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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 28, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to _____________________
Commission File Number: 0-21238
LANDSTAR SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1313069
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
13410 Sutton Park Drive South, Jacksonville, Florida
(Address of principal executive offices)
32224
(Zip Code)
(904) 398-9400
(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 28, 2002 was
15,818,387.
PART I
FINANCIAL INFORMATION
Index
Item 1
Consolidated Balance Sheets as of September 28, 2002
and December 29, 2001 ............................................... Page 3
Consolidated Statements of Income for the Thirty-Nine and Thirteen Weeks
Ended September 28, 2002 and September 29, 2001 ..................... Page 4
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks
Ended September 28, 2002 and September 29, 2001 ..................... Page 5
Consolidated Statement of Changes in Shareholders'
Equity for the Thirty-Nine Weeks Ended September 28, 2002 ........... Page 6
Notes to Consolidated Financial Statements............................. Page 7
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ Page 9
Item 3
Quantitative and Qualitative Disclosures About Market Risk............. Page 15
Item 4
Controls and Procedures ............................................... Page 15
Item 1. Financial Statements
The interim consolidated financial statements contained herein reflect
all adjustments (all of a normal, recurring nature) which, in the opinion of
management, are necessary for a fair statement of the financial condition,
results of operations, cash flows and changes in shareholders' equity
for the periods presented. They have been prepared in accordance with Rule
10-01 of Regulation S-X and do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the thirty-nine weeks ended September 28,
2002 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 28, 2002.
These interim financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
2001 Annual Report on Form 10-K.
2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
Sept. 28, Dec. 29,
2002 2001
---------- ------------
ASSETS
Current assets:
Cash $ 64,946 $ 47,886
Short-term investments 2,200 2,982
Trade accounts receivable, less allowance of $3,838
and $4,416 208,647 185,206
Other receivables, including advances to independent
contractors, less allowance of $5,053 and $4,740 10,346 13,779
Prepaid expenses and other current assets 5,549 4,020
---------- -----------
Total current assets 291,688 253,873
---------- -----------
Operating property, less accumulated depreciation
and amortization of $51,945 and $44,455 65,000 68,532
Goodwill 31,134 31,134
Other assets 16,575 11,112
---------- -----------
Total assets $ 404,397 $ 364,651
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 16,339 $ 13,018
Accounts payable 70,241 55,813
Current maturities of long-term debt 10,163 9,965
Insurance claims 23,903 21,602
Other current liabilities 41,174 31,667
---------- -----------
Total current liabilities 161,820 132,065
---------- -----------
Long-term debt, excluding current maturities 62,460 91,909
Insurance claims 23,897 21,585
Deferred income taxes 3,268 1,652
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 16,286,306 and 13,328,834 shares 163 133
Additional paid-in capital 261 75,036
Retained earnings 159,299 258,162
Cost of 112,879 and 5,241,841 shares of common
stock in treasury (5,435) (209,926)
Notes receivable arising from exercise of stock options (1,336) (5,965)
---------- -----------
Total shareholders' equity 152,952 117,440
---------- -----------
Total liabilities and shareholders' equity $ 404,397 $ 364,651
========== ===========
See accompanying notes to consolidated financial statements.
3
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Thirty-Nine Weeks Ended Thirteen Weeks Ended
----------------------- -----------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenue $1,112,569 $1,044,983 $ 385,660 $ 355,684
Investment income 1,552 2,861 474 902
Costs and expenses:
Purchased transportation 822,193 774,162 285,771 264,125
Commissions to agents 87,550 82,291 30,645 28,284
Other operating costs 26,274 24,841 8,460 7,946
Insurance and claims 32,672 23,802 8,288 6,777
Selling, general and administrative 77,421 76,127 26,698 25,152
Depreciation and amortization 8,521 10,328 2,821 3,302
---------- ---------- ---------- ----------
Total costs and expenses 1,054,631 991,551 362,683 335,586
---------- ---------- ---------- ----------
Operating income 59,490 56,293 23,451 21,000
Interest and debt expense 3,518 5,529 966 1,597
---------- ---------- ---------- ----------
Income before income taxes 55,972 50,764 22,485 19,403
Income taxes 21,269 19,547 8,544 7,473
---------- ---------- ---------- ----------
Net income $ 34,703 $ 31,217 $ 13,941 $ 11,930
========== ========== ========== ==========
Earnings per common share (1) $ 2.14 $ 1.85 $ 0.86 $ 0.72
========== ========== ========== ==========
Diluted earnings per share (1) $ 2.06 $ 1.81 $ 0.83 $ 0.70
========== ========== ========== ==========
Average number of shares outstanding:
Earnings per common share (1) 16,223,000 16,838,000 16,224,000 16,501,000
========== ========== ========== ==========
Diluted earnings per share (1) 16,847,000 17,270,000 16,875,000 16,943,000
========== ========== ========== ==========
(1) All earnings per share amounts and average number of shares outstanding have been restated to give
retroactive effect to a two-for-one stock split effected in the form of a 100% stock dividend
announced July 18, 2002.
