UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 28, 2002 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________________ to _____________________ Commission File Number: 0-21238 LANDSTAR SYSTEM, INC. (Exact name of registrant as specified in its charter) Delaware 06-1313069 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 13410 Sutton Park Drive South, Jacksonville, Florida (Address of principal executive offices) 32224 (Zip Code) (904) 398-9400 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ( X ) No ( ) The number of shares of the registrant's Common Stock, par value $.01 per share, outstanding as of the close of business on October 28, 2002 was 15,818,387.
PART I FINANCIAL INFORMATION Index Item 1 Consolidated Balance Sheets as of September 28, 2002 and December 29, 2001 ............................................... Page 3 Consolidated Statements of Income for the Thirty-Nine and Thirteen Weeks Ended September 28, 2002 and September 29, 2001 ..................... Page 4 Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended September 28, 2002 and September 29, 2001 ..................... Page 5 Consolidated Statement of Changes in Shareholders' Equity for the Thirty-Nine Weeks Ended September 28, 2002 ........... Page 6 Notes to Consolidated Financial Statements............................. Page 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations........................ Page 9 Item 3 Quantitative and Qualitative Disclosures About Market Risk............. Page 15 Item 4 Controls and Procedures ............................................... Page 15 Item 1. Financial Statements The interim consolidated financial statements contained herein reflect all adjustments (all of a normal, recurring nature) which, in the opinion of management, are necessary for a fair statement of the financial condition, results of operations, cash flows and changes in shareholders' equity for the periods presented. They have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the thirty-nine weeks ended September 28, 2002 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 28, 2002. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's 2001 Annual Report on Form 10-K. 2
LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) Sept. 28, Dec. 29, 2002 2001 ---------- ------------ ASSETS Current assets: Cash $ 64,946 $ 47,886 Short-term investments 2,200 2,982 Trade accounts receivable, less allowance of $3,838 and $4,416 208,647 185,206 Other receivables, including advances to independent contractors, less allowance of $5,053 and $4,740 10,346 13,779 Prepaid expenses and other current assets 5,549 4,020 ---------- ----------- Total current assets 291,688 253,873 ---------- ----------- Operating property, less accumulated depreciation and amortization of $51,945 and $44,455 65,000 68,532 Goodwill 31,134 31,134 Other assets 16,575 11,112 ---------- ----------- Total assets $ 404,397 $ 364,651 ========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Cash overdraft $ 16,339 $ 13,018 Accounts payable 70,241 55,813 Current maturities of long-term debt 10,163 9,965 Insurance claims 23,903 21,602 Other current liabilities 41,174 31,667 ---------- ----------- Total current liabilities 161,820 132,065 ---------- ----------- Long-term debt, excluding current maturities 62,460 91,909 Insurance claims 23,897 21,585 Deferred income taxes 3,268 1,652 Shareholders' equity: Common stock, $.01 par value, authorized 20,000,000 shares, issued 16,286,306 and 13,328,834 shares 163 133 Additional paid-in capital 261 75,036 Retained earnings 159,299 258,162 Cost of 112,879 and 5,241,841 shares of common stock in treasury (5,435) (209,926) Notes receivable arising from exercise of stock options (1,336) (5,965) ---------- ----------- Total shareholders' equity 152,952 117,440 ---------- ----------- Total liabilities and shareholders' equity $ 404,397 $ 364,651 ========== =========== See accompanying notes to consolidated financial statements. 3
LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) Thirty-Nine Weeks Ended Thirteen Weeks Ended ----------------------- ----------------------- Sept. 28, Sept. 29, Sept. 28, Sept. 29, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Revenue $1,112,569 $1,044,983 $ 385,660 $ 355,684 Investment income 1,552 2,861 474 902 Costs and expenses: Purchased transportation 822,193 774,162 285,771 264,125 Commissions to agents 87,550 82,291 30,645 28,284 Other operating costs 26,274 24,841 8,460 7,946 Insurance and claims 32,672 23,802 8,288 6,777 Selling, general and administrative 77,421 76,127 26,698 25,152 Depreciation and amortization 8,521 10,328 2,821 3,302 ---------- ---------- ---------- ---------- Total costs and expenses 1,054,631 991,551 362,683 335,586 ---------- ---------- ---------- ---------- Operating income 59,490 56,293 23,451 21,000 Interest and debt expense 3,518 5,529 966 1,597 ---------- ---------- ---------- ---------- Income before income taxes 55,972 50,764 22,485 19,403 Income taxes 21,269 19,547 8,544 7,473 ---------- ---------- ---------- ---------- Net income $ 34,703 $ 31,217 $ 13,941 $ 11,930 ========== ========== ========== ========== Earnings per common share (1) $ 2.14 $ 1.85 $ 0.86 $ 0.72 ========== ========== ========== ========== Diluted earnings per share (1) $ 2.06 $ 1.81 $ 0.83 $ 0.70 ========== ========== ========== ========== Average number of shares outstanding: Earnings per common share (1) 16,223,000 16,838,000 16,224,000 16,501,000 ========== ========== ========== ========== Diluted earnings per share (1) 16,847,000 17,270,000 16,875,000 16,943,000 ========== ========== ========== ========== (1) All earnings per share amounts and average number of shares outstanding have been restated to give retroactive effect to a two-for-one stock split effected in the form of a 100% stock dividend announced July 18, 2002. See accompanying notes to consolidated financial statements. 4
LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Thirty-Nine Weeks Ended --------------------------- Sept. 28, Sept. 29, 2002 2001 ----------- ----------- OPERATING ACTIVITIES Net income $ 34,703 $ 31,217 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of operating property 8,521 9,417 Amortization of goodwill 911 Non-cash interest charges 205 86 Provisions for losses on trade and other accounts receivable 6,084 5,300 Losses (gains) on sales of operating property 34 (197) Deferred income taxes, net 1,616 (192) Changes in operating assets and liabilities: Increase in trade and other accounts receivable (26,092) (7,326) Decrease (increase) in prepaid expenses and other assets (634) 1,329 Increase in accounts payable 14,428 4,791 Increase (decrease) in other liabilities 9,507 (9,983) Increase (decrease) in insurance claims 4,613 (4,022) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 52,985 31,331 ----------- ----------- INVESTING ACTIVITIES Maturities of investments 2,500 1,009 Purchases of investments (8,281) (496) Purchases of operating property (2,649) (4,902) Proceeds from sales of operating property 294 631 ----------- ---------- NET CASH USED BY INVESTING ACTIVITIES (8,136) (3,758) ----------- ---------- FINANCING ACTIVITIES Increase (decrease) in cash overdraft 3,321 (790) Borrowings on revolving credit facility 25,000 Proceeds from exercises of stock options 1,523 1,763 Proceeds from repayment of notes receivable arising from exercises of stock options 4,721 1,183 Purchases of common stock (5,435) (37,199) Principal payments on long-term debt and capital lease obligations (31,919) (15,377) ----------- ----------- NET CASH USED BY FINANCING ACTIVITIES (27,789) (25,420) ----------- ----------- Increase in cash 17,060 2,153 Cash at beginning of period 47,886 32,926 ----------- ----------- Cash at end of period $ 64,946 $ 35,079 =========== =========== See accompanying notes to consolidated financial statements. 5
LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Thirty-Nine Weeks Ended September 28, 2002 (Dollars in thousands) (Unaudited) Notes Treasury Stock Receivable Common Stock Additional at Cost Arising from ------------------ Paid-In Retained ------------------- Exercise of Shares Amount Capital Earnings Shares Amount Stock Options Total ---------- ------- --------- --------- --------- --------- ------------- --------- Balance December 29, 2001 13,328,834 $ 133 $ 75,036 $ 258,162 5,241,841 $(209,926) $ (5,965) $ 117,440 Net income 34,703 34,703 Exercises of stock options 77,660 1 1,614 (92) 1,523 Repayment of notes receivable arising from exercises of stock options 4,721 4,721 Retirement of treasury stock (5,241,841) (52) (76,389) (133,485)(5,241,841) 209,926 - Purchases of common stock 112,879 (5,435) (5,435) Stock split effected in the form of a 100% stock dividend 8,121,653 81 (81) - ---------- ------- --------- --------- --------- --------- ------------- --------- Balance September 28, 2002 16,286,306 $ 163 $ 261 $ 159,299 112,879 $ (5,435) $ (1,336) $ 152,952 ========== ======= ========= ========= ========= ========= ============= ========= See accompanying notes to consolidated financial statements. 6
LANDSTAR SYSTEM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all adjustments (all of a normal, recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. The preparation of the consolidated financial statements requires the use of management's estimates. Actual results could differ from those estimates. Landstar System, Inc. and its subsidiary are herein referred to as "Landstar" or the "Company." (1) Stock Split On July 18, 2002, Landstar announced that its Board of Directors had declared a two-for-one stock split of its common stock to be effected in the form of a 100% stock dividend. Stockholders of record on August 2, 2002 received one additional share of common stock for each share held. The additional shares were distributed on August 12, 2002. All share and per share amounts have been restated to give retroactive effect to this stock split. (2) Income Taxes The provisions for income taxes for the 2002 and 2001 thirty-nine-week and thirteen-week periods were based on estimated full year combined effective income tax rates of approximately 38.0% and 38.5%, respectively, which are higher than the statutory federal income tax rate primarily as a result of state income taxes and the meals and entertainment exclusion in both years and the amortization of certain goodwill in the 2001 period. (3) Earnings Per Share Earnings per common share amounts are based on the weighted average number of common shares outstanding and diluted earnings per share amounts are based on the weighted average number of common shares outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options. All earnings per share amounts have been restated to give retroactive effect