LANDSTAR SYSTEM INC
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
March 27, 2010
OR
| o | 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)
(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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files):
Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes
o
No
þ
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding
as of the close of business on April 19, 2010 was 50,151,922.
Index
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| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
| EX-32.2 | ||||||||
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 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
2
Table of Contents
thirteen weeks ended March 27, 2010 are
not necessarily indicative of the results that may be expected for the entire fiscal year ending
December 25, 2010.
These interim financial statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company’s 2009 Annual Report on Form 10-K.
3
Table of Contents
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
| March 27, | December 26, | |||||||
| 2010 | 2009 | |||||||
|
ASSETS
|
||||||||
|
Current Assets
|
||||||||
|
Cash and cash equivalents
|
$ | 82,493 | $ | 85,719 | ||||
|
Short-term investments
|
24,391 | 24,325 | ||||||
|
Trade accounts receivable, less allowance of $5,399 and $5,547
|
290,785 | 278,854 | ||||||
|
Other receivables, including advances to independent contractors, less allowance
of $5,954 and $5,797
|
28,073 | 18,149 | ||||||
|
Deferred income taxes and other current assets
|
13,890 | 19,565 | ||||||
|
|
||||||||
|
Total current assets
|
439,632 | 426,612 | ||||||
|
|
||||||||
|
|
||||||||
|
Operating property, less accumulated depreciation and amortization of $129,949
and $124,810
|
140,188 | 116,656 | ||||||
|
Goodwill
|
57,470 | 57,470 | ||||||
|
Other assets
|
49,068 | 48,054 | ||||||
|
|
||||||||
|
Total assets
|
$ | 686,358 | $ | 648,792 | ||||
|
|
||||||||
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|
||||||||
|
LIABILITIES AND EQUITY
|
||||||||
|
Current Liabilities
|
||||||||
|
Cash overdraft
|
$ | 23,291 | $ | 28,919 | ||||
|
Accounts payable
|
133,505 | 121,030 | ||||||
|
Current maturities of long-term debt
|
25,562 | 24,585 | ||||||
|
Insurance claims
|
38,194 | 41,627 | ||||||
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Other current liabilities
|
50,011 | 42,474 | ||||||
|
|
||||||||
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Total current liabilities
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270,563 | 258,635 | ||||||
|
|
||||||||
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|
||||||||
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Long-term debt, excluding current maturities
|
82,641 | 68,313 | ||||||
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Insurance claims
|
30,931 | 30,680 | ||||||
|
Deferred income taxes
|
22,345 | 23,013 | ||||||
|
|
||||||||
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Equity
|
||||||||
|
Landstar System, Inc. and subsidiary shareholders’ equity
|
||||||||
|
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 66,281,824
and 66,255,358 shares
|
663 | 663 | ||||||
|
Additional paid-in capital
|
162,614 | 161,261 | ||||||
|
Retained earnings
|
780,954 | 766,040 | ||||||
|
Cost of 16,142,282 and 16,022,111 shares of common stock in treasury
|
(664,953 | ) | (660,446 | ) | ||||
|
Accumulated other comprehensive income
|
684 | 498 | ||||||
|
|
||||||||
|
Total Landstar System, Inc. and subsidiary shareholders’ equity
|
279,962 | 268,016 | ||||||
|
|
||||||||
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Noncontrolling interest
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(84 | ) | 135 | |||||
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|
||||||||
|
Total equity
|
279,878 | 268,151 | ||||||
|
|
||||||||
|
Total liabilities and equity
|
$ | 686,358 | $ | 648,792 | ||||
|
|
||||||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
| Thirteen Weeks Ended | ||||||||
| March 27, | March 28, | |||||||
| 2010 | 2009 | |||||||
|
Revenue
|
$ | 548,088 | $ | 469,247 | ||||
|
Investment income
|
285 | 425 | ||||||
|
Costs and expenses:
|
||||||||
|
Purchased transportation
|
417,201 | 351,324 | ||||||
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Commissions to agents
|
40,408 | 38,324 | ||||||
|
Other operating costs
|
7,536 | 7,450 | ||||||
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Insurance and claims
|
12,298 | 9,002 | ||||||
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Selling, general and administrative
|
36,843 | 34,369 | ||||||
|
Depreciation and amortization
|
5,792 | 5,485 | ||||||
|
|
||||||||
|
Total costs and expenses
|
520,078 | 445,954 | ||||||
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|
||||||||
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Operating income
|
28,295 | 23,718 | ||||||
|
Interest and debt expense
|
854 | 1,163 | ||||||
|
|
||||||||
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Income before income taxes
|
27,441 | 22,555 | ||||||
|
Income taxes
|
10,484 | 8,661 | ||||||
|
|
||||||||
|
Net income
|
16,957 | 13,894 | ||||||
|
Less: Net loss attributable to noncontrolling interest
|
(219 | ) | — | |||||
|
|
||||||||
|
Net income attributable to Landstar System, Inc. and subsidiary
|
$ | 17,176 | $ | 13,894 | ||||
|
|
||||||||
|
Earnings per common share attributable to Landstar System, Inc. and subsidiary
|
$ | 0.34 | $ | 0.27 | ||||
|
|
||||||||
|
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary
|
$ | 0.34 | $ | 0.27 | ||||
|
|
||||||||
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|
||||||||
|
Average number of shares outstanding:
|
||||||||
|
Earnings per common share
|
50,207,000 | 51,575,000 | ||||||
|
|
||||||||
|
Diluted earnings per share
|
50,318,000 | 51,782,000 | ||||||
|
|
||||||||
|
Dividends paid per common share
|
$ | 0.0450 | $ | 0.0400 | ||||
|
|
||||||||
See accompanying notes to consolidated financial statements.
5
Table of Contents
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Thirteen Weeks Ended | ||||||||
| March 27, | March 28, | |||||||
| 2010 | 2009 | |||||||
|
OPERATING ACTIVITIES
|
||||||||
|
Net income
|
$ | 16,957 | $ | 13,894 | ||||
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
|
Depreciation and amortization of operating property and intangible assets
|
5,792 | 5,485 | ||||||
|
Non-cash interest charges
|
55 | 55 | ||||||
|
Provisions for losses on trade and other accounts receivable
|
1,027 | 2,743 | ||||||
|
Losses on sales/disposals of operating property
|
20 | 2 | ||||||
|
Deferred income taxes, net
|
(805 | ) | 783 | |||||
|
Stock-based compensation
|
1,185 | 1,389 | ||||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Decrease (increase) in trade and other accounts receivable
|
(22,882 | ) | 71,948 | |||||
|
Decrease in other assets
|
5,977 | 7,278 | ||||||
|
Increase (decrease) in accounts payable
|
12,475 | (17,845 | ) | |||||
|
Increase (decrease) in other liabilities
|
7,490 | (5,149 | ) | |||||
|
Increase (decrease) in insurance claims
|
(3,182 | ) | 410 | |||||
|
|
||||||||
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|
||||||||
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NET CASH PROVIDED BY OPERATING ACTIVITIES
|
24,109 | 80,993 | ||||||
|
|
||||||||
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|
||||||||
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INVESTING ACTIVITIES
|
||||||||
|
Net change in other short-term investments
|
(1,237 | ) | 6,505 | |||||
|
Sales and maturities of investments
|
6,082 | 442 | ||||||
|
Purchases of investments
|
(6,275 | ) | (8,828 | ) | ||||
|
Purchases of operating property
|
(22,239 | ) | (555 | ) | ||||
|
Proceeds from sales of operating property
|
55 | 28 | ||||||
|
|
||||||||
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|
||||||||
|
NET CASH USED BY INVESTING ACTIVITIES
|
(23,614 | ) | (2,408 | ) | ||||
|
|
||||||||
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|
||||||||
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FINANCING ACTIVITIES
|
||||||||
|
Decrease in cash overdraft
|
(5,628 | ) | (8,230 | ) | ||||
|
Dividends paid
|
(2,262 | ) | (2,068 | ) | ||||
|
Proceeds from exercises of stock options
|
159 | 533 | ||||||
|
Excess tax benefit on stock option exercises
|
9 | 239 | ||||||
|
Borrowings on revolving credit facility
|
15,000 | — | ||||||
|
Purchases of common stock
|
(4,507 | ) | (11,958 | ) | ||||
|
Principal payments on long-term debt and capital lease obligations
|
(6,592 | ) | (25,540 | ) | ||||
|
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||||||||
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||||||||
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NET CASH USED BY FINANCING ACTIVITIES
|
(3,821 | ) | (47,024 | ) | ||||
|
|
||||||||
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|
||||||||
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Effect of exchange rate changes on cash and cash equivalents
|
100 | (87 | ) | |||||
|
|
||||||||
|
Increase (decrease) in cash and cash equivalents
|
(3,226 | ) | 31,474 | |||||
|
Cash and cash equivalents at beginning of period
|
85,719 | 98,904 | ||||||
|
|
||||||||
|
Cash and cash equivalents at end of period
|
$ | 82,493 | $ | 130,378 | ||||
|
|
||||||||
See accompanying notes to consolidated financial statements.