See accompanying notes to consolidated financial statements.
4
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Thirty-Nine Weeks Ended
---------------------------
Sept. 28, Sept. 29,
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net income $ 34,703 $ 31,217
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of operating property 8,521 9,417
Amortization of goodwill 911
Non-cash interest charges 205 86
Provisions for losses on trade and other accounts receivable 6,084 5,300
Losses (gains) on sales of operating property 34 (197)
Deferred income taxes, net 1,616 (192)
Changes in operating assets and liabilities:
Increase in trade and other accounts receivable (26,092) (7,326)
Decrease (increase) in prepaid expenses and other assets (634) 1,329
Increase in accounts payable 14,428 4,791
Increase (decrease) in other liabilities 9,507 (9,983)
Increase (decrease) in insurance claims 4,613 (4,022)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 52,985 31,331
----------- -----------
INVESTING ACTIVITIES
Maturities of investments 2,500 1,009
Purchases of investments (8,281) (496)
Purchases of operating property (2,649) (4,902)
Proceeds from sales of operating property 294 631
----------- ----------
NET CASH USED BY INVESTING ACTIVITIES (8,136) (3,758)
----------- ----------
FINANCING ACTIVITIES
Increase (decrease) in cash overdraft 3,321 (790)
Borrowings on revolving credit facility 25,000
Proceeds from exercises of stock options 1,523 1,763
Proceeds from repayment of notes receivable
arising from exercises of stock options 4,721 1,183
Purchases of common stock (5,435) (37,199)
Principal payments on long-term debt and capital lease obligations (31,919) (15,377)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (27,789) (25,420)
----------- -----------
Increase in cash 17,060 2,153
Cash at beginning of period 47,886 32,926
----------- -----------
Cash at end of period $ 64,946 $ 35,079
=========== ===========
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 28, 2002
(Dollars in thousands)
(Unaudited)
Notes
Treasury Stock Receivable
Common Stock Additional at Cost Arising from
------------------ Paid-In Retained ------------------- Exercise of
Shares Amount Capital Earnings Shares Amount Stock Options Total
---------- ------- --------- --------- --------- --------- ------------- ---------
Balance December 29, 2001 13,328,834 $ 133 $ 75,036 $ 258,162 5,241,841 $(209,926) $ (5,965) $ 117,440
Net income 34,703 34,703
Exercises of stock options 77,660 1 1,614 (92) 1,523
Repayment of notes receivable
arising from exercises of
stock options 4,721 4,721
Retirement of treasury
stock (5,241,841) (52) (76,389) (133,485)(5,241,841) 209,926 -
Purchases of common stock 112,879 (5,435) (5,435)
Stock split effected
in the form of a
100% stock dividend 8,121,653 81 (81) -
---------- ------- --------- --------- --------- --------- ------------- ---------
Balance September 28, 2002 16,286,306 $ 163 $ 261 $ 159,299 112,879 $ (5,435) $ (1,336) $ 152,952
========== ======= ========= ========= ========= ========= ============= =========
See accompanying notes to consolidated financial statements.
6
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System,
Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all
adjustments (all of a normal, recurring nature) which are, in the opinion of
management, necessary for a fair statement of the results for the periods
presented. The preparation of the consolidated financial statements requires
the use of management's estimates. Actual results could differ from those
estimates. Landstar System, Inc. and its subsidiary are herein referred to as
"Landstar" or the "Company."
(1) Stock Split
On July 18, 2002, Landstar announced that its Board of Directors
had declared a two-for-one stock split of its common stock to be
effected in the form of a 100% stock dividend. Stockholders of
record on August 2, 2002 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.
