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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 March 29, 2003
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 ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ( X ) No ( )
The number of shares of the registrant's Common Stock, par value $0.01 per
share, outstanding as of the close of business on May 2, 2003 was
15,931,159.
PART I
FINANCIAL INFORMATION
Index
Item 1
Consolidated Balance Sheets as of March 29, 2003
and December 28, 2002 ............................................... Page 3
Consolidated Statements of Income for the Thirteen Weeks
Ended March 29, 2003 and March 30, 2002 ......................... Page 4
Consolidated Statements of Cash Flows for the Thirteen Weeks
Ended March 29, 2003 and March 30, 2002 ......................... Page 5
Consolidated Statement of Changes in Shareholders'
Equity for the Thirteen Weeks Ended March 29, 2003 .................. Page 6
Notes to Consolidated Financial Statements............................. Page 7
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................ Page 10
Item 3
Quantitative and Qualitative Disclosures About Market Risk............. Page 16
Item 4
Controls and Procedures................................................ Page 16
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 thirteen weeks ended March 29, 2003
are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 27, 2003.
These interim financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
2002 Annual Report on Form 10-K.
2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
March 29, Dec. 28,
2003 2002
---------- -----------
ASSETS
Current assets:
Cash $ 68,136 $ 65,447
Short-term investments 2,724 3,130
Trade accounts receivable, less allowance of $3,932
and $3,953 182,746 190,052
Other receivables, including advances to independent
contractors, less allowance of $5,469 and $5,331 21,347 12,640
Prepaid expenses and other current assets 3,227 3,338
---------- -----------
Total current assets 278,180 274,607
---------- -----------
Operating property, less accumulated depreciation
and amortization of $55,226 and $52,841 74,198 76,774
Goodwill 31,134 31,134
Other assets 15,247 18,233
---------- -----------
Total assets $ 398,759 $ 400,748
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 18,410 $ 16,545
Accounts payable 61,248 60,297
Current maturities of long-term debt 11,434 12,123
Insurance claims 25,859 24,419
Other current liabilities 40,699 40,593
---------- -----------
Total current liabilities 157,650 153,977
---------- -----------
Long-term debt, excluding current maturities 50,569 65,237
Insurance claims 27,342 25,276
Deferred income taxes 7,524 7,165
Shareholders' equity:
Common stock, $0.01 par value, authorized 20,000,000
shares, issued 16,540,507 and 16,337,506 shares 165 163
Additional paid-in capital 7,248 2,609
Retained earnings 183,976 173,817
Cost of 714,730 and 554,879 shares of common stock in
treasury (34,773) (26,306)
Notes receivable arising from exercise of stock options (942) (1,190)
---------- -----------
Total shareholders' equity 155,674 149,093
---------- -----------
Total liabilities and shareholders' equity $ 398,759 $ 400,748
========== ===========
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)
Thirteen Weeks Ended
-----------------------
March 29, March 30,
2003 2002
---------- ----------
Revenue $ 365,718 $ 335,693
Investment income 324 563
Costs and expenses:
Purchased transportation 271,462 247,188
Commissions to agents 28,084 26,088
Other operating costs 9,231 8,106
Insurance and claims 10,628 10,907
Selling, general and administrative 26,381 26,048
Depreciation and amortization 3,166 2,879
---------- ----------
Total costs and expenses 348,952 321,216
---------- ----------
Operating income 17,090 15,040
Interest and debt expense 770 1,308
---------- ----------
Income before income taxes 16,320 13,732
Income taxes 6,161 5,218
---------- ----------
Net income $ 10,159 $ 8,514
========== ==========
Earnings per common share (1) $ 0.64 $ 0.53
========== ==========
Diluted earnings per share (1) $ 0.62 $ 0.51
========== ==========
Average number of shares outstanding:
Earnings per common share (1) 15,774,000 16,193,000
========== ==========
Diluted earnings per share (1) 16,426,000 16,727,000
========== ==========
(1) 2002 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.