6
Table of Contents
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Thirteen Weeks Ended March 27, 2010
(Dollars in thousands)
(Unaudited)
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Thirteen Weeks Ended March 27, 2010
(Dollars in thousands)
(Unaudited)
| Landstar System, Inc. and Subsidiary Shareholders | ||||||||||||||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||||||
| Additional | Treasury Stock | Other | Non- | |||||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | at Cost | Comprehensive | controlling | |||||||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Shares | Amount | Income | Interest | Total | ||||||||||||||||||||||||||||
|
Balance December 26, 2009
|
66,255,358 | $ | 663 | $ | 161,261 | $ | 766,040 | 16,022,111 | $ | (660,446 | ) | $ | 498 | $ | 135 | $ | 268,151 | |||||||||||||||||||
|
Net income (loss)
|
17,176 | (219 | ) | 16,957 | ||||||||||||||||||||||||||||||||
|
Dividends paid ($0.045 per share)
|
(2,262 | ) | (2,262 | ) | ||||||||||||||||||||||||||||||||
|
Purchases of common stock
|
120,171 | (4,507 | ) | (4,507 | ) | |||||||||||||||||||||||||||||||
|
Stock-based compensation
|
1,185 | 1,185 | ||||||||||||||||||||||||||||||||||
|
Exercises of stock options and issuance of
non-vested stock,
including excess tax benefit
|
26,466 | 168 | 168 | |||||||||||||||||||||||||||||||||
|
Foreign currency translation
|
100 | 100 | ||||||||||||||||||||||||||||||||||
|
Unrealized gain on available-for-sale
investments, net of income taxes
|
86 | 86 | ||||||||||||||||||||||||||||||||||
|
Balance March 27, 2010
|
66,281,824 | $ | 663 | $ | 162,614 | $ | 780,954 | 16,142,282 | $ | (664,953 | ) | $ | 684 | $ | (84 | ) | $ | 279,878 | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
7
Table of Contents
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.” Significant intercompany
accounts have been eliminated in consolidation.
Landstar owns, through various subsidiaries, a controlling interest in A3i Acquisition LLC,
which in turn owns 100% of A3 Integration, LLC (A3i Acquisition LLC, A3 Integration, LLC and its
subsidiaries are collectively referred to herein as “A3i”), a supply chain systems integration and
solutions company acquired in the Company’s 2009 fiscal third quarter. Given Landstar’s controlling
interest in A3i Acquisition, the accounts of A3i have been consolidated herein and a noncontrolling
interest has been recorded for the noncontrolling investor’s interests in the net assets and
operations of A3i.
(1) Acquisitions
In the Company’s 2009 fiscal third quarter, the Company completed the acquisitions of (i)
National Logistics Management Co. (together with a limited liability company and certain corporate
subsidiaries and affiliates, “NLM”) and (ii) A3i. Consideration paid with respect to the
acquisitions, net of cash acquired of $2.4 million, was approximately $15.9 million, which included
27,323 shares, or $1.0 million, of common stock of Landstar, subject to certain vesting and other
restrictions including restrictions on transfer. Net liabilities acquired were approximately $17.0
million. Identified in the allocation of purchase price was approximately $9.0 million of
identifiable intangible assets which are included in other assets on the consolidated balance
sheets. The resulting goodwill arising from the acquisitions was approximately $26.3 million, all
of which is expected to be deductible for income tax purposes. The results of operations from NLM
and A3i are presented as part of the Company’s transportation logistics segment.
(2) Share-based Payment Arrangements
As of March 27, 2010, the Company had an employee stock option plan, an employee stock option
and stock incentive plan (the “ESOSIP”) and one stock option plan for members of its Board of
Directors (the “Plans”). In addition, the Company had a stock compensation plan for members of its
Board of Directors (the “Directors Stock Compensation Plan”). No further grants can be made under
the employee stock option plan as its term for granting stock options has expired. In addition, no
further grants are to be made under the stock option plan for members of the Board of Directors.
Amounts recognized in the financial statements with respect to these Plans are as follows (in
thousands):
| Thirteen Weeks Ended | ||||||||
| March 27, | March 28, | |||||||
| 2010 | 2009 | |||||||
|
Total cost of the Plans during the period
|
$ | 1,185 | $ | 1,389 | ||||
|
Amount of related income tax benefit
recognized during the period
|
299 | 353 | ||||||
|
|
||||||||
|
Net cost of the Plans during the period
|
$ | 886 | $ | 1,036 | ||||
|
|
||||||||
The fair value of each option grant on its grant date was calculated using the Black-Scholes
option pricing model with the following weighted average assumptions for grants made in the 2010
and 2009 thirteen-week periods:
| 2010 | 2009 | |||||||
|
Expected volatility
|
37.0 | % | 38.0 | % | ||||
|
Expected dividend yield
|
0.400 | % | 0.400 | % | ||||
|
Risk-free interest rate
|
2.50 | % | 1.50 | % | ||||
|
Expected lives (in years)
|
4.2 | 4.4 | ||||||
8
Table of Contents
The Company utilizes historical data, including exercise patterns and employee departure
behavior, in estimating the term that options will be outstanding. Expected volatility was based on
historical volatility and other factors, such as expected changes in volatility arising from
planned changes to the Company’s business, if any. The risk-free interest rate was based on the
yield of zero coupon U.S. Treasury bonds for terms that approximated the terms of the options
granted. The weighted average grant date fair value of stock options granted during the
thirteen-week periods ended March 27, 2010 and March 28, 2009 was $11.98 and $11.75, respectively.
The following table summarizes information regarding the Company’s stock options granted
under the Plans:
| Weighted Average | ||||||||||||||||
| Weighted Average | Remaining | |||||||||||||||
| Number of | Exercise Price | Contractual | Aggregate Intrinsic | |||||||||||||
| Options | per Share | Term (years) | Value (000s) | |||||||||||||
|
Options outstanding at December 26, 2009
|
2,557,802 | $ | 36.86 | |||||||||||||
|
Granted
|
223,250 | $ | 37.37 | |||||||||||||
|
Exercised
|
(44,920 | ) | $ | 26.95 | ||||||||||||
|
Forfeited
|
(50,367 | ) | $ | 43.22 | ||||||||||||
|
|
||||||||||||||||
|
Options outstanding at March 27, 2010
|
2,685,765 | $ | 36.95 | 6.7 | $ | 11,945 | ||||||||||
|
|
||||||||||||||||
|
Options exercisable at March 27, 2010
|
1,316,815 | $ | 33.43 | 5.1 | $ | 10,501 | ||||||||||
|
|
||||||||||||||||
The total intrinsic value of stock options exercised during the thirteen-week periods ended
March 27, 2010 and March 28, 2009 was $532,000 and $939,000, respectively.
As of March 27, 2010, there was $12,803,000 of total unrecognized compensation cost related to
non-vested stock options granted under the Plans. The unrecognized compensation cost related to
these non-vested options is expected to be recognized over a weighted average period of 3.3 years.
The fair value of each share of non-vested restricted stock issued under the ESOSIP is based
on the fair value of a share of the Company’s common stock on the date of grant.
The following table summarizes information regarding the Company’s non-vested restricted stock
under the ESOSIP:
| Number of | Grant Date | |||||||
| Shares | Fair Value | |||||||
|
Restricted stock outstanding at December 26, 2009
|
11,500 | $ | 34.82 | |||||
|
Granted
|
8,400 | $ | 39.10 | |||||
|
|
||||||||
|
Restricted stock outstanding at March 27, 2010
|
19,900 | $ | 36.63 | |||||
|
|
||||||||
As of March 27, 2010, there was $650,000 of total unrecognized compensation cost related to
non-vested shares of restricted stock granted under the ESOSIP. The unrecognized compensation cost
related to these non-vested shares of restricted stock is expected to be recognized over a weighted
average period of 3.7 years.
As of March 27, 2010, there were 5,080,482 shares of the Company’s common stock reserved for
issuance upon exercise of options granted and to be granted under the Plans and 138,423 shares of
the Company’s common stock reserved for issuance upon the grant of stock under the Directors’ Stock
Compensation Plan.
(3) Income Taxes
The provisions for income taxes for the 2010 and 2009 thirteen-week periods were based on
estimated full year combined effective income tax rates of approximately 38.2% and 38.4%,
respectively, which were higher than the statutory federal income tax rate primarily as a result of
state taxes, the meals and entertainment exclusion and non-deductible stock-based compensation.
9
Table of Contents
(4) Earnings Per Share
Earnings per common share attributable to Landstar System, Inc. and subsidiary are based on
the weighted average number of common shares outstanding and diluted earnings per share
attributable to Landstar System, Inc. and subsidiary 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.
The following table provides a reconciliation of the average number of common shares
outstanding used to calculate earnings per share attributable to Landstar System, Inc. and
subsidiary to the average number of common shares and common share equivalents outstanding used to
calculate diluted earnings per share attributable to Landstar System, Inc. and subsidiary (in
thousands):
| Thirteen Weeks Ended | ||||||||
| March 27, | March 28, | |||||||
| 2010 | 2009 | |||||||
|
Average number of common shares outstanding
|
50,207 | 51,575 | ||||||
|
Incremental shares from assumed exercises of stock options
|
111 | 207 | ||||||
|
|
||||||||
|
Average number of common shares and common share
equivalents outstanding
|
50,318 | 51,782 | ||||||
|
|
||||||||
For the thirteen-week periods ended March 27, 2010 and March 28, 2009, there were options
outstanding of 1,653,913 and 2,037,747, respectively, to purchase shares of common stock excluded
from the calculation of diluted earnings per share attributable to Landstar System, Inc. and
subsidiary because they were antidilutive.
