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 September 27, 1997
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.)
4160 Woodcock Drive, Jacksonville, Florida
(Address of principal executive offices)
32207
(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 October 31, 1997 was
12,368,433.
PART I
FINANCIAL INFORMATION
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 thirty-nine and thirteen weeks ended September 27,
1997 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 27, 1997.
These interim financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's 1996
Annual Report on Form 10-K.
Index
Item 1
Consolidated Balance Sheets as of September 27, 1997
and December 28, 1996 ................................................ Page 3
Consolidated Statements of Income for the Thirty-Nine and Thirteen Weeks
Ended September 27, 1997 and September 28, 1996 ...................... Page 4
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks
Ended September 27, 1997 and September 28, 1996 ...................... Page 5
Consolidated Statement of Changes in Shareholders'
Equity for the Thirty-Nine Weeks Ended September 27, 1997 ............ 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
2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
September 27, December 28,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash $ 12,146 $ 4,187
Short-term investments 3,018
Trade accounts receivable, less allowance of $6,376 171,414 176,892
and $6,526
Other receivables, including advances to independent
contractors, less allowance of $4,599 and $4,390 11,835 10,740
Inventories 926 1,785
Prepaid expenses and other current assets 15,536 7,319
----------- -----------
Total current assets 214,875 200,923
----------- -----------
Operating property, less accumulated depreciation
and amortization of $49,759 and $50,223 89,464 105,564
Goodwill, less accumulated amortization of $8,385 and $7,087 53,828 55,126
Deferred income taxes and other assets 5,622 9,188
----------- -----------
Total assets $ 363,789 $ 370,801
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 11,908 $ 13,488
Accounts payable 48,832 39,901
Current maturities of long-term debt 16,878 23,241
Estimated insurance claims 29,986 25,328
Other current liabilities 30,478 28,312
----------- -----------
Total current liabilities 138,082 130,270
----------- -----------
Long-term debt, excluding current maturities 40,063 67,155
Estimated insurance claims 28,233 25,819
Deferred income taxes 1,071
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 12,900,974 shares and 12,882,874 shares 129 129
Additional paid-in capital 62,169 61,740
Retained earnings 104,665 87,655
Cost of 443,041 and 94,041 shares of common stock in treasury (10,623) (1,967)
----------- -----------
Total shareholders' equity 156,340 147,557
----------- -----------
Total liabilities and shareholders' equity $ 363,789 $ 370,801
=========== ===========
See accompanying notes to consolidated financial statements.
3
[BL1]
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Thirty-Nine Weeks Ended Thirteen Weeks Ended
----------------------- ----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
---------- ---------- ----------- ----------
Revenue $ 965,551 $ 954,784 $ 326,311 $ 330,195
Costs and expenses:
Purchased transportation 677,246 654,537 230,177 229,308
Drivers' wages and benefits 21,825 32,277 6,575 9,547
Fuel and other operating costs 36,973 53,118 11,218 15,826
Insurance and claims 35,081 26,069 11,290 8,313
Commissions to agents and brokers 72,945 63,499 25,240 22,838
Selling, general and administrative 69,400 70,578 22,479 23,309
Depreciation and amortization 15,810 17,994 5,367 5,793
Restructuring costs 3,164
---------- ---------- ---------- ----------
Total costs and expenses 932,444 918,072 312,346 314,934
---------- ---------- ---------- ----------
Operating income 33,107 36,712 13,965 15,261
Interest and debt expense, net 3,780 5,909 919 1,936
---------- ---------- ---------- ----------
Income before income taxes 29,327 30,803 13,046 13,325
Income taxes 12,317 12,941 5,481 5,631
---------- ---------- ---------- ----------
Net income $ 17,010 $ 17,862 $ 7,565 $ 7,694
========== ========== ========== ==========
Earnings per share $ 1.35 $ 1.40 $ 0.60 $ 0.60
========== ========== ========== ==========
Average number of common shares outstanding 12,636,000 12,783,000 12,565,000 12,788,000
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Thirty-Nine Weeks Ended
-----------------------------
September 27, September 28,
1997 1996
------------- --------------
OPERATING ACTIVITIES
Net income $ 17,010 $ 17,862
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of operating property 14,205 16,376