4
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Thirteen Weeks Ended
---------------------------
March 29, March 30,
2003 2002
----------- -----------
OPERATING ACTIVITIES
Net income $ 10,159 $ 8,514
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of operating property 3,166 2,879
Non-cash interest charges 68 68
Provisions for losses on trade and other accounts receivable 1,405 1,428
Losses on sales and disposals of operating property 140 6
Deferred income taxes, net 359 (445)
Changes in operating assets and liabilities:
Increase in trade and other accounts receivable (2,806) (4,352)
Decrease in prepaid expenses and other assets 2,535 2,601
Increase in accounts payable 951 3,671
Increase in other liabilities 106 9,932
Increase in insurance claims 3,506 2,368
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 19,589 26,670
----------- -----------
INVESTING ACTIVITIES
Maturities of investments 900 2,000
Purchases of investments (5,722)
Purchases of operating property (1,070) (715)
Proceeds from sales of operating property 340 220
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 170 (4,217)
----------- -----------
FINANCING ACTIVITIES
Increase in cash overdraft 1,865 1,740
Proceeds from repayment of notes receivable arising from
exercises of stock options 248 2,078
Proceeds from exercises of stock options 4,641 594
Principal payments on long-term debt and capital lease obligations (15,357) (14,911)
Purchases of common stock (8,467)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (17,070) (10,499)
----------- -----------
Increase in cash 2,689 11,954
Cash at beginning of period 65,447 47,886
----------- -----------
Cash at end of period $ 68,136 $ 59,840
=========== ===========
See accompanying notes to consolidated financial statements.
5
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
Thirteen Weeks Ended March 29, 2003
(Dollars in thousands)
(Unaudited)
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 28, 2002 16,337,506 $ 163 $ 2,609 $ 173,817 554,879 $ (26,306) $ (1,190) $ 149,093
Net income 10,159 10,159
Purchases of common stock 159,851 (8,467) (8,467)
Exercises of stock options 203,001 2 4,639 4,641
Repayment of notes
receivable arising from
exercises of stock
options 248 248
---------- ------- --------- --------- --------- --------- ------------- ---------
Balance March 29, 2003 16,540,507 $ 165 $ 7,248 $ 183,976 714,730 $ (34,773) $ (942) $ 155,674
========== ======= ========= ========= ========= ========= ============= =========
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 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 2002 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 2003 and 2002 thirteen-week
periods were based on estimated full year combined effective income
tax rates of approximately 37.8% and 38.0%, 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.
(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. At March 29, 2003, there were 153,000
options outstanding to purchase shares of common stock excluded from the
calculation of diluted earnings per share because they were antidilutive.
No such antidilutive options were outstanding at March 30, 2002.
(4) Additional Cash Flow Information
During the 2003 period, Landstar paid income taxes and interest of
$303,000 and $841,000, respectively. During the 2002 period, Landstar
paid income taxes and interest of $25,000 and $1,097,000, respectively.
7
(5) Segment Information
The following tables summarize information about Landstar's reportable
business segments as of and for the thirteen weeks ended March 29, 2003
and March 30, 2002 (in thousands):
Thirteen Weeks Ended March 29, 2003
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 290,045 $ 68,709 $ 6,964 $ 365,718
Investment income 324 324
Internal revenue 4,471 647 7,165 12,283
Operating income 18,496 1,924 5,435 $ (8,765) 17,090
Goodwill 20,496 10,638 31,134
Thirteen Weeks Ended March 30, 2002
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 269,963 $ 58,719 $ 7,011 $ 335,693
Investment income 563 563
Internal revenue 5,146 515 6,609 12,270
Operating income 16,856 1,140 5,322 $ (8,278) 15,040
Goodwill 20,496 10,638 31,134
(6) Stock-Based Compensation
At March 29, 2003, the Company has two stock-based employee compensation
plans and one stock-based plan for members of its Board of Directors.