to the two-for-one stock split announced July 18, 2002. (4) Goodwill The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets" in the first quarter of fiscal year 2002. SFAS No. 142 eliminates the requirement to amortize goodwill on a recurring basis over its estimated useful life. Adoption of SFAS No. 142 resulted in the elimination of goodwill amortization expense beginning with the first quarter of 2002. SFAS No. 142 requires that goodwill now be tested for impairment on an annual basis by reporting unit based on fair value measurements. During the first quarter of 2002, the Company completed the transitional goodwill impairment test and determined that the fair value of each reporting unit exceeded the carrying value of the net assets of each reporting unit. Accordingly, no impairment loss was recognized. During the thirty-nine-week and thirteen-week periods ended September 29, 2001, the Company recorded goodwill amortization expense of $911,000 and $302,000, respectively. Elimination of this amortization expense would have resulted in net income of $32,128,000, or an increase of $0.06 in earnings per share ($0.05 per diluted share), and $12,232,000, or an increase of $0.02 in earnings per share ($0.02 per diluted share), in the 2001 thirty-nine-week and thirteen-week periods, respectively. The Company has no other intangible assets subject to the provisions of SFAS No. 142. 7
(5) Additional Cash Flow Information During the 2002 period, Landstar paid income taxes and interest of $16,638,000 and $3,303,000, respectively, and acquired operating property by entering into capital leases in the amount of $2,668,000. During the 2001 period, Landstar paid income taxes and interest of $19,131,000 and $6,175,000, respectively. The Company did not acquire operating property by entering into capital leases during 2001. (6) Segment Information The following tables summarize information about Landstar's reportable business segments for the thirty-nine and thirteen weeks ended September 28, 2002 and September 29, 2001 (in thousands): Thirty-nine Weeks Ended September 28, 2002 ------------------------------------------ Carrier Multimodal Insurance Other Total ------- ---------- --------- ----- ----- External revenue $ 878,836 $ 213,018 $ 20,715 $1,112,569 Investment income 1,552 1,552 Internal revenue 17,899 1,849 22,667 42,415 Operating income 63,912 5,007 15,867 $(25,296) 59,490 Goodwill 20,496 10,638 31,134 Thirty-nine Weeks Ended September 29, 2001 ------------------------------------------ Carrier Multimodal Insurance Other Total ------- ---------- --------- ----- ----- External revenue $ 820,055 $ 207,209 $ 17,719 $1,044,983 Investment income 2,861 2,861 Internal revenue 22,100 1,764 20,185 44,049 Operating income 56,055 3,836 22,932 $(26,530) 56,293 Goodwill 20,788 10,775 31,563 Thirteen Weeks Ended September 28, 2002 ------------------------------------------ Carrier Multimodal Insurance Other Total ------- ---------- --------- ----- ----- External revenue $ 298,872 $ 79,959 $ 6,829 $ 385,660 Investment income 474 474 Internal revenue 6,394 689 7,194 14,277 Operating income 22,453 2,222 8,307 $ (9,531) 23,451 Thirteen Weeks Ended September 29, 2001 ------------------------------------------ Carrier Multimodal Insurance Other Total ------- ---------- --------- ----- ----- External revenue $ 276,496 $ 73,190 $ 5,998 $ 355,684 Investment income 902 902 Internal revenue 7,669 643 7,131 15,443 Operating income 18,452 1,715 9,224 $ (8,391) 21,000 8
(7) Commitments and Contingencies At September 28, 2002, Landstar had commitments for letters of credit outstanding in the amount of $19,929,000, primarily as collateral for insurance claims. The commitments for letters of credit outstanding included $9,080,000 under the Third Amended and Restated Credit Agreement and $10,849,000 secured by assets deposited with a financial institution. Landstar is involved in certain claims and pending litigation arising from the normal conduct of business. Based on the knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all claims and pending litigation and that the ultimate outcome, after provisions thereof, will not have a material adverse effect on the financial condition of Landstar, but could have a material adverse effect on the results of operations in a given quarter or year. However, no assurances can be given in this regard. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the attached interim consolidated financial statements and notes thereto, and with the Company's audited financial statements and notes thereto for the fiscal year ended December 29, 2001 and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2001 Annual Report to Shareholders. RESULTS OF OPERATIONS Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. ("Landstar" or the "Company"), provide transportation services to a variety of market niches throughout the United States and to a lesser extent in Canada and between the United States and Canada and Mexico through its operating subsidiaries. The Company has three reportable business segments. These are the carrier, multimodal and insurance segments. The carrier segment consists of Landstar Ranger, Inc., Landstar Inway, Inc., Landstar Ligon, Inc. and Landstar Gemini, Inc. The carrier segment primarily provides truckload transportation for a wide range of general commodities over irregular routes with its