##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
  0-21238
 
 LANDSTAR SYSTEM, INC.
  Delaware
    
    06-1313069(State or other jurisdiction 
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 13410 Sutton Park Drive South, Jacksonville, Florida   32224   (904) 398-9400   N/A
  þ o
  þ o o
  o þ




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##### 



Index
 PART I Financial InformationItem 1.     Financial StatementsConsolidated Balance Sheets as of March 31, 2007 and December 30, 2006
    
    Page 3Consolidated Statements of Income for the Thirteen Weeks Ended March 31, 2007 and April 1, 2006
    
    Page 4Consolidated Statements of Cash Flows for the Thirteen Weeks Ended March 31, 2007 and April 1, 2006
    
    Page 5Consolidated Statement of Changes in Shareholders Equity for the Thirteen Weeks Ended March 31, 2007
    
    Page 6Notes to Consolidated Financial Statements
    
    Page 7Item 2.     Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    Page 10Item 3.     Quantitative and Qualitative Disclosures About Market Risk
    
    Page 17Item 4.     Controls and Procedures
    
    Page 17PART II Other InformationItem 1.     Legal Proceedings
    
    Page 18Item 1A.     Risk Factors
    
    Page 19Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
    
    Page 19Item 6.     Exhibits
    
    Page 19Signatures
    
    Page 21EX-31.1 Section 302 Certification of President & CEOEX-31.2 Section 302 Certification of V.P. & CFOEX-32.1 Section 906 Certification of President & CEOEX-32.2 Section 906 Certification of V.P. & CFO
  
 PART I 
 
    2




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March 31,
    
    
    Dec. 30,2007
    
    
    2006ASSETSCurrent AssetsCash and cash equivalents
    
    $
    77,780
    
    
    $
    91,491Short-term investments
    
    
    20,701
    
    
    
    21,548Trade accounts receivable, less allowance of $4,589 and $4,834
    
    
    300,255
    
    
    
    318,983Other receivables, including advances to independent contractors,
less allowance of $3,987 and $4,512
    
    
    22,053
    
    
    
    14,198Deferred income taxes and other current assets
    
    
    17,154
    
    
    
    25,142Total current assets
    
    
    437,943
    
    
    
    471,362Operating property, less accumulated depreciation and amortization
of $78,307 and $77,938
    
    
    115,501
    
    
    
    110,957Goodwill
    
    
    31,134
    
    
    
    31,134Other assets
    
    
    36,006
    
    
    
    33,198Total assets
    
    $
    620,584
    
    
    $
    646,651LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesCash overdraft
    
    $
    25,160
    
    
    $
    25,435Accounts payable
    
    
    120,404
    
    
    
    122,313Current maturities of long-term debt
    
    
    19,578
    
    
    
    18,730Insurance claims
    
    
    27,386
    
    
    
    25,238Other current liabilities
    
    
    55,138
    
    
    
    58,478Total current liabilities
    
    
    247,666
    
    
    
    250,194Long-term debt, excluding current maturities
    
    
    78,415
    
    
    
    110,591Insurance claims
    
    
    43,127
    
    
    
    36,232Deferred income taxes
    
    
    20,424
    
    
    
    19,360Shareholders EquityCommon stock, $0.01 par value, authorized 160,000,000 shares,
issued 65,127,496 and 64,993,143
    
    
    651
    
    
    
    650Additional paid-in capital
    
    
    112,345
    
    
    
    108,020Retained earnings
    
    
    519,195
    
    
    
    499,273Cost of 9,583,961 and 9,028,009 shares of common stock in treasury
    
    
    (401,247
    )
    
    
    (377,662
    )Accumulated other comprehensive income (loss)
    
    
    8
    
    
    
    (7
    )Total shareholders equity
    
    
    230,952
    
    
    
    230,274Total liabilities and shareholders equity
    
    $
    620,584
    
    
    $
    646,651
  
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Thirteen Weeks EndedMarch 31,
    
    
    April 1,2007
    
    
    2006Revenue
    
    $
    576,649
    
    
    $
    610,042Investment income
    
    
    1,740
    
    
    
    379Costs and expenses:Purchased transportation
    
    
    434,058
    
    
    
    458,250Commissions to agents
    
    
    46,632
    
    
    
    47,011Other operating costs
    
    
    5,506
    
    
    
    12,068Insurance and claims
    
    
    17,540
    
    
    
    11,552Selling, general and administrative
    
    
    33,165
    
    
    
    35,836Depreciation and amortization
    
    
    4,617
    
    
    
    4,093Total costs and expenses
    
    
    541,518
    
    
    