Amortization of goodwill and non-competition agreements 1,605 1,618
Non-cash interest charges 199 198
Provisions for losses on trade and other accounts
receivable 2,678 3,411
Gains on sales of operating property (2,190) (1,719)
Deferred income taxes, net 5,487 888
Changes in operating assets and liabilities:
Decrease (increase) in trade and other
accounts receivable 1,705 (30,061)
Increase in inventories,
prepaid expenses and other assets (7,236) (4,300)
Increase in accounts payable and other liabilities 11,097 3,210
Increase (decrease) in estimated insurance claims 7,072 (106)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 51,632 7,377
----------- -----------
INVESTING ACTIVITIES
Purchases of investments (4,799)
Maturity of short-term investment 303
Purchases of operating property (8,458) (8,481)
Proceeds from sales of operating property 12,543 7,133
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (411) (1,348)
----------- -----------
FINANCING ACTIVITIES
Borrowings under revolving credit facility 16,000
(Decrease) increase in cash overdraft (1,580) 8
Proceeds from exercise of stock options and
related income tax benefit 429 236
Purchases of common stock (8,656)
Principal payments on long-term debt and capital lease
obligations (33,455) (20,722)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (43,262) (4,478)
----------- -----------
Increase in cash 7,959 1,551
Cash at beginning of period 4,187 3,415
----------- -----------
Cash at end of period $ 12,146 $ 4,966
=========== ===========
See accompanying notes to consolidated financial statements.
5
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
Thirty-Nine Weeks Ended September 27, 1997
(Dollars in thousands)
(Unaudited)
Treasury Stock
Common Stock Additional at Cost
------------------ Paid-In Retained -----------------
Shares Amount Capital Earnings Shares Amount Total
---------- ------ -------- -------- ------ --------- --------
Balance December 28, 1996 12,882,874 $ 129 $61,740 $ 87,655 94,041 $ (1,967) $147,557
Purchases of common stock 349,000 (8,656) (8,656)
Exercise of stock options
and related income tax
benefit 18,100 429 429
Net income 17,010 17,010
---------- ------ ------- -------- ------- --------- --------
Balance September 27, 1997 12,900,974 $ 129 $62,169 $104,665 443,041 $(10,623) $156,340
========== ====== ======= ======== ======= ========= ========
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. ("LSHI"), 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".
(1) Income Taxes
The provisions for income taxes for both the 1997 and 1996 thirty-nine
week periods were based on an estimated combined full year effective
income tax rate of approximately 42%, 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.
(2) Earnings Per Share
Earnings per share amounts were based on the weighted average number of
common shares outstanding.
(3) Additional Cash Flow Information
During the 1997 period, Landstar paid income taxes and interest of
$10,090,000 and $4,363,000, respectively, and did not enter into any
capital leases. During the 1996 period, Landstar paid income taxes and
interest of $14,040,000 and $5,525,000, respectively, and acquired
operating property by entering into capital leases in the amount of
$14,742,000.
(4) Commitments and Contingencies
At September 27, 1997, Landstar had commitments for letters of credit
outstanding in the amount of $18,659,325, primarily as collateral for
estimated insurance claims.
Landstar is involved in certain claims and pending litigation arising
from the normal conduct of business. Based on the knowledge of the facts
and, in certain cases, opinions of outside counsel, management believes
that adequate provisions have been made for probable losses with respect
to the resolution of all claims and pending litigation and that the
ultimate outcome, after provisions thereof, will not have a material
adverse effect on the financial condition of Landstar, but could have a
material effect on the results of operations in a given quarter or year.
7
(5) Subsequent Events
On October 10, 1997, Landstar renegotiated its existing Credit Agreement
with a syndicate of banks and The Chase Manhattan Bank, as administrative
agent (the "Second Amended and Restated Credit Agreement"). The Second
Amended and Restated Credit Agreement provides $200,000,000 of borrowing
capacity, consisting of $150,000,000 of revolving credit (the "Working
Capital Facility") and $50,000,000 of revolving credit available to
finance acquisitions (the "Acquisition Facility"). $50,000,000 of the
total borrowing capacity under the Working Capital Facility may be
utilized in the form of letter of credit guarantees. The Second Amended
and Restated Credit Agreement expires on October 10, 2002.