fleet of dry and specialty vans and unsided trailers, including flatbed, drop deck and specialty. It also provides short-to-long haul movement of containers by truck and dedicated power-only truck capacity and truck brokerage. The carrier segment markets its services primarily through independent commission sales agents and utilizes tractors provided by independent contractors, either permanently leased to the Company or third party broker carriers. Historically, the Company's carrier segment has primarily relied on capacity provided by independent contractors permanently leased to the Company. Pursuant to a plan to augment its available capacity and increase its revenue, the Company has begun to increase the carrier segment's use of capacity provided by third party broker carriers. A significant decrease in the number of tractors supplied by independent contractors permanently leased to the Company or the availability of capacity provided by third party broker carriers may have an adverse effect on the Company's results of operations. The nature of the carrier segment's business is such that a significant portion of its operating costs varies directly with revenue. The multimodal segment is comprised of Landstar Logistics, Inc. and Landstar Express America, Inc. Transportation services provided by the multimodal segment include the arrangement of intermodal moves, contract logistics, truck brokerage and emergency and expedited ground and air freight. The multimodal segment markets its services through independent commission sales agents and utilizes tractors provided by independent contractors, railroads and air cargo carriers. The nature of the multimodal segment's business is such that a significant portion of its operating costs also varies directly with revenue. 9
The insurance segment is comprised of Signature Insurance Company ("Signature"), a wholly-owned offshore insurance subsidiary, and Risk Management Claim Services, Inc. The insurance segment provides risk and claims management services to Landstar's operating companies. In addition, it reinsures certain property, casualty and occupational accident risks of certain independent contractors who have contracted to haul freight for Landstar and provides certain property and casualty insurance directly to Landstar's operating subsidiaries. Purchased transportation represents the amount an independent contractor is paid to haul freight and is primarily based on a contractually agreed- upon percentage of revenue generated by the haul for truck capacity provided by independent contractors who are permanently leased to the Company. Purchased transportation for the brokerage services operations of the carrier and multimodal segments is based on a negotiated rate for each load hauled. Purchased transportation for the intermodal services operations and the air freight operations of the multimodal segment is based on a contractually agreed-upon fixed rate. Purchased transportation as a percentage of revenue for the intermodal and brokerage services operations is normally higher than that of Landstar's other transportation operations. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases in proportion to the revenue generated through independent contractors. Commissions to agents are primarily based on contractually agreed-upon percentages of revenue at the carrier segment and of gross profit, revenue less the cost of purchased transportation, at the multimodal segment. Commissions to agents as a percentage of consolidated revenue will vary directly with the percentage of consolidated revenue generated by the carrier segment, the multimodal segment and Signature and increases or decreases in gross profit at the multimodal segment. Trailing equipment rent and maintenance costs are the largest components of other operating costs. Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. A material increase in the frequency or severity of accidents, cargo or workers' compensation claims or the unfavorable development of existing claims could be expected to materially adversely affect Landstar's operating income. Landstar retains liability for each individual commercial trucking claim up to $1,000,000 per occurrence through April 30, 2001 and $5,000,000 per occurrence thereafter. To reduce its exposure to unladen liability claims (claims incurred while the vehicle is being operated without a trailer attached or is being operated with an attached trailer which does not contain or carry any cargo), Landstar requires its independent contractors to maintain unladen truckers liability coverage of $1,000,000 per occurrence. Under the Company's unladen truckers liability program, independent contractors purchase truckers unladen liability coverage from a third party insurance company. Signature reinsures this unladen liability coverage for independent contractors who participate in the Company's unladen program, up to $25,000 per occurrence through December 31, 2001 and $1,000,000 thereafter. The Company also retains liability for each general liability claim up to $1,000,000, $250,000 for each workers' compensation claim and $250,000 for each cargo claim. Employee compensation and benefits account for over half of the Company's selling, general and administrative expense. Other significant components of selling, general and administrative expense are communications costs and rent expense. Depreciation and amortization primarily relates to depreciation of trailing equipment and management information services equipment. All historical share related financial information presented herein has been restated to reflect a two-for-one stock split effected in the form of a 100% stock dividend distributed on August 12, 2002 to stockholders of record on August 2, 2002. 10
