Jul 15, 2009
Executives
Henry H. Gerkens – President, Chief Executive Officer & Director James B.
Gattoni – Chief Financial Officer & Vice President Patrick J. O’Malley – President – Landstar Carrier Group Jim M.
Handoush – President Landstar Global Logistics and Landstar Express
Analysts
Edward Wolfe – Wolfe Research LLC Jon Langenfeld – Robert W. Baird & Co., Inc.
Christopher Ceraso – Credit Suisse Thomas Wadewitz – JP Morgan John Barnes – RBC Capital Markets Todd Fowler – Keybanc Capital Markets David Campbell – Thompson, Davis & Co. Nate Brochmann – William Blair & Co.
David Mack – Decade Capital Alex Brand – Stephens Inc.
Operator
Welcome to the Landstar System, Inc. second quarter 2009 earnings release conference call.
(Operator Instructions) Joining us today from Landstar are Henry Gerkens, President and Chief Executive Officer; Jim Gattoni, Vice President and Chief Financial Officer; Pat O’Malley, President Landstar Carrier Group; Jim Handoush, President Landstar Global Logistics. Now, I would like to turn the call over to Mr.
Henry Gerkens. Sir you may begin.
Henry Gerkens
Thanks. Good afternoon and welcome to the Landstar 2009 second quarter earnings conference call.
This call will be limited to no more than one hour so please limit your questions to no more than two questions each when asked when the question and answer period begins. We will keep our prepared remarks brief to allow ample time for questions.
Before we begin let me read the following statement. The following is a Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.
Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call I and other members of Landstar’s management may make certain statements containing forward-looking statements such as statements which relate to Landstar’s business objectives, plans, strategies and expectations.
Such statements are by nature subject to uncertainties and risks including, but not limited to, the operational, financial and legal risks detailed in Landstar’s Form 10K for the 2008 fiscal year described in the section “risk factors” and other SEC filings from time-to-time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated.
Investors should not place undue reliance on such forward-looking statements and Landstar undertakes no obligation to publicly update or revise any forward-looking statements. Let me first talk about our second quarter revenue performance.
The 2009 second quarter operating environment remained very challenging. I knew going into the 2009 second quarter that the revenue comparisons to the prior year quarter would be difficult despite the stable sequential week-over-week volume trends we had been experiencing.
As we anticipated, in the 2009 second quarter substantive line-haul revenue, all automotive related revenue and fuel surcharges on brokerage, rail, ocean and air revenue were all substantially lower than the prior year and were the main drivers of the quarter-over-quarter revenue decline. Specifically, substitute line-haul revenue declined approximately 50% quarter-over-quarter.
All automotive related revenue declined approximately 31% quarter-over-quarter and fuel surcharges on brokerage, rail, ocean and air revenue declined approximately 79% quarter-over-quarter or approximately $39 million. As I have stated before, these major headwinds begin to dissipate in the back half of the year.
Additionally, revenue generated from the United States Department of Defense and from customers servicing the alternative energy sector was also very weak. I believe year-over-year revenue comparisons excluding any revenue from disaster relief services in either year should become somewhat easier as we move towards the end of the September timeframe.
Irrespective of the quarter-over-quarter revenue decline, Landstar’s net margin increased to 17.2% from 15.3% the prior year. SG&A expenses excluding the one-time acquisition costs and bad debt expense associated with trade accounts receivable were approximately 12% lower than the prior year and consistent with what I had previously stated on a prior conference call.
Operating profit margin was 6.1% and 6.5% excluding one-time costs incurred with the acquisitions. Diluted earnings per share was $0.35 per share and excluding the $0.02 per share related to the one-time acquisition costs it was $0.37 per share.
Despite the very difficult economic conditions and a very challenging trade environment, Landstar continued to move forward and strengthen its operating base. On July 2, Landstar announced the acquisition of two technology based companies, Premier Logistics based in Detroit, Michigan and A3 Integration, LLC based in Ann Arbor, Michigan.
I am very excited about the opportunities these two acquisitions create. In Premier Logistics, Landstar obtains a company with proven technology that includes web based bidding, scheduling, shipping, tracking and reporting, allowing customers complete, real-time visibility to follow their inbound and outbound shipments from pick up to destination.
In A3i, Landstar will now be able to provide its customers with state of the art web-based transportation and supply chain management technologies to optimize the complete order to cash process. With these acquisitions, Landstar now possesses the tools to become a significant player in the freight under management environment as well as offering its customers complete integrated supply chain solutions.
Although we don’t anticipate any significant impact in the near-term, strategically these acquisitions are a win/win for Landstar, its agents and its third-party capacity and will provide the platform for future growth. Landstar also continued to see much opportunity to attract new agents to our system in the 2009 second quarter.
Our agent location count at the end of the 2009 second quarter was 1,436 compared to 1,409 at the end of the 2008 second quarter. Agents added in 2008 and 2009 contributed approximately $19 million in new revenue in the 2009 second quarter.
Additionally, during the 2009 second quarter we added another 10 agents who had a prior revenue run rate of at least $1 million. Since the beginning of the 2008 fourth quarter we have now added 38 of such new agents.
Our number one strategy in this environment continues to be add quality, productive agents. Our pipeline of prospective new agents remains very strong.
