UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 26, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to _____________________
Commission File Number: 0-21238
LANDSTAR SYSTEM, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1313069
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4160 Woodcock Drive, Jacksonville, Florida
(Address of principal executive offices)
32207
(Zip Code)
(904) 390-1234
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes ( X ) No ( )
The number of shares of the registrant's Common Stock, par value $.01 per
share, outstanding as of the close of business on October 30, 1998 was
10,390,733.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
The interim consolidated financial statements contained herein reflect
all adjustments (all of a normal, recurring nature) which, in the opinion of
management, are necessary for a fair statement of the financial condition,
results of operations, cash flows and changes in shareholders' equity
for the periods presented. They have been prepared in accordance with Rule
10-01 of Regulation S-X and do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the thirty-nine weeks ended September 26,
1998 are not necessarily indicative of the results that may be expected for the
entire fiscal year ending December 26, 1998.
These interim financial statements should be read in conjunction with
the audited financial statements and notes thereto included in the Company's
1997 Annual Report on Form 10-K.
Index
Item 1
Consolidated Balance Sheets as of September 26, 1998
and December 27, 1997 ............................................... Page 3
Consolidated Statements of Income for the Thirty-Nine and Thirteen Weeks
Ended September 26, 1998 and September 27, 1997 .................... Page 4
Consolidated Statements of Cash Flows for the Thirty-Nine Weeks
Ended September 26, 1998 and September 27, 1997 .................... Page 5
Consolidated Statement of Changes in Shareholders'
Equity for the Thirty-Nine Weeks Ended September 26, 1998 .......... Page 6
Notes to Consolidated Financial Statements............................ Page 7
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations....................... Page 9
2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
September 26, December 27,
1998 1997
------------- ------------
ASSETS
Current assets:
Cash $ 20,181 $ 17,994
Short-term investments 1,461 3,012
Trade accounts receivable, less allowance of $7,490
and $5,957 172,975 176,785
Other receivables, including advances to independent
contractors, less allowance of $4,866 and $4,009 13,552 12,599
Prepaid expenses and other current assets 8,148 7,832
---------- -----------
Total current assets 216,317 218,222
---------- -----------
Operating property, less accumulated depreciation
and amortization of $29,520 and $50,301 47,828 81,258
Goodwill, less accumulated amortization of $6,256 and $8,818 35,306 53,289
Deferred income taxes and other assets 13,717 4,410
---------- -----------
Total assets $ 313,168 $ 357,179
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Cash overdraft $ 14,018 $ 12,475
Accounts payable 55,569 50,394
Current maturities of long-term debt 5,078 14,228
Insurance claims 31,112 28,247
Other current liabilities 40,374 33,827
---------- -----------
Total current liabilities 146,151 139,171
---------- -----------
Long-term debt, excluding current maturities 30,756 36,218
Insurance claims 30,273 27,890
Deferred income taxes 2,204
Shareholders' equity:
Common stock, $.01 par value, authorized 20,000,000
shares, issued 12,945,974 shares and 12,900,974 shares 129 129
Additional paid-in capital 63,287 62,169
Retained earnings 112,911 112,345
Cost of 2,445,041 and 915,441 shares of common stock in treasury (70,339) (22,947)
---------- -----------
Total shareholders' equity 105,988 151,696
---------- -----------
Total liabilities and shareholders' equity $ 313,168 $ 357,179
========== ===========
See accompanying notes to consolidated financial statements.
