UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1998 Commission File No. 000-22490 LANDAIR SERVICES, INC. (Exact name of registrant as specified in its charter) TENNESSEE 62-1120025 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 430 AIRPORT ROAD GREENEVILLE, TENNESSEE 37745 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (423) 636-7000 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 outstanding of the registrant's common stock, $.01 par value, as of April 27, 1998 was 6,146,891. TABLE OF CONTENTS LANDAIR SERVICES, INC. PART I. FINANCIAL INFORMATION
Page Number ------ ITEM 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 3 Condensed Consolidated Statements of Income - Three months ended March 31, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements - March 31, 1998 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 13 ITEM 2. Changes in Securities 13 ITEM 3. Defaults Upon Senior Securities 13 ITEM 4. Submission of Matters to a Vote of Security Holders 13 ITEM 5. Other Information 13 ITEM 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 EXHIBIT INDEX 15
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Landair Services, Inc. Condensed Consolidated Balance Sheets
March 31, December 31, 1998 1997 --------------------- (Unaudited) (Note) (In thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 1,164 $ 686 Accounts receivable, less allowance of $1,111 in 1998 and $928 in 1997 28,998 28,771 Other current assets 8,560 6,372 --------------------- Total current assets 38,722 35,829 Property and equipment 120,446 115,130 Less accumulated depreciation and amortization 38,272 35,933 --------------------- 82,174 79,197 Other assets 3,367 3,305 --------------------- Total assets $124,263 $118,331 ===================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,040 $ 5,126 Accrued expenses 14,528 13,730 Current portion of long-term debt 10,475 11,120 Current portion of capital lease obligations 4,030 3,924 --------------------- Total current liabilities 33,073 33,900 Long-term debt, less current portion 19,816 16,347 Capital lease obligations, less current portion 5,327 6,058 Deferred income taxes 12,305 11,566 Shareholders' equity: Preferred stock -- -- Common stock, $.01 par value: Authorized shares - 20,000,000 Issued and outstanding shares - 6,146,578 in 1998 and 6,024,388 in 1997 61 60 Additional paid-in capital 27,844 26,804 Retained earnings 25,837 23,596 --------------------- Total shareholders' equity 53,742 50,460 --------------------- Total liabilities and shareholders' equity $124,263 $118,331 =====================
Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date, but does not include all of the financial information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. 3 Landair Services, Inc. Condensed Consolidated Statements of Income (Unaudited)
Three months ended -------------------------- March 31, March 31, 1998 1997 -------------------------- (In thousands, except per share data) Operating revenue $ 52,855 $ 41,005 Operating expenses: Purchased transportation 17,211 13,899 Salaries, wages, and employee benefits 15,390 11,669 Depreciation and amortization 3,206 2,559 Fuel and fuel taxes 3,270 2,583 Insurance and claims 2,246 2,512 Operating leases 1,778 1,481 Other operating expenses 5,391 4,380 -------------------------- 48,492 39,083 Income from operations 4,363 1,922 Other income (expense): Interest expense (677) (681) Other, net 16 30 -------------------------- (661) (651) Income before income taxes 3,702 1,271 Income taxes 1,461 500 -------------------------- Net income $ 2,241 $ 771 ========================== Net income per share: Primary $ .37 $ .13 ========================== Diluted $ .35 $ .13 ========================== Dividends declared per share -- -- ==========================
See notes to condensed consolidated financial statements. 4 Landair Services, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended ------------------------ March 31, March 31, 1998 1997 ------------------------ (In thousands) Cash from operations $ 3,458 $ 3,091 Investing activities: Proceeds from disposal of property and equipment 521 106 Purchases of property and equipment (6,635) (4,967) Other (106) (23) ------------------------ (6,220) (4,884) Financing activities: Proceeds from long-term debt 5,733 4,990 Payments of long-term debt (2,909) (1,842) Payments of capital lease obligations (625) (845) Proceeds from exercise of stock options 1,041 -- ------------------------ 3,240 2,303 ------------------------ Increase in cash and cash equivalents $ 478 $ 510 ========================