(2) Income Taxes
The provisions for income taxes for the 2002 and 2001 thirty-nine-week
and thirteen-week periods were based on estimated full year combined
effective income tax rates of approximately 38.0% and 38.5%,
respectively, which are higher than the statutory federal income tax
rate primarily as a result of state income taxes and the meals and
entertainment exclusion in both years and the amortization of certain
goodwill in the 2001 period.
(3) Earnings Per Share
Earnings per common share amounts are based on the weighted average
number of common shares outstanding and diluted earnings per share
amounts are based on the weighted average number of common shares
outstanding plus the incremental shares that would have been outstanding
upon the assumed exercise of all dilutive stock options. All earnings
per share amounts have been restated to give retroactive effect to the
two-for-one stock split announced July 18, 2002.
(4) Goodwill
The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 142, "Goodwill and Other Intangible Assets" in the first quarter
of fiscal year 2002. SFAS No. 142 eliminates the requirement to amortize
goodwill on a recurring basis over its estimated useful life. Adoption
of SFAS No. 142 resulted in the elimination of goodwill amortization
expense beginning with the first quarter of 2002. SFAS No. 142 requires
that goodwill now be tested for impairment on an annual basis by reporting
unit based on fair value measurements. During the first quarter of 2002,
the Company completed the transitional goodwill impairment test and
determined that the fair value of each reporting unit exceeded the
carrying value of the net assets of each reporting unit. Accordingly, no
impairment loss was recognized. During the thirty-nine-week and
thirteen-week periods ended September 29, 2001, the Company recorded
goodwill amortization expense of $911,000 and $302,000, respectively.
Elimination of this amortization expense would have resulted in net
income of $32,128,000, or an increase of $0.06 in earnings per share
($0.05 per diluted share), and $12,232,000, or an increase of $0.02 in
earnings per share ($0.02 per diluted share), in the 2001 thirty-nine-week
and thirteen-week periods, respectively. The Company has no other
intangible assets subject to the provisions of SFAS No. 142.
7
(5) Additional Cash Flow Information
During the 2002 period, Landstar paid income taxes and interest of
$16,638,000 and $3,303,000, respectively, and acquired operating
property by entering into capital leases in the amount of $2,668,000.
During the 2001 period, Landstar paid income taxes and interest
of $19,131,000 and $6,175,000, respectively. The Company did not
acquire operating property by entering into capital leases during
2001.
(6) Segment Information
The following tables summarize information about Landstar's reportable
business segments for the thirty-nine and thirteen weeks ended
September 28, 2002 and September 29, 2001 (in thousands):
Thirty-nine Weeks Ended September 28, 2002
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 878,836 $ 213,018 $ 20,715 $1,112,569
Investment income 1,552 1,552
Internal revenue 17,899 1,849 22,667 42,415
Operating income 63,912 5,007 15,867 $(25,296) 59,490
Goodwill 20,496 10,638 31,134
Thirty-nine Weeks Ended September 29, 2001
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 820,055 $ 207,209 $ 17,719 $1,044,983
Investment income 2,861 2,861
Internal revenue 22,100 1,764 20,185 44,049
Operating income 56,055 3,836 22,932 $(26,530) 56,293
Goodwill 20,788 10,775 31,563
Thirteen Weeks Ended September 28, 2002
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 298,872 $ 79,959 $ 6,829 $ 385,660
Investment income 474 474
Internal revenue 6,394 689 7,194 14,277
Operating income 22,453 2,222 8,307 $ (9,531) 23,451
Thirteen Weeks Ended September 29, 2001
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 276,496 $ 73,190 $ 5,998 $ 355,684
Investment income 902 902
Internal revenue 7,669 643 7,131 15,443
Operating income 18,452 1,715 9,224 $ (8,391) 21,000
8
(7) Commitments and Contingencies
At September 28, 2002, Landstar had commitments for letters of
credit outstanding in the amount of $19,929,000, primarily as
collateral for insurance claims. The commitments for letters of credit
outstanding included $9,080,000 under the Third Amended and Restated
Credit Agreement and $10,849,000 secured by assets deposited with a
financial institution.
Landstar is involved in certain claims and pending litigation
arising from the normal conduct of business. Based on the
knowledge of the facts and, in certain cases, opinions of
outside counsel, management believes that adequate provisions
have been made for probable losses with respect to the resolution
of all claims and pending litigation and that the ultimate outcome,
after provisions thereof, will not have a material adverse effect
on the financial condition of Landstar, but could have a material
adverse effect on the results of operations in a given quarter or
year. However, no assurances can be given in this regard.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the attached
interim consolidated financial statements and notes thereto, and with the
Company's audited financial statements and notes thereto for the fiscal year
ended December 29, 2001 and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the 2001 Annual Report to
Shareholders.