3
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Thirty-Nine Weeks Ended Thirteen Weeks Ended
----------------------- -----------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Revenue $ 949,742 $ 893,980 $ 324,033 $ 304,157
Investment income 1,191 441
Costs and expenses:
Purchased transportation 701,981 657,736 239,952 224,418
Other operating costs 20,818 25,366 6,574 7,553
Insurance and claims 32,886 31,069 8,300 9,000
Commissions to agents and brokers 74,803 71,877 25,688 24,954
Selling, general and administrative 71,414 63,824 24,766 20,576
Depreciation and amortization 7,531 8,701 2,678 2,919
Restructuring costs 3,247
---------- ---------- ---------- ----------
Total costs and expenses 909,433 861,820 307,958 289,420
---------- ---------- ---------- ----------
Operating income 41,500 32,160 16,516 14,737
Interest and debt expense 2,584 2,293 988 494
---------- ---------- ---------- ----------
Income from continuing operations
before income taxes 38,916 29,867 15,528 14,243
Income taxes 15,761 12,455 6,289 5,940
---------- ---------- ---------- ----------
Income from continuing operations 23,155 17,412 9,239 8,303
Discontinued operations, net of income taxes (22,589) (402) (738)
---------- ---------- ---------- ----------
Net income $ 566 $ 17,010 $ 9,239 $ 7,565
========== ========== ========== ==========
Earnings (loss) per common share:
Income from continuing operations $ 2.06 $ 1.38 $ 0.86 $ 0.66
Loss from discontinued operations (2.01) (0.03) (0.06)
---------- ---------- ---------- ----------
Earnings per common share $ 0.05 $ 1.35 $ 0.86 $ 0.60
========== ========== ========== ==========
Diluted earnings (loss) per share:
Income from continuing operations $ 2.05 $ 1.37 $ 0.85 $ 0.66
Loss from discontinued operations (2.00) (0.03) (0.06)
---------- ---------- ---------- ----------
Diluted earnings per share $ 0.05 $ 1.34 $ 0.85 $ 0.60
========== ========== ========== ==========
Average number of shares outstanding:
Earnings per common share 11,223,000 12,636,000 10,743,000 12,565,000
========== ========== ========== ==========
Diluted earnings per share 11,316,000 12,664,000 10,852,000 12,612,000
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
4
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Thirty-Nine Weeks Ended
---------------------------
Sept. 26, Sept. 27,
1998 1997
----------- -----------
OPERATING ACTIVITIES
Net income $ 566 $ 17,010
Adjustments to reconcile net income to net cash provided
by operating activities of continuing operations:
Discontinued operations 22,589 402
Depreciation and amortization of operating property 6,570 7,484
Amortization of goodwill and non-competition agreements 961 1,217
Non-cash interest charges 243 199
Provisions for losses on trade and other accounts receivable 3,850 2,961
Gains on sales of operating property (306) (486)
Deferred income taxes, net (2,118) 4,629
Changes in operating assets and liabilities, net of discontinued operations:
Increase in trade and other accounts receivable (6,817) (5,146)
Increase in prepaid expenses and other assets (4,146) (8,815)
Increase in accounts payable 7,427 10,300
Increase in other liabilities 5,019 1,841
Increase in insurance claims 6,848 8,980
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 40,686 40,576
----------- -----------
INVESTING ACTIVITIES
Purchases of investments (4,799)
Maturities of short-term investments 1,552 303
Purchases of operating property (4,347) (7,743)
Proceeds from sales of operating property 1,383 9,039
Proceeds from sale of discontinued operations 40,435
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 39,023 (3,200)
----------- -----------
FINANCING ACTIVITIES OF CONTINUING OPERATIONS
Increase (decrease) in cash overdraft 1,870 (1,203)
Borrowings on revolving credit facility 15,000
Proceeds from exercise of stock options and related income tax benefit 1,118 429
Purchases of common stock (47,392) (8,656)
Principal payments on long-term debt and capital lease obligations (21,646) (25,507)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES OF CONTINUING OPERATIONS (51,050) (34,937)
----------- -----------
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS (26,472) 5,520
----------- -----------
Increase in cash 2,187 7,959
Cash at beginning of period 17,994 4,187
----------- -----------
Cash at end of period $ 20,181 $ 12,146
=========== ===========
See accompanying notes to consolidated financial statements.
5
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES
IN SHAREHOLDERS' EQUITY
Thirty-Nine Weeks Ended September 26, 1998
(Dollars in thousands)
(Unaudited)
Treasury Stock
Common Stock Additional at Cost
------------------ Paid-In Retained -------------------
Shares Amount Capital Earnings Shares Amount Total
---------- ------- --------- --------- --------- -------- ---------
Balance December 27, 1997 12,900,974 $ 129 $ 62,169 $ 112,345 915,441 $ (22,947) $ 151,696
Purchases of common stock 1,529,600 (47,392) (47,392)
Exercise of stock options
and related income tax
benefit 45,000 1,118 1,118
Net income 566 566
---------- ------- --------- --------- --------- --------- ---------
Balance September 26, 1998 12,945,974 $ 129 $ 63,287 $ 112,911 2,445,041 $ (70,339) $ 105,988
========== ======= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
6
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System,
Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all
adjustments (all of a normal, recurring nature) which are, in the opinion of
management, necessary for a fair statement of the results for the periods
presented. The preparation of the consolidated financial statements requires
the use of management's estimates. Actual results could differ from those
estimates. Landstar System, Inc. and its subsidiary are herein referred to as
"Landstar".
(1) Discontinued Operations
On August 22, 1998, Landstar Poole, Inc. ("Landstar Poole"), a wholly-owned
subsidiary of Landstar which comprised the entire company-owned tractor
segment, completed the sale of all of its tractors and trailers, certain
operating assets and the Landstar Poole business to Schneider National, Inc.
for approximately $40,435,000 in cash. In addition, Landstar Poole entered
into an agreement to sell its remaining truck terminal to an unrelated third
party for approximately $732,000 in cash. Accordingly, the financial results
of this segment have been reported as discontinued operations in the
accompanying financial statements.