The following table sets forth the percentage relationships of income and expense items to revenue for the periods indicated: Thirty-Nine Weeks Ended Thirteen Weeks Ended ------------------------ ------------------------ Sept. 28, Sept. 29, Sept. 28, Sept. 29, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Revenue 100.0% 100.0% 100.0% 100.0% Investment income 0.1 0.3 0.1 0.3 Costs and expenses: Purchased transportation 73.9 74.1 74.1 74.3 Commissions to agents 7.9 7.8 7.9 8.0 Other operating costs 2.4 2.4 2.2 2.2 Insurance and claims 2.9 2.3 2.2 1.9 Selling, general and administrative 6.9 7.3 6.9 7.1 Depreciation and amortization 0.8 1.0 0.7 0.9 ------- ------ ------- ------ Total costs and expenses 94.8 94.9 94.0 94.4 ------- ------ ------- ------ Operating income 5.3 5.4 6.1 5.9 Interest and debt expense 0.3 0.5 0.3 0.4 ------- ------ ------- ------ Income before income taxes 5.0 4.9 5.8 5.5 Income taxes 1.9 1.9 2.2 2.1 ------- ------ ------- ------ Net income 3.1% 3.0% 3.6% 3.4% ======= ====== ======= ====== THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002 COMPARED TO THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2001 Revenue for the 2002 thirty-nine-week period was $1,112,569,000, an increase of $67,586,000 over the 2001 thirty-nine-week period. The increase was attributable to increased revenue of $58,781,000, $5,809,000 and $2,996,000 at the carrier, multimodal and insurance segments, respectively. Overall, revenue miles (volume) increased approximately 8%. Revenue per load increased approximately 6% while revenue per revenue mile (price) decreased approximately 1%, reflecting changes in freight mix, including an increase in the average length of haul at the carrier segment. The increase in premium revenue at the insurance segment was primarily attributable to an increase in the level of reinsurance underwritten for unladen truckers liability from $25,000 per occurrence to $1,000,000 per occurrence effective January 1, 2002. Investment income at the insurance segment was $1,552,000 and $2,861,000 in the 2002 and 2001 periods, respectively. The decrease in investment income was primarily due to a reduced rate of return, attributable to the decline in interest rates. Purchased transportation was 73.9% of revenue in 2002 compared with 74.1% in 2001. The decrease in purchased transportation as a percentage of revenue was primarily due to increased revenue at the insurance and carrier segments and reduced rates paid to third party broker carriers at the multimodal segment. Commissions to agents were 7.9% of revenue in 2002 and 7.8% of revenue in 2001. The increase in commissions to agents as a percentage of revenue was primarily due to an increase in net revenue, revenue less the cost of purchased transportation, at the multimodal segment. 11
Other operating costs were 2.4% of revenue in 2002 and 2001. Insurance and claims were 2.9% of revenue in 2002 compared with 2.3% in 2001. The increase in insurance and claims as a percentage of revenue was primarily attributable to increased trucking claims in the $4 million excess of $1 million layer as a result of one severe accident in June 2002, increased unladen truckers liability claims due to the increased level of risk assumed under the program effective January 1, 2002 and favorable development of prior year claims in 2001, partially offset by reduced property and casualty insurance premiums. Selling, general and administrative costs were 6.9% of revenue in 2002 compared with 7.3% of revenue in 2001. The decrease in selling, general and administrative costs as a percentage of revenue was primarily due to decreased wages, travel and entertainment expenses and communications costs, partially offset by an increased provision for bonuses under the Company's incentive compensation plans. Depreciation and amortization was 0.8% of revenue in 2002 compared with 1.0% in 2001. The decrease in depreciation and amortization as a percentage of revenue was primarily due to the January 1, 2002 implementation of SFAS No. 142, which eliminated the amortization of goodwill, and reduced depreciation expense for trailing equipment and information technology assets. Interest and debt expense was 0.3% and 0.5% of revenue in 2002 and 2001, respectively. This decrease was primarily attributable to decreased interest rates, decreased average borrowings on the senior credit facility and decreased average capital lease obligations for trailing equipment. The provisions for income taxes for the 2002 and 2001 thirty-nine-week periods were based on estimated full year combined effective income tax rates of approximately 38.0% and 38.5%, respectively, which are greater than the statutory federal income tax rate primarily as a result of state income taxes and the meals and entertainment exclusion in both years and the amortization of certain goodwill in the 2001 period. The decrease in the effective income tax rate was attributable to the elimination of goodwill amortization in 2002. Net income was $34,703,000, or $2.14 per common share ($2.06 per diluted share), in the 2002 period compared with $31,217,000, or $1.85 per common share ($1.81 per diluted share), in the 2001 period. 12