See notes to condensed consolidated financial statements. 5 Landair Services, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) March 31, 1998 NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Landair Services, Inc. annual report on Form 10-K for the year ended December 31, 1997. NOTE 2 - INCOME TAXES For the three months ended March 31, 1998 and 1997, the effective income tax rate varied from the statutory federal income tax rate of 34% primarily as a result of the effect of state income taxes, net of the federal benefit, and permanent differences. NOTE 3 - EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share and uses the treasury stock method in calculating dilution. All earnings per share amounts for all periods have been presented and restated to conform to Statement 128 requirements. 6 Landair Services, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) NOTE 3 - EARNINGS PER SHARE (CONTINUED) The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Three months ended --------------------- March 31, March 31, 1998 1997 --------------------- Numerator: Numerator for basic and diluted earnings per share - net income $2,241 $ 771 ===================== Denominator: Denominator for basic earnings per share- weighted-average shares 6,076 5,953 Effect of dilutive stock options 306 101 --------------------- Denominator for diluted earnings per share- adjusted weighted-average shares 6,382 6,054 ===================== Basic net income per share $ .37 $ .13 ===================== Diluted net income per share $ .35 $ .13 ===================== Securities that could potentially dilute basic net income per share in the future that were not included in the computation of diluted net income per share because to do so would have been antidilutive for the periods presented -- 448 =====================
7 Landair Services, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) NOTE 4 - BUSINESS SEGMENTS A summary of information about the Company's operations by segment for the three months ended March 31, 1998 and 1997 is as follows (in thousands):
Truckload Forward Air --------- ----------- Three months ended March 31, 1998 Operating revenue from external customers $24,005 $28,850 Intersegment revenue 1,318 -- Segment income from operations 1,581 2,782 Three months ended March 31, 1997 Operating revenue from external customers $19,393 $21,612 Intersegment revenue 1,152 -- Segment income from operations 156 1,766
A reconciliation of reportable segment income from operations to the Company's consolidated totals is as follows (in thousands):
Three months ended ---------------------- March 31, March 31, 1998 1997 ----------------------- Total income from operations for reportable segments $4,363 $1,922 Other profit or loss -- -- ----------------------- Total consolidated income from operations $4,363 $1,922 =======================
There was no material change in total assets by segment, as of March 31, 1998, from the amounts disclosed in the Company's annual report on Form 10-K for the year ended December 31, 1997. 8 Landair Services, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) NOTE 5 - COMMITMENTS AND CONTINGENCIES The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involve claims for personal injury and property damage incurred in connection with the transportation of freight. Management believes none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or results of operations of the Company. In connection with the Company's anticipated fuel requirements, the Company periodically enters into forward contracts for the purchase of fuel as deemed appropriate to reduce the risk of future fuel price increases. At March 31, 1998, the Company had commitments to purchase approximately 500,000 gallons of fuel per month through February 1999. The price required to be paid under the forward contracts is not materially different from the current market price at March 31, 1998. The Company is exposed to loss in the event of nonperformance by the other parties to the forward contracts; however, the Company does not anticipate nonperformance by the counterparties. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth the percentage relationship of expense items to operating revenue for the periods indicated.