The loss from discontinued operations of $22,589,000 in the thirty-nine week
period ended September 26, 1998, included an estimated loss on sale of
$21,489,000, net of income tax benefits of $2,511,000, and a loss from
operations of $1,100,000, net of income tax benefits of $597,000. Certain
liabilities of the company-owned tractor segment were retained by Landstar,
primarily insurance claims, capital lease obligations and accounts payable.
The company-owned tractor segment had revenues of $58,715,000 and $13,357,000
for the thirty-nine weeks and thirteen weeks ended September 26, 1998,
respectively, and $71,571,000 and $22,154,000 for the thirty-nine weeks and
thirteen weeks ended September 27, 1997, respectively.
(2) Reclassification of Certain Costs
Certain costs have been reclassified for the 1997
period to conform with the classification of these costs in
1998. The reclassification had no effect on operating income or net
income for the periods presented.
(3) Income Taxes
The provisions for income taxes on continuing operations for the 1998 and
1997 thirty-nine week periods were based on estimated combined full year
effective income tax rates of 40.5% and 41.7%, respectively, which are
higher than the statutory federal income tax rate, primarily as a result
of state income taxes, amortization of certain goodwill and the meals
and entertainment exclusion.
7
(4) Earnings Per Share
Earnings per common share amounts are based on the weighted average
number of common shares outstanding and diluted earnings per share
amounts are based on the weighted average number of common shares
outstanding plus the incremental shares that would have been outstanding
upon the assumed exercise of all dilutive stock options.
(5) Additional Cash Flow Information
During the 1998 period, Landstar paid income taxes and
interest of $18,718,000 and $3,207,000 ($836,000 related to Landstar
Poole), respectively, and acquired operating property by entering into
capital leases in the amount of $12,902,000. During the 1997 period,
Landstar paid income taxes and interest of $10,090,000 and $4,363,000
($1,487,000 related to Landstar Poole), respectively.
(6) Segment Information
The following tables summarize information about Landstar's reportable
business segments for the thirty-nine and thirteen weeks ended
September 26, 1998 and September 27, 1997 (in thousands):
Thirty-Nine Weeks Ended September 26, 1998
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 730,119 $ 201,558 $ 18,065 $ 949,742
Investment income 1,191 1,191
Internal revenue 28,089 378 16,385 44,852
Operating income 48,774 4,839 13,002 $(25,115) 41,500
Thirty-Nine Weeks Ended September 27, 1997
------------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 699,613 $ 181,195 $ 13,172 $ 893,980
Internal revenue 29,918 790 10,258 40,966
Operating income 43,987 2,188 8,184 $(22,199) 32,160
8
Thirteen Weeks Ended September 26, 1998
---------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 247,908 $ 69,858 $ 6,267 $ 324,033
Investment income 441 441
Internal revenue 9,639 115 4,844 14,598
Operating income 17,779 2,089 6,576 $ (9,928) 16,516
Thirteen Weeks Ended September 27, 1997
---------------------------------------
Carrier Multimodal Insurance Other Total
------- ---------- --------- ----- -----
External revenue $ 236,036 $ 62,643 $ 5,478 $ 304,157
Internal revenue 8,938 367 5,500 14,805
Operating income 14,799 1,598 5,223 $ (6,883) 14,737
(7) Commitments and Contingencies
At September 26, 1998, Landstar had commitments for letters of
credit outstanding in the amount of $26,292,000, primarily as
collateral for insurance claims. The commitments for letters of credit
outstanding included $19,292,000 under the Second Amended and Restated
Credit Agreement and $7,000,000 secured by assets deposited with a
financial institution.
Landstar is involved in certain claims and pending litigation
arising from the normal conduct of business. Based on the
knowledge of the facts and, in certain cases, opinions of
outside counsel, management believes that adequate provisions
have been made for probable losses with respect to the resolution
of all claims and pending litigation and that the ultimate outcome,
after provisions thereof, will not have a material adverse effect
on the financial condition of Landstar, but could have a material
effect on the results of operations in a given quarter or year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All statements in this quarterly report on Form 10-Q that do not reflect
historical information are forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward looking
statements are subject to risks and uncertainties including the ability to
complete the conversion of the Company's computer systems in order for them
to be year 2000 compliant on schedule.
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 27, 1997 and
Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the 1997 Annual Report to
Shareholders.
9
RESULTS OF OPERATIONS
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc.