THIRTEEN WEEKS ENDED SEPTEMBER 28, 2002 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 29, 2001 Revenue for the 2002 thirteen-week period was $385,660,000, an increase of $29,976,000 over the 2001 thirteen-week period. The increase was attributable to increased revenue of $22,376,000, $6,769,000 and $831,000 at the carrier, multimodal and insurance segments, respectively. Overall, revenue miles increased approximately 11%. Revenue per load increased approximately 4% while revenue per revenue mile decreased approximately 2%, reflecting changes in freight mix, including an increase in the average length of haul at the carrier segment. During the quarter, trucks provided by independent contractors declined slightly. This decrease was more than offset by increased truck productivity and increased utilization of capacity provided by third party broker carriers. The increase in premium revenue at the insurance segment was primarily attributable to an increase in the level of reinsurance underwritten for unladen truckers liability. Investment income at the insurance segment was $474,000 and $902,000 in the 2002 and 2001 periods, respectively. The decrease in investment income was primarily due to a reduced rate of return, attributable to the decline in interest rates. Purchased transportation was 74.1% of revenue in 2002 compared with 74.3% in 2001. The decrease in purchased transportation as a percentage of revenue was primarily attributable to increased revenue at the insurance segment. Commissions to agents were 7.9% of revenue in 2002 and 8.0% of revenue in 2001. The decrease in commissions to agents as a percentage of revenue was primarily due to reduced gross profit at the multimodal segment resulting from higher purchased transportation costs. Other operating costs were 2.2% of revenue in 2002 and 2001. Insurance and claims were 2.2% of revenue in 2002 compared with 1.9% in 2001. The increase in insurance and claims as a percentage of revenue was primarily attributable to increased unladen truckers liability claims due to the increased level of risk assumed under the program, effective January 1, 2002 and increased cargo claims costs. Selling, general and administrative costs were 6.9% of revenue in 2002 compared with 7.1% of revenue in 2001. The decrease in selling, general and administrative costs as a percentage of revenue was primarily due to decreased wages, travel and entertainment expenses and communications costs, partially offset by an increased provision for bonuses under the Company's incentive compensation plans. Depreciation and amortization was 0.7% of revenue in 2002 compared with 0.9% in 2001. The decrease in depreciation and amortization as a percentage of revenue was primarily due to the January 1, 2002 implementation of SFAS No. 142, which eliminated the amortization of goodwill and reduced depreciation and amortization for trailing equipment and information technology assets. Interest and debt expense was 0.3% and 0.4% of revenue in 2002 and 2001, respectively. The decrease was primarily attributable to decreased interest rates, decreased average borrowings on the senior credit facility and decreased capital lease obligations for trailing equipment. The provisions for income taxes for the 2002 and 2001 thirteen-week periods were based on estimated full year combined effective income tax rates of approximately 38.0% and 38.5%, respectively, which are greater than the statutory federal income tax rate primarily as a result of state income taxes and the meals and entertainment exclusion in both years and the amortization of certain goodwill in the 2001 period. The decrease in the effective income tax rate was attributable to the elimination of goodwill amortization in 2002. Net income was $13,941,000, or $0.86 per common share ($0.83 per diluted share), in the 2002 period compared with $11,930,000, or $0.72 per common share ($0.70 per diluted share), in the 2001 period. 13
CAPITAL RESOURCES AND LIQUIDITY Shareholders' equity increased to $152,952,000 at September 28, 2002 compared with $117,440,000 at December 29, 2001, primarily as a result of net income for the period and the repayment of notes receivable arising from the exercises of stock options, partially offset by the purchase of 112,879 shares of the Company's common stock at an aggregate price of $5,435,000. Shareholders' equity was 68% and 54% of total capitalization at September 28, 2002 and December 29, 2001, respectively. As of September 28, 2002, the Company is authorized to purchase up to 887,121 shares, adjusted for the two-for-one stock split, of its common stock under its authorized stock purchase program. Working capital and the ratio of current assets to current liabilities were $129,868,000 and 1.80 to 1, respectively, at September 28, 2002, compared with $121,808,000 and 1.92 to 1, respectively, at December 29, 2001. Landstar has historically operated with current ratios within the range of 1.5 to 1 to 2.0 to 1. Cash provided by operating activities was $52,985,000 in the 2002 period compared with $31,331,000 in the 2001 period. The increase in cash flow provided by operating activities was primarily attributable to the timing