(5) Additional Cash Flow Information
During the 2010 thirteen-week period, Landstar paid income taxes and interest of $1,795,000
and $895,000, respectively. During the 2009 thirteen-week period, Landstar paid income taxes and
interest of $1,655,000 and $1,395,000, respectively. Landstar acquired operating property by
entering into capital leases in the amount of $6,897,000 and $6,585,000 in the 2010 and 2009
thirteen-week periods, respectively. During the 2010 thirteen-week period, the Company purchased
$22,239,000 of operating property, including $21,135,000 for the purchase of the Company’s primary
facility in Jacksonville, Florida.
(6) Segment Information
The following tables summarize information about Landstar’s reportable business segments as of
and for the thirteen-week periods ended March 27, 2010 and March 28, 2009 (in thousands):
| Thirteen Weeks Ended | ||||||||||||||||||||||||
| March 27, 2010 | March 28, 2009 | |||||||||||||||||||||||
| Transportation | Transportation | |||||||||||||||||||||||
| Logistics | Insurance | Total | Logistics | Insurance | Total | |||||||||||||||||||
|
External revenue
|
$ | 539,615 | $ | 8,473 | $ | 548,088 | $ | 459,934 | $ | 9,313 | $ | 469,247 | ||||||||||||
|
Investment income
|
285 | 285 | 425 | 425 | ||||||||||||||||||||
|
Internal revenue
|
5,903 | 5,903 | 5,831 | 5,831 | ||||||||||||||||||||
|
Operating income
|
22,527 | 5,768 | 28,295 | 15,106 | 8,612 | 23,718 | ||||||||||||||||||
|
Expenditures on long-lived assets
|
22,239 | 22,239 | 555 | 555 | ||||||||||||||||||||
|
Goodwill
|
57,470 | 57,470 | 31,134 | 31,134 | ||||||||||||||||||||
In the thirteen-week period ended March 27, 2010, one customer accounted for approximately 14
percent of the Company’s revenue. In the thirteen-week period ended March 28, 2009, there were no
customers who accounted for 10 percent or more of the Company’s revenue.
(7) Comprehensive Income
The following table includes the components of comprehensive income attributable to Landstar System, Inc. and subsidiary for the thirteen-week periods ended March 27, 2010 and March 28, 2009 (in thousands):
| Thirteen Weeks Ended | ||||||||
| March 27, | March 28, | |||||||
| 2010 | 2009 | |||||||
|
Net income attributable to Landstar System, Inc. and subsidiary
|
$ | 17,176 | $ | 13,894 | ||||
|
Unrealized gains/(losses) on available-for-sale investments, net of income taxes
|
86 | (152 | ) | |||||
|
Foreign currency translation gains/(losses)
|
100 | (87 | ) | |||||
|
|
||||||||
|
Comprehensive income attributable to Landstar System, Inc. and subsidiary
|
$ | 17,362 | $ | 13,655 | ||||
|
|
||||||||
10
Table of Contents
The unrealized holding gain on available-for-sale investments during the 2010 thirteen-week
period represents the mark-to-market adjustment of $133,000, net of related income taxes of
$47,000. The unrealized holding loss on available-for-sale investments during the 2009
thirteen-week period represents the mark-to-market adjustment of $235,000, net of related income
tax benefits of $83,000. The foreign currency translation gain/loss represents the unrealized net
gain or loss on the translation of the financial statements of the Company’s Canadian operations.
Accumulated other comprehensive income as reported as a component of equity at March 27, 2010 of
$684,000 represents the unrealized net gain on the translation of the financial statements of the
Company’s Canadian operations of $308,000 and the cumulative unrealized holding gains on
available-for-sale investments, net of income taxes, of $376,000.
(8) Investments
Investments consist of investment-grade bonds having maturities of up to five years (the “bond
portfolio”). Bonds in the bond portfolio are reported as available-for-sale and are carried at fair
value. Bonds maturing less than one year from the balance sheet date are included in short-term
investments and bonds maturing more than one year from the balance sheet date are included in other
assets in the consolidated balance sheets. Management has performed an analysis of the nature of
the unrealized losses on available-for-sale investments to determine whether such losses are
other-than-temporary. Unrealized losses, representing the excess of the purchase price of an
investment over its market value as of the end of a period, considered to be other-than-temporary,
are to be included as a charge in the statement of income while unrealized losses considered to be
temporary are to be included as a component of equity. Investments whose values are based on quoted
market prices in active markets are classified within Level 1. Investments that trade in markets
that are not considered to be active, but are valued based on quoted market prices are classified
within Level 2. As Level 2 investments include positions that are not traded in active markets,
valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally
based on available market information. Transfers between levels are recognized as of the beginning
of the period. Fair value of the bond portfolio was determined using Level 1 inputs related to U.S.
Treasury obligations and Level 2 inputs related to investment-grade corporate bonds and direct
obligations of U.S. government agencies. Net unrealized gains on the bonds in the bond portfolio
were $581,000 at March 27, 2010 and $448,000 at December 26, 2009.
The amortized cost and fair market values of available-for-sale investments are as follows at
March 27, 2010 and December 26, 2009 (in thousands):
| Gross | Gross | Fair | ||||||||||||||
| Amortized | Unrealized | Unrealized | Market | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
|
March 27, 2010
|
||||||||||||||||
|
|
||||||||||||||||
|
Corporate bonds and direct obligations of U.S.
government agencies
|
$ | 39,372 | $ | 609 | $ | 32 | $ | 39,949 | ||||||||
|
U.S. Treasury obligations
|
11,492 | 4 | — | 11,496 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 50,864 | $ | 613 | $ | 32 | $ | 51,445 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
December 26, 2009
|
||||||||||||||||
|
|
||||||||||||||||
|
Corporate bonds and direct obligations of U.S.
government agencies
|
$ | 39,261 | $ | 668 | $ | 226 | $ | 39,703 | ||||||||
|
U.S. Treasury obligations
|
11,489 | 6 | — | 11,495 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 50,750 | $ | 674 | $ | 226 | $ | 51,198 | ||||||||
|
|
||||||||||||||||
For those available-for-sale investments with unrealized losses at March 27, 2010 and December
26, 2009, the following table summarizes the duration of the unrealized loss (in thousands):
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||
| Fair Market | Unrealized | Fair Market | Unrealized | Fair Market | Unrealized | |||||||||||||||||||
| Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
|
March 27, 2010
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Corporate bonds and direct obligations of
U.S. government agencies
|
$ | 2,019 | $ | 4 | $ | 780 | $ | 28 | $ | 2,799 | $ | 32 | ||||||||||||
|
|
||||||||||||||||||||||||
|
December 26, 2009
|
||||||||||||||||||||||||
|
|
||||||||||||||||||||||||
|
Corporate bonds and direct obligations of
U.S. government agencies
|
$ | 1,989 | $ | 10 | $ | 1,192 | $ | 216 | $ | 3,181 | $ | 226 | ||||||||||||
11
Table of Contents
(9) Commitments and Contingencies
Short-term investments include $21,423,000 in current maturities of investment-grade bonds and
$2,968,000 of cash equivalents held by the Company’s insurance segment at March 27, 2010. These
short-term investments together with $25,444,000 of the non-current portion of investment-grade
bonds included in other assets at March 27, 2010 provide collateral for the $45,148,000 of letters
of credit issued to guarantee payment of insurance claims. As of March 27, 2010, Landstar also had
$33,837,000 of letters of credit outstanding under the Company’s credit agreement.
In the Company’s 2009 fiscal third quarter, the Company completed the acquisitions of NLM and
A3i. As it relates to NLM, the Company may be required to pay additional consideration to the prior
owner of NLM contingent on NLM achieving certain levels of earnings through December 2014. As it
relates to the noncontrolling interest of A3i Acquisition, the Company has the option, during the
period commencing on the fourth anniversary of June 29, 2009, the closing date of the acquisition
(the “Closing Date”), and ending on the sixth anniversary of the Closing Date, to purchase at fair
value all but not less than all of the noncontrolling interest. The noncontrolling interest is also
subject to customary restrictions on transfer, including a right of first refusal in favor of the
Company, and drag-along rights. For a specified period following each of the sixth, seventh and
eighth anniversaries of the Closing Date, the owner of the noncontrolling interest shall have the
right, but not the obligation, to sell at fair value to the Company up to one third annually of the
investment then held by such owner. The owner of the non-controlling interest also has certain
preemptive rights and tag-along rights.