RESULTS OF OPERATIONS
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc.
("Landstar" or the "Company"), provide transportation services to a variety
of market niches throughout the United States and to a lesser extent in Canada
and between the United States and Canada and Mexico through its operating
subsidiaries. The Company has three reportable business segments. These are
the carrier, multimodal and insurance segments.
The carrier segment consists of Landstar Ranger, Inc., Landstar Inway, Inc.,
Landstar Ligon, Inc. and Landstar Gemini, Inc. The carrier segment 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 and dedicated power-only
truck capacity and truck brokerage. The carrier segment markets its services
primarily through independent commission sales agents and utilizes tractors
provided by independent contractors, either permanently leased to the Company
or third party broker carriers. Historically, the Company's carrier segment
has primarily relied on capacity provided by independent contractors
permanently leased to the Company. 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 third party broker carriers.
A significant decrease in the number of tractors supplied by independent
contractors permanently leased to the Company or the availability of capacity
provided by third party broker carriers may have an adverse effect on the
Company's results of operations. The nature of the carrier segment's
business is such that a significant portion of its operating costs varies
directly with revenue.
The multimodal segment is comprised of Landstar Logistics, Inc. and Landstar
Express America, Inc. Transportation services provided by the multimodal
segment include the arrangement of intermodal moves, contract logistics, truck
brokerage and emergency and expedited ground and air freight. The multimodal
segment markets its services through independent commission sales agents and
utilizes tractors provided by independent contractors, railroads and
air cargo carriers. The nature of the multimodal segment's business is such
that a significant portion of its operating costs also varies directly with
revenue.
9
The insurance segment is comprised of Signature Insurance Company
("Signature"), a wholly-owned offshore insurance subsidiary, and Risk
Management Claim Services, Inc. The insurance segment provides risk and
claims management services to Landstar's operating companies. In addition,
it reinsures certain property, casualty and occupational accident risks of
certain independent contractors who have contracted to haul freight for
Landstar and provides certain property and casualty insurance directly to
Landstar's operating subsidiaries.
Purchased transportation represents the amount an independent contractor
is paid to haul freight and is primarily based on a contractually agreed-
upon percentage of revenue generated by the haul for truck capacity provided
by independent contractors who are permanently leased to the Company.
Purchased transportation for the brokerage services operations of the
carrier and multimodal segments is based on a negotiated rate for each load
hauled. Purchased transportation for the intermodal services operations
and the air freight operations of the multimodal segment is based on a
contractually agreed-upon fixed rate. Purchased transportation as a
percentage of revenue for the intermodal and brokerage services operations
is normally higher than that of Landstar's other transportation operations.
Purchased transportation is the largest component of costs and expenses and,
on a consolidated basis, increases or decreases in proportion to the revenue
generated through independent contractors. Commissions to agents are
primarily based on contractually agreed-upon percentages of revenue at the
carrier segment and of gross profit, revenue less the cost of purchased
transportation, at the multimodal segment. Commissions to agents as a
percentage of consolidated revenue will vary directly with the percentage
of consolidated revenue generated by the carrier segment, the multimodal
segment and Signature and increases or decreases in gross profit at the
multimodal segment.
Trailing equipment rent and maintenance costs are the largest components
of other operating costs.
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. A material increase in the
frequency or severity of accidents, cargo or workers' compensation claims
or the unfavorable development of existing claims could be expected to
materially adversely affect Landstar's operating income. Landstar retains
liability for each individual commercial trucking claim up to $1,000,000
per occurrence through April 30, 2001 and $5,000,000 per occurrence
thereafter. To reduce its exposure to unladen liability claims (claims
incurred while the vehicle is being operated without a trailer attached or
is being operated with an attached trailer which does not contain or carry
any cargo), 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
truckers unladen liability coverage from a third party insurance company.
Signature reinsures this unladen liability coverage for independent
contractors who participate in the Company's unladen program, up to $25,000
per occurrence through December 31, 2001 and $1,000,000 thereafter. The
Company also retains liability for each general liability claim up to
$1,000,000, $250,000 for each workers' compensation claim and $250,000 for
each cargo claim.