Three months ended ---------------------- March 31, March 31, 1998 1997 ----------------------- Operating revenue 100.0% 100.0% Operating expenses: Purchased transportation 32.6 33.9 Salaries, wages, and employee benefits 29.1 28.5 Depreciation and amortization 6.0 6.2 Fuel and fuel taxes 6.2 6.3 Insurance and claims 4.2 6.1 Operating leases 3.4 3.6 Other operating expenses 10.2 10.7 --------------------- 91.7 95.3 Income from operations 8.3 4.7 Other income (expense): Interest expense (1.3) (1.7) Other, net -- 0.1 --------------------- (1.3) (1.6) --------------------- Income before income taxes 7.0 3.1 Income taxes 2.8 1.2 --------------------- Net income 4.2% 1.9% =====================
Results of Operations Operating revenue increased by $11.9 million, or 29%, to $52.9 million in the first quarter of 1998 from $41.0 million in 1997. Purchased transportation was 32.6% of operating revenue in the first three months of 1998 compared to 33.9% in 1997. The decrease in purchased transportation as a percentage of operating revenue between periods was primarily attributable to a reduction in the ratio of owner- operator to Company-operated equipment in 1998. During the first three months of 1998 and 1997, approximately 40.1% and 41.9% of the Company's total average tractors in service were contracted through owner-operators. Salaries, wages and benefits were 29.1% of operating revenue in the first three months of 1998 compared to 28.5% in 1997. The increase as a percentage of operating revenue in 1998 was due 10 primarily to higher cargo handling wages and terminal managers' salaries required to operate additional terminals and greater operating volumes in the Company's Forward Air operations combined with an increase in the ratio of Company-operated to owner-operator equipment. These factors were partially offset by increased utilization of Company-operated equipment during the first three months of 1998 compared to 1997. Depreciation and amortization expense as a percentage of operating revenue was 6.0% in the first quarter of 1998, compared to 6.2% in 1997. The improvement in depreciation and amortization expense as a percentage of operating revenue is primarily attributed to increased utilization of operating assets partially offset by additional depreciation and amortization as a result of a higher ratio of Company-operated to owner-operator equipment during the first three months of 1998 compared to the prior year. Fuel and fuel taxes were 6.2% of operating revenue in the first quarter of 1998, compared to 6.3% in 1997. The decrease in fuel and fuel taxes as a percentage of operating revenue during 1998 resulted from a lower average fuel price per gallon coupled with improvements in the average miles per gallon and average revenue per loaded mile of the Company-operated tractor fleet. The increase in fuel and fuel taxes as a percentage of operating revenue during 1998 was also attributed to an increase in the ratio of Company-operated to owner-operator equipment. Insurance and claims were 4.2% of operating revenue for the three months ended March 31, 1998, compared with 6.1% in 1997. The decrease in insurance and claims expense as a percentage of operating revenue is due primarily to a decrease in the severity of accidents and lower premium costs during the first quarter of 1998 compared with 1997. Operating leases were 3.4% of operating revenue in the first quarter of 1998, compared to 3.6% in 1997. The decrease in operating lease expense as a percentage of operating revenue is attributed to increased utilization of leased operating equipment and facilities. Other operating expenses were 10.2% of operating revenue in the first quarter of 1998 compared to 10.7% in 1997. The decrease in 1998 as a percentage of operating revenue is attributed to both a reduced operating cost structure and improvements in utilization levels in the Company's operations. The effective tax rate for the first quarter of 1998 was 39.5% compared to 39.0% for 1997. Forward Air Segment - Operating revenue in the Company's Forward Air operations increased by $7.2 million, or 33%, during the first three months of 1998 over the prior-year quarter and represented approximately 54.6% and 52.7% of the Company's total operating revenue for these periods, respectively. Operating revenue increases in the Forward Air operations resulted from increasing the number of operating terminals, enhancements to the Forward Air network and greater volume from domestic and international air cargo customers. The operating revenue increase in 1998 is also partially attributed to the acquisition on October 27, 1997 of the air cargo operating assets of Adams Air Cargo, Inc. 11 Forward Air income from operations increased by $1.0 million during the first three months of 1998 over the prior-year quarter. The increase in income from operations resulted from higher operating revenue, which was reduced in part by the incremental costs associated with such revenue. Truckload Segment - Operating revenue in the Company's Truckload operations increased by $4.8 million, or 23%, during the first three months of 1998 over the prior-year quarter. The operating revenue increase in the Truckload operations resulted primarily from increases in equipment