As further described in periodic and current reports previously filed by the Company with the
Securities and Exchange Commission (the “SEC”), the Company and certain of its subsidiaries (the
“Defendants”) are defendants in a suit (the “Litigation”) brought in the United States District
Court for the Middle District of Florida (the “District Court”) by the Owner-Operator Independent
Drivers Association, Inc. (“OOIDA”) and four former BCO Independent Contractors (the “Named
Plaintiffs” and, with OOIDA, the “Plaintiffs”) on behalf of all independent contractors who provide
truck capacity to the Company and its subsidiaries under exclusive lease arrangements (the “BCO
Independent Contractors”). The Plaintiffs allege that certain aspects of the Company’s motor
carrier leases and related practices with its BCO Independent Contractors violate certain federal
leasing regulations and seek injunctive relief, an unspecified amount of damages and attorneys’
fees.
On March 29, 2007, the District Court denied the request by Plaintiffs for injunctive relief,
entered a judgment in favor of the Defendants and issued written orders setting forth its rulings
related to the decertification of the plaintiff class and other important elements of the
Litigation relating to liability, injunctive relief and monetary relief. The Plaintiffs filed an
appeal with the United States Court of Appeals for the Eleventh Circuit (the “Appellate Court”) of
certain of the District Court’s rulings in favor of the Defendants. The Defendants asked the
Appellate Court to affirm such rulings and filed a cross-appeal with the Appellate Court with
respect to certain other rulings of the District Court.
On September 3, 2008, the Appellate Court issued its ruling, which, among other things,
affirmed the District Court’s rulings that (i) the Defendants are not prohibited by the applicable
federal leasing regulations from charging administrative or other fees to BCO Independent
Contractors in connection with voluntary programs offered by the Defendants through which a BCO
Independent Contractor may purchase discounted products and services for a charge that is deducted
against the compensation payable to the BCO Independent Contractor (a “Charge-back Deduction”),
(ii) the Plaintiffs are not entitled to restitution or disgorgement with respect to violations by
Defendants of the applicable federal leasing regulations but instead may recover only actual
damages, if any, which they sustained as a result of any such violations and (iii) the claims of
BCO Independent Contractors may not be handled on a class action basis for purposes of determining
the amount of actual damages, if any, they sustained as a result of any violations. Further, the
analysis of the Appellate Court confirmed the absence of any violations alleged by the Plaintiffs
of the federal leasing regulations with respect to the written terms of all leases currently in use
between the Defendants and BCO Independent Contractors.
However, the ruling of the Appellate Court reversed the District Court’s rulings (i) that an
old version of the lease formerly used by Defendants but not in use with any current BCO
Independent Contractor complied with applicable disclosure requirements under the federal leasing
regulations with respect to adjustments to compensation payable to BCO Independent Contractors on
certain loads sourced from the U. S. Department of Defense, and (ii) that the Defendants had
provided sufficient documentation to BCO Independent
12
Table of Contents
Contractors under the applicable federal
leasing regulations relating to how the component elements of Charge-back Deductions were computed.
The Appellate Court then remanded the case to the District Court to permit the Plaintiffs to seek
injunctive relief with respect to these violations of the federal leasing regulations and to hold
an evidentiary hearing to give the Named Plaintiffs an opportunity to produce evidence of any
damages they actually sustained as a result of such violations.
Each of the parties to the Litigation has filed a petition with the Appellate Court seeking
rehearing of the Appellate Court’s ruling; however, there can be no assurance that any petition for
rehearing will be granted.
Although no assurances can be given with respect to the outcome of the Litigation, including
any possible award of attorneys’ fees to the Plaintiffs, the Company believes that (i) no Plaintiff
has sustained any actual damages as a result of any violations by the Defendants of the federal
leasing regulations and (ii) injunctive relief, if any, that may be granted by the District Court
on remand is unlikely to have a material adverse financial effect on the Company.
The Company is involved in certain other claims and pending litigation arising from the normal
conduct of business. Based on knowledge of the facts and, in certain cases, opinions of outside
counsel, management believes that adequate provisions have been made for probable losses with
respect to the resolution of all such other claims and pending litigation and that the ultimate
outcome, after provisions therefore, will not have a material adverse effect on the financial
condition of the Company, 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 26, 2009 and Management’s Discussion and Analysis
of Financial Condition and Results of Operations included in the 2009 Annual Report on Form 10-K.
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 contain forward-looking statements, such
as statements which relate to Landstar’s business objectives, plans, strategies and expectations.
Terms such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “predicts,” “may,”
“should,” “could,” “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 other
claims; unfavorable development of existing accident claims; dependence on third party insurance
companies; dependence on independent commission sales agents; dependence on third party capacity
providers; substantial industry competition; disruptions or failures in our computer systems;
changes in fuel taxes; status of independent contractors; a downturn in economic growth or growth
in the transportation sector; acquired businesses; intellectual property; and other operational,
financial or legal risks or uncertainties detailed in Landstar’s Form 10-K for the 2009 fiscal
year, described in Item 1A “Risk Factors”, 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.
Introduction
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (together, referred
to herein as “Landstar” or the “Company”), is a non-asset based provider of freight transportation
services and supply chain solutions. The Company offers customers services across multiple
transportation modes, with the ability to arrange for individual shipments of freight to
enterprise-wide solutions to manage all of a customer’s transportation and logistics needs.
Landstar provides services principally throughout the United States and to a lesser extent in
Canada, and between the United States and Canada, Mexico and other countries around the world. The
Company’s services emphasize safety, information coordination and customer service and are
delivered through a network of independent commission sales agents and third party capacity
providers linked together by a series of technological applications which are provided and
coordinated by the Company. Landstar markets its freight transportation services and supply chain
solutions primarily through independent commission sales agents and exclusively utilizes third
party capacity providers to transport and store customers’ freight. The nature of the Company’s
business is such that a significant portion of its operating costs varies directly with revenue.
13
Table of Contents
In the Company’s 2009 fiscal third quarter, the Company completed the acquisitions of (i)
National Logistics Management Co. (together with a limited liability company and certain corporate
subsidiaries and affiliates, “NLM”) and (ii) A3 Integration LLC (“A3i”) through A3i Acquisition
LLC, an entity of which the Company owns 100% of the non-voting, preferred interests and 75% of the
voting, common equity interests. A3i is a wholly-owned subsidiary of A3i Acquisition. These two
acquisitions are referred to herein collectively as the “Recent Acquisitions.” NLM and A3i offer
customers technology-based supply chain solutions and other value-added services on a
fee-for-service basis. NLM and A3i are herein referred to as the “Acquired Entities.” The results
of operations from NLM and A3i are presented as part of the Company’s transportation logistics
segment. Transportation management fees represented 1% of the Company’s transportation logistics
segment revenue in the thirteen-week period ended March 27, 2010.
Landstar markets its freight transportation services and supply chain solutions primarily
through independent commission sales agents who enter into contractual arrangements with the
Company and are responsible for locating freight, making that freight available to Landstar’s
capacity providers and coordinating the transportation of the freight with customers and capacity
providers. The Company’s third party capacity providers consist of independent contractors who
provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent
Contractors”), unrelated trucking companies who provide truck capacity to the Company under
non-exclusive contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean
cargo carriers, railroads and independent warehouse capacity providers (“Warehouse Capacity
Owners”). The Company has contracts with all of the Class 1 domestic and Canadian railroads and
certain short-line railroads and contracts with domestic and international airlines and ocean
lines. Through this network of agents and capacity providers linked together by Landstar’s
technological applications, Landstar operates a transportation services and supply chain solutions
business primarily throughout North America with revenue of approximately $2.0 billion during the
most recently completed fiscal year. The Company reports the results of two operating segments: the
transportation logistics segment and the insurance segment.
The transportation logistics segment provides a wide range of transportation services and
supply chain solutions. Transportation services offered by the Company include truckload and
less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and
air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico
cross-border, project cargo and customs brokerage. Supply chain solutions are based on advanced
technology solutions offered by the Company and include integrated multi-modal solutions,
outsourced logistics, supply chain engineering and warehousing. Also, supply chain solutions can be
delivered through a software-as-a-service model. Industries serviced by the transportation
logistics segment include automotive products, paper, lumber and building products, metals,
chemicals, foodstuffs, heavy machinery, retail, electronics, ammunition and explosives and military
hardware. In addition, the transportation logistics segment provides transportation services to
other transportation companies, including logistics and less-than-truckload service providers. Each
of the independent commission sales agents has the opportunity to market all of the services
provided by the transportation logistics segment. Freight transportation services are typically
charged to customers on a per shipment basis for the physical transportation of freight. Supply
chain solution customers are generally charged fees for the services provided. Revenue recognized
by the transportation logistics segment when providing capacity to customers to haul their freight
is referred to herein as “transportation services revenue” and revenue for freight management
services recognized on a fee-for-service basis is referred to herein as “transportation management
fees.” During the thirteen weeks ended March 27, 2010, transportation services revenue hauled by
BCO Independent Contractors, Truck Brokerage Carriers, rail intermodal, ocean cargo carriers and
air cargo carriers represented 53%, 41%, 3%, 1%, and 1%, respectively, of the Company’s
transportation logistics segment revenue.