Employee compensation and benefits account for over half of the Company's
selling, general and administrative expense. Other significant components of
selling, general and administrative expense are communications costs and rent
expense.
Depreciation and amortization primarily relates to depreciation of trailing
equipment and management information services equipment.
All historical share related financial information presented herein has been
restated to reflect a two-for-one stock split effected in the form of a 100%
stock dividend distributed on August 12, 2002 to stockholders
of record on August 2, 2002.
10
The following table sets forth the percentage relationships of
income and expense items to revenue for the periods indicated:
Thirty-Nine Weeks Ended Thirteen Weeks Ended
------------------------ ------------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenue 100.0% 100.0% 100.0% 100.0%
Investment income 0.1 0.3 0.1 0.3
Costs and expenses:
Purchased transportation 73.9 74.1 74.1 74.3
Commissions to agents 7.9 7.8 7.9 8.0
Other operating costs 2.4 2.4 2.2 2.2
Insurance and claims 2.9 2.3 2.2 1.9
Selling, general and administrative 6.9 7.3 6.9 7.1
Depreciation and amortization 0.8 1.0 0.7 0.9
------- ------ ------- ------
Total costs and expenses 94.8 94.9 94.0 94.4
------- ------ ------- ------
Operating income 5.3 5.4 6.1 5.9
Interest and debt expense 0.3 0.5 0.3 0.4
------- ------ ------- ------
Income before income taxes 5.0 4.9 5.8 5.5
Income taxes 1.9 1.9 2.2 2.1
------- ------ ------- ------
Net income 3.1% 3.0% 3.6% 3.4%
======= ====== ======= ======
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002 COMPARED TO THIRTY-NINE WEEKS
ENDED SEPTEMBER 29, 2001
Revenue for the 2002 thirty-nine-week period was $1,112,569,000, an increase
of $67,586,000 over the 2001 thirty-nine-week period. The increase was
attributable to increased revenue of $58,781,000, $5,809,000 and
$2,996,000 at the carrier, multimodal and insurance segments, respectively.
Overall, revenue miles (volume) increased approximately 8%. Revenue per load
increased approximately 6% while revenue per revenue mile (price) decreased
approximately 1%, reflecting changes in freight mix, including an increase in
the average length of haul at the carrier segment. The increase in premium
revenue at the insurance segment was primarily attributable to an increase
in the level of reinsurance underwritten for unladen truckers liability
from $25,000 per occurrence to $1,000,000 per occurrence effective
January 1, 2002. Investment income at the insurance segment was $1,552,000
and $2,861,000 in the 2002 and 2001 periods, respectively. The decrease in
investment income was primarily due to a reduced rate of return, attributable
to the decline in interest rates.
Purchased transportation was 73.9% of revenue in 2002 compared with 74.1% in
2001. The decrease in purchased transportation as a percentage of revenue was
primarily due to increased revenue at the insurance and carrier segments and
reduced rates paid to third party broker carriers at the multimodal
segment. Commissions to agents were 7.9% of revenue in 2002 and 7.8% of
revenue in 2001. The increase in commissions to agents as a percentage of
revenue was primarily due to an increase in net revenue, revenue less the
cost of purchased transportation, at the multimodal segment.
11
Other operating costs were 2.4% of revenue in 2002 and 2001. Insurance and
claims were 2.9% of revenue in 2002 compared with 2.3% in 2001. The increase
in insurance and claims as a percentage of revenue was primarily attributable
to increased trucking claims in the $4 million excess of $1 million layer
as a result of one severe accident in June 2002, increased unladen truckers
liability claims due to the increased level of risk assumed under the program
effective January 1, 2002 and favorable development of prior year claims in
2001, partially offset by reduced property and casualty insurance premiums.
Selling, general and administrative costs were 6.9% of revenue in 2002
compared with 7.3% of revenue 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 communications costs, partially
offset by an increased provision for bonuses under the Company's incentive
compensation plans. Depreciation and amortization was 0.8% of revenue in 2002
compared with 1.0% in 2001. The decrease in depreciation and amortization as
a percentage of revenue was primarily due to the January 1, 2002
implementation of SFAS No. 142, which eliminated the amortization of goodwill,
and reduced depreciation expense for trailing equipment and information
technology assets.