("Landstar" or the "Company"), provide transportation services to a variety
of market niches throughout the United States and to a lesser extent in Canada
and between the United States and Canada and Mexico through its operating
subsidiaries which employ different operating strategies. The Company
has three reportable business segments: the carrier segment, the multimodal
segment and the insurance segment.
The carrier segment consists of Landstar Ranger, Inc.("Landstar Ranger"),
Landstar Inway, Inc. ("Landstar Inway") and Landstar Ligon, Inc.("Landstar
Ligon"). The carrier segment provides truckload transportation for a wide
range of general commodities over irregular routes with its fleet of dry and
specialty vans and unsided trailers, including flatbed, drop deck and
specialty. The carrier segment markets its services primarily through
independent commission sales agents and utilizes tractors provided by
independent contractors. The nature of the carrier segment's business is
such that a significant portion of its operating costs varies directly with
revenue.
The multimodal segment is comprised of Landstar Logistics, Inc. and Landstar
Express America, Inc. ("Landstar Express"). Transportation services provided
by the multimodal segment include the arrangement of intermodal moves, contract
logistics, truck brokerage, short-to-long haul movement of containers by truck
and emergency and expedited air freight and truck services. The multimodal
segment markets its services through independent commission sales agents and
utilizes capacity provided by independent contractors, including railroads
and air cargo carriers. The nature of the multimodal segment's business is
such that a significant portion of its operating costs also varies directly
with revenue.
The insurance segment is Signature Insurance Company ("Signature"), a wholly-
owned offshore insurance subsidiary, formed in March 1997. The insurance
segment reinsures certain property, casualty and occupational accident risks of
certain independent contractors who have contracted to haul freight for
Landstar. In addition, the insurance segment provides certain property and
casualty insurance directly to Landstar's operating subsidiaries.
On August 22, 1998, Landstar Poole, Inc. ("Landstar Poole"), a wholly-owned
subsidiary of Landstar which comprised the entire company-owned tractor
segment, completed the sale of all of its tractors and trailers, certain
operating assets and the Landstar Poole business to Schneider National, Inc.
for approximately $40,435,000 in cash. In addition, Landstar Poole entered into
an agreement to sell its remaining truck terminal to an unrelated third party
for approximately $732,000 in cash. Accordingly, the financial results of this
segment have been reported as discontinued operations in the accompanying
financial statements.
In accordance with a restructuring plan announced in the fourth quarter of
1996, the operations of Landstar T.L.C., Inc. ("Landstar T.L.C.") were merged
into Landstar Inway, and all of Landstar T.L.C.'s company-owned tractors were
disposed of by June 1997.
10
Purchased transportation represents the amount an independent contractor
is paid to haul freight and is based on a contractually agreed-upon
percentage of revenue generated by the haul for truck capacity provided by
independent contractors. Purchased transportation for the intermodal services
operations and the air freight operations of the multimodal segment is based on
a contractually agreed-upon fixed rate. Purchased transportation as a
percentage of revenue for the intermodal services operations is normally higher
than that of Landstar's other transportation operations. Purchased
transportation is the largest component of costs and expenses and, on a
consolidated basis, increases or decreases in proportion to the revenue
generated through independent contractors. Commissions to agents and brokers
are primarily based on contractually agreed-upon percentages of revenue or
contractually agreed-upon percentages of gross profit. Commissions to agents
and brokers as a percentage of consolidated revenue will vary directly with
revenue generated through independent commission sales agents. Both purchased
transportation and commissions to agents and brokers generally will also
increase or decrease as a percentage of the Company's consolidated revenue
if there is a change in the percentage of revenue contributed by Signature or
by the intermodal services operations or the air freight operations of the
multimodal segment.
Potential liability associated with accidents in the trucking industry is
severe and occurrences are unpredictable. The industry is also subject to
substantial workers' compensation expense. A material increase in the
frequency or severity of accidents or workers' compensation claims or the
unfavorable development of existing claims can be expected to adversely affect
Landstar's operating income.
Trailer rental and maintenance costs, paid to third parties, are the largest
component of other operating costs.
Employee compensation and benefits account for nearly half of the Company's
selling, general and administrative expense. Other significant components of
selling, general and administrative expense are data processing expense,
communications costs and rent expense.
