Oct 24, 2011
Executives
Joseph Beacom - Chief Safety and Operations Officer and Vice President Patrick J. O’Malley - Chief Commercial and Marketing Officer and Vice President Jim B.
Gattoni - Chief Financial Officer, Principal Accounting Officer and Vice President Henry H. Gerkens - Chairman of the Board, Chief Executive Officer, President, Member of Strategic Planning Committee, Member of Safety & Risk Committee, Chief Executive Officer of Landstar System Holdings Inc, President of Landstar System Holdings Inc and Director of Landstar System Holdings Inc
Analysts
Scott H. Group - Wolfe Trahan & Co.
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division Benjamin J.
Hartford - Robert W. Baird & Co.
Incorporated, Research Division Jack Waldo - Stephens Inc., Research Division John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division Nathan Brochmann - William Blair & Company L.L.C., Research Division Thomas S.
Albrecht - BB&T Capital Markets, Research Division H. Peter Nesvold - Jefferies & Company, Inc., Research Division Christopher J.
Ceraso - Crédit Suisse AG, Research Division Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division Jason H.
Seidl - Dahlman Rose & Company, LLC, Research Division Unknown Analyst - Matthew Brooklier - Piper Jaffray Companies, Research Division Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division Robert H.
Salmon - Deutsche Bank AG, Research Division
Operator
Good afternoon, and welcome to Landstar System Inc.' s Third Quarter 2011 Earnings Release Conference Call.
[Operator Instructions] Today's call is being recorded. If you have any objections, you may disconnect at this time.
Joining us today from Landstar are Henry Gerkens, Chairman, President and CEO; Jim Gattoni, Vice President and Chief Financial Officer; Pat O'Malley, Vice President and Chief Commercial and Marketing Officer; Joe Beacom, Vice President and Chief Safety and Operations Officer. Now I would like turn the call over to Mr.
Henry Gerkens. Sir, you may begin.
Henry H. Gerkens
Thanks, Terry, and good afternoon, and welcome to the Landstar 2011 Third Quarter Earnings Conference Call. This call will be limited to one hour.
In addition, please limit your questions to no more than 2 questions each when the question-and-answer period begins. Before we begin, let me read the following statements.
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 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 10-K for the 2010 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.
The 2011 third quarter was another outstanding quarter for Landstar as earnings per share increased a remarkable 45% over the 2010 third quarter, and 31% if one were to exclude from the 2010 third quarter, the charge for the buyout of the contingent payment obligation in connection with the 2009 acquisition of NLM. It was the seventh consecutive quarter of impressive results.
Tracking back to the first quarter of 2010, Landstar has now increased its earnings per share on a quarter over prior year quarter basis in the range of 26% to 40%, excluding the one-time buyout charge recorded in the 2010 third quarter, quite a performance over the past 7 quarters by any measure. But more importantly, Landstar's future outlook continues to be one of strong performance.
Back to the current quarter. In our 2011 third quarter mid-quarter update call, I stated that I expected 2011 third quarter Landstar results to be pretty much in line with the consensus of analyst estimates as reported by FIRST CALL.
Actual third quarter 2011 earnings per share was $0.64 per share compared to $0.44 per share in the 2010 third quarter, and $0.02 above the consensus of analysts' estimates. And it was the second consecutive quarter of record quarterly earnings per share.
Actual third quarter 2011 operating margin was 44.7%, up from 35.6% in the 2010 third quarter, and up from 39.4% in the 2010 third quarter if you exclude the previously mentioned buyout charge recorded in the 2010 third quarter. It was also up from the 2011 second quarter operating margin of 43.6%.
As I've said many times before, Landstar's operating leverage comes from its ability to grow revenue and gross profit dollars from its safety performance and its ability to control costs. We continue to drive our model and we have yet to leverage and take full advantage of our supply chain technology.