Interest and debt expense was 0.3% and 0.5% of revenue in 2002 and 2001,
respectively. This decrease was primarily attributable to decreased
interest rates, decreased average borrowings on the senior credit facility
and decreased average capital lease obligations for trailing equipment.
The provisions for income taxes for the 2002 and 2001 thirty-nine-week periods
were based on estimated full year combined effective income tax rates of
approximately 38.0% and 38.5%, respectively, which are greater than the
statutory federal income tax rate primarily as a result of state income taxes
and the meals and entertainment exclusion in both years and the amortization
of certain goodwill in the 2001 period. The decrease in the effective income
tax rate was attributable to the elimination of goodwill amortization in 2002.
Net income was $34,703,000, or $2.14 per common share ($2.06 per diluted
share), in the 2002 period compared with $31,217,000, or $1.85 per common
share ($1.81 per diluted share), in the 2001 period.
12
THIRTEEN WEEKS ENDED SEPTEMBER 28, 2002 COMPARED TO THIRTEEN WEEKS
ENDED SEPTEMBER 29, 2001
Revenue for the 2002 thirteen-week period was $385,660,000, an increase of
$29,976,000 over the 2001 thirteen-week period. The increase was
attributable to increased revenue of $22,376,000, $6,769,000 and $831,000
at the carrier, multimodal and insurance segments, respectively. Overall,
revenue miles increased approximately 11%. Revenue per load increased
approximately 4% while revenue per revenue mile decreased approximately
2%, reflecting changes in freight mix, including an increase in the average
length of haul at the carrier segment. During the quarter, trucks provided by
independent contractors declined slightly. This decrease was more than offset
by increased truck productivity and increased utilization of capacity
provided by third party broker carriers. The increase in premium revenue at
the insurance segment was primarily attributable to an increase in the level
of reinsurance underwritten for unladen truckers liability. Investment income
at the insurance segment was $474,000 and $902,000 in the 2002 and 2001
periods, respectively. The decrease in investment income was primarily due to
a reduced rate of return, attributable to the decline in interest rates.
Purchased transportation was 74.1% of revenue in 2002 compared with 74.3%
in 2001. The decrease in purchased transportation as a percentage of revenue
was primarily attributable to increased revenue at the insurance segment.
Commissions to agents were 7.9% of revenue in 2002 and 8.0% of revenue in
2001. The decrease in commissions to agents as a percentage of revenue was
primarily due to reduced gross profit at the multimodal segment resulting from
higher purchased transportation costs. Other operating costs were 2.2% of
revenue in 2002 and 2001. Insurance and claims were 2.2% of revenue in 2002
compared with 1.9% in 2001. The increase in insurance and claims as a
percentage of revenue was primarily attributable to increased unladen truckers
liability claims due to the increased level of risk assumed under the program,
effective January 1, 2002 and increased cargo claims costs. Selling, general
and administrative costs were 6.9% of revenue in 2002 compared with 7.1%
of revenue 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 communications costs, partially offset by an
increased provision for bonuses under the Company's incentive compensation
plans. Depreciation and amortization was 0.7% of revenue in 2002 compared
with 0.9% in 2001. The decrease in depreciation and amortization as a
percentage of revenue was primarily due to the January 1, 2002 implementation
of SFAS No. 142, which eliminated the amortization of goodwill and reduced
depreciation and amortization for trailing equipment and information
technology assets.
Interest and debt expense was 0.3% and 0.4% of revenue in 2002 and 2001,
respectively. The decrease was primarily attributable to decreased
interest rates, decreased average borrowings on the senior credit facility
and decreased capital lease obligations for trailing equipment.
The provisions for income taxes for the 2002 and 2001 thirteen-week periods
were based on estimated full year combined effective income tax rates of
approximately 38.0% and 38.5%, respectively, which are greater than the
statutory federal income tax rate primarily as a result of state income taxes
and the meals and entertainment exclusion in both years and the amortization
of certain goodwill in the 2001 period. The decrease in the effective income
tax rate was attributable to the elimination of goodwill amortization in 2002.
Net income was $13,941,000, or $0.86 per common share ($0.83 per diluted
share), in the 2002 period compared with $11,930,000, or $0.72 per common
share ($0.70 per diluted share), in the 2001 period.
13
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' equity increased to $152,952,000 at September 28, 2002 compared
with $117,440,000 at December 29, 2001, primarily as a result of net income
for the period and the repayment of notes receivable arising from the
exercises of stock options, partially offset by the purchase of 112,879
shares of the Company's common stock at an aggregate price of $5,435,000.