The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore
insurance subsidiary, and Risk Management Claim Services, Inc. This segment provides risk and
claims management services to certain of Landstar’s operating subsidiaries. In addition, it
reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property
and casualty insurance directly to certain of Landstar’s operating subsidiaries. Revenue,
representing premiums on reinsurance programs provided to the Company’s BCO Independent
Contractors, at the insurance segment represented approximately 2% of the Company’s total revenue
for the thirteen weeks ended March 27, 2010.
Changes in Financial Condition and Results of Operations
Management believes the Company’s success principally depends on its ability to generate
freight through its network of independent commission sales agents and to efficiently deliver that
freight utilizing third party capacity providers. Management believes the most significant factors
to the Company’s success include increasing revenue, sourcing capacity and controlling costs.
While customer demand, which is subject to overall economic conditions, ultimately drives
increases or decreases in revenue, the Company primarily relies on its independent commission sales
agents to establish customer relationships and generate revenue opportunities. Management’s primary
focus with respect to revenue growth is on revenue generated by independent commission sales agents
who on an annual basis generate $1 million or more of Landstar revenue (“Million Dollar Agents”).
Management believes future
14
Table of Contents
revenue growth is primarily dependent on its ability to increase both
the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a
combination of recruiting new agents and increasing the revenue opportunities generated by existing
independent commission sales agents. During the 2009 fiscal year, 405 independent commission sales
agents generated $1 million or more of Landstar’s revenue and thus qualified as Million Dollar
Agents. During the 2009 fiscal year, the average revenue generated by a Million Dollar Agent was
$4,292,000 and revenue generated by Million Dollar Agents in the aggregate represented 87% of
consolidated Landstar revenue. The Company had 1,372 and 1,445 agent locations at March 27, 2010
and March 28, 2009, respectively.
Management monitors business activity by tracking the number of loads (volume) and revenue per
load by mode of transportation. Revenue per load can be influenced by many factors other than a
change in price. Those factors include the average length of haul, freight type, special handling
and equipment requirements and delivery time requirements. For shipments involving two or more
modes of transportation, revenue is classified by the mode of transportation having the highest
cost for the load. The following table summarizes this data by mode of transportation:
| Thirteen Weeks Ended | ||||||||
| March 27, | March 28, | |||||||
| 2010 | 2009 | |||||||
|
Revenue generated through (in thousands):
|
||||||||
|
|
||||||||
|
BCO Independent Contractors
|
$ | 286,141 | $ | 262,065 | ||||
|
Truck Brokerage Carriers
|
219,755 | 164,243 | ||||||
|
Rail intermodal
|
14,776 | 19,318 | ||||||
|
Ocean cargo carriers
|
9,135 | 8,851 | ||||||
|
Air cargo carriers
|
4,603 | 5,387 | ||||||
|
|
||||||||
|
Other
(1)
|
13,678 | 9,383 | ||||||
|
|
||||||||
|
|
$ | 548,088 | $ | 469,247 | ||||
|
|
||||||||
|
|
||||||||
|
Number of loads:
|
||||||||
|
|
||||||||
|
BCO Independent Contractors
|
197,750 | 170,650 | ||||||
|
Truck Brokerage Carriers
|
149,350 | 117,650 | ||||||
|
Rail intermodal
|
6,870 | 9,580 | ||||||
|
Ocean cargo carriers
|
1,460 | 1,240 | ||||||
|
Air cargo carriers
|
1,500 | 3,260 | ||||||
|
|
||||||||
|
|
356,930 | 302,380 | ||||||
|
|
||||||||
|
|
||||||||
|
Revenue per load:
|
||||||||
|
|
||||||||
|
BCO Independent Contractors
|
$ | 1,447 | $ | 1,536 | ||||
|
Truck Brokerage Carriers
|
1,471 | 1,396 | ||||||
|
Rail intermodal
|
2,151 | 2,016 | ||||||
|
Ocean cargo carriers
|
6,257 | 7,138 | ||||||
|
Air cargo carriers
|
3,069 | 1,652 | ||||||
| (1) | Includes premium revenue generated by the insurance segment and warehousing revenue and transportation management fees generated by the transportation logistics segment. |
Also critical to the Company’s success is its ability to secure capacity, particularly truck
capacity, at rates that allow the Company to profitably transport customers’ freight. The
following table summarizes available truck capacity providers:
15
Table of Contents
| March 27, | March 28, | |||||||
| 2010 | 2009 | |||||||
|
BCO Independent Contractors
|
7,800 | 8,424 | ||||||
|
Truck Brokerage Carriers:
|
||||||||
|
Approved and active
(1)
|
15,644 | 14,877 | ||||||
|
Other approved
|
9,674 | 10,682 | ||||||
|
|
||||||||
|
|
25,318 | 25,559 | ||||||
|
|
||||||||
|
Total available truck capacity providers
|
33,118 | 33,983 | ||||||
|
|
||||||||
|
Number of trucks provided by BCO Independent Contractors
|
8,384 | 9,013 | ||||||
|
|
||||||||
| (1) | Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal quarter end. |
The Company incurs costs that are directly related to the transportation of freight that
include purchased transportation and commissions to agents. The Company incurs indirect costs
associated with the transportation of freight that include other operating costs and insurance and
claims. In addition, the Company incurs selling, general and administrative costs essential to
administering its business operations. Management continually monitors all components of the costs
incurred by the Company and establishes annual cost budgets which, in general, are used to
benchmark costs incurred on a monthly basis.
Purchased transportation represents the amount a BCO Independent Contractor or other third
party capacity provider is paid to haul freight. The amount of purchased transportation paid to a
BCO Independent Contractor is primarily based on a contractually agreed-upon percentage of revenue
generated by the haul. Purchased transportation paid to a Truck Brokerage Carrier is based on
either a negotiated rate for each load hauled or a contractually agreed-upon rate. Purchased
transportation paid to rail intermodal, air cargo or ocean cargo carriers is based on contractually
agreed-upon fixed rates. Purchased transportation as a percentage of revenue for truck brokerage,
rail intermodal and ocean cargo services is normally higher than that of BCO Independent Contractor
and air cargo services. 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
BCO Independent Contractors and other third party capacity providers, transportation management
fees and revenue from the insurance segment. Purchased transportation as a percent of revenue also
increases or decreases in relation to the general availability of truck brokerage capacity in the
marketplace and the price of fuel on revenue hauled by Truck Brokerage Carriers. Purchased
transportation costs are recognized upon the completion of freight delivery.
Commissions to agents are based on contractually agreed-upon percentages of revenue or gross
profit, defined as revenue less the cost of purchased transportation, or gross profit less a
contractually agreed upon percentage of revenue retained by Landstar. Commissions to agents as a
percentage of consolidated revenue will vary directly with fluctuations in the percentage of
consolidated revenue generated by the various modes of transportation, transportation management
fees and the insurance segment and with changes in gross profit on services provided by Truck
Brokerage Carriers, rail intermodal, air cargo and ocean cargo carriers. Commissions to agents are
recognized upon the completion of freight delivery.
Revenue less the cost of purchased transportation and commissions to agents is referred to as
net revenue. Net revenue over revenue is referred to as net margin. In general, net margin on
revenue hauled by BCO Independent Contractors represents a fixed percentage of revenue due to the
nature of the contracts that pay a fixed percentage of revenue to both the BCO Independent
Contractors and independent commission sales agents. For revenue hauled by Truck Brokerage
Carriers, net margin is either fixed or variable as a percent of revenue, depending on the contract
with each individual independent commission sales agent. Under certain contracts with independent
commission sales agents, the Company retains a fixed percentage of revenue and the agent retains
the amount remaining less the cost of purchased transportation (the “retention contracts”). Net
margin on revenue hauled by rail, air cargo carriers, ocean cargo carriers and Truck Brokerage
Carriers, other than under retention contracts, is variable in nature as the Company’s contracts
with independent commission sales agents provide commissions to agents at a contractually agreed
upon percentage of gross profit. Approximately 74% of the Company’s revenue in the thirteen-week
period ended March 27, 2010 had a fixed net margin.
Maintenance costs for Company-provided trailing equipment, BCO Independent Contractor
recruiting costs and bad debts from BCO Independent Contractors and independent commission sales
agents are the largest components of other operating costs.
Potential liability associated with accidents in the trucking industry is severe and
occurrences are unpredictable. For commercial trucking claims, Landstar retains liability up to
$5,000,000 per occurrence. The Company also retains liability for each general liability
16
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claim up
to $1,000,000, $250,000 for each workers’ compensation claim and up to $250,000 for each cargo
claim. The Company’s exposure to liability associated with accidents incurred by Truck Brokerage
Carriers, rail intermodal capacity providers and air cargo and ocean cargo carriers who transport
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 claims 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 costs.
Depreciation and amortization primarily relate to depreciation of trailing equipment,
amortization of intangible assets attributable to the Recent Acquisitions and management
information services equipment.