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 each option 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 Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation:
Thirteen Weeks Ended
-----------------------
March 29, March 30,
2003 2002
------- -------
Net income, as reported $ 10,159 $ 8,514
Deduct: Total stock-based employee
compensation expense determined
under the fair value based
method for all awards, net of
related income tax benefits (899) (752)
------- -------
Pro forma net income $ 9,260 $ 7,762
======= =======
Earnings per common share:
As reported $ 0.64 $ 0.53
Pro forma $ 0.59 $ 0.48
Diluted earnings per share:
As reported $ 0.62 $ 0.51
Pro forma $ 0.58 $ 0.48
8
(7) Commitments and Contingencies
At March 29, 2003, Landstar had commitments for letters of
credit outstanding in the amount of $26,060,000, 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 $16,980,000 secured by cash and investments deposited
with a financial institution.
On September 20, 2001, a suit was filed entitled Gulf Bridge RoRo, Inc. v.
Landstar System, Inc., Landstar Logistics, Inc. and Ford Motor Co., Inc.
in Federal District Court in Mobile, Alabama (the "Court"). The complaint
alleged breach of contract, fraud and tortious interference with
contractual business relationships against Landstar System, Inc. and
Landstar Logistics, Inc. 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. Ford Motor
Co. entered into a settlement with the plaintiff and was dismissed from
the case by Order dated March 6, 2003.
The complaint and discovery developed after the filing of the suit
indicate that plaintiff's principal remaining claim is that the defendants
breached a duty under the contract to use "best efforts"
to aid in the arrangement of freight for plaintiff's vessel and that
the defendants fraudulently induced plaintiff to enter into the contract
by misrepresenting certain material facts. The suit makes claim for
$25,000,000 for damages for breach of contract and $50,000,000 punitive
and other damage related to the fraud and tortious interference claims.
These alleged damages appear to relate primarily to alleged lost profits
post-dating the termination of the contract by the plaintiff in April
1999. In November 2002, Landstar System, Inc. and Landstar Logistics, Inc.
filed motions for summary judgment with the Court seeking to dismiss the
breach of contract and fraud claims against them and to limit the amount
of damages obtainable by the plaintiff. By Order dated April 23, 2003,
the Court granted (i) Landstar System, Inc.'s motion to dismiss the breach
of contract and fraud claims against Landstar System, Inc., and (ii)
Landstar Logistics, Inc.'s motion to bar the plaintiff, under its breach
of contract claim, from recovering any lost profits not sustained prior to
the end of the 30 day termination period in the contract. The Court did
not grant Landstar Logistics, Inc.'s motion to limit any damages arising
out of the plaintiff's fraud claims to the same period of time. However,
this issue has again been presented to the Court in a motion for
reconsideration filed on May 8, 2003. Other grounds argued by Landstar
Logistics, Inc. for summary judgment were denied in the Court's order
dated April 23, 2003.
Although discovery was previously completed and the matter had been set
for trial in April 2003, by Order dated March 21, 2003, the Court granted
Landstar's request to continue the trial and assessed sanctions against
the plaintiff due to conduct which Landstar asserted constituted abuse of
the discovery process. As a result of such Order, discovery in the case
has been re-opened and the case is presently scheduled for trial in
September 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 Landstar,
the liability 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.
9
Landstar is involved in certain other 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 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.
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 28, 2002 and Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the 2002 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, 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 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 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.
10
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.
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. 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.
11
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 2002 share and per share amounts have been restated to give retroactive
effect to this stock split.
