (1)$ 3.05 $ 2.57 $ 2.57 $ 2.30 $ 1.56
Loss from discontinued operations (1) (1.02)
--------- --------- --------- --------- ---------
Earnings per common share (1) $ 3.05 $ 2.57 $ 2.57 $ 2.30 $ 0.54
========= ========= ========= ========= =========
Diluted earnings per share:
Income from continuing operations (1)$ 2.94 $ 2.50 $ 2.52 $ 2.27 $ 1.55
Loss from discontinued operations (1) (1.02)
--------- --------- --------- --------- ---------
Diluted earnings per share (1) $ 2.94 $ 2.50 $ 2.52 $ 2.27 $ 0.53
========= ========= ========= ========= =========
(1) All earnings per share amounts have been restated to give retroactive
effect to a two-for-one stock split effected in the form of a 100% stock
dividend declared July 17, 2002.
Dec. 28, Dec. 29, Dec. 30, Dec. 25, Dec. 26,
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
Balance Sheet Data:
Total assets $ 400,748 $ 364,651 $ 370,362 $ 365,441 $ 313,665
Long-term debt, including
current maturities 77,360 101,874 94,643 67,298 34,440
Shareholders' equity 149,093 117,440 107,859 106,884 111,848
71