In addition, we continue to make good progress on our universal agent and business unit specialist initiatives. Our balance sheet remains strong.
We ended the quarter with approximately $116 million in cash and marketable securities. In addition, we have reduced long-term debt including current maturities by approximately $73 million from the end of the 2008 fourth quarter.
In short, Landstar’s financial position continues to remain very, very strong. On that note I am going to turn it over to Jim for his financial review.
James Gattoni
Thanks Henry. Henry has already discussed the revenue for the 2009 second quarter.
I will cover various other financial information included in our second quarter release. Investment income was $250,000 in the 2009 quarter compared to $773,000 in the 2008 period.
The $523,000 decrease in investment income was due to a lower rate of return on investments held by the insurance segment in the 2009 second quarter. Purchase transportation was 74.6% of revenue in the 2009 second quarter compared to 77.2% in the 2008 second quarter.
The decrease in purchase transportation as a percent of revenue was primarily attributable to decreased rates of purchase transportation paid to third-party truck brokerage carriers which was due to excess truck capacity and lower fuel prices and decreased less and truckload substitute line-haul revenue hauled by truck brokerage carriers which tend to have a higher cost of purchase transportation. Commissions to agents were 8.1% of revenue in the 2009 quarter compared to 7.6% in the 2008 quarter.
This increase was primarily due to increased gross profit representing revenue less the cost of purchase transportation on revenue hauled by truck brokerage carriers. Other operating costs were 1.5% of revenue in the 2009 quarter compared to 1.1% in the 2008 quarter.
This increase was primarily attributable to the effect of decreased revenue. Although the company reduced trailer rental costs by $1 million in the 2009 second quarter, this was offset by an increase in the provision for contractor bad debt in the 2009 second quarter.
Insurance and claims costs were 2% of revenue in the 2009 quarter compared to 1.4% in the 2008 quarter. This increase was attributable to increased severity of commercial trucking accidents and an increase in the cost per claim per occupational accident claims under the company’s third-party program in the 2009 second quarter.
Selling, general and administrative costs were 6.6% of revenue in the 2009 quarter compared to 5% of revenue in the 2008 quarter. This increase was attributable to the effect of decreased revenue.
There was no provision for bonuses included in the 2009 second quarter as management does not currently anticipate achieving bonus targets. Included in the 2009 second quarter was $2 million of costs related to the acquisitions completed in the first week of the company’s third quarter.
Depreciation and amortization was 1.2% of revenues in 2009 second quarter compared to 0.7% in the 2008 quarter. This increased was primarily due to the effect of decreased revenue.
Interest and debt expense was $973,000 in the 2009 quarter compared to $1.7 million in the 2008 quarter. The decrease in interest expense was attributable to lower interest rates and lower borrowings under the company’s senior credit facility.
The effective income tax rate was 38% in the 2009 quarter compared to 38.6% in the 2008 quarter. The decrease in the effective income tax rate was primarily attributable to lower state taxes due to state income tax planning strategies implemented in the back half of 2008.
Looking at our balance sheet we ended the quarter with cash and short-term investments of $116 million. During the 2009 first half, Landstar’s long-term was $73 million.
Cash flow from operations was $106.3 million during the 2009 first half. On June 27, 2009 shareholder equity represents 81% of total capitalization.
2009 trailing 12-month return on equity remained high at 35%. Back to you Henry.
Henry Gerkens
Thanks Jim. As I look back to the back half of 2009 I see little reason to believe there will be a significant change in current economic conditions.
I see a very slow recovery. However, I do believe the worst is over.
From Landstar’s perspective we have taken advantage of the opportunities the marketplace has presented us and we will continue to do so. The 2009 third quarter over the 2008 third quarter revenue comparison will continue to be difficult.
However, I believe it should be slightly easier than the 2009 second quarter over the 2008 second quarter. Recent sequential low volumes have improved slightly however there still remains some pressure on price.
I remain hesitant about giving specific revenue or earnings guidance for the 2009 third quarter at this time as I believe there still remains a degree of market uncertainty despite some of the stabilizing trends we have experienced. Over the past two quarters Landstar’s actual results have demonstrated how Landstar’s variable cost business model reacts given the various revenue levels.
All anyone has to do is look at the 2009 versus 2008 second quarter revenue comparison to get an idea how our earnings per share reacts. It is the beauty of our variable cost model.
Remember, Landstar’s variable cost business model has automatic cost reduction triggers. Additionally, excluding SG&A expense of the recently acquired companies and any change in the provisions for doubtful trade accounts receivable, I anticipate SG&A expenses to be approximately 12-15% lower in the 2009 third quarter versus the 2008 third quarter.
Given what should be easing revenue comparisons starting towards the very end of the 2009 third quarter in the substantive line-haul business, the automotive business and fuel surcharges which are included in revenue coupled with the incremental business added from new agent additions and from our two new acquisitions plus a slowly improving economy, I see only good trends as Landstar moves into the back half of 2009 and into 2010. With that I will open it up for questions.
Operator
(Operator Instructions) The first question comes from the line of Edward Wolfe – Wolfe Research LLC.