The following table sets forth the percentage relationships of
income and expense items to revenue for the periods indicated:
Thirteen Weeks Ended
------------------------
March 29, March 30,
2003 2002
---------- ----------
Revenue 100.0% 100.0%
Investment income 0.1 0.2
Costs and expenses:
Purchased transportation 74.2 73.6
Commissions to agents 7.7 7.8
Other operating costs 2.5 2.4
Insurance and claims 2.9 3.2
Selling, general and administrative 7.2 7.8
Depreciation and amortization 0.9 0.9
------- ------
Total costs and expenses 95.4 95.7
------- ------
Operating income 4.7 4.5
Interest and debt expense 0.2 0.4
------- ------
Income before income taxes 4.5 4.1
Income taxes 1.7 1.6
------- ------
Net income 2.8% 2.5%
======= ======
THIRTEEN WEEKS ENDED MARCH 29, 2003 COMPARED TO THIRTEEN WEEKS
ENDED MARCH 30, 2002
Revenue for the 2003 thirteen-week period was $365,718,000, an increase of
$30,025,000, or 8.9%, over the 2002 thirteen-week period. The increase was
attributable to increased revenue of $20,082,000 and $9,990,000 at the carrier
and multimodal segments, respectively. Overall, truck revenue miles (volume)
increased approximately 8%. Revenue per load increased approximately 9% while
truck revenue per revenue mile (price) increased approximately 1%, reflecting
changes in freight mix, including a 3% increase in average length of haul at
the carrier segment. During the 2003 thirteen-week period, revenue generated
for the U.S. Government, primarily for the Department of Defense, increased to
9.5% of revenue compared to 4.0% in the 2002 thirteen-week period, primarily
due to Operation Iraqi Freedom. Investment income at the insurance segment was
$324,000 and $563,000 in the 2003 and 2002 periods, 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 and a reduction in the amount of assets available for
investment as a portion of the assets were used to reduce borrowings under the
Company's senior credit facility.
12
Purchased transportation was 74.2% and 73.6% of revenue in 2003 and 2002,
respectively. The increase in purchased transportation as a percentage of
revenue was primarily due to increased truck brokerage revenue and increased
rail intermodal revenue, both of which tend to have a higher cost of purchased
transportation, and increased rates charged by other third-party truck capacity
providers at the multimodal segment. These increases were partially offset by
reduced purchased transportation costs at the carrier segment attributable to
an increased use of Company provided trailing equipment. Commissions to agents
were 7.7% and 7.8% of revenue in 2003 and 2002, respectively. The decrease in
commissions to agents as a percentage of revenue was primarily due to a
decrease in gross profit, revenue less the cost of purchased transportation,
at the multimodal segment.
Other operating costs were 2.5% of revenue in 2003 and 2.4% of revenue in 2002.
The increase in other operating costs as a percentage of revenue was primarily
due to increased trailer maintenance costs and increased costs for cargo
securement devices. Insurance and claims were 2.9% of revenue in 2003 compared
with 3.2% of revenue in 2002. The decrease in insurance and claims as a
percentage of revenue was primarily attributable to an increase in the
percentage of revenue generated through other third party capacity providers,
which has a lower claims risk profile, and reduced cargo claims. Selling,
general and administrative costs were 7.2% of revenue in 2003 compared with
7.8% of revenue in 2002. The decrease in selling, general and administrative
costs as a percentage of revenue was primarily attributable to reduced
telecommunication costs, a decreased provision for customer bad debts and the
effect of increased revenue as total selling, general and administration costs
remained approximately the same as in the prior year. Depreciation and
amortization was 0.9% of revenue in both 2003 and 2002.
Interest and debt expense was 0.2% and 0.4% of revenue in 2003 and 2002,
respectively. This decrease was primarily attributable to the effect of
lower interest rates and decreased average borrowings on the senior credit
facility.
The provisions for income taxes for the 2003 and 2002 thirteen-week periods
were based on estimated full year combined effective income tax rates of
approximately 37.8% and 38.0%, 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. The decrease in the effective
income tax rate was primarily attributable to the implementation of certain
state income tax planning strategies.
Net income was $10,159,000, or $0.64 per common share ($0.62 per diluted
share), in the 2003 period compared with $8,514,000, or $0.53 per common share
($0.51 per diluted share), in the 2002 period.
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' equity increased to $155,674,000 at March 29, 2003 compared
with $149,093,000 at December 28, 2002, primarily as a result of net income for
the period, partially offset by the purchase of 159,851 shares of the
Company's common stock at a total cost of $8,467,000. Shareholders' equity was
72% and 66% of total capitalization at March 29, 2003 and December 28, 2002,
respectively. As of March 29, 2003, the Company may purchase up to an
additional 285,270 shares of its common stock under its authorized stock
purchase program.