of payments. During the 2002 period, Landstar purchased $2,649,000 of operating property and acquired $2,668,000 of revenue equipment by entering into capital leases. Management anticipates acquiring $17,000,000 of operating property during the remainder of fiscal year 2002 either by purchase or lease financing. Management believes that cash flow from operations combined with the Company's borrowing capacity under its revolving credit agreement will be adequate to meet Landstar's debt service requirements, fund continued growth, both internal and through acquisitions, complete its announced stock repurchase program and meet working capital needs. Management does not believe inflation has had a material impact on the results of operations or financial condition of Landstar in the past five years. However, inflation higher than that experienced in the past five years might have an adverse effect on the Company's results of operations. 14
FORWARD-LOOKING STATEMENTS Certain of the statements contained in this report are forward-looking statements. From time to time, we may also provide oral or written forward- looking statements in other materials we release to the public. Forward- looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipates", "believes", "estimates", "plans", 'predicts", "may", "should", "will", and other words of similar meaning in connection with any discussion of future operating or financial performance. Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management. A variety of factors could cause our actual results to differ materially from those expressed in such forward-looking statements. These factors include, without limitation, an increase in the frequency or severity of accidents; cargo or workers' compensation claims; unfavorable development of existing accident claims; a downturn in economic domestic growth or growth in the transportation sector; a significant decrease in the availability of capacity; and the other factors described elsewhere in this report, in Item 7 of the Company's Report on Form 10-K for the year ended December 29, 2001 or in other Securities and Exchange Commission filings of the Company. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set-of-all potential risks and uncertainties. While the Company periodically reassesses material trends and uncertainties affecting its results of operations and financial condition, the Company does not intend, and undertakes no obligation, to review or revise any particular forward-looking statement referenced in this report or elsewhere in light of future events. SEASONALITY Landstar's operations are subject to seasonal trends common to the trucking industry. Results of operations for the quarter ending in March are typically lower than the quarters ending June, September and December. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company maintains a credit agreement with a syndicate of banks and JPMorgan Chase Bank, as the administrative agent, (the "Third Amended and Restated Credit Agreement") that provides $175,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. Borrowings under the Third Amended and Restated Credit Agreement bear interest at rates equal to, at the option of Landstar, either (i) the greatest of (a) the prime rate as publicly announced from time to time by JPMorgan Chase Bank, (b) the three month CD rate adjusted for statutory reserves and FDIC assessment costs plus 1% and (c) the federal funds effective rate plus 1/2%, or, (ii) the rate at the time offered to JPMorgan Chase Bank in the Eurodollar market for amounts and periods comparable to the relevant loan plus a margin that is determined based on the level of the Company's Leverage Ratio, as defined in the Third Amended and Restated Credit Agreement. There have been no significant changes that would affect the information provided in Item 7a of the 2001 Annual Report on Form 10-K regarding quantitative and qualitative disclosures about market risk. Item 4. Controls and Procedures Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the CEO an CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of such evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls. 15 PART II OTHER INFORMATION Item 1. Legal Proceedings On September 20, 2001, a suit was filed entitled Gulf Bridge RoRo, Inc. v. Landstar System, Inc. (hereinafter "Landstar"), Landstar Logistics, Inc. (hereinafter "Landstar Logistics"), and Ford Motor Co., Inc. in Federal District Court in Mobile, Alabama. The suit alleges breach of contract and misrepresentation against Landstar and Landstar Logistics and certain other causes of action arising out of a contract between Landstar Logistics and the Plaintiff involving a trans-Gulf of Mexico roll-on/roll-off shipping venture developed by the Plaintiffs. The complaint and discovery developed after the filing of the suit would indicate that Plaintiff's principal claim is that Landstar and Landstar Logistics breached a duty under the contract to use "best efforts" to aid in the arrangement of freight for Plaintiff's vessel and that Landstar and Landstar Logistics misrepresented material facts which induced Plaintiff to enter into the contract with Landstar Logistics. The suit makes claim for $25,000,000 for damages for breach of contract and $50,000,000 punitive and other damages related to the misrepresentation counts. As of October 31, 