FORM 10-Q

OR

Commission File Number:               0-21238

LANDSTAR SYSTEM, INC.

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

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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

     Yes x No o

The number of shares of the registrant’s Common Stock, par value $0.01 per share, outstanding as of the close of business on October 22, 2004 was 30,315,430.

PART I

FINANCIAL INFORMATION

Index

Item 1

Item 2

Item 3

Item 4

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 25, 2004 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 25, 2004.

These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s 2003 Annual Report on Form 10-K.

LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)

See accompanying notes to consolidated financial statements.

LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

See accompanying notes to consolidated financial statements.

LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
Thirty Nine Weeks Ended September 25, 2004
(Dollars in thousands)
(Unaudited)

See accompanying notes to consolidated financial statements.

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)

Capital Stock

At the May 13, 2004 annual meeting of shareholders, the shareholders of the Company approved an amendment to Article IV of the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock from 50,000,000 shares to 80,000,000 shares.

(2)

Litigation Settlement Agreement

On September 20, 2001, a suit was filed entitled Gulf Bridge RoRo, Inc. v. Landstar System, Inc., Landstar Logistics, Inc. and Ford Motor Co., Inc. in Federal District Court in Mobile, Alabama. The complaint alleged breach of contract, fraud and tortious interference with contractual business relationships against Landstar System, Inc. and Landstar Logistics, Inc. arising out of a contract between Landstar Logistics, Inc. and the plaintiff involving a trans-Gulf of Mexico roll-on/roll-off shipping venture developed by the plaintiff. The suit made claim for $25,000,000 for damages for breach of contract and $50,000,000 in punitive and other damages related to the fraud and tortious interference claims. Landstar denies all claims made by the plaintiff. In order to avoid the cost of protracted litigation, on September 9, 2003 Landstar entered into a comprehensive settlement agreement with the plaintiffs and Landstar’s insurance carrier with respect to all claims asserted in this lawsuit. The total cost incurred, net of insurance recoveries, by Landstar to defend and settle this suit during 2003 was approximately $4,150,000, approximately $3,180,000 of which was incurred in the thirteen week period ended September 27, 2003. The settlement component, net of insurance recoveries, was $2,700,000. Net of related income tax benefits, the total costs to defend and settle this suit reduced Landstar’s net income for the thirty nine and thirteen week periods ended September 27, 2003 by approximately $2,650,000, or $0.09 per common share ($0.08 per diluted share), and $2,030,000, or $0.07 per common share ($0.06 per diluted share), respectively.

(3)

Indebtedness

On July 8, 2004, Landstar renegotiated its existing credit agreement with a syndicate of banks and JPMorgan Chase Bank, as administrative agent (the “Fourth Amended and Restated Credit Agreement”). The Fourth Amended and Restated Credit Agreement, which expires on July 8, 2009, provides $225,000,000 of borrowing capacity in the form of a revolving credit facility, $75,000,000 of which may be utilized in the form of letter of credit guarantees. The initial borrowing of $70,000,000 under the facility has been used to refinance the Company’s prior credit facility, which has been terminated.

Borrowings under the Fourth 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 Fourth Amended and Restated Credit Agreement. The margin is subject to an increase of 0.125% if the aggregate amount outstanding under the Fourth Amended and Restated Credit Agreement exceeds 50% of the total borrowing capacity.

The unused portion of the Fourth Amended and Restated Credit Agreement carries a commitment fee determined based on the level of the Leverage Ratio, as therein defined. As of September 25, 2004, the commitment fee for the unused portion of the Fourth Amended and Restated Credit Agreement was 0.200%. At September 25, 2004, the weighted average interest rate on borrowings under the Fourth Amended and Restated Credit Agreement was 2.45%.

The Fourth Amended and Restated Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness, the incurrence of operating or capital lease obligations and the purchase of operating property. The Fourth Amended and Restated Credit Agreement also requires Landstar to meet certain financial tests. Landstar is required to, among other things, maintain minimum levels of Consolidated Net Worth and Fixed Charge Coverage, as each is defined in the Fourth Amended and Restated Credit Agreement.

The Fourth Amended and Restated Credit Agreement provides for an event of default related to a person or group acquiring 25% or more of the outstanding capital stock of the Company or obtaining the power to elect a majority of the Company’s directors.

Borrowings under the Fourth Amended and Restated Credit Agreement are unsecured; however, Landstar System, Inc. and all but one of Landstar System Holdings, Inc.’s (“LSHI”) subsidiaries guarantee LSHI’s obligations under the Fourth Amended and Restated Credit Agreement.

(4)

Income Taxes

The provisions for income taxes for the 2004 and 2003 thirty nine week and thirteen week periods were based on estimated full year combined effective income tax rates of approximately 38.3% and 38.0%, respectively, which are higher than the statutory federal income tax rate primarily as a result of state income taxes and the meals and entertainment exclusion.

(5)

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.

The following table provides a reconciliation of the average number of common shares outstanding used to calculate earnings per share to the average number of common shares and common share equivalents outstanding used in calculating diluted earnings per share (in thousands):

For the thirty nine week periods ended September 25, 2004 and September 27, 2003, there were options outstanding to purchase 65,000 and 2,000 shares of common stock, respectively, excluded from the calculations of diluted earnings per share because such options were antidilutive.

For the thirteen week period ended September 25, 2004, there were 65,000 options outstanding to purchase shares of common stock excluded from the calculation of diluted earnings per share. For the thirteen week period ended September 27, 2003 there were no such options outstanding.

(6)

Additional Cash Flow Information

During the 2004 thirty nine week period, Landstar paid income taxes and interest of $22,209,000 and $2,382,000, respectively. During the 2003 thirty nine week period, Landstar paid income taxes and interest of $15,288,000 and $2,593,000, respectively. Landstar acquired operating property by entering into capital leases in the amount of $8,380,000 in the 2004 thirty nine week period. The Company did not acquire any property by entering into capital leases in the 2003 thirty nine week period.

(7)

Segment Information

The following tables summarize information about Landstar’s reportable business segments as of and for the thirty nine and thirteen week periods ended September 25, 2004 and September 27, 2003 (in thousands):

(8)

Stock-Based Compensation

The Company has two employee stock option plans and one stock option plan for members of its Board of Directors (collectively, the “Plans”). The Company accounts for stock options issued under the Plans pursuant to the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation is reflected in net income from the Plans, as all options granted under the Plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share from the Plans, as if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation:

Under the Directors’ Stock Compensation Plan, all independent Directors who are elected or re-elected to the Board will receive 3,000 shares (1,500 prior to the two-for-one stock split declared on October 15, 2003) of common stock of the Company, subject to certain restrictions including restrictions on transfer. During the 2004 and 2003 thirty nine week periods, a total of 9,000 and 3,000 shares, respectively, of the Company’s common stock were issued to members of the Board of Directors upon their re-election at the 2004 and 2003 annual shareholders’ meetings. During the thirty nine week periods ended September 25, 2004 and September 27, 2003, the Company reported $402,000 and $85,000, respectively, in compensation expense representing the fair market value of these share awards.

(9)

Comprehensive Income

The following table includes the components of comprehensive income for the thirty nine and thirteen week periods ended September 25, 2004. The Company did not have any transactions resulting in comprehensive income in the thirty nine or thirteen week periods ended September 27, 2003 (in thousands):