Edward Wolfe – Wolfe Research LLC
I thought I heard you say that substitute line-haul was down 50% quarter-over-quarter. Did you mean year-over-year?
Henry Gerkens
Quarter-over-quarter.
Edward Wolfe – Wolfe Research LLC
So second quarter is down 50 relative to first quarter?
Henry Gerkens
Well quarter-over-quarter when I refer to quarter-over-quarter that is not sequential, that is 2008 to 2009.
Edward Wolfe – Wolfe Research LLC
Second quarter 2009 over second quarter 2008?
Henry Gerkens
2009 over 2008 first quarter as I recall was down 43%.
Edward Wolfe – Wolfe Research LLC
So it is down 50. So there is not one big line-haul customer that capitulated between second quarter and first quarter in other words?
Henry Gerkens
No, we knew that was going to be slow. We had a very good second quarter in 2008 vis a vie substitute line-haul and the difference this year.
Edward Wolfe – Wolfe Research LLC
When you say the worst is over you think are you talking in terms of demand, pricing or both?
Henry Gerkens
I think from a demand standpoint we have started to see clear stabilization. In fact we have seen a slight increase in load volumes.
There is still some fluctuation and some uncertainty in the pricing environment and I am hesitant to say that is bottom but clearly there is an element of stabilization in pricing and when it relates to Landstar, as I move towards the end of the third quarter I know my comps become a lot easier.
Edward Wolfe – Wolfe Research LLC
Can you talk in terms of the revenue per load if you have it net of fuel, but if not gross of fuel, how it went through the quarter April, May, June into July?
Henry Gerkens
That Jim might have. Do you have that in front of you?
James Gattoni
From the brokerage standpoint, because it is not in the BCO, if you look at rate per load from a brokerage truck, brokerage piece, the rates, April, May and June were off 21%, 24% and 26%. Without fuel, if you take fuel out of that, 13%, 15% and 18%.
Edward Wolfe – Wolfe Research LLC
Any sign in July yet?
James Gattoni
No.
Edward Wolfe – Wolfe Research LLC
Can you just do the same for BCO’s gross or however you have it?
James Gattoni
I only have it for [inaudible]. I didn’t combine them.
Edward Wolfe – Wolfe Research LLC
I’ll take whatever you have got.
James Gattoni
656 for vans.
Edward Wolfe – Wolfe Research LLC
And flat?
James Gattoni
13, 14, 21.
Henry Gerkens
The reason you have the big variance there is you have got to take a look at the heavy bulk stuff. That was very big in the June quarter.
It is really a mix issue when you talk about it.
Operator
The next question comes from Jon Langenfeld – Robert W. Baird & Co., Inc.
Jon Langenfeld – Robert W. Baird & Co., Inc.
At the beginning of the year you kind of talked about the variations of revenue versus earnings and kind of being able to align that like you did here in the second quarter. Is there a point in which you stretch too much internally on your cost side?
I think the range you gave was 0-20 and here we are at 30 and yet you are still kind of able to gear those earnings to that extent. How badly are you stretching internally to try to make these earnings?
Henry Gerkens
When you say badly stretched…
Jon Langenfeld – Robert W. Baird & Co., Inc.
I shouldn’t say badly. How difficult is it internally on the people, really looking at the SG&A line you continue to do a good job there.
I’m just wondering…
Henry Gerkens
You have to remember we did a couple of things. Our bonus program is variable so everybody is aware of that.
What we have done is we have instituted, and we did this at the beginning of the year, we instituted a hiring freeze. So if a person were to leave we weren’t replacing them.
We have literally got a wage freeze if you will in effect. We also took actions at the beginning of the year which I tried to explain in a couple of conference calls that actually affect individual quarters more so.
Like the first quarter for example. We have action plans we took in the very beginning of the year that resulted, for example, in a 12% differential in the second quarter and it will be as high as 15% in the third quarter.
When you go to the fourth quarter that is going to drop down a little bit because you have the effect of the bonus plans that we didn’t approve in the fourth quarter last year. We thought we had a pretty good handle on what we could do with the cost element.
I don’t see any pressure if you will at this point. Obviously we are looking to save every penny we can in this environment without sacrificing strategically new opportunities.
Jon Langenfeld – Robert W. Baird & Co., Inc.
When you talk about SG&A and you talk about being down 12, is that your SG&A line? What is included in all of that?
Henry Gerkens
SG&A line in the income statement exclusive of any of the change in the allowance for doubtful trade accounts receivable, customer bad debt. As you recall what I explained I think in the mid-quarter conference call or first quarter or at one of my presentations is we would anticipate a 12% change or decline in the second quarter; 15% in the third quarter and about 7% in the fourth quarter.
Again, it is reflective of our variable cost model plus the additional actions we took at the beginning of the year.
Jon Langenfeld – Robert W. Baird & Co., Inc.
You said the bad debt was in the “other operating costs.”
James Gattoni
No. That is in SG&A.
Other operating has the bad debt from our BCO and independent contractors, we have been loaning them money for [tire purchases] and then they disappear. So contractor bad debt is under other operating, customer bad debts is SG&A.
Jon Langenfeld – Robert W. Baird & Co., Inc.
So in the other operating costs there was also expense in there associated with the bad debt side?