2002, discovery remains open and proceeding in this matter. Discovery completion date has been set by the Court for November 8, 2002. The trial court had initially ordered that this matter would be tried in February of 2003, but has now indicated that the matter will not be tried until April of 2003. The Company believes it has meritorious defenses to this litigation and intends to defend it vigorously. The Company also believes that if this litigation were determined adverse to it, the probable liability of the Company, exclusive of any available insurance recoveries, would not have a material adverse effect on the financial condition of the Company but could have a material adverse effect on the results of operations in a given quarter or year. The Company also believes, however, that any such liability would have no greater impact on the Company's results of operations for any fiscal quarter or fiscal year than any previous litigation to which the Company has been a party in the last three fiscal years. No assurances can be given as to the outcome of this matter. The Company is routinely a party to litigation incidental to its business, primarily involving claims for personal injury and property damage incurred in the transportation of freight. The Company maintains insurance which covers liability amounts in excess of retained liabilities from personal injury and property damages claims. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. 16
Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information KPMG LLP provides certain tax compliance services to the Company. The Company's audit committee pre-approved the provision of these non-audit services to the Company, as contemplated by Section 202 of the Sarbanes-Oxley Act of 2002. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The exhibits listed on the Exhibit Index are filed as part of this quarterly report on Form 10-Q. (b) Form 8-K The Company's Form 8-K filed with the Securities and Exchange Commission on July 22, 2002 announced the Company's authorized 2-for-1 stock split effected in the form of a 100% stock dividend effective August 12, 2002 to shareholders of record on August 2, 2002. The Company's Form 8-K filed with the Securities and Exchange Commission on August 8, 2002 contained the Company's Principal Executive Officer's and Principal Financial Officer's certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. The Company's Form 8-K filed with the Securities and Exchange Commission on August 9, 2002 contained the Company's Principal Executive Officer's and Principal Financial Officer's certifications of certain covered reports pursuant to Securities and Exchange Commission Order No. 4-460. 17
EXHIBIT INDEX Registrant's Commission File No.: 0-21238 Exhibit No. Description - ------------ ----------- (11) Statement re: Computation of Per Share Earnings: 11.1 * Landstar System, Inc. and Subsidiary Calculation of Earnings Per Common Share for the Thirty-Nine and Thirteen Weeks Ended September 28, 2002 and September 29, 2001 11.2 * Landstar System, Inc. and Subsidiary Calculation of Diluted Earnings Per Share for the Thirty-Nine and Thirteen Weeks September 28, 2002 and September 29, 2001 __________________ * Filed herewith 18
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LANDSTAR SYSTEM, INC. Date: November 1, 2002 /s/ Jeffrey C. Crowe ---------------------------- Jeffrey C. Crowe Chairman of the Board and Chief Executive Officer Date: November 1, 2002 /s/ Robert C. LaRose ---------------------------- Robert C. LaRose Vice President, Chief Financial Officer and Secretary 19
CERTIFICATIONS I, Jeffrey C. Crowe , certify that: 1. I have reviewed this quarterly report on Form 10-Q of Landstar System, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 1, 2002 - ----------------------- Jeffrey C. Crowe Chairman of the Board and Chief Executive Officer 20
CERTIFICATIONS I, Robert C. LaRose, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Landstar System, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 1, 2002 - ---------------------- Robert C. LaRose Vice President, Chief Financial Officer and Secretary 21
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. 28, Sept. 29, Sept. 28, Sept. 29, 2002 2001 2002 2001 ------------ ------------- ------------- ----------- Earnings available for earnings per share: Net income $ 34,703 $ 31,217 $ 13,941 $ 11,930 ============ ============ ============ ============ Average number of common shares outstanding 16,223 16,838 16,224 16,501 ============ ============ ============ ============ Earnings per common share $ 2.14 $ 1.85 $ 0.86 $ 0.72 ============ ============ ============ ============ 22
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. 28, Sept. 29, Sept. 28, Sept. 29, 2002 2001 2002 2001 ------------ ------------ ------------- ----------- Net income $ 34,703 $ 31,217 $ 13,941 $ 11,930 ============ ============ ============ ============ Average number of common shares 16,223 16,838 16,224 16,501 Plus: Incremental shares from assumed exercise of stock options 624 432 651 442 ------------ ------------ ------------ ------------ Average number of common shares and common share equivalents outstanding 16,847 17,270 16,875 16,943 ============ ============ ============ ============ Diluted earnings per share $ 2.06 $ 1.81 $ 0.83 $ 0.70 ============ ============ ============ ============ 23