Shareholders' equity was 68% and 54% of total capitalization at September 28,
2002 and December 29, 2001, respectively. As of September 28, 2002, the Company
is authorized to purchase up to 887,121 shares, adjusted for the two-for-one
stock split, of its common stock under its authorized stock purchase program.
Working capital and the ratio of current assets to current liabilities were
$129,868,000 and 1.80 to 1, respectively, at September 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 $52,985,000 in the 2002
period compared with $31,331,000 in the 2001 period. The increase in cash
flow provided by operating activities was primarily attributable to the
timing of payments. During the 2002 period, Landstar purchased $2,649,000
of operating property and acquired $2,668,000 of revenue equipment by
entering into capital leases. Management anticipates acquiring $17,000,000
of operating property during the remainder of fiscal year 2002 either by
purchase or lease financing.
Management believes that cash flow from operations combined with the Company's
borrowing capacity under its revolving credit agreement will be adequate to
meet Landstar's debt service requirements, fund continued growth, both internal
and through acquisitions, complete its announced stock repurchase program and
meet working capital needs.
Management does not believe inflation has had a material impact on the
results of operations or financial condition of Landstar in the past five
years. However, inflation higher than that experienced in the past five
years might have an adverse effect on the Company's results of operations.
14
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this report are forward-looking
statements. From time to time, we may also provide oral or written forward-
looking statements in other materials we release to the public. Forward-
looking statements give our current expectations or forecasts of future events.
You can identify these statements by the fact that they do not relate strictly
to historical or current facts. They use words such as "anticipates",
"believes", "estimates", "plans", 'predicts", "may", "should", "will", and
other words of similar meaning in connection with any discussion of future
operating or financial performance. Forward-looking statements are made based
upon management's current expectations and beliefs concerning future
developments and their potential effects on the Company. There can be no
assurance that future developments will be in accordance with management's
expectations or that the effect of future developments on the Company will
be those anticipated by management. A variety of factors could cause our
actual results to differ materially from those expressed in such
forward-looking statements. These factors include, without limitation, an
increase in the frequency or severity of accidents; cargo or workers'
compensation claims; unfavorable development of existing accident claims; a
downturn in economic domestic growth or growth in the transportation sector;
a significant decrease in the availability of capacity; and the other factors
described elsewhere in this report, in Item 7 of the Company's Report on Form
10-K for the year ended December 29, 2001 or in other Securities and
Exchange Commission filings of the Company. You should understand that it is
not possible to predict or identify all such factors. Consequently, you should
not consider any such list to be a complete set-of-all potential risks and
uncertainties. While the Company periodically reassesses material trends and
uncertainties affecting its results of operations and financial condition, the
Company does not intend, and undertakes no obligation, to review or revise any
particular forward-looking statement referenced in this report or elsewhere in
light of future events.
SEASONALITY
Landstar's operations are subject to seasonal trends common to the
trucking industry. Results of operations for the quarter ending in
March are typically lower than the quarters ending June, September
and December.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company maintains a credit agreement with a syndicate of banks and
JPMorgan Chase Bank, as the administrative agent, (the "Third Amended
and Restated Credit Agreement") that provides $175,000,000 of borrowing
capacity in the form of a revolving credit facility, $50,000,000 of
which may be utilized in the form of letter of credit guarantees.
Borrowings under the Third Amended and Restated Credit Agreement bear
interest at rates equal to, at the option of Landstar, either (i)
the greatest of (a) the prime rate as publicly announced from time
to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted
for statutory reserves and FDIC assessment costs plus 1% and (c) the
federal funds effective rate plus 1/2%, or, (ii) the rate at the time
offered to JPMorgan Chase Bank in the Eurodollar market for amounts
and periods comparable to the relevant loan plus a margin that is
determined based on the level of the Company's Leverage Ratio, as
defined in the Third Amended and Restated Credit Agreement. There have
been no significant changes that would affect the information provided
in Item 7a of the 2001 Annual Report on Form 10-K regarding quantitative
and qualitative disclosures about market risk.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including the Chief Executive Officer ("CEO") and Chief Financial
Officer ("CFO"), of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, the CEO an CFO have concluded that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. Subsequent to the date of such evaluation,
there were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls.
15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On September 20, 2001, a suit was filed entitled Gulf Bridge RoRo, Inc. v.