Borrowings under the Second Amended and Restated Credit Agreement bear
interest at rates equal to, at the option of Landstar, either (i) the
greatest of (a) the prime rate as publicly announced from time to time
by The Chase Manhattan Bank, (b) the three month CD rate adjusted for
statutory reserves and FDIC assessment costs plus 1% and (c) the federal
funds effective rate plus 1/2%, or, (ii) the rate at the time offered to
The Chase Manhattan Bank in the Eurodollar market for amounts and periods
comparable to the relevant loan plus a margin that is determined based
on the level of the Company's leverage ratio, as defined in the Second
Amended and Restated Credit Agreement. As of October 10, 1997, the margin
is equal to 32/100 of 1%. The unused portion of the Second Amended and
Restated Credit Agreement carries a commitment fee determined based on
the level of the leverage ratio, as therein defined. As of October 10,
1997, the commitment fee for the unused portion of the Second Amended and
Restated Credit Agreement is 0.100%
The Second Amended and Restated Credit Agreement contains a number of
covenants that limit, among other things, the incurrence of additional
indebtedness, the incurrence of operating or capital lease obligations
and the purchase of operating property. The Second Amended and Restated
Credit Agreement also requires Landstar to meet certain financial tests.
Landstar is required to, among other things, maintain minimum levels of
Net Worth, as defined in the Second Amended and Restated Credit
Agreement, and Interest and Fixed Charge Coverages, as therein defined.
The Second Amended and Restated Credit Agreement provides a number of
events of default related to a person or group acquiring 25% or more of
the outstanding capital stock of the Company or obtaining the power to
elect a majority of the Company's directors.
Borrowings under the Second Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of LSHI's subsidiaries
guarantee LSHI's obligations under the Second Amended and Restated Credit
Agreement.
8
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 28, 1996 and Management's Discussion and Analysis of Financial
Condition and Results of Operations, included in the 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 provides truckload transportation, intermodal
transportation services, expedited air and surface transportation and contract
logistics services.
The Company provides truckload and expedited surface transportation through
independent contractors, and to a lesser extent company-owned equipment driven
by company-employed drivers. The Company's intermodal and expedited air
transportation services primarily involve arranging for the movement of
customer's goods by a combination of rail or air and truck. Both the railroads
and air cargo carriers used by the Company in its intermodal and expedited air
operations are independent contractors. Contract logistics services include
single source alternatives, truck brokerage and other transportation solutions
for large customers. The Company markets its transportation services and
provides local operating support primarily through a network of independent
commission sales agents.
In March 1997, Landstar formed Signature Insurance Company ("Signature"), a
wholly-owned offshore insurance subsidiary. Signature's primary activity is
the reinsurance of certain property, casualty and occupational accident risks
of the independent contractors who have contracted to haul freight with
Landstar. The independent contractors who provide truck capacity to Landstar,
must provide proof of insurance for certain coverages prior to contracting with
Landstar, which Signature may reinsure. In addition, Signature provides certain
property and casualty insurance directly to Landstar's operating subsidiaries.
A significant portion of the Company's operating costs vary directly with
revenue due to the use of independent contractors and independent commission
sales agents. 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 truckload and
expedited surface transportation. Purchased transportation for intermodal
and expedited air transportation is based on a contractually agreed-upon fixed
rate. Purchased transportation as a percentage of revenue for intermodal
transportation is normally higher than that of Landstar's other transportation
services.
9
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 and brokers
are primarily based on contractually agreed-upon percentages of revenue or
contractually agreed-upon percentages of gross profit. Commissions to agents
and brokers as a percentage of consolidated revenue will vary directly with the
revenue generated through independent commission sales agents. Both purchased
transportation and commissions to agents and brokers generally will also
increase or decrease as a percentage of the Company's consolidated revenue
if there is a change in the percentage of revenue contributed by Signature,
intermodal operations or expedited air operations or through company-employed
drivers.
Drivers' wages and benefits represent the amount company-employed drivers are
compensated. Employee drivers are compensated primarily on a cents per
mile driven basis. Drivers' wages and benefits as a percentage of consolidated
revenue generally will vary only if there is a change in the revenue
contribution generated by Signature or through independent contractors or a
change in Landstar's rate of employee driver pay or benefit structure.