James Gattoni
Yes. Contractor bad debt was up in the quarter in the other operating line.
Jon Langenfeld – Robert W. Baird & Co., Inc.
That was another headwind you faced in the quarter. What was the thought process behind paying down the debt versus share buyback and how do you think about managing that over the next couple of…
Henry Gerkens
A couple of things. As it relates to share buyback in the process of doing these acquisitions we felt it was prudent not to really go into the market place understanding what we were doing.
So we really stayed away from that. The result from that is using the cash to pay down debt.
Jon Langenfeld – Robert W. Baird & Co., Inc.
The amount of expense on the acquisitions? How much is that total?
Henry Gerkens
$2 million.
Operator
The next question comes from Christopher Ceraso – Credit Suisse.
Christopher Ceraso – Credit Suisse
I noticed both of these acquisitions are Michigan based. Do they have automotive customer exposure?
Henry Gerkens
A couple of things and then I will let Jim Handoush say a few words on the acquisitions. The Premier acquisition when you look at its customer base it is primarily automotive based.
The A3i acquisition is really a startup venture that has some very unique technology that both acquisitions we believe have interplay to other industries that I think will be of great use to our agents and Jim maybe you want to add a little bit of color?
Jim Handoush
One of the main things we looked at in reviewing these companies was not only how they complemented each other but also how the complemented our base business. We at the same time looked at their core business and the technology they were delivering to ensure we could deliver that to a broader customer base.
So as we went through the analysis we saw that we could and again it complemented our core business and our core drivers of our business, our agent family and BCO’s and third-party capacity. At the same time it would get us into a market that our customers are driving us towards.
That is the reason we kind of do everything we do. We feel very, very good about these acquisitions and how they fit into the company.
One of the other things we looked at, that you have to look at in any acquisition, is the actual fit of the people and the culture and that is a great fit for us as well. We are very excited about the acquisitions.
Christopher Ceraso – Credit Suisse
Elsewhere in your business where you do have automotive exposure, have you started to see any signs yet with build rates or whatever it is that you carry for auto companies improve a bit?
Henry Gerkens
No, I think it is too early to tell in July but I feel actually as I said before I think from our perspective we feel that has sort of bottomed and I think in the back half of the year that actually might present an opportunity.
Christopher Ceraso – Credit Suisse
Can you highlight any particular areas of your business where the price pressure is the most pronounced whether it is a different mode, customer or region?
Henry Gerkens
I think Jim described in his van numbers pretty consistent. I wouldn’t say it is, maybe someone else can answer that as far as region, but clearly from the flat bed side on the revenue per load basis clearly the biggest impact has to do with some of the power generation heavy bulk business because that really impacts that dramatically.
Other than that I think you really see some stabilization to a certain degree. It is the lack of all that heavy bulk business which just has a large revenue per load which is basically causing those bigger decreases.
Operator
The next question comes from Thomas Wadewitz – JP Morgan.
Thomas Wadewitz – JP Morgan
I wanted to see if you could give some of the monthly numbers on the volume side similar to what you did on price?
James Gattoni
Total volumes, being load count was off 18% in April, 14% in May and 16% in June.
Thomas Wadewitz – JP Morgan
18, 14 and 16?
James Gattoni
Yes.
Thomas Wadewitz – JP Morgan
And that is including both brokerage and BCO?
James Gattoni
That is total load count.
Henry Gerkens
That is compared to the prior year too so you need to keep that in mind because sequentially we have started to see some numbers that are improving. That is the bright light in all of this.
You are starting to see sequential improvement. The prior year comparisons, as I think you well know, we had a pretty good second quarter and June.
Thomas Wadewitz – JP Morgan
Yes, you had a good June. Is there anything you can provide in terms of comments about where the improvement is?
You talked a little bit about where but is power generation, you mentioned that was a pretty big drag in the second quarter. Does that look like it is picking up a bit in the second half?
Henry Gerkens
We haven’t seen that yet. We think it will pick up based on some comments we have heard.
We haven’t really seen any effects and I will turn back on this with the stimulus as of yet. Reports are that obviously it is being slowly released which we can attest to that.
Comments on general…
Patrick O'Malley
I think we have gotten some commitments on the back half of the year on some of the wind energy business but again as Henry mentioned earlier mix comes into play. Whether it is late in the fall or size and scope of the transport that is going to have some impact on the total revenue that is generated.
So although the shipments are going to go up and the demand is going to increase slightly, you know we have yet to see where that falls out on the price.
Thomas Wadewitz – JP Morgan
You are electing to not give us the guidance or the kind of non-guidance as you did last quarter but what do you think about seasonality for third quarter earnings versus second? It seems that you typically would see a stronger third quarter than second quarter from an earnings basis.
Is that reasonable to expect that seasonality to be true this year or do you kind of throw seasonality out given the way the economy is working?
Henry Gerkens
A couple of things. The reason we didn’t provide the non-guidance is because exactly the way you interpreted it.
Non-guidance. It was really meant to be a sensitivity analysis.
I think what I’m trying to show now is a revenue assumption and I think I said we think the numbers are an easier comparison and typically the third quarter is strong. September is strong.
Look, June typically is a strong month and it was strong last year. Very strong.