11
The following table sets forth the percentage relationships of
expense and loss items and investment income to revenue for the periods
indicated:
Thirty-Nine Weeks Ended Thirteen Weeks Ended
------------------------ ----------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
---------- ---------- --------- ---------
Revenue 100.0% 100.0% 100.0% 100.0%
Investment income 0.1% 0.1%
Costs and expenses:
Purchased transportation 73.9% 73.6% 74.1% 73.8%
Other operating costs 2.2% 2.8% 2.0% 2.5%
Insurance and claims 3.4% 3.5% 2.6% 2.9%
Commissions to agents and brokers 7.9% 8.0% 7.9% 8.2%
Selling, general and administrative 7.5% 7.1% 7.6% 6.8%
Depreciation and amortization 0.8% 1.0% 0.8% 1.0%
Restructuring costs 0.4%
------- ------ ------- ------
Total costs and expenses 95.7% 96.4% 95.0% 95.2%
------- ------ ------- ------
Operating income 4.4% 3.6% 5.1% 4.8%
Interest and debt expense 0.3% 0.3% 0.3% 0.1%
------- ------ ------- ------
Income from continuing operations
before income taxes 4.1% 3.3% 4.8% 4.7%
Income taxes 1.7% 1.4% 1.9% 2.0%
------- ------ ------- ------
Income from continuing operations 2.4% 1.9% 2.9% 2.7%
Discontinued operations, net of income taxes (2.3%) (0.2%)
------- ------ ------- ------
Net income 0.1% 1.9% 2.9% 2.5%
======= ====== ======= ======
THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 1998 COMPARED TO THIRTY-NINE WEEKS
ENDED SEPTEMBER 27, 1997
Revenue for the 1998 thirty-nine week period was $949,742,000, an increase of
$55,762,000, or 6.2%, over the 1997 thirty-nine week period. The increase was
attributable to increased revenue of $30,506,000, $20,363,000 and $4,893,000
at the carrier, multimodal and insurance segments, respectively. Overall,
revenue per revenue mile (price) increased approximately 3%, which reflected
improved freight quality, while revenue miles (volume) were approximately 2%
higher than 1997. During the 1998 period, $1,191,000 of investment income was
generated by the insurance segment.
12
Purchased transportation was 73.9% of revenue in 1998 compared with 73.6% in
1997. Other operating costs were 2.2% of revenue in 1998 compared with 2.8%
in 1997. The increase in purchased transportation and the decrease in fuel and
other operating costs as a percentage of revenue was primarily attributable to
the effects of the restructuring of the Landstar T.L.C. operations. Insurance
and claims were 3.4% of revenue in 1998 compared with 3.5% in 1997. The
decrease in insurance and claims as a percentage of revenue was primarily
attributable to decreased frequency and severity of accidents and favorable
development of prior year claims. Commissions to agents and brokers were 7.9%
of revenue in 1998 and 8.0% in 1997. The decrease in commissions to agents and
brokers as a percentage of revenue was primarily due to the effect of increased
premium revenue at the insurance segment. Selling, general and administrative
costs were 7.5% of revenue in 1998 compared with 7.1% of revenue in 1997,
primarily due to a higher provision for bonuses under the Company's management
incentive compensation plan, an increase in the provision for customer bad
debts, increased management information systems costs and one time costs of
$560,000 related to the relocation of Landstar Express from Charlotte, North
Carolina to Jacksonville, Florida, partially offset by reduced wages and
benefits and the effect of the increase in revenue.
On December 18, 1996, the Company announced a plan to restructure its Landstar
T.L.C. operations, in addition to the relocation of its Shelton, Connecticut
corporate office headquarters to Jacksonville, Florida in the second quarter of
1997. During the 1997 period, the Company recorded $3,247,000 of restructuring
costs. The restructuring was substantially completed by June 28, 1997.
Interest and debt expense was 0.3% of revenue in both 1998 and 1997.
The provisions for income taxes on continuing operations for the 1998 and 1997
thirty-nine week periods were based on estimated full year combined effective
income tax rates of approximately 40.5% and 41.7%, respectively, which are
higher than the statutory federal income tax rate primarily as a result of
state income taxes, amortization of certain goodwill and the meals and
entertainment exclusion.
Income from continuing operations was $23,155,000, or $2.06 per common share,
in the 1998 period compared with $17,412,000, or $1.38 per common share, in the
1997 period. Including the dilutive effect of the Company's stock options,
diluted earnings per share from continuing operations was $2.05 in the 1998
period and $1.37 in the 1997 period. Excluding restructuring costs, income from
continuing operations for the 1997 period would have been $19,305,000, or $1.53
per common share ($1.52 diluted earnings per share).
The Company recorded a loss from discontinued operations of $22,589,000, or
$2.01 per share ($2.00 diluted loss per share), for the 1998 period, which
included a loss from operations of $1,100,000, net of income tax benefits of
$597,000 and an estimated loss on disposal of $21,489,000, net of income tax
benefits of $2,511,000. The loss from discontinued operations for 1997 was
$402,000, or $0.03 loss per common share ($0.03 diluted loss per share).