13
Working capital and the ratio of current assets to current liabilities were
$120,530,000 and 1.76 to 1, respectively, at March 29, 2003, compared with
$120,630,000 and 1.78 to 1, respectively, at December 28, 2002. 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 $19,589,000 in the 2003
thirteen-week period compared with $26,670,000 in the 2002 thirteen-week
period. The decrease in cash flow provided by operating activities was
primarily attributable to timing of payments. During the 2003 period, Landstar
purchased $1,070,000 of operating property. Landstar anticipates it will
acquire between $17,000,000 and $29,000,000 of operating property during the
remainder of fiscal year 2003 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, 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.
On September 20, 2001, a suit was filed entitled Gulf Bridge RoRo, Inc. v.
Landstar System, Inc., Landstar Logistics, Inc. and Ford Motor Co., Inc.
in Federal District Court in Mobile, Alabama (the "Court"). The complaint
alleged breach of contract, fraud and tortious interference with
contractual business relationships against Landstar System, Inc. and
Landstar Logistics, Inc. 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. Ford Motor
Co. entered into a settlement with the plaintiff and was dismissed from
the case by Order dated March 6, 2003.
The complaint and discovery developed after the filing of the suit
indicate that plaintiff's principal remaining claim is that the defendants
breached a duty under the contract to use "best efforts"
to aid in the arrangement of freight for plaintiff's vessel and that
the defendants fraudulently induced plaintiff to enter into the contract
by misrepresenting certain material facts. The suit makes claim for
$25,000,000 for damages for breach of contract and $50,000,000 punitive
and other damage related to the fraud and tortious interference claims.
These alleged damages appear to relate primarily to alleged lost profits
post-dating the termination of the contract by the plaintiff in April
1999. In November 2002, Landstar System, Inc. and Landstar Logistics, Inc.
filed motions for summary judgment with the Court seeking to dismiss the
breach of contract and fraud claims against them and to limit the amount
of damages obtainable by the plaintiff. By Order dated April 23, 2003,
the Court granted (i) Landstar System, Inc.'s motion to dismiss the breach
of contract and fraud claims against Landstar System, Inc., and (ii)
Landstar Logistics, Inc.'s motion to bar the plaintiff, under its breach
of contract claim, from recovering any lost profits not sustained prior to
the end of the 30 day termination period in the contract. The Court did
not grant Landstar Logistics, Inc.'s motion to limit any damages arising
out of the plaintiff's fraud claims to the same period of time. However,
this issue has again been presented to the Court in a motion for
reconsideration filed on May 8, 2003. Other grounds argued by Landstar
Logistics, Inc. for summary judgment were denied in the Court's order
dated April 23, 2003.
Although discovery was previously completed and the matter had been set
for trial in April 2003, by Order dated March 21, 2003, the Court granted
Landstar's request to continue the trial and assessed sanctions against
the plaintiff due to conduct which Landstar asserted constituted abuse of
the discovery process. As a result of such Order, discovery in the case
has been re-opened and the case is presently scheduled for trial in
September 2003.
14
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 Landstar,
the liability 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.
Landstar is involved in certain other 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 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.
FORWARD-LOOKING STATEMENTS
The following is a "safe harbor" statement under the Private Securities
Litigation Reform Act of 1995. Statements contained in this document that are
not based on historical facts are "forward-looking statements." This
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-Q statement contain forward-
looking statements, such as statements which relate to Landstar's business
objectives, plans, strategies and expectations. Terms such as "anticipates,"
"believes," "estimates," "plans," "predicts," "may," "should," "will," the
negative thereof and similar expressions are intended to identify forward-
looking statements. Such statements are by nature subject to uncertainties and
risks, including but not limited to: an increase in the frequency or severity
of accidents 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 report or in Landstar's other
Securities and Exchange Commission 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.
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 fiscal years ended 2002 and 2001, the
Company experienced abnormally high levels 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 of both trade and other receivables at
March 29, 2003 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.
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.
15
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.