It picked up a little this year but in fact it wasn’t as great as what it was last year. So you have a bigger discrepancy if you will.
But in September things start to change a little bit because September usually is a big month. As you recall in late September fuel starts to come down a little bit.
I know I have favorable comps in the back half of September also on the substitute line-haul so it is kind of tough for me to figure out. I would expect September to be better than the July/August timeframe but how good that is going to be again I think it is a very slow recovery.
I feel positive that we have come out of the worst. It is kind of tough for me to couch exactly where that number is going to be.
Typically September and the third quarter is seasonally a very good year. This year has been so unpredictable that I don’t think it would be prudent to try to state that.
If it tracks the prior year it is typically seasonally a pretty good quarter.
Thomas Wadewitz – JP Morgan
So it is reasonable to think that it is up but it is kind of hard to have a lot of visibility beyond that if you look at versus the 37 in the second?
Henry Gerkens
Yes. The only thing we have a little bit, not visibility but just from a comparability standpoint the fourth quarter clearly in my opinion is where things start to change a little bit because our comparisons become a lot easier.
Operator
The next question comes from John Barnes – RBC Capital Markets.
John Barnes – RBC Capital Markets
As you look at the first half of the year and the sharp decline in auto, the sharp decline in the substitute line-haul, how do you factor that in terms of your strategy going forward? Are you looking to diversify away and is that part of your agent recruitment process?
Maybe move away from just a pure substitute line-haul agent into something you are not exposed to? How do you balance that out?
Henry Gerkens
It is pretty interesting because when you look at things quarter-to-quarter and things like that those types of issues come up. Any business we get, as long as I make money and generate cash over it I am going to try to go after.
I think all that business is good and at some point in time that is going to come back. To me what is king is cash.
No, I think in a perfect world we should be totally diversified. Quite frankly we are a pretty diversified company.
But substitute line-haul happened to be down. Automotive happened to be down.
I believe what goes down comes back up and I do believe those things will change at some point in time. I would never walk away from any business.
We clearly from Landstar’s perspective want to be as diverse as possible but that is not to say I would ever walk away from anything.
John Barnes – RBC Capital Markets
In terms of I think last quarter on the call you talked a little bit about gross margins, BCO versus brokerage historically kind of 19-20% on the BCO side and maybe 9-11% on the brokerage. Do those percentages still kind of hold true at the upper end on brokerage just given how loose capacity is?
Did that hold true for the second quarter? Did you see something similar on the BCO side or was there some pressure on either one?
James Gattoni
Typically no pressure from the BCO because those are all fixed rates. The brokerage piece continued to pick up margin.
Remember, all the margin improvement we pick up from the carriers is shared with the agent so if I tell you we picked up 250 basis points on brokerage carry in the quarter you kind of share half of that with the agent family and that is part of how that net revenue went from 15.3 to 17.2. You saw the same thing in the first quarter.
Our net went from 15.9 in the first quarter of 2008 to 17.1 I think in the first quarter of 2009. So you see a consistent trend in the way the brokerage margins are working.
John Barnes – RBC Capital Markets
On the pricing stability that you talked about, I am curious as to it looks like less capacity is coming out of the market than you would think would kind of given the circumstances, the tough economy and the like. Do you think enough has come out that there has been a bit of equilibrium or do you think pricing is beginning to stabilize because the carriers just can’t do it for any cheaper?
Henry Gerkens
I think that is a very good point. I think you started to see a slight pick up in demand.
I think carriers are at the bare bone at this point in time. I think you have almost reached that equilibrium.
That is not to say you can’t have a dip down. What I have said, it is too early to say anything like that.
I believe that demand has clearly stabilized because we have seen a pick up in sequential load demand. I think that is a good trend.
That sort of dovetails a little bit as far as starting to see some stabilization maybe in the price. I think it is a little bit too early to say it has total bottomed.
It could but I’m not sure I can make that statement yet.
Operator
The next question comes from Todd Fowler – Keybanc Capital Markets.
Todd Fowler – Keybanc Capital Markets
Talking about the business trends and maybe thinking about it a little bit differently, we have talked about the year-over-year comparisons throughout the quarter. Can you talk about what volumes did sequentially?
How was May relative to April and then how was June relative to May? Any sort of commentary on July and what you have seen in the first couple of weeks would be helpful as well.
Henry Gerkens
He has a book of information so give him some time. If you have another question.
Todd Fowler – Keybanc Capital Markets
Thinking about areas of strength we obviously know substitute line-haul, auto was weak. Any areas in particular that have firmed up more than what you would have expected or are a little bit stronger right now than where they were at the beginning of the year or over the past couple of months?
Henry Gerkens
I think a lot of the stuff from a sequential question as far as market segment the only thing I can tell you is from a quarter-over-quarter or month-over-month type thing from last year to this year the bigger changes were, as I said, the substitute line-haul for example 50% down this quarter versus 43% down that quarter so you had an increase I think U.S. DOD business was worse in the second quarter than it was in the first quarter.
There is not a lot of activity there. I would probably expect that to continue for a little bit.
But the others, those are the ones that come to mind. Automotive actually has stabilized to a degree and that is a positive.
So it is not getting any worse. I would say other than that and I guess the power generation business everything else is down but it is better.