utilization, yield and additional tractors in service. During the first three months of 1998 and 1997, the average tractors in service utilized by the Truckload operations, including owner-operators, were 780 and 695, respectively. Truckload income from operations increased by $1.4 million during the first three months of 1998 over the prior-year quarter. The increase in income from operations in 1998 was due mainly to a lower operating cost ratio resulting from an increase in equipment utilization and yield during the year. Liquidity and Sources of Capital Cash flows from operations were $3.5 million for the first three months of 1998 compared with $3.1 million in the same period of 1997. The $400,000 increase in cash flows from operations was principally attributable to increased business volumes and collection of the related accounts receivable. Management believes available borrowing under existing lines of credit, future borrowing under installment notes for revenue equipment, and cash generated by operations will be sufficient to fund the Company's cash needs and anticipated capital expenditures over the near term. Recent Developments On February 10, 1998, the Company's Board announced it had authorized the creation of a special committee of independent directors to consider a plan to separate the Company into two publicly-traded companies, one comprised of the Truckload operations, and the other the Forward Air operations. There can be no assurance as to whether any such transaction will occur or as to the timing or terms of any such transaction. Under the plan currently being considered, the transaction would be structured as a tax-free spin-off, subject, among other things, to the receipt of a ruling as to tax-free status from the Internal Revenue Service. 12 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is, from time to time, a party to litigation arising in the normal course of its business, most of which involve claims for personal injury and property damage incurred in connection with the transportation of freight. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on the financial condition or results of operations of the Company. ITEM 2. CHANGES IN SECURITIES Not Applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable ITEM 5. OTHER INFORMATION Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The following exhibits are included herein: (a) Exhibits - The response to this portion of Item 6 is submitted as a separate section of this report. (b) Reports on Form 8-K - The Company did not file any reports on Form 8-K during the three months ended March 31, 1998. 13 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. Landair Services, Inc. Date: May 8, 1998 By: /s/ Edward W. Cook ------------------------------ Edward W. Cook Chief Financial Officer and Senior Vice President 14 EXHIBIT INDEX
Exhibit Number Exhibit ------ ------- 10.1 $15,000,000 Restated, Amended and Replacement Promissory Note (Line of Credit), dated as of January 30, 1998, among First Tennessee Bank National Association, the registrant, Landair Transport, Inc., Landair International Airlines, Inc., Transportation Properties, Inc. and Forward Air, Inc. 10.2 Third Amendment to Line of Credit Loan Agreement and to Amended and Restated Security Agreement, dated as of January 30, 1998, among First Tennessee Bank National Association, the registrant, Landair Transport, Inc., Landair International Airlines, Inc., Transportation Properties, Inc., and Forward Air, Inc. 10.3 $15,000,000 Restated, Amended and Replacement Promissory Note (Equipment Loan), dated as of January 30, 1998, among First Tennessee Bank National Association, the registrant, Landair Transport, Inc., Landair International Airlines, Inc., Transportation Properties, Inc. and Forward Air, Inc. 10.4 Sixth Amendment to Loan and Security Agreements, dated as of January 30, 1998, among First Tennessee Bank National Association, the registrant, Landair Transport, Inc., Landair International Airlines, Inc., Transportation Properties, Inc. and Forward Air, Inc. 10.5 Seventh Amendment to Loan and Security Agreements, dated as of January 30, 1998, among First Tennessee Bank National Association, the registrant, Landair Transport, Inc., Landair International Airlines, Inc., Transportation Properties, Inc. and Forward Air, Inc. 10.6 Eighth Amendment to Loan and Security Agreements, dated as of February 24, 1998, among First Tennessee Bank National Association, the registrant, Landair Transport, Inc., Landair International Airlines, Inc., Transportation Properties, Inc. and Forward Air, Inc. 10.7 Ninth Amendment to Loan and Security Agreements, dated as of March 24, 1998, among First Tennessee Bank National Association, the registrant, Landair Transport, Inc., Landair International Airlines, Inc., Transportation Properties, Inc. and Forward Air, Inc.
15
Exhibit Number Exhibit ------ ------- 27.1 Financial Data Schedule - Period Ended March 31, 1998 (Electronic Filing Only) 27.2 Financial Data Schedule (Restated) - Year Ended December 31, 1996 (Electronic Filing Only) 27.3 Financial Data Schedule (Restated) - Period Ended June 30, 1997 (Electronic Filing Only) 27.4 Financial Data Schedule (Restated) - Period Ended September 30, 1997 (Electronic Filing Only)
16