The Company's intention is to continue its expansion of truckload capacity
provided by independent contractors and to reduce its truckload capacity
provided by company-owned equipment. It is also the Company's intention to
favor independent commission sales agent locations over company-owned and
operated locations. Historically, the intermodal operations and a portion of
the company-owned equipment operations have principally utilized a company
employee sales structure and to a lesser degree, independent commission sales
agents. During 1996, management completed the process of converting the
majority of the company-owned sales locations to independent commission sales
agent locations. Accordingly, purchased transportation and commissions to
agents and brokers are anticipated to increase as a percentage of total
consolidated revenue and drivers' wages and benefits are anticipated to decline
as a percentage of total consolidated revenue over time.
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. The industry is also subject to
substantial workers' compensation expense. A material increase in the
frequency or severity of accidents or workers' compensation claims or the
unfavorable development of existing claims can be expected to adversely affect
Landstar's operating income.
The cost of fuel, including fuel taxes, is the largest component of fuel and
other operating costs. Changes in prevailing prices of fuel or increases in
fuel taxes can significantly affect the operating results of the company-owned
equipment operations. Also, included in fuel and other operating costs are
costs of equipment maintenance paid to third parties and the operating costs of
Company terminals. Effective August 1, 1996, Landstar closed all but one of
its Landstar Poole, Inc. ("Landstar Poole") terminals, including those that had
functioned as Landstar Centers. The closings were part of the Company's
strategy to reduce its fixed cost elements.
Employee compensation and benefits account for nearly half of the Company's
selling, general and administrative expense. Other significant components of
selling, general and administrative expense are data processing expense,
communications costs and rent expense.
10
The following table sets forth the percentage relationships of expense items to
revenue for the periods indicated:
Thirty-Nine Weeks Ended Thirteen Weeks Ended
------------------------ -----------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
---------- ---------- ---------- ----------
Revenue 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Purchased transportation 70.1% 68.6% 70.5% 69.4%
Drivers' wages and benefits 2.3% 3.4% 2.0% 2.9%
Fuel and other operating costs 3.8% 5.6% 3.4% 4.8%
Insurance and claims 3.6% 2.7% 3.5% 2.5%
Commissions to agents and brokers 7.6% 6.6% 7.7% 6.9%
Selling, general and administrative 7.2% 7.4% 6.9% 7.1%
Depreciation and amortization 1.6% 1.9% 1.7% 1.8%
Restructuring costs 0.3%
------ ------ ------ ------
Total costs and expenses 96.5% 96.2% 95.7% 95.4%
------ ------ ------ ------
Operating income 3.5% 3.8% 4.3% 4.6%
Interest and debt expense, net 0.4% 0.6% 0.3% 0.6%
------ ------ ------ ------
Income before income taxes 3.1% 3.2% 4.0% 4.0%
Income taxes 1.3% 1.3% 1.7% 1.7%
------- ------ ------ ------
Net income 1.8% 1.9% 2.3% 2.3%
======= ====== ====== ======
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO THIRTY-NINE
WEEKS ENDED SEPTEMBER 28, 1996
Revenue for the 1997 thirty-nine week period was $965,551,000, an increase of
$10,767,000, or 1.1%, over the 1996 thirty-nine week period. The increase in
revenue was attributable to premium revenue of $13,172,000 generated by
Signature and an overall increase in rate per mile (price) of approximately
4%, which reflected improved freight quality. These increases in revenue were
partially offset by a decrease in revenue miles (volume), which reflected a
reduction in company-owned tractors, in accordance with a previously announced
restructuring plan, and a decrease in tractors supplied by independent
contractors. In the 1997 period, revenue generated through independent
contractors, including railroads and air cargo carriers, was 92.7% of total
consolidated revenue compared with 89.9% in the 1996 period.
Purchased transportation was 70.1% of revenue in 1997 compared with 68.6% in
1996. Drivers' wages and benefits were 2.3% of revenue in 1997 compared with
3.4% in 1996. Fuel and other operating costs were 3.8% of revenue in 1997
compared with 5.6% in 1996. The increase in purchased transportation and
decrease in drivers' wages and benefits and fuel and other operating costs as a
percentage of revenue was primarily attributable to an increase in the
11
percentage of revenue generated through independent contractors which reflected
the reduction in company-owned equipment in accordance with a previously
announced restructuring plan. The decrease in fuel and other operating costs
as a percentage of revenue was also attributable to reduced terminal and
maintenance costs.