Is that fair Pat?
Patrick O'Malley
One of the things we look at too is where are we spotting van trailers? That is kind of an indicator.
Although the number of customers we are spotting trailers at has increased in the second quarter 2009 over 2008 the number of trailers we are spotting at those locations is significantly less. So as we bring on new agents that have new book business we are filling those spot requests and as our sales efforts bring on new customers with really no spot requests yet the volumes out of those locations are down significantly year-over-year.
James Gattoni
The problem is you are looking for a week-to-week analysis. We do 4-5 weeks, April, May and June.
If you look at what happened during the quarter, April, May and June, on a load count we were up about 5% in load count April to May which each have four weeks on a weekly basis. Then June was relatively flat to where May was.
It kind of leveled off. But I have to factor in Memorial Day and I haven’t done that.
So there is a whole bunch of other factors that affect a weekly analysis.
Todd Fowler – Keybanc Capital Markets
Certainly a build throughout the quarter sequentially and June may be stable relative to where May was then?
James Gattoni
That is fair.
Todd Fowler – Keybanc Capital Markets
With the insurance claims here during the quarter what is the best way to think about the run rate going forward? Roughly around $10 million just on expense on the P&L during the quarter.
Is that going to be about the same? I guess I was a little bit surprised given the fact that the volumes were down and it moved up sequentially from the first quarter.
What is kind of the expectation for the third and fourth run rate on the insurance claims line?
James Gattoni
Like I said, we had some unfavorable experience in this quarter on our occupational accident program and our third-party programs which was higher than usual. In this kind of environment I think that is kind of expected but it was even higher than what we expected.
I would expect it to hold where we are but it really has to do with the severity of accidents. We are exposed up to $5 million per occurrence.
I don’t want to hold myself to any given number. If we are running these kinds of volumes and we are safe and frequency of severity stays the same you would expect the number you are looking at right now in the quarter.
Todd Fowler – Keybanc Capital Markets
So somewhere between in the second quarter run rate is a good placeholder going forward?
James Gattoni
One thing you have to remember too is it is highly attributable to what happens with the BCO revenue, not total revenue. Our accident claims are almost 100% attributed to BCO’s so really what happens to that business.
That business you have to look at it as a volume thing, not as a revenue thing. That revenue is off 14% so what you are saying is you expect to see your claims to go down 14% but unfortunately we didn’t because our trucking was a little more severe on the accident side and the occupational accidents drove it a little bit also.
I would tend to think you will hold 1.5-2% of where your revenue is excluding any significant events.
Operator
The next question comes from David Campbell – Thompson, Davis & Co.
David Campbell – Thompson, Davis & Co.
Asking about the acquisition costs, you said there would be no impact in the third and fourth quarters but didn’t you acquire some revenues with those businesses?
Henry Gerkens
The businesses we acquired were basically a fee-based business. On an annual run rate you are looking at $10-15 million in fees.
It is not the margin based business we run. The plan is this will drive more margin based business to our system but that would be the revenue we would anticipate on an annual run rate currently.
David Campbell – Thompson, Davis & Co.
So there would be a like amount of expenses on a quarterly basis somewhere in the P&L right?
Henry Gerkens
Not a like amount. We anticipate making money on that.
The $2 million I talked about that were recorded in the second quarter are expenses related to the actual acquisition of the companies which are legal fees and accounting fees and things like that. Under the revised purchase accounting rules and guidelines under GAAP those have to be expensed.
If you went back several years those used to be capitalized as part of the cost of the acquisition. No longer are they allowed to be capitalized.
David Campbell – Thompson, Davis & Co.
What was the insurance operating income in the quarter?
Henry Gerkens
We don’t look at it as operating income. The real way to look at it is insurance is an expense because it is a cost.
That is the reason we don’t disclose that but Jim will come up with a number for you.
James Gattoni
$8.4 million.
Operator
The next question comes from Nate Brochmann – William Blair & Co.
Nate Brochmann – William Blair & Co.
Kind of going back to John’s diversity question a little bit. Clearly in this environment I am sure a lot of the agents are kind of picking up more on the cross-selling opportunities.
Can you talk a little bit about how that is going and how granted it is down year-over-year because of fuel surcharges and what not but how some of the other modes are doing?
Henry Gerkens
I think either Pat or Jim either one can answer that as far as the impressions of how our business unit specialists. Either one if you want to chime in.
Jim Handoush
It is going extremely well. We have over 120 new agents that are participating in various modes of transportation, mostly on the ocean and air side, and some on the mobile side and we continue to push that with our field organization and within our agent family at every opportunity we can.
There is a lot of success stories with that. They feed off each other, actually probably more agents who want to get involved so we see the activity level continuing to grow.
Patrick O'Malley
When you think about it from an agent’s perspective if our revenue is down their revenue is down and in order to generate additional revenue opportunities they have gone back into their existing customers and started selling multiple services that Landstar has. In a bizarre twist, the negative revenue environment we are currently operating in has helped us kind of push that initiative out.
Nate Brochmann – William Blair & Co.
Do you think one of the old things you pointed out was a couple of years ago maybe not every agent was receptive to that because they were happy with their current berth of business but now that is down do you feel like every agent is picking up on that or is it still just 20% that really care about driving better revenue for themselves?