    568,810Operating income
    
    
    36,871
    
    
    
    41,611Interest and debt expense
    
    
    1,592
    
    
    
    1,850Income before income taxes
    
    
    35,279
    
    
    
    39,761Income taxes
    
    
    13,675
    
    
    
    15,411Net income
    
    $
    21,604
    
    
    $
    24,350Earnings per common share
    
    $
    0.39
    
    
    $
    0.41Diluted earnings per share
    
    $
    0.38
    
    
    $
    0.41Average number of shares outstanding:Earnings per common share
    
    
    55,926,000
    
    
    
    58,901,000Diluted earnings per share
    
    
    56,470,000
    
    
    
    59,919,000Dividends paid per common share
    
    $
    0.030
    
    
    $
    0.025




4



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Thirteen Weeks EndedMarch 31,
    
    
    April 1,2007
    
    
    2006OPERATING ACTIVITIESNet income
    
    $
    21,604
    
    
    $
    24,350Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization of operating property
    
    
    4,617
    
    
    
    4,093Non-cash interest charges
    
    
    43
    
    
    
    44Provisions for losses on trade and other accounts receivable
    
    
    392
    
    
    
    1,892Gains on sales of operating property
    
    
    (979
    )
    
    
    (158
    )Deferred income taxes, net
    
    
    654
    
    
    
    276Stock-based compensation
    
    
    1,792
    
    
    
    1,411Changes in operating assets and liabilities:Decrease in trade and other accounts receivable
    
    
    10,481
    
    
    
    84,836Decrease in other assets
    
    
    9,689
    
    
    
    2,738Decrease in accounts payable
    
    
    (1,909
    )
    
    
    (18,368
    )Decrease in other liabilities
    
    
    (3,348
    )
    
    
    (2,016
    )Increase (decrease) in insurance claims
    
    
    9,043
    
    
    
    (1,560
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    52,079
    
    
    
    97,538INVESTING ACTIVITIESNet change in other short-term investments
    
    
    1
    
    
    
    1,448Sales and maturities of investments
    
    
    12,232
    
    
    
    10,328Purchases of investments
    
    
    (15,505
    )
    
    
    (11,701
    )Purchases of operating property
    
    
    (2,327
    )
    
    
    (668
    )Proceeds from sales of operating property
    
    
    2,165
    
    
    
    415NET CASH USED BY INVESTING ACTIVITIES
    
    
    (3,434
    )
    
    
    (178
    )FINANCING ACTIVITIESDecrease in cash overdraft
    
    
    (275
    )
    
    
    (5,834
    )Dividends paid
    
    
    (1,682
    )
    
    
    (1,474
    )Proceeds from exercises of stock options
    
    
    2,026
    
    
    
    2,376Excess tax benefit on stock option exercises
    
    
    508
    
    
    
    1,694Purchases of common stock
    
    
    (23,585
    )
    
    
    (11,131
    )Principal payments on long-term debt and capital lease obligations
    
    
    (39,348
    )
    
    
    (62,988
    )NET CASH USED BY FINANCING ACTIVITIES
    
    
    (62,356
    )
    
    
    (77,357
    )Increase (decrease) in cash and cash equivalents
    
    
    (13,711
    )
    
    
    20,003Cash and cash equivalents at beginning of period
    
    
    91,491
    
    
    
    29,398Cash and cash equivalents at end of period
    
    $
    77,780
    
    
    $
    49,401
  5




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Treasury Stock
    
    
    AccumulatedCommon Stock
    
    
    Add'l
    
    
    
    
    
    
    at Cost
    
    
    OtherPaid-In
    
    
    Retained
    
    
    
    
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Shares
    
    
    Amount
    
    
    Income (Loss)
    
    
    TotalBalance December 30, 2006
    
    
    64,993,143
    
    
    $
    650
    
    
    $
    108,020
    
    
    $
    499,273
    
    
    
    9,028,009
    
    
    $
    (377,662
    )
    
    $
    (7
    )
    
    $
    230,274Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,604
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,604Dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,682
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,682
    )Purchases of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    555,952
    
    
    
    (23,585
    )
    
    
    
    
    
    
    (23,585
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    1,792
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,792Exercises of stock options,
including
excess tax benefit
    
    
    134,353
    
    
    
    1
    
    
    
    2,533
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,534Unrealized holding gains
on available-for-sale
investments, net of income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    15Balance March 31, 2007
    
    
    65,127,496
    
    
    $
    651
    
    
    $
    112,345
    
    
    $
    519,195
    
    
    
    9,583,961
    
    
    $
    (401,247
    )
    
    $
    8
    
    
    $
    230,952
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(1)
    