13
THIRTEEN WEEKS ENDED SEPTEMBER 26, 1998 COMPARED TO THIRTEEN WEEKS
ENDED SEPTEMBER 27, 1997
Revenue for the 1998 thirteen-week period was $324,033,000, an increase of
$19,876,000, or 6.5%, over the 1997 thirteen-week period. The increase was
attributable to increased revenue of $11,872,000, $7,215,000 and $789,000 at
the carrier, multimodal and insurance segments, respectively. Overall, revenue
per revenue mile increased approximately 2%, which reflected improved freight
quality, while revenue miles were approximately 4% higher than 1997. During
the 1998 period, $441,000 of investment income was generated by the insurance
segment.
Purchased transportation was 74.1% of revenue in 1998 compared with 73.8% in
1997. The increase in purchased transportation as a percentage of revenue was
primarily attributable to an increase in intermodal revenue. Other operating
costs were 2.0% of revenue in 1998 compared with 2.5% in 1997. The decrease
in other operating costs was primarily attributable to the effects of the
restructuring of the Landstar T.L.C. operations and a decrease in the provision
for contractor bad debts. Insurance and claims were 2.6% of revenue in
1998 compared with 2.9% in 1997. The decrease in insurance and claims as a
percent of revenue was primarily attributable to decreased frequency and
severity of accidents and the favorable development of prior year claims.
Commissions to agents and brokers were 7.9% of revenue in 1998 and 8.2% in
1997. The decrease in commissions to agents and brokers as a percentage of
revenue was due to a decrease in the percentage of brokered freight and the
effect of increased premium revenue at the insurance segment. Selling, general
and administrative costs were 7.6% of revenue in 1998 and 6.8% in 1997,
primarily due to an increase in the provision for
bonuses under the Company's management incentive compensation plan,
increased management information systems costs and an increase
in the provision for customer bad debts, partially
offset by increased revenue.
Interest and debt expense was 0.3% of revenue in 1998 and 0.1% in 1997. The
increase in interest and debt expense as a percent of revenue was due to
increased average borrowings under the senior credit facility in order to
finance the Company's stock repurchase program.
The provisions for income taxes on continuing operations for the 1998 and 1997
thirteen-week periods were based on estimated full year combined effective
income tax rates of approximately 40.5% and 41.7%, respectively, which are
higher than the statutory federal income tax rate primarily as a result of
state income taxes, amortization of certain goodwill and the meals and
entertainment exclusion.
Income from continuing operations was $9,239,000, or $0.86 per common share,
in the 1998 period compared with $8,303,000, or $0.66 per common share, in the
1997 period. Including the dilutive effect of the Company's stock options,
diluted earnings per share for continuing operations was $0.85 in the 1998
period and $0.66 in the 1997 period.
The loss from discontinued operations for 1997 was $738,000, or $0.06 loss per
common share ($0.06 diluted loss per share).
14
CAPITAL RESOURCES AND LIQUIDITY
Shareholders' equity decreased to $105,988,000 at September 26, 1998, compared
with $151,696,000 at December 27, 1997, primarily as a result of the repurchase
of 1,529,600 shares of common stock, at an aggregate cost of $47,392,000.
Shareholders' equity was 75% of total capitalization at September 26, 1998
and December 27, 1997.
Working capital and the ratio of current assets to current liabilities were
$70,166,000 and 1.48 to 1, respectively, at September 26, 1998, compared with
$79,051,000 and 1.57 to 1, respectively, at December 27, 1997. Landstar has
historically operated with a current ratio of approximately 1.5 to 1. Cash
provided by operating activities of continuing operations was $40,686,000 in
the 1998 period compared with $40,576,000 in the 1997 period. The increase in
cash flow provided by operating activities of continuing operations was
primarily attributable to increased earnings from continuing operations and
the timing of cash collections and payments. During the 1998 period, Landstar
purchased $4,347,000 of operating property and acquired $12,902,000 of revenue
equipment by entering into capital leases. Management does not anticipate
significant additional capital expenditures during the remainder of fiscal year
1998.
The Company is aware of the issues associated with the programming code in its
existing computer systems in order for the systems to recognize date sensitive
information when the year changes to 2000. The Company believes it has
identified all of its information technology (IT) and non-information
technology (non-IT) systems which require change to ensure all of its systems
will be year 2000 compliant. The Company plans to replace all non-IT systems
that are not year 2000 compliant with year 2000 compliant systems prior to
September 1999. The Company is utilizing in-house staff, with third
party assistance, to convert the IT systems to year 2000 compliance. The
Company believes that its pricing, billing and settlement systems are
critical to the Company's operations. These systems enable the Company to
invoice customers and pay independent contractors and commission sales agents
properly. The operating subsidiaries comprising the multimodal segment are
already year 2000 compliant. Several years ago the Company began to implement a
strategy to standardize the carrier group's critical IT systems using the
Landstar Ranger system as the base. Landstar Ranger, whose revenue represents
43% of the carrier segment's revenue, is year 2000 compliant. As part of its
ongoing system development, the Company is in the process of converting the
critical IT systems of Landstar Ligon, whose revenue represents approximately
22% of the carrier segment's revenue, to the same systems as Landstar Ranger.