Insurance and claims were 3.6% of revenue in 1997 compared with 2.7% of revenue
in 1996. Excluding Signature, insurance and claims were 2.9% of revenue in
1997. The increase in insurance and claims as a percentage of revenue compared
to the prior year, excluding Signature, was primarily attributable to the
favorable development of prior years claims during the 1996 period.
Commissions to agents and brokers were 7.6% of revenue in 1997 compared with
6.6% of revenue in 1996, primarily due to an increased percentage of revenue
generated through independent commission sales agents, which partially
reflected the conversion of company-owned sales locations to independent
commission sales agent locations. Selling, general and administrative costs
were 7.2% of revenue in 1997 compared with 7.4% in 1996, primarily due to the
effect of increased revenue and lower wages, partially offset by sales and
marketing costs incurred by Signature and an increased provision for bonuses
under the Company's management incentive compensation plan. Depreciation and
amortization was 1.6% of revenue in 1997 compared with 1.9% in 1996, primarily
due to a decrease in the number of company-owned tractors.
During the fourth quarter of 1996, the Company announced a plan to restructure
its Landstar T.L.C., Inc. ("Landstar T.L.C.") and Landstar Poole operations, in
addition to the relocation of its Shelton, Connecticut office headquarters to
Jacksonville, Florida in the second quarter of 1997. The Landstar Poole
restructuring plan included the transfer of the variable cost business
component of Landstar Poole to Landstar Ranger, Inc. and the disposal of 175
company-owned tractors. The Landstar T.L.C. restructuring plan included the
merger of Landstar T.L.C. into Landstar Inway, Inc. and the disposal of all the
company-owned tractors. During the thirty-nine week period of 1997, the
Company incurred $3,164,000 of such restructuring costs. The restructuring has
been substantially completed.
Interest and debt expense, net, was 0.4% of revenue in 1997 and 0.6% in 1996.
This decrease was primarily attributable to lower average borrowings on the
senior credit facility, reduced capital lease obligations and interest income
from cash and investments at Signature.
The provisions for income taxes for both the 1997 and 1996 thirty-nine week
periods were based on an estimated full year combined effective income tax
rate of approximately 42%, 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 $17,010,000 or $1.35 per share, in the 1997 period, compared
with $17,862,000, or $1.40 per share, in 1996. Excluding restructuring costs,
1997 net income would have been $18,845,000, or $1.49 per share.
THIRTEEN WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO THIRTEEN WEEKS
ENDED SEPTEMBER 28, 1996
Revenue for the 1997 thirteen week period was $326,311,000, a decrease of
$3,884,000, or 1.2%, from the 1996 thirteen week period. The decrease was
12
primarily attributable to a decrease in revenue miles of approximately 11%,
which reflected a reduction in company-owned tractors, in accordance with a
previously announced restructuring plan, and a decrease in tractors supplied by
independent contractors, partially offset by an increase in rate per mile of
approximately 8% and $5,478,000 of premium revenue generated by Signature. In
the 1997 period, revenue generated through independent contractors, including
railroads and air cargo carriers, was 93.0% of total consolidated revenue
compared with 91.1% in the 1996 period.
Purchased transportation was 70.5% of revenue in 1997 compared with 69.4% in
1996. Drivers' wages and benefits were 2.0% of revenue in 1997 compared with
2.9% in 1996. Fuel and other operating costs were 3.4% of revenue in 1997
compared with 4.8% in 1996. The increase in purchased transportation and
decrease in drivers' wages and benefits and fuel and other operating costs as a
percentage of revenue was primarily attributable to an increase in the
percentage of revenue generated through independent contractors which reflected
the reduction in company-owned equipment in accordance with a previously
announced restructuring plan. The decrease in fuel and other operating costs
as a percentage of revenue was also attributable to reduced terminal and
maintenance costs.
Insurance and claims were 3.5% of revenue in 1997 compared with 2.5% in 1996.
Excluding Signature, insurance and claims were 2.6% of revenue in the 1997
period. The increase in insurance and claims as a percentage of revenue
compared to the prior year, excluding Signature, was primarily attributable to
the favorable development of prior years claims during the 1996 period.