Patrick O'Malley
I think it has accelerated the acceptance of that initiative. As more agents have success you get sort of a “me too” mentality.
So whether it is 20%, 30% or 50%, I don’t think it will ever be 100% of our agents that explore all the opportunities we have but we are pleased with where it is at and the acceptance rate is faster than I anticipated and really I attribute it to this.
Nate Brochmann – William Blair & Co.
Do you think that having that accelerated helps win share in other areas of the business too in terms of being able to provide those multi-modal solutions?
Patrick O'Malley
I think when this thing turns we are going to be very well positioned.
Operator
The next question comes from David Mack – Decade Capital.
David Mack – Decade Capital
I just wanted to make sure I heard it right, the revenue trends you expect to see in the third quarter is that excluding the $27 odd million that you had last year from the bus business?
Henry Gerkens
I think you have to exclude that.
David Mack – Decade Capital
My other question has to do with the balance sheet. I just noticed when I go back about 10 years this is the first second quarter that you have run with a positive net cash balance of I have about $51 million.
What I am wondering is why the cash balance is so high? Is there something unseasonal this year?
If this is a trend for the rest of the year how do we think about what you are going to do with this cash? Do you want to have a higher level of cash due to the uncertainty or can we look forward to other cash deployments through acquisitions or buybacks or dividends?
Henry Gerkens
In this environment that we are in, we have such a significant slow down that we have that started in December, we collect a ton of receivables and we are not paying out as much in purchase transportation. So for about 3-6 months after a significant downturn the cash pours in.
That is just where we are. We didn’t get in the market during the second quarter because we were cognizant of the acquisitions we were working on and we knew something that no one else knew so cash piled up.
I don’t know if that trend continues because right now we are back in balance. I am billing like I am paying so you may see a little bit of slow down.
If you look at operating cash flow, this year’s first half with $106 million compared to $35 million last year and that is really driven due to the slow down in the economy and the collection of receivables without the offset going out to the carriers.
David Mack – Decade Capital
So when I think about when we head to the end of the year should I think about that cash balance as running down to normal levels and then building up at the beginning of the year the way it normally does or can you hold onto some of that?
Henry Gerkens
It depends. If the economy goes gangbusters, which I don’t anticipate, you would start to see more money being shelled out in advance as we do.
I don’t believe that is going to happen. I do think you have an incremental slow improvement in what is going to happen.
In addition to that we bought very little stock in the second quarter. The acquisitions were out and what we do with the cash in the third quarter is a different issue.
David Mack – Decade Capital
On the buyback, I understand you had some acquisitions you were doing and that is why you weren’t buying but Jim and I have talked about this, over the last few years the buyback pace has slowed a lot from what you had done I guess in the earlier part of the decade. What I would like to know is did you have a change of philosophy relative to the pace and level of buybacks or has it just been a timing thing and you have just been waiting for the right time?
Can you talk to us a little bit about your philosophy?
Henry Gerkens
I have no change in my philosophy on buying back stock. I think it is part of the Landstar business model.
We started doing this in 1997 when I first recommended we do it and it is part of the business model and as I said it was prudent in the first quarter and the second quarter with the acquisitions. As far as the slow down I think Jim’s got numbers and I think other than probably the big buyback that we had as a result of all the cash we collected from the FAA stock I think it has actually been pretty consistent.
I will leave that to Jim.
James Gattoni
If you compare 2006 to 2007 we generated a ton of cash from the FAA and those were unnaturally spiked. If you look prior to that we bought 400,000 shares in the first quarter.
Excluding the second quarter that would be 1.2 million run rate. You find us in that range not every year but in most years on the number of shares and the dollar spend that we do.
Henry Gerkens
There is no change in my philosophy to get to the real point of your question.
Operator
The next question comes from Alex Brand – Stephens Inc.
Alex Brand – Stephens Inc.
With respect to your flat bed business with the steel mills finally over 50% of their capacity in production are you seeing that yet or is there sort of an offset with some of the weaker parts of your flat bed business?
Patrick O'Malley
I would not say we are seeing any significant pick up at the steel mills themselves.
Alex Brand – Stephens Inc.
Sort of a longer term or potentially a more general question about this recovery which is maybe unusual, in terms of the broker capacity do you think there is enough excess capacity right now that even as you start to see sequential demand improvement that we potentially, the typical broker squeeze doesn’t happen right away? That truck pricing stays relatively stable even as demand starts to pick up?
Henry Gerkens
I don’t quite understand your question.
Alex Brand – Stephens Inc.
The question is normally we would have had a lot more capacity exit the market by now sort of like John was asking. Since we have had an unnatural maybe because the banks didn’t want to put guys out of business or whatever and take the assets, can we have some recovery now without the truck pricing having to go up?
Henry Gerkens
I think that it is a very good question. I think what we are starting to see and if you think about what my opening comments were, we are starting to see a slow pick up in demand and we are actually starting to see some level of stabilization in prices.
So I think that dovetails exactly to what you are saying. So yes, I think we can have that.
We are not going to have the spike in demand and it is going to be a slow, slow recovery. I mean, I would think that is possible.