    Share-Based Payments
   Thirteen Weeks EndedMarch 31,
    
    
    April 1,2007
    
    
    2006Total cost of share-based payment
plans during the period
    
    $
    1,792
    
    
    $
    1,411Amount of related income tax benefit
recognized during the period
    
    
    523
    
    
    
    467Net cost of share based payment plans
during the period
    
    $
    1,269
    
    
    $
    944
  2007
    
    
    2006Expected volatility
    
    
    33.0
    %
    
    
    34.0
    %Expected dividend yield
    
    
    0.3
    %
    
    
    0.3
    %Risk-free interest rate
    
    
    4.75
    %
    
    
    4.75
    %Expected lives (in years)
    
    
    4.2
    
    
    
    4.5
    Weighted Average
    
    
    Weighted AverageNumber of
    
    
    Exercise Price
    
    
    Remaining Contractual
    
    
    Aggregate IntrinsicOptions
    
    
    per Share
    
    
    Term (years)
    
    
    Value (000s)Options outstanding at December 30, 2006
    
    
    2,566,571
    
    
    $
    27.35Granted
    
    
    266,500
    
    
    $
    42.97Exercised
    
    
    (134,353
    )
    
    $
    15.09Options outstanding at March 31, 2007
    
    
    2,698,718
    
    
    $
    29.50
    
    
    
    7.3
    
    
    $
    44,101Options exercisable at March 31, 2007
    
    
    1,220,903
    
    
    $
    23.59
    
    
    
    6.2
    
    
    $
    27,162
  7




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(2)
    
    Income Taxes
     (3)
    
    Earnings Per Share
   Thirteen Weeks EndedMarch 31,
    
    
    April 1,2007
    
    
    2006Average number of common
shares outstanding
    
    
    55,926
    
    
    
    58,901Incremental shares under stock
option plans
    
    
    544
    
    
    
    1,018Average number of common shares
and common share equivalents
outstanding
    
    
    56,470
    
    
    
    59,919
  (4)
    
    Additional Cash Flow Information
  8




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(5)
    
    Segment Information
  Thirteen Weeks Ended March 31, 2007Carrier
    
    
    Global Logistics
    
    
    Insurance
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    423,574
    
    
    $
    143,865
    
    
    $
    9,210
    
    
    
    
    
    
    $
    576,649Investment income
    
    
    
    
    
    
    
    
    
    
    1,740
    
    
    
    
    
    
    
    1,740Internal revenue
    
    
    12,696
    
    
    
    822
    
    
    
    6,196
    
    
    
    
    
    
    
    19,714Operating income
    
    
    41,409
    
    
    
    4,688
    
    
    
    3,359
    
    
    $
    (12,585
    )
    
    
    36,871Goodwill
    
    
    20,496
    
    
    
    10,638
    
    
    
    
    
    
    
    
    
    
    
    31,134
 Thirteen Weeks Ended April 1, 2006Carrier
    
    
    Global Logistics
    
    
    Insurance
    
    
    Other
    
    
    TotalExternal revenue
    
    $
    428,313
    
    
    $
    173,425
    
    
    $
    8,304
    
    
    
    
    
    
    $
    610,042Investment income
    
    
    
    
    
    
    
    
    
    
    379
    
    
    
    
    
    
    
    379Internal revenue
    
    
    11,856
    
    
    
    360
    
    
    
    5,939
    
    
    
    
    
    
    
    18,155Operating income
    
    
    40,571
    
    
    
    8,727
    
    
    
    6,676
    
    
    $
    (14,363
    )
    
    
    41,611Goodwill
    
    
    20,496
    
    
    
    10,638
    
    
    
    
    
    
    
    
    
    
    
    31,134
 (6)
    
    Comprehensive Income
  Thirteen Weeks EndedMarch 31,
    
    
    April 1,2007
    
    
    2006Net income
    
    $
    21,604
    
    
    $
    24,350Unrealized holding
gains on available
-for-sale
investments, net of
income taxes
    
    
    15
    
    
    
    137Comprehensive income
    
    $
    21,619
    
    
    $
    24,487
  (7)
    
    Commitments and Contingencies
    9




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Introduction
    10




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Changes in Financial Condition and Results of Operations
    Thirteen Weeks EndedMarch 31,
    
    
    April 1,2007
    
    
    2006Carrier Segment:External revenue generated through (in thousands):BCO Independent Contractors
    
    $
    299,398
    
    
    $
    303,793Truck Brokerage Carriers
    
    
    124,176
    
    
    