Commissions to agents and brokers were 7.7% of revenue in 1997 compared with
6.9% in 1996, primarily due to an increased percentage of revenue generated
through independent commission sales agents, which partially reflected the
conversion of company-owned sales locations to independent commission sales
agent locations. Selling, general and administrative costs were 6.9% of
revenue in 1997 compared with 7.1% of revenue in 1996, primarily due to a
decrease in wages and a lower provision for customer bad debts, partially
offset by sales and marketing costs incurred by Signature. Depreciation and
amortization was 1.7% of revenue in 1997 compared with 1.8% in 1996, primarily
due to a decrease in the number of company-owned tractors.
Interest and debt expense, net, was 0.3% in 1997 and 0.6% in 1996. The
decrease was primarily attributable to lower average borrowings on the senior
credit facility, interest income from cash and investments at Signature and
reduced capital lease obligations.
The provisions for income taxes for both the 1997 and 1996 thirteen week
periods were based on an estimated full year combined effective income tax
rate of approximately 42%, 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 $7,565,000, or $0.60 per share, in the 1997 period, compared
with $7,694,000, or $0.60 per share, in the 1996 period.
13
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' equity increased to $156,340,000 at September 27, 1997, compared
with $147,557,000 at December 28, 1996, which reflected net income for the
thirty-nine weeks of 1997, partially offset by the repurchase of 349,000 shares
of common stock, at an aggregate cost of $8,656,000. Shareholders' equity
increased to 73.3% of total capitalization at September 27, 1997 compared with
62.0% at December 28, 1996, as a result of reduced borrowings on the
acquisition line of the senior credit facility and reduced capital lease
obligations.
Working capital and the ratio of current assets to current liabilities were
$76,793,000 and 1.56 to 1, respectively, at September 27, 1997, compared with
$70,653,000 and 1.54 to 1, respectively, at December 28, 1996. Landstar has
historically operated with a current ratio of approximately 1.5 to 1. Cash
provided by operating activities was $51,632,000 in the 1997 thirty-nine week
period compared with $7,377,000 in the 1996 thirty-nine week period. The
increase in cash flow provided by operating activities was primarily
attributable to the timing of cash collections and payments. During the 1997
thirty-nine week period, Landstar purchased $8,458,000 of operating property
and did not acquire any property by entering into capital leases. Landstar
plans to acquire approximately $4,000,000 of operating property during the
remainder of fiscal year 1997 either by purchase or lease financing.
On October 10, 1997, Landstar renegotiated its existing Credit Agreement with
a syndicate of banks and The Chase Manhattan Bank, as administrative agent (the
"Second Amended and Restated Credit Agreement"). The Second Amended and
Restated Credit Agreement provides $200,000,000 of borrowing capacity,
consisting of $100,000,000 of revolving credit (the "Working Capital Facility")
and $50,000,000 of revolving credit available to finance acquisitions (the
"Acquisition Facility"). $50,000,000 of the total borrowing capacity under the
Working Capital Facility may be utilized in the form of letter of credit
guarantees. The Second Amended and Restated Credit Agreement expires on
October 10, 2002.
Borrowings under the Second Amended and Restated Credit Agreement bear
interest at rates equal to, at the option of Landstar, either (i) the greatest
of (a) the prime rate as publicly announced from time to time by The
Chase Manhattan Bank, (b) the three month CD rate adjusted for statutory
reserves and FDIC assessment costs plus 1% and (c) the federal funds
effective rate plus 1/2%, or, (ii) the rate at the time offered to The
Chase Manhattan Bank in the Eurodollar market for amounts and periods
comparable to the relevant loan plus a margin that is determined based
on the level of the Company's leverage ratio, as defined in the Second
Amended and Restated Credit Agreement. As of October 10, 1997, the margin
is equal to 32/100 of 1%. The unused portion of the Second Amended and
Restated Credit Agreement carries a commitment fee determined based
on the level of the leverage ratio, as therein defined. As of October 10,
1997, the commitment fee for the unused portion of the Second Amended and
Restated Credit Agreement is 0.100%
The Second Amended and Restated Credit Agreement contains a number of
covenants that limit, among other things, the incurrence of additional
indebtedness, the incurrence of operating or capital lease obligations and the
purchase of operating property.