Now I still believe quite frankly you will have some capacity. Banks are keeping certain people alive but quite frankly when you don’t generate any cash and you have more cash going out than coming in that has got to be a problem and at some point in time the plug has got to be pulled.
Operator
The next question comes from Edward Wolfe – Wolfe Research LLC.
Edward Wolfe – Wolfe Research LLC
Can you go over what the incentive comp looks like in third quarter 2008 and fourth quarter 2008, the comps that are coming up and then what your expectations if no change right now what they would look like?
James Gattoni
You are talking about the provisional bonuses?
Edward Wolfe – Wolfe Research LLC
Yes.
James Gattoni
I would anticipate with the run rate we are currently at now there wouldn’t be any third or fourth quarter provision provided in those numbers.
Edward Wolfe – Wolfe Research LLC
And the comp?
James Gattoni
$2.9 million in Q3. $600,000 to $700,000 in Q4.
Edward Wolfe – Wolfe Research LLC
I’m sorry, second quarter 2008 what was it?
James Gattoni
[2.3]
Edward Wolfe – Wolfe Research LLC
Was there nothing in Q2 2009?
James Gattoni
Nothing.
Operator
The next question comes from Jon Langenfeld – Robert W. Baird & Co., Inc.
Jon Langenfeld – Robert W. Baird & Co., Inc.
Do you have the volume trends in the month for the third quarter of last year?
James Gattoni
I don’t have that with me. I don’t have any specific numbers.
Henry Gerkens
Jim doesn’t have them with him but I can tell you based on my recollection there was some dramatic fall off in September from a revenue standpoint partially due to I think, looking at Jim, the substitute line-haul started to decline in September. Automotive came down a little bit more and I know from a revenue standpoint you started to see some change in the fuel surcharge because prices started to come down rather dramatically.
So volumes if I were to guess, and it is kind of tough to say because August typically is slow anyway but as you relate to the prior year which now would be 2008 to 2007 it was more of a less favorable comp in September of 2008 to September of 2007 versus like 2008/2007 July and August because the trend was down if that makes any sense.
Jon Langenfeld – Robert W. Baird & Co., Inc.
It does. It strikes me that the bulk, your volume trends second to third quarter last year were not that dramatic, it was down minus 1 and then minus 3 in the third and I guess my recollection was that you had an okay September.
Not a great September. You really didn’t start to feel the heat of the market contraction until October.
Henry Gerkens
As I recall that is correct. Overall, as I recall the fourth quarter 2008 in October we were plus 5%.
We were minus 2% in November and then down like minus 20% in December. So you had a dramatic fall off.
A lot of that was due to the substitute line-haul slow down and when you are down 50% as we were in the second quarter when that starts to stabilize in the back half of the year your levels start to equalize. Again, that is just the facts.
Jon Langenfeld – Robert W. Baird & Co., Inc.
What was your cash CapEx in the quarter? Or year-to-date?
James Gattoni
$2.047 million.
Operator
The next question comes from David Campbell – Thompson, Davis & Co.
David Campbell – Thompson, Davis & Co.
Just a question about the agents. You mention how the pipeline is so big but the agent locations were down from the first quarter.
Is that just a calendar thing?
Henry Gerkens
No. Clearly in the second quarter there is some small locations that were just terminated by Landstar because they weren’t generating anything.
Remember the key to the agent location, although an account sounds very good, it is those productive agent locations that really make the difference. The key metric there is the ten we added in the third quarter which tie to the nine we added in the first quarter and 18 in the fourth quarter that have substantial book of business if you will.
The reason the number was down first quarter to second quarter was really basically some smaller people that were let go.
David Campbell – Thompson, Davis & Co.
The only problem is in this economy a lot of agents get smaller. It doesn’t mean they are not as good does it?
Henry Gerkens
Well if they are generating zero or $10,000 of revenue and we have seen that for a period of 18 months or a year he is obviously doing something different. We are not talking people that had a substantial run rate to begin with.
Remember we are going to try to bring in as many people as we can and we will bring in anywhere from 300 agents, but we can delete up to 280 any given year also. It is just the way we work our agent base.
We will bring them in but if they are not going to be productive in a period of time they will leave.
Operator
At this time I show no further questions. I would like to turn the call back over to you Sir for closing remarks.
Jim Handoush
Regardless of the current environment I think the company’s variable cost business model performed as expected. Despite a higher than expected 30% decline in revenue we managed to get diluted earnings per share only to decrease 33%.
That is kind of the whole concept of the model and that is what we live by. The acquisitions we announced, I am excited about those and the opportunity to apply to the agents and the capacity and hopefully increase floating opportunities in the future.
Henry Gerkens
I want to thank everybody for being on the call. I can only tell you as I said before I do think the worst is over.
I think you have in the third quarter some, somebody mentioned the 27-28 million of revenue comparison to the FAA business with the evacuation services, but generally the comps really start to improve in the back half of September. We also feel that demand has started to pick up albeit slow.
I do believe that the worst is over. We look forward with the acquisitions and what we have done going into the back half of 2009 and 2010.
With that we bid you adieu. Our mid-quarter update for the third quarter is scheduled for August 26th and we look forward to talking to you all at that time.
Thanks again.
Operator
Thank you for joining us today. You may now disconnect.