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 2002 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 the Company's disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the CEO and 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.
16
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., Landstar Logistics, Inc. and Ford Motor Co., Inc.
in Federal District Court in Mobile, Alabama (the "Court"). The complaint
alleged breach of contract, fraud and tortious interference with
contractual business relationships against Landstar System, Inc. and
Landstar Logistics, Inc. 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. Ford Motor
Co. entered into a settlement with the plaintiff and was dismissed from
the case by Order dated March 6, 2003.
The complaint and discovery developed after the filing of the suit
indicate that plaintiff's principal remaining claim is that the defendants
breached a duty under the contract to use "best efforts"
to aid in the arrangement of freight for plaintiff's vessel and that
the defendants fraudulently induced plaintiff to enter into the contract
by misrepresenting certain material facts. The suit makes claim for
$25,000,000 for damages for breach of contract and $50,000,000 punitive
and other damage related to the fraud and tortious interference claims.
These alleged damages appear to relate primarily to alleged lost profits
post-dating the termination of the contract by the plaintiff in April
1999. In November 2002, Landstar System, Inc. and Landstar Logistics, Inc.
filed motions for summary judgment with the Court seeking to dismiss the
breach of contract and fraud claims against them and to limit the amount
of damages obtainable by the plaintiff. By Order dated April 23, 2003,
the Court granted (i) Landstar System, Inc.'s motion to dismiss the breach
of contract and fraud claims against Landstar System, Inc., and (ii)
Landstar Logistics, Inc.'s motion to bar the plaintiff, under its breach
of contract claim, from recovering any lost profits not sustained prior to
the end of the 30 day termination period in the contract. The Court did
not grant Landstar Logistics, Inc.'s motion to limit any damages arising
out of the plaintiff's fraud claims to the same period of time. However,
this issue has again been presented to the Court in a motion for
reconsideration filed on May 8, 2003. Other grounds argued by Landstar
Logistics, Inc. for summary judgment were denied in the Court's order
dated April 23, 2003.
Although discovery was previously completed and the matter had been set
for trial in April 2003, by Order dated March 21, 2003, the Court granted
Landstar's request to continue the trial and assessed sanctions against
the plaintiff due to conduct which Landstar asserted constituted abuse of
the discovery process. As a result of such Order, discovery in the case
has been re-opened and the case is presently scheduled for trial in
September 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 Landstar,
the liability 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.
The Company is routinely a party to other 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 damage claims.
17
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index are furnished 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 March 12, 2003 contained the Company's Principal
Executive Officer's and Principal Financial Officer's certifications
related to the Company's filing of Form 10-K for fiscal year end 2002
and pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
18
EXHIBIT INDEX
Registrant's Commission File No.: 0-21238
Exhibit No. Description
- ------------ -----------
(11) Statement re: Computation of Per Share Earnings:
11.1 * Landstar System, Inc. and Subsidiary Calculation of Earnings
Per Common Share for the Thirteen Weeks Ended March 29, 2003
and March 30, 2002
11.2 * Landstar System, Inc. and Subsidiary Calculation of Diluted
Earnings Per Share for the Thirteen Weeks Ended March 29,
2003 and March 30, 2002
(99) Additional Exhibits:
99.1 * Chief Executive Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 * Chief Financial Officer certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
__________________
* Filed herewith
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LANDSTAR SYSTEM, INC.
Date: May 8, 2003 /s/ Jeffrey C. Crowe
----------------------------
Jeffrey C. Crowe
Chairman of the Board and
Chief Executive Officer
Date: May 8, 2003 /s/ Robert C. LaRose
----------------------------
Robert C. LaRose
Vice President, Chief Financial
Officer and Secretary
20
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 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 functions):
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 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: May 8, 2003
/s/ Jeffrey C. Crowe
_______________________
Jeffrey C. Crowe
Chairman of the Board and
Chief Executive Officer
21
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 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 functions):
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 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: May 8, 2003
/s/ Robert C. LaRose
_______________________
Robert C. LaRose
Vice President, Chief
Financial Officer and Secretary
22