This conversion is expected to be completed by July 1999. Landstar Inway, the
remaining operating company in the carrier segment, has successfully converted
approximately 35% of its critical IT systems and expects to complete the
project by May 1999. In addition, as part of the overall standardization plan,
the Company intends to convert all of it's operating companies to a generic,
year 2000 compliant general ledger and accounts payable software system
during 1999.
15
As part of the Company's comprehensive review of its systems, it is continuing
to verify the year 2000 readiness of third parties (customer and vendors) that
provide services that are material to the Company's operations. The Company is
currently communicating with its material vendors and customers to assess their
year 2000 readiness and will continue to monitor their progress throughout
1999.
The vast majority of the changes necessary to make the Company's IT systems
year 2000 compliant were incurred as part of ongoing system development or as
part of a Company-wide strategy to standardize computer systems. As such,
management has not separately quantified the cost of year 2000 compliance.
However, management estimates the total cost of third party assistance for
year 2000 compliance will approximate $500,000, of which approximately
$300,000 has been incurred. Although management expects the cost of
maintaining and upgrading the Company's computer systems to increase
over the next few years compared to prior years, management
does not believe that the future costs of maintaining and upgrading Landstar's
computer systems will have a material adverse effect on the results of
operations.
The Company's contingency plan for Landstar Inway, which is still
in the process of converting its critical IT systems, is to accelerate the
transfer of data processing information to the Landstar Ranger based system.
In the event the Company determines that one or more of its material vendors
will not become year 2000 compliant, the Company's contingency plan is to
select alternative vendors.
The Company believes that the year 2000 project will be completed in sufficient
time to ensure that transactions affecting the year 2000 will be properly
recognized by the revised programming code. Failure to complete the
year 2000 project, both internal and the readiness of third party vendors,
could have a material adverse effect on the Company's future operating results
or financial condition.
Management believes that cash flow from operations combined with the Company's
borrowing capacity under its revolving credit agreement will be adequate to
meet Landstar's debt service requirements, fund continued growth, both internal
and through acquisitions, and meet working capital needs.
Management does not believe inflation has had a material impact on the
results of operations or financial condition of Landstar in the past five
years. However, inflation higher than that experienced in the past five
years might have an adverse effect on the Company's results of operations.
SEASONALITY
Landstar's operations are subject to seasonal trends common to the
trucking industry. Results of operations for the quarter ending in
March is typically lower than the quarters ending June, September
and December due to reduced shipments and higher operating costs in
the winter months.
16
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On September 29, 1998, suit entitled United States of America vs. Landstar
Ligon, et al was filed in the U.S. District Court in the District Court of
Colorado (Ligon). Ligon is co-defendant with 14 other defendants. This suit
claims cost of removal of environmental hazards and remedial action at a
Chemical Handling Corporation (CHC) facility in Jefferson County, Colorado,
which was operated as a treatment facility for hazardous materials as defined
by the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended (CERCLA). Ligon transported a shipment of batteries in 1992
and an accident in Colorado caused the spillage of battery acid and related
materials. The batteries and related materials were disposed of at the Chemical
Handling Corporation (CHC) facility. CHC became insolvent and the United States
Environmental Protection Agency pursuant to CERCLA sponsored a clean-up of the
facility. The government claims $173,063 against Ligon as its portion of the
clean-up costs. A Consent Decree was executed by all parties and submitted to
the Court with the Complaint. Ligon anticipates the Court will approve the
Consent Decree for damages that have been paid into escrow. The escrow will be
released to the U.S. Government upon court approval. The Company anticipates
no further liability from the suit, the CHC site clean-up or the accident
giving rise to the spillage.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
17
Item 5. Other Information
Cutoff for Shareholder Proposals to be Voted Upon at the Landstar
Annual Meeting of Shareholders Scheduled May 19, 1999
The bylaws of the corporation provide that any proposal by any
shareholder to transact any corporate business at the annual meeting
of shareholders shall be made by notice in writing and mailed certified
mail to the secretary of the corporation and received by the
corporation no later than 35 days prior to the annual meeting. The
date therefore for shareholder proposals to be voted upon at Landstar's
Annual Meeting of Shareholders for the 1999 Annual Meeting of
Shareholders should be received by the Landstar Corporate Secretary
on/or before April 14, 1999, which is 35 days prior to the annual
meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index are filed as part
of this quarterly report on Form 10-Q.