The following table sets forth the percentage relationships of income and expense items to
revenue for the periods indicated:
| Thirteen Weeks Ended | ||||||||
| March 27, | March 28, | |||||||
| 2010 | 2009 | |||||||
|
Revenue
|
100.0 | % | 100.0 | % | ||||
|
Investment income
|
0.1 | 0.1 | ||||||
|
Costs and expenses:
|
||||||||
|
Purchased transportation
|
76.1 | 74.9 | ||||||
|
Commissions to agents
|
7.4 | 8.1 | ||||||
|
Other operating costs
|
1.4 | 1.6 | ||||||
|
Insurance and claims
|
2.2 | 1.9 | ||||||
|
Selling, general and administrative
|
6.7 | 7.3 | ||||||
|
Depreciation and amortization
|
1.1 | 1.2 | ||||||
|
|
||||||||
|
Total costs and expenses
|
94.9 | 95.0 | ||||||
|
|
||||||||
|
|
||||||||
|
Operating income
|
5.2 | 5.1 | ||||||
|
Interest and debt expense
|
0.2 | 0.3 | ||||||
|
|
||||||||
|
|
||||||||
|
Income before income taxes
|
5.0 | 4.8 | ||||||
|
Income taxes
|
1.9 | 1.8 | ||||||
|
|
||||||||
|
|
||||||||
|
Net income
|
3.1 | % | 3.0 | % | ||||
|
|
||||||||
THIRTEEN WEEKS ENDED MARCH 27, 2010 COMPARED TO THIRTEEN WEEKS ENDED MARCH 28, 2009
Revenue for the 2010 thirteen-week period was $548,088,000, an increase of $78,841,000, or
16.8%, compared to the 2009 thirteen-week period. Revenue increased $79,681,000, or 17.3%, at the
transportation logistics segment. The increase in revenue at the transportation logistics segment
was primarily attributable to an 18% increase in the number of loads hauled, partly offset by a
lower revenue per load amount of approximately 2%. Revenue hauled by BCO Independent Contractors,
Truck Brokerage Carriers and ocean cargo carriers increased 9%, 34% and 3%, respectively, partially
offset by decreased revenue hauled by rail intermodal carriers and air cargo carriers of 24% and
15%, respectively. Included in the 2010 thirteen-week period was $5,085,000 of transportation
management fees related to the Acquired Entities. The number of loads in the 2010 period hauled by
BCO Independent Contractors, Truck Brokerage Carriers and ocean cargo carriers increased 16%, 27%
and 18%, respectively, compared to the 2009 period, while the number of loads hauled by rail
intermodal carriers and air cargo carriers decreased 28% and 54%, respectively, over the same
period. Revenue per load for loads hauled by Truck Brokerage Carriers, rail intermodal carriers and
air cargo carriers increased approximately 5%, 7% and 86%, respectively, compared to the 2009
period. Revenue per load for loads hauled by BCO Independent Contractors and ocean cargo carriers
decreased approximately 6% and 12%, respectively, compared to the 2009 period. The increase in
revenue per load on Truck Brokerage Carrier revenue was partly attributable to increased fuel
surcharges identified separately in billings to customers in the 2010 period compared to the 2009
period. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to
customers and included as a component of Truck Brokerage Carrier revenue were $18,959,000 and
$9,776,000 in the 2010 and 2009 periods, respectively. Fuel surcharges billed to customers on
revenue hauled by BCO Independent Contractors are excluded from revenue.
Investment income at the insurance segment was $285,000 and $425,000 in the 2010 and 2009
thirteen-week periods, respectively. The decrease in investment income was primarily due to
decreased average investments held by the insurance segment in the 2010 period.
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Purchased transportation was 76.1% and 74.9% of revenue in the 2010 and 2009 thirteen-week
periods, respectively. The increase in purchased transportation as a percentage of revenue was
primarily attributable to increased revenue hauled by Truck Brokerage Carriers, which tends to have
a higher cost of purchased transportation, and increased rates of purchased transportation paid to
Truck Brokerage Carriers. Commissions to agents were 7.4% of revenue in the 2010 period and 8.1% of
revenue in the 2009 period. The decrease in commissions to agents as a percentage of revenue was
primarily attributable to decreased gross profit on revenue hauled by Truck Brokerage Carriers.
Other operating costs were 1.4% and 1.6% of revenue in the 2010 and 2009 periods, respectively. The
decrease in other operating costs as a percentage of revenue was primarily attributable to the
effect of increased revenue and lower trailing equipment rental costs in the 2010 period, partly
offset by $834,000 of other operating costs of the Acquired Entities in the 2010 period. Insurance
and claims were 2.2% of revenue in the 2010 period and 1.9% of revenue in the 2009 period. The
increase in insurance and claims as a percentage of revenue was primarily due to increased cost of
cargo claims and increased frequency and severity of commercial trucking claims in the 2010 period.
Selling, general and administrative costs were 6.7% of revenue in the 2010 period and 7.3% of
revenue in the 2009 period. The decrease in selling, general and administrative costs as a
percentage of revenue was primarily attributable to the effect of increased revenue and a decreased
provision for customer bad debt, partially offset by a $2,400,000 provision for bonuses under the
Company’s incentive compensation programs in the 2010 period compared to no provision in the 2009
period and $3,944,000 of selling, general and administrative costs of the Acquired Entities in the
2010 period. Depreciation and amortization was 1.1% of revenue in the 2010 period compared with
1.2% in the 2009 period. The decrease in depreciation and amortization as a percentage of revenue
was primarily due to the effect of increased revenue.
Interest and debt expense was 0.2% of revenue in the 2010 thirteen-week period, compared to
0.3% in the 2009 period. The decrease in interest and debt expense as a percentage of revenue was
primarily attributable to the effect of increased revenue and lower average borrowings on the
Company’s senior credit facility.
The provisions for income taxes for the 2010 and 2009 thirteen-week periods were based on
estimated full year combined effective income tax rates of approximately 38.2% and 38.4%,
respectively, which were higher than the statutory federal income tax rate primarily as a result of
state taxes, the meals and entertainment exclusion and non-deductible stock compensation expense.
The net loss attributable to noncontrolling interest of $219,000 represents the noncontrolling
investor’s 25 percent share of the net loss incurred by A3i during the 2010 thirteen-week period.
Net income attributable to the Company was $17,176,000, or $0.34 per common share ($0.34 per
diluted share), in the 2010 thirteen-week period. Net income attributable to the Company was
$13,894,000, or $0.27 per common share ($0.27 per diluted share), in the 2009 thirteen-week period.
CAPITAL RESOURCES AND LIQUIDITY
Equity was $279,878,000, or 72% of total capitalization (defined as long-term debt including
current maturities plus equity), at March 27, 2010, compared to $268,151,000, or 74% of total
capitalization, at December 26, 2009. The increase in equity was primarily a result of net income
and the effect of the exercises of stock options during the period, partially offset by the
purchase of 120,171 shares of the Company’s common stock at a total cost of $4,507,000 and
dividends paid by the Company.
The Company paid $0.045 per share, or $2,262,000, in cash dividends during the thirteen-week
period ended March 27, 2010. It is the intention of the Board of Directors to continue to pay a
quarterly dividend. As of March 27, 2010, the Company may purchase up to an additional 1,255,282
shares of its common stock under its authorized stock purchase program. Long-term debt, including
current maturities, was $108,203,000 at March 27, 2010, $15,305,000 higher than at December 26,
2009.
Working capital and the ratio of current assets to current liabilities were $169,069,000 and
1.6 to 1, respectively, at March 27, 2010, compared with $167,977,000 and 1.6 to 1, respectively,
at December 26, 2009. 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 $24,109,000 in the 2010
thirteen-week period compared with $80,993,000 in the 2009 thirteen-week period. The decrease in
cash flow provided by operating activities was primarily attributable to the timing of collections
of receivables.
On June 27, 2008, Landstar entered into a credit agreement with a syndicate of banks and
JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement,
which expires on June 27, 2013, provides $225,000,000 of
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borrowing capacity in the form of a
revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit
guarantees.
The Credit Agreement contains a number of covenants that limit, among other things, the
incurrence of additional indebtedness. The Company is required to, among other things, maintain a
minimum Fixed Charge Coverage Ratio, as defined in the Credit Agreement, and maintain a Leverage
Ratio, as defined in the Credit Agreement, below a specified maximum. The Credit Agreement provides
for a restriction on cash dividends and other distributions to stockholders on the Company’s
capital stock to the extent there is a default under the Credit Agreement. In addition, the Credit
Agreement under certain circumstances limits the amount of such cash dividends and other
distributions to stockholders in the event that after giving effect to any payment made to effect
such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro forma
basis as of the end of the Company’s most recently completed fiscal quarter. The Credit Agreement
provides for an event of default in the event, among other things, that a person or group acquires
25% or more of the outstanding capital stock of the Company or obtains power to elect a majority of
the Company’s directors. None of these covenants are presently considered by management to be
materially restrictive to the Company’s operations, capital resources or liquidity. The Company is
currently in compliance with all of the debt covenants under the Credit Agreement.
At March 27, 2010, the Company had $33,837,000 of letters of credit outstanding under the
Credit Agreement. At March 27, 2010, there was $136,163,000 available for future borrowings under
the Credit Agreement. In addition, the Company has $45,148,000 in letters of credit outstanding, as
collateral for insurance claims, that are secured by investments and cash equivalents totaling
$49,835,000. Investments, all of which are carried at fair value, consist of investment-grade
bonds having maturities of up to five years. Fair value of investments is based primarily on
quoted market prices.