    124,520$
    423,574
    
    
    $
    428,313Revenue per revenue mile
    
    $
    1.98
    
    
    $
    1.99Revenue per load
    
    $
    1,569
    
    
    $
    1,580Average length of haul (miles)
    
    
    792
    
    
    
    793Number of loads
    
    
    270,000
    
    
    
    271,000Global Logistics Segment:External revenue generated through (in thousands):BCO Independent Contractors (1)
    
    $
    26,841
    
    
    $
    24,832Truck Brokerage Carriers
    
    
    79,953
    
    
    
    100,627Rail, air, ocean and bus carriers (2)
    
    
    37,071
    
    
    
    47,966$
    143,865
    
    
    $
    173,425Revenue per load (3)
    
    $
    1,560
    
    
    $
    1,500Number of loads (3)
    
    
    90,000
    
    
    
    92,000
 
 (1)
    
    Includes revenue from freight hauled by carrier segment BCO Independent Contractors
for global logistics customers.(2)
    
    Included in the 2007 and 2006 thirteen week period was $481,000 and $10,856,000,
respectively, of revenue attributable to buses provided under a contract between Landstar
Express America, Inc. and the United States Department of Transportation/Federal Aviation
Administration (the FAA). 11




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(3)
    
    Number of loads and revenue per load excludes the effect of $3,445,000 in 2007 and
$35,449,000 in 2006 of revenue derived from transportation services provided under the FAA
contract as discussed further in the paragraphs that follow. (See the section Use of
Non-GAAP Financial Measures.)  March 31,
    
    
    April 1,2007
    
    
    2006BCO Independent Contractors
    
    
    8,510
    
    
    
    8,219Truck Brokerage Carriers:Approved and active (1)
    
    
    14,784
    
    
    
    13,698Other approved
    
    
    8,758
    
    
    
    8,38123,542
    
    
    
    22,079Total available truck capacity providers
    
    
    32,052
    
    
    
    30,298Number of trucks provided by BCO Independent Contractors
    
    
    9,158
    
    
    
    8,932
 
 (1)
    
    Active refers to Truck Brokerage Carriers who moved at least one load in the 180
days immediately preceding the fiscal
quarter end.      12




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Thirteen Weeks EndedMarch 31,
    
    
    April 1,2007
    
    
    2006Revenue
    
    
    100.0
    %
    
    
    100.0
    %Investment income
    
    
    0.3
    
    
    
    0.0Costs and expenses:Purchased transportation
    
    
    75.3
    
    
    
    75.1Commissions to agents
    
    
    8.1
    
    
    
    7.7Other operating costs
    
    
    1.0
    
    
    
    2.0Insurance and claims
    
    
    3.0
    
    
    
    1.9Selling, general and administrative
    
    
    5.7
    
    
    
    5.9Depreciation and amortization
    
    
    0.8
    
    
    
    0.6Total costs and expenses
    
    
    93.9
    
    
    
    93.2Operating income
    
    
    6.4
    
    
    
    6.8Interest and debt expense
    
    
    0.3
    
    
    
    0.3Income before income taxes
    
    
    6.1
    
    
    
    6.5Income taxes
    
    
    2.4
    
    
    
    2.5Net income
    
    
    3.7
    %
    
    
    4.0
    %
     13




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14




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15




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16




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17




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PART
II
 
      18




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Purchases of Equity Securities by the Company
 Total number of shares
    
    
    Maximum number ofpurchased as part of
    
    
    shares that may yet beTotal number of
    
    
    Average price paid
    
    
    publicly announced
    
    
    purchased under theFiscal period
    
    shares purchased
    
    
    per share
    
    
    programs
    
    
    programsDecember 30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    827,501Dec. 31, 2006  Jan. 27, 2007Jan. 28, 2007  Feb. 24, 2007Feb. 25, 2007  Mar. 31, 2007
    
    
    555,952
    
    
    $
    42.42
    
    
    
    555,952
    
    
    
    271,549Total
    
    
    555,952
    
    
    $
    42.42
    
    
    
    555,952
          
   19




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Exhibit No.
    
    Description(31
    )
    
    Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002:31.1*
    
    
    Chief Executive Officer certification, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    
    Chief Financial Officer certification, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.(32
    )
    
    Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002:32.1**
    
    
    Chief Executive Officer certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2**
    
    
    Chief Financial Officer certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith**
    
    Furnished herewith 20




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LANDSTAR SYSTEM, INC.Date: May 4, 2007
    /s/ Henry H. GerkensHenry H. GerkensPresident and
Chief Executive OfficerDate: May 4, 2007
    /s/ James B. GattoniJames B. GattoniVice President and Chief
Financial Officer 21