14
The Second Amended and Restated Credit Agreement also requires Landstar
to meet certain financial tests. Landstar is required to, among other
things, maintain minimum levels of Net Worth, as defined in the Second
Amended and Restated Credit Agreement, and Interest and Fixed Charge
Coverages, as therein defined.
The Second Amended and Restated Credit Agreement provides a number of
events of default related to a person or group acquiring 25% or more of the
outstanding capital stock of the Company or obtaining the power to elect a
majority of the Company's directors.
Borrowings under the Second Amended and Restated Credit Agreement are
unsecured, however, the Company and all but one of LSHI's subsidiaries
guarantee LSHI's obligations under the Second Amended and Restated Credit
Agreement.
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, and meet working capital needs.
Management does not believe inflation has had a material impact on the results
of operations or financial condition of Landstar in the past five years.
However, inflation higher than that experienced in the past five years might
have an adverse effect on the Company's results of operations.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("FAS") No. 128, "Earnings per Share." This
statement, effective for financial statements issued for periods ending after
December 15, 1997, replaces the presentation of primary earnings per share,
currently required under Accounting Principals Board Opinion 15 "Earnings Per
Share" ("APB 15"), with a presentation of basic earnings per share. Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common
shares outstanding for the period. FAS No. 128 also requires the dual
presentation of basic earnings per share and diluted earnings per share on the
face of the income statement. Management believes that, upon the adoption of
this statement, basic earnings per share will not differ from primary earnings
per share calculated in accordance with APB 15 and diluted earnings per share
will not be materially different from the basic earnings per share given the
current market value of the Company's common stock and the current structure of
its stock compensation plans.
SEASONALITY
Landstar's operations are subject to seasonal trends common to the trucking
industry. Results of operations for the quarter ending in March is typically
lower than the quarters ending June, September and December due to reduced
shipments and higher operating costs in the winter months.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On August 5, 1997, suit was filed entitled Rene Alberto Rivas vs. Landstar
System, Inc., Landstar Gemini, Inc., Landstar Ranger, Inc., Risk Management
Claims Services, Inc., Insurance Management Corporation, and Does 1 through
500, inclusive in federal district court in Los Angeles. The suit claims Rivas
represents a class of all drivers allegedly aggrieved by the practice of
Landstar Gemini, Inc. requiring each independent contractor provide either a
worker's compensation certificate or participate in an occupational accident
insurance program. Rivas claims violations of federal leasing regulations for
allegedly improperly disclosing the program. Rivas also claims violations of
Racketeer Influence and Corrupt Organizations ("RICO") Act and the California
Business and Professions Act. Rivas, an independent contractor, also claims to
be an employee. He seeks on behalf of himself and the class damages of $15
million trebled by virtue of trebling provisions in the RICO Act plus punitive
damages. The Company is vigorously defending this action. It believes it has
meritorious defenses to the various claims.
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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
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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
No reports on Form 8-K were filed by the Registrant during the
thirteen week period ended September 27, 1997.
EXHIBIT INDEX
Registrant's Commission File No.: 0-21238
Exhibit No. Description
- ------------ -----------
(4) Instruments defining the rights of security holders,
including indentures
(4.1)* The Second Amended and Restated Credit Agreement, dated
October 10, 1997, among LSHI, Landstar, the lenders named
therein and The Chase Manhattan Bank as administrative agent
(including exhibits and schedules thereto).
(11) Statement re: Computation of Per Share Earnings:
(11.1)* Statement re: Computation of Per Share Earnings for the
Thirty-Nine and Thirteen Weeks ended September 27, 1997.
(11.2)* Statement re: Computation of Per Share Earnings for the
Thirty-Nine and Thirteen Weeks ended September 28, 1996.
(27) Statement re: Financial Data Schedule:
(27 )* Statement re: Financial Data Schedule
__________________
* Filed herewith
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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: November 6, 1997 Henry H. Gerkens
----------------------------
Henry H. Gerkens
Executive Vice President and
Chief Financial Officer;
Principal Financial Officer
Date: November 6, 1997 Robert C. LaRose
----------------------------
Robert C. LaRose
Vice President Finance and Treasurer;
Principal Accounting Officer
18