Historically, the Company has generated sufficient operating cash flow to meet its debt
service requirements, fund continued growth, both internal and through acquisitions, complete or
execute share purchases of its common stock under authorized share purchase programs, pay dividends
and meet working capital needs. As a non-asset based provider of transportation services and supply
chain solutions, the Company’s annual capital requirements for operating property are generally for
trailing equipment and management information services equipment. In addition, a significant
portion of the trailing equipment used by the Company is provided by third party capacity
providers, thereby reducing the Company’s capital requirements. During the 2010 thirteen-week
period, the Company purchased $22,239,000 of operating property, including $21,135,000 for the
purchase of the Company’s primary facility in Jacksonville, FL and acquired $6,897,000 of trailing
equipment by entering into capital leases. Landstar anticipates purchasing approximately
$20,000,000 in operating property, primarily new trailing equipment to replace older trailing
equipment, and information technology equipment during the remainder of fiscal year 2010 either by
purchase or lease financing.
Management believes that cash flow from operations combined with the Company’s borrowing
capacity under the Credit Agreement will be adequate to meet Landstar’s debt service requirements,
fund continued growth, both internal and through acquisitions, pay dividends, complete the
authorized share purchase programs and meet working capital needs.
LEGAL MATTERS
As further described in periodic and current reports previously filed by the Company with the
SEC, the Company and certain of its subsidiaries (the “Defendants”) are defendants in a suit (the
“Litigation”) brought in the United States District Court for the Middle District of Florida (the
“District Court”) by the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and four
former BCO Independent Contractors (the “Named Plaintiffs” and, with OOIDA, the “Plaintiffs”) on
behalf of all independent contractors who provide truck capacity to the Company and its
subsidiaries under exclusive lease arrangements (the “BCO Independent Contractors”). The
Plaintiffs allege that certain aspects of the Company’s motor carrier leases and related practices
with its BCO Independent Contractors violate certain federal leasing regulations and seek
injunctive relief, an unspecified amount of damages and attorneys’ fees.
On March 29, 2007, the District Court denied the request by Plaintiffs for injunctive relief,
entered a judgment in favor of the Defendants and issued written orders setting forth its rulings
related to the decertification of the plaintiff class and other important elements of the
Litigation relating to liability, injunctive relief and monetary relief. The Plaintiffs filed an
appeal with the United States Court of Appeals for the Eleventh Circuit (the “Appellate Court”) of
certain of the District Court’s rulings in favor of the Defendants. The Defendants asked the
Appellate Court to affirm such rulings and filed a cross-appeal with the Appellate Court with
respect to certain other rulings of the District Court.
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On September 3, 2008, the Appellate Court issued its ruling, which, among other things,
affirmed the District Court’s rulings that (i) the Defendants are not prohibited by the applicable
federal leasing regulations from charging administrative or other fees to BCO Independent
Contractors in connection with voluntary programs offered by the Defendants through which a BCO
Independent Contractor may purchase discounted products and services for a charge that is deducted
against the compensation payable to the BCO Independent Contractor (a “Charge-back Deduction”),
(ii) the Plaintiffs are not entitled to restitution or disgorgement with respect to violations by
Defendants of the applicable federal leasing regulations but instead may recover only actual
damages, if any, which they sustained as a result of any such violations and (iii) the claims of
BCO Independent Contractors may not be handled on a class action basis for purposes of determining
the amount of actual damages, if any, they sustained as a result of any violations. Further, the
analysis of the Appellate Court confirmed the absence of any violations alleged by the Plaintiffs
of the federal leasing regulations with respect to the written terms of all leases currently in use
between the Defendants and BCO Independent Contractors.
However, the ruling of the Appellate Court reversed the District Court’s rulings (i) that an
old version of the lease formerly used by Defendants but not in use with any current BCO
Independent Contractor complied with applicable disclosure requirements under the federal leasing
regulations with respect to adjustments to compensation payable to BCO Independent Contractors on
certain loads sourced from the U. S. Department of Defense, and (ii) that the Defendants had
provided sufficient documentation to BCO Independent Contractors under the applicable federal
leasing regulations relating to how the component elements of Charge-back Deductions were computed.
The Appellate Court then remanded the case to the District Court to permit the Plaintiffs to seek
injunctive relief with respect to these violations of the federal leasing regulations and to hold
an evidentiary hearing to give the Named Plaintiffs an opportunity to produce evidence of any
damages they actually sustained as a result of such violations.
Each of the parties to the Litigation has filed a petition with the Appellate Court seeking
rehearing of the Appellate Court’s ruling; however, there can be no assurance that any petition for
rehearing will be granted.
Although no assurances can be given with respect to the outcome of the Litigation, including
any possible award of attorneys’ fees to the Plaintiffs, the Company believes that (i) no Plaintiff
has sustained any actual damages as a result of any violations by the Defendants of the federal
leasing regulations and (ii) injunctive relief, if any, that may be granted by the District Court
on remand is unlikely to have a material adverse financial effect on the Company.
The Company is involved in certain other claims and pending litigation arising from the normal
conduct of business. Based on knowledge of the facts and, in certain cases, opinions of outside
counsel, management believes that adequate provisions have been made for probable losses with
respect to the resolution of all such other claims and pending litigation and that the ultimate
outcome, after provisions in respect thereof, will not have a material adverse effect on the
financial condition of the Company, but could have a material effect on the results of operations
in a given quarter or year.
CRITICAL 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. In 2009,
the Company experienced a higher level of customer bad debt expense than typically experienced in
the past. Management believes this resulted from the difficult economic environment experienced by
the Company’s customers. Historically, management’s estimates for uncollectible receivables have
been materially correct. Although management believes the amount of the allowance for both trade
and other receivables at March 27, 2010 is appropriate, a prolonged period of low or no economic
growth may adversely affect the collection of these receivables. Conversely, 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 applicable balance sheet date. The ultimate resolution of these
claims may be for an amount greater or less than the amount estimated by management. The Company
continually revises its existing claim estimates as new or revised information becomes available on
the status of each claim. Historically, the Company has experienced both favorable and unfavorable
development of prior years’ claims estimates. During the 2010 thirteen-week period, insurance and
claims costs included $418,000 of unfavorable adjustments to prior years’ claims estimates. During
the 2009 thirteen-week period, insurance and claims costs included $132,000 of favorable
adjustments to prior years’ claims estimates. It is reasonably likely that the ultimate outcome of
settling all outstanding claims will be more or less than the estimated claims reserve at March 27,
2010.
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. Certain of these tax planning strategies result in a
20
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level
of uncertainty as to whether the related tax positions taken by the Company would result in a
recognizable benefit. The Company has provided for its estimated exposure attributable to such tax
positions due to the corresponding level of uncertainty with respect to the amount of income tax
benefit that may ultimately be realized. Management believes that the provision for liabilities
resulting from the uncertainty in certain income tax positions is appropriate. To date, the Company
has not experienced an examination by governmental revenue authorities that would lead management
to believe that the Company’s past provisions for exposures related to the uncertainty of such
income tax positions are not appropriate.
Significant variances from management’s estimates for the amount of uncollectible receivables,
the ultimate resolution of self-insured claims or the provision for uncertainty in income tax
positions can all 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.
EFFECTS OF INFLATION
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 in excess of
historic trends might have an adverse effect on the Company’s results of 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 is exposed to changes in interest rates as a result of its financing activities,
primarily its borrowings on the revolving credit facility, and investing activities with respect to
investments held by the insurance segment.
On June 27, 2008, Landstar entered into a credit agreement with a syndicate of banks and
JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement,
which expires on June 27, 2013, provides $225,000,000 of borrowing capacity in the form of a
revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit
guarantees.
Borrowings under the Credit Agreement bear interest at rates equal to, at the option of the
Company, either (i) the greater of (a) the prime rate as publicly announced from time to time by
JPMorgan Chase Bank, N.A. and (b) the federal funds effective rate plus .5%, or, (ii) the rate at
the time offered to JPMorgan Chase Bank, N.A. in the Eurodollar market for amounts and periods
comparable to the relevant loan plus, in either case, a margin that is determined based on the
level of the Company’s Leverage Ratio, as defined in the Credit Agreement. As of March 27, 2010,
the weighted average interest rate on borrowings outstanding was 1.10%. During the first quarter of
2010, the average outstanding balance under the Credit Agreement was approximately $32,934,000.
Based on the borrowing rates in the Credit Agreement and the repayment terms, the fair value of the
outstanding borrowings as of March 27, 2010 was estimated to approximate carrying value. Assuming
that debt levels on the Credit Agreement remain at $55,000,000, the balance at March 27, 2010, a
hypothetical increase of 100 basis points in current rates provided for under the Credit Agreement
is estimated to result in an increase in interest expense of $550,000 on an annualized basis.
Long-term investments, all of which are available-for-sale, consist of investment-grade bonds
having maturities of up to five years. Assuming that the long-term portion of investments in bonds
remains at $30,022,000, the balance at March 27, 2010, a hypothetical increase or decrease in
interest rates of 100 basis points would not have a material impact on future earnings on an
annualized basis. Short-term investments consist of short-term investment-grade instruments and the
current maturities of investment-grade bonds. Accordingly, any future interest rate risk on these
short-term investments would not be material.