Landstar System, Inc. (hereinafter "Landstar"), Landstar Logistics, Inc.
(hereinafter "Landstar Logistics"), and Ford Motor Co., Inc. in Federal
District Court in Mobile, Alabama. The suit alleges breach of contract
and misrepresentation against Landstar and Landstar Logistics and
certain other causes of action arising out of a contract between Landstar
Logistics and the Plaintiff involving a trans-Gulf of Mexico roll-on/roll-off
shipping venture developed by the Plaintiffs. The complaint and discovery
developed after the filing of the suit would indicate that Plaintiff's
principal claim is that Landstar and Landstar Logistics breached a duty under
the contract to use "best efforts" to aid in the arrangement of freight for
Plaintiff's vessel and that Landstar and Landstar Logistics misrepresented
material facts which induced Plaintiff to enter into the contract with
Landstar Logistics. The suit makes claim for $25,000,000 for damages for
breach of contract and $50,000,000 punitive and other damages related to the
misrepresentation counts. As of October 31, 2002, discovery remains open and
proceeding in this matter. Discovery completion date has been set by the Court
for November 8, 2002. The trial court had initially ordered that this matter
would be tried in February of 2003, but has now indicated that the matter will
not be tried until April of 2003.
The Company believes it has meritorious defenses to this litigation and intends
to defend it vigorously. The Company also believes that if this litigation were
determined adverse to it, the probable liability of the Company, exclusive of
any available insurance recoveries, would not have a material adverse
effect on the financial condition of the Company but could have a material
adverse effect on the results of operations in a given quarter or year. The
Company also believes, however, that any such liability would have no greater
impact on the Company's results of operations for any fiscal quarter or fiscal
year than any previous litigation to which the Company has been a party in the
last three fiscal years. No assurances can be given as to the outcome
of this matter.
The Company is routinely a party to litigation incidental to its business,
primarily involving claims for personal injury and property damage incurred
in the transportation of freight. The Company maintains insurance which covers
liability amounts in excess of retained liabilities from personal injury and
property damages claims.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
16
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
KPMG LLP provides certain tax compliance services to the Company.
The Company's audit committee pre-approved the provision of these
non-audit services to the Company, as contemplated by Section
202 of the Sarbanes-Oxley Act of 2002.
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
The Company's Form 8-K filed with the Securities and Exchange
Commission on July 22, 2002 announced the Company's authorized
2-for-1 stock split effected in the form of a 100% stock dividend
effective August 12, 2002 to shareholders of record on August 2,
2002.
The Company's Form 8-K filed with the Securities and Exchange
Commission on August 8, 2002 contained the Company's Principal
Executive Officer's and Principal Financial Officer's certifications
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The Company's Form 8-K filed with the Securities and Exchange
Commission on August 9, 2002 contained the Company's Principal
Executive Officer's and Principal Financial Officer's certifications
of certain covered reports pursuant to Securities and Exchange
Commission Order No. 4-460.
17
EXHIBIT INDEX
Registrant's Commission File No.: 0-21238
Exhibit No. Description
- ------------ -----------
(11) Statement re: Computation of Per Share Earnings:
11.1 * Landstar System, Inc. and Subsidiary Calculation of Earnings
Per Common Share for the Thirty-Nine and Thirteen Weeks Ended
September 28, 2002 and September 29, 2001
11.2 * Landstar System, Inc. and Subsidiary Calculation of Diluted
Earnings Per Share for the Thirty-Nine and Thirteen Weeks
September 28, 2002 and September 29, 2001
__________________
* Filed herewith
18
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 1, 2002 /s/ Jeffrey C. Crowe
----------------------------
Jeffrey C. Crowe
Chairman of the Board and
Chief Executive Officer
Date: November 1, 2002 /s/ Robert C. LaRose
----------------------------
Robert C. LaRose
Vice President, Chief Financial
Officer and Secretary
19
CERTIFICATIONS
I, Jeffrey C. Crowe , certify that:
1. I have reviewed this quarterly report on Form 10-Q of Landstar
System, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 1, 2002
- -----------------------
Jeffrey C. Crowe
Chairman of the Board and
Chief Executive Officer
20
CERTIFICATIONS
I, Robert C. LaRose, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Landstar System, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the
period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002
- ----------------------
Robert C. LaRose
Vice President, Chief
Financial Officer and Secretary
21