(b) Form 8-K
A current report on Form 8-K was filed on September 8, 1998 reporting
the sale of Landstar Poole, Inc. to Schneider National, Inc. which
took place on August 22, 1998.
18
EXHIBIT INDEX
Registrant's Commission File No.: 0-21238
Exhibit No. Description
- ------------ -----------
(11) Statement re: Computation of Per Share Earnings:
11.1 * Landstar System, Inc. and Subsidiary Calculation of Earnings
Per Common Share for the Thirty-Nine and Thirteen Weeks Ended
September 26, 1998 and September 27, 1997
11.2 * Landstar System, Inc. and Subsidiary Calculation of Diluted
Earnings Per Share for the Thirty-Nine and Thirteen Weeks
Ended September 26, 1998 and September 27, 1997
(27) Financial Data Schedules:
27.1 * Restated 1997 Financial Data Schedule
27.2 * 1998 Financial Data Schedule
__________________
* Filed herewith
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
LANDSTAR SYSTEM, INC.
Date: November 6, 1998 Henry H. Gerkens
----------------------------
Henry H. Gerkens
Executive Vice President and
Chief Financial Officer;
Principal Financial Officer
Date: November 6, 1998 Robert C. LaRose
----------------------------
Robert C. LaRose
Vice President Finance and Treasurer;
Principal Accounting Officer
20
EXHIBIT 11.1
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CALCULATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
(Unaudited)
Thirty-Nine Thirteen
Weeks Ended Weeks Ended
--------------------------- ---------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
--------------------------- ---------------------------
Earnings available for earnings per share:
Income from continuing operations $ 23,155 $ 17,412 $ 9,239 $ 8,303
Discontinued operations, net of income taxes (22,589) (402) (738)
------------ ------------ ------------ ------------
Net income $ 566 $ 17,010 $ 9,239 $ 7,565
============ ============ ============ ============
Average number of common shares outstanding 11,223 12,636 10,743 12,565
============ ============ ============ ============
Earnings (loss) per common share:
Income from continuing operations $ 2.06 $ 1.38 $ 0.86 $ 0.66
Loss from discontinued operations (2.01) (0.03) (0.06)
------------ ------------ ------------ ------------
Earnings per common share $ 0.05 $ 1.35 $ 0.86 $ 0.60
============ ============ ============ ============
EXHIBIT 11.2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CALCULATION OF DILUTED EARNINGS PER SHARE
(In thousands, except per share amounts)
(Unaudited)
Thirty-Nine Thirteen
Weeks Ended Weeks Ended
--------------------------- ---------------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1998 1997 1998 1997
--------------------------- ---------------------------
Income from continuing operations $ 23,155 $ 17,412 $ 9,239 $ 8,303
Discontinued operations, net of income taxes (22,589) (402) (738)
------------ ------------ ------------ ------------
Net income $ 566 $ 17,010 $ 9,239 $ 7,565
============ ============ ============ ============
Average number of common shares
outstanding 11,223 12,636 10,743 12,565
============ ============ ============ ============
Plus: Incremental shares from
assumed exercise of stock
options 93 28 109 47
------------ ------------ ------------ ------------
Average number of common shares
and common share equivalents
outstanding 11,316 12,664 10,852 12,612
============ ============ ============ ============
Diluted earnings (loss) per share:
Income from continuing operations $ 2.05 $ 1.37 $ 0.85 $ 0.66
Loss from discontinued operations (2.00) (0.03) (0.06)
------------ ------------ ------------ ------------
Diluted earnings per share $ 0.05 $ 1.34 $ 0.85 $ 0.60
============ ============ ============ ============
5
1,000
OTHER
DEC-27-1997
DEC-29-1996
SEP-27-1997
12,146
3,018
177,790
6,376
926
214,875
139,223
49,759
363,789
138,082
40,063
0
0
129
156,211
363,789
0
893,980
0
683,102
31,069
2,961
2,293
29,867
12,455
17,412
(402)
0
0
17,010
1.35
1.34
5
1,000
OTHER
DEC-26-1998
DEC-28-1997
SEP-26-1998
20,181
1,461
180,465
7,490
0
216,317
77,348
29,520
313,168
146,151
30,756
0
0
129
105,859
313,168
0
950,933
0
722,799
32,886
3,850
2,584
38,916
15,761
23,155
(22,589)
0
0
566
0.05
0.05