Assets and liabilities of the Company’s Canadian operations are translated from their
functional currency to U.S. dollars using exchange rates in effect at the balance sheet date and
revenue and expense accounts are translated at average monthly exchange rates during the period.
Adjustments resulting from the translation process are included in accumulated other comprehensive
income. Transactional gains and losses arising from receivable and payable balances, including
intercompany balances, in the normal course of business that are denominated in a currency other
than the functional currency of the applicable operation are recorded in the statements of income
when they occur. The net assets held at the Company’s Canadian subsidiary at March 27, 2010 were,
as translated to U.S. dollars,
21
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less than 1% of total consolidated net assets. Accordingly, any
translation gain or loss related to the Canadian operation would not be material.
Item 4. Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, 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 (as defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the
CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of
March 27, 2010, to provide reasonable assurance that information required to be disclosed by the
Company in reports that it filed or submitted under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
There were no significant changes in the Company’s internal controls over financial reporting
during the Company’s fiscal quarter ended March 27, 2010 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
In designing and evaluating controls and procedures, Company management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Because of the inherent limitation in any control system, no evaluation or implementation of a
control system can provide complete assurance that all control issues and all possible instances of
fraud have been or will be detected.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As further described in periodic and current reports previously filed by the Company with the
SEC, the Company and certain of its subsidiaries (the “Defendants”) are defendants in a suit (the
“Litigation”) brought in the United States District Court for the Middle District of Florida (the
“District Court”) by the Owner-Operator Independent Drivers Association, Inc. (“OOIDA”) and four
former BCO Independent Contractors (the “Named Plaintiffs” and, with OOIDA, the “Plaintiffs”) on
behalf of all independent contractors who provide truck capacity to the Company and its
subsidiaries under exclusive lease arrangements (the “BCO Independent Contractors”). The
Plaintiffs allege that certain aspects of the Company’s motor carrier leases and related practices
with its BCO Independent Contractors violate certain federal leasing regulations and seek
injunctive relief, an unspecified amount of damages and attorneys’ fees.
On March 29, 2007, the District Court denied the request by Plaintiffs for injunctive relief,
entered a judgment in favor of the Defendants and issued written orders setting forth its rulings
related to the decertification of the plaintiff class and other important elements of the
Litigation relating to liability, injunctive relief and monetary relief. The Plaintiffs filed an
appeal with the United States Court of Appeals for the Eleventh Circuit (the “Appellate Court”) of
certain of the District Court’s rulings in favor of the Defendants. The Defendants asked the
Appellate Court to affirm such rulings and filed a cross-appeal with the Appellate Court with
respect to certain other rulings of the District Court.
On September 3, 2008, the Appellate Court issued its ruling, which, among other things,
affirmed the District Court’s rulings that (i) the Defendants are not prohibited by the applicable
federal leasing regulations from charging administrative or other fees to BCO Independent
Contractors in connection with voluntary programs offered by the Defendants through which a BCO
Independent Contractor may purchase discounted products and services for a charge that is deducted
against the compensation payable to the BCO Independent Contractor (a “Charge-back Deduction”),
(ii) the Plaintiffs are not entitled to restitution or disgorgement with respect to violations by
Defendants of the applicable federal leasing regulations but instead may recover only actual
damages, if any, which they sustained as a result of any such violations and (iii) the claims of
BCO Independent Contractors may not be handled on a class action basis for purposes of determining
the amount of actual damages, if any, they sustained as a result of any violations. Further, the
analysis of the Appellate Court confirmed the absence of any violations alleged by the Plaintiffs
of the federal leasing regulations with respect to the written terms of all leases currently in use
between the Defendants and BCO Independent Contractors.
22
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However, the ruling of the Appellate Court reversed the District Court’s rulings (i) that an
old version of the lease formerly used by Defendants but not in use with any current BCO
Independent Contractor complied with applicable disclosure requirements under the federal leasing
regulations with respect to adjustments to compensation payable to BCO Independent Contractors on
certain loads sourced from the U. S. Department of Defense, and (ii) that the Defendants had
provided sufficient documentation to BCO Independent Contractors under the applicable federal
leasing regulations relating to how the component elements of Charge-back Deductions were computed.
The Appellate Court then remanded the case to the District Court to permit the Plaintiffs to seek
injunctive relief with respect to these violations of the federal leasing regulations and to hold
an evidentiary hearing to give the Named Plaintiffs an opportunity to produce evidence of any
damages they actually sustained as a result of such violations.
Each of the parties to the Litigation has filed a petition with the Appellate Court seeking
rehearing of the Appellate Court’s ruling; however, there can be no assurance that any petition for
rehearing will be granted.
Although no assurances can be given with respect to the outcome of the Litigation, including
any possible award of attorneys’ fees to the Plaintiffs, the Company believes that (i) no Plaintiff
has sustained any actual damages as a result of any violations by the Defendants of the federal
leasing regulations and (ii) injunctive relief, if any, that may be granted by the District Court
on remand is unlikely to have a material adverse financial effect on the Company.
The Company is involved in certain other claims and pending litigation arising from the normal
conduct of business. Based on knowledge of the facts and, in certain cases, opinions of outside
counsel, management believes that adequate provisions have been made for probable losses with
respect to the resolution of all such other claims and pending litigation and that the ultimate
outcome, after provisions in respect thereof, will not have a material adverse effect on the
financial condition of the Company, but could have a material effect on the results of operations
in a given quarter or year.
Item 1A. Risk Factors
For a discussion identifying risk factors and other important factors that could cause actual
results to differ materially from those anticipated, see the discussions under Part I, Item 1A,
“Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 26,
2009, and in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Notes to Consolidated Financial Statements” in this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Company
The following table provides information regarding the Company’s purchases of its Common Stock
during the period from December 27, 2009 to March 27, 2010, the Company’s first fiscal quarter:
| Total Number of Shares | Maximum Number of | |||||||||||||||
| Purchased as Part of | Shares That May Yet | |||||||||||||||
| Total Number of | Average Price Paid | Publicly Announced | Be Purchased Under | |||||||||||||
| Fiscal Period | Shares Purchased | Per Share | Programs | the Programs | ||||||||||||
|
December 26, 2009
|
1,375,453 | |||||||||||||||
|
Dec. 27, 2009 – Jan. 23, 2010
|
— | $ | — | — | 1,375,453 | |||||||||||
|
Jan. 24, 2010 – Feb. 20, 2010
|
80,882 | $ | 35.70 | 80,882 | 1,294,571 | |||||||||||
|
Feb. 21, 2010 – Mar. 27, 2010
|
39,289 | $ | 41.23 | 39,289 | 1,255,282 | |||||||||||
|
|
||||||||||||||||
|
Total
|
120,171 | $ | 37.51 | 120,171 | ||||||||||||
|
|
||||||||||||||||
On January 28, 2009, Landstar System, Inc. announced that it had been authorized by its Board
of Directors to purchase up to 1,569,377 shares of its Common Stock from time to time in the open
market and in privately negotiated transactions. No specific expiration date has been assigned to
the January 28, 2009 authorization.
During the thirteen-week period ended March 27, 2010, Landstar paid dividends as follows:
23
Table of Contents
| Dividend Amount | Declaration | Record | Payment | |||
| per share | Date | Date | Date | |||
|
$0.045
|
January 26, 2010 | February 5, 2010 | February 26, 2010 |
On June 27, 2008, Landstar entered into a credit agreement with a syndicate of banks and
JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement
provides for a restriction on cash dividends and other distributions to stockholders on the
Company’s capital stock to the extent there is a default under the Credit Agreement. In addition,
the Credit Agreement, under certain circumstances, limits the amount of such cash dividends and
other distributions to stockholders in the event that, after giving effect to any payment made to
effect such cash dividend or other distribution, the Leverage Ratio, as defined in the Credit
Agreement, would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently
completed fiscal quarter.
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
The exhibits listed on the Exhibit Index are furnished as part of this quarterly report on Form
10-Q.
24
Table of Contents
EXHIBIT INDEX
Registrant’s Commission File No.: 0-21238
| Exhibit No. | Description | |
|
|
||
|
(31)
|
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002: | |
|
|
||
|
31.1 *
|
Chief Executive Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
|
|
||
|
31.2 *
|
Chief Financial Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
|
|
||
|
(32)
|
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002: | |
|
|
||
|
32.1 **
|
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. | |
|
|
||
|
32.2 **
|
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 | |
| ** | Furnished herewith |
25
Table of Contents
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: April 30, 2010
|
/s/ Henry H. Gerkens | ||
|
|
|||
|
|
Henry H. Gerkens | ||
|
|
Chairman, President and | ||
|
|
Chief Executive Officer | ||
|
|
|||
|
Date: April 30, 2010
|
/s/ James B. Gattoni | ||
|
|
|||
|
|
James B. Gattoni | ||
|
|
Vice President and Chief | ||
|
|
Financial Officer |
26
TABLE OF CONTENTS
Part IItem 1. Financial StatementsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart IIItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission Of Matters To A Vote Of Security HoldersItem 5. Other InformationItem 6. Exhibits