Over the next several years, I anticipate Landstar would create even more operating leverage as additional revenue is added over our cost structure. Consolidated revenue in the 2011 third quarter was approximately $684 million, up approximately 10% from the revenue generated in the 2010 third quarter.
This increase was net of a $31 million or 65% decline in revenue from our low-margin substitute line haul service offering. The decline in substitute line haul revenue has been factored in to all of our prior guidance.
Substitute line haul revenue represented only 2.5% of consolidated revenue in the 2011 third quarter versus 7.8% in the 2010 third quarter. Excluding substitute line haul revenue from both the 2011 and 2010 quarters, all other revenue increased a healthy 16%.
Total truck transportation revenue represented approximately 91% of consolidated revenue in the 2011 third quarter versus 92% in the 2010 third quarter. Revenue haul by BCOs represented 51% of total revenue in the 2011 third quarter and 54% in the 2010 third quarter, while total brokerage revenue was 40% of consolidated revenue in the 2011 third quarter versus 38% of consolidated revenue in the 2010 third quarter.
Excluding substitute line haul revenue from both periods, revenue generated through all broker carriers increased approximately 35% and revenue generated through BCOs increased approximately 5%. From a load volume standpoint, total truck transportation loads hauled, excluding loads hauled in our substitute line haul service offering, increased approximately 6% from the 2010 third quarter.
In our 2011 third quarter mid-quarter update call, I indicated that total truck transportation loads hauled x substitute line haul load volume, increased approximately 5% in the first 8 weeks of the 2011 quarter over the prior year 8-week period. The fiscal 2011 September truck load volume again x substitute line haul volume, increased 9% over the fiscal 2010 September truck load volume.
Revenue per load. Again excluding revenue per load associated with our substitute line haul service offering, increased approximately 9% in the 2011 third quarter compared to the 2010 third quarter and was very consistent on a month-over-month basis within the quarter.
The 2011 third quarter versus the 2010 third quarter total van revenue, excluding substitute line haul revenue, increased 10% with about more than half of that increase due to increased load volume. Total platform revenue increased approximately 25%, with about 1/3 of the increase due to increased load volume and the balance due to increased revenue per load.
The increase in the revenue per load continued to be very reflective of a very, very tight flatbed capacity market. And I don't see that changing anytime in the near future.
Collectively, revenue generated from all other sources increased approximately 18% in the 2011 quarter versus the 2010 third quarter. From a new agent revenue standpoint, revenue generated from all new agent locations added over the past year amounted to approximately $28 million in the 2011 third quarter as we continue to add quality, productive revenue-producing agents.
Landstar again increased its available capacity providers. Landstar's total available truck capacity providers was 35,288 at the end of the 2011 third quarter, up 512 capacity providers from the end of the 2010 third quarter, and up 897 capacity providers from the end of the 2011 second quarter.
I might also add that our BCO count at the end of the 2011 third quarter increased by 87 BCOs since the end of the 2011 second quarter and continues to increase in the fourth quarter. One final note before I turn it over to Jim for his financial review, in the 2011 third quarter, Landstar purchased approximately 817,000 shares of its common stock under its authorized share buyback programs.
Jim?
Jim B. Gattoni
Thanks, Henry. Henry has already discussed certain information regarding the 2011 third quarter.
I will cover various other financial information included in our third quarter release. Gross profit, representing revenue less the cost of purchased transportation and commission to agents in the 2011 third quarter was $110.7 million or 16.2% of revenue compared to $100.8 million or 16.2% of revenue in the 2010 quarter.
During the 2011 and 2010 third quarters, revenue hauled under contract to generate a fixed profit margin contributed 65% and 72%, respectively, of total revenue. Overall, the cost of purchased transportation was 75.8% of revenue in the 2011 third quarter compared to 76.2% in the 2010 third quarter.
The decrease in purchased transportation as a percent of revenue was primarily due to a change in revenue mix. Less-than-truckload substitute line haul revenue, which is primarily included in truck brokerage revenue was 2.5% and 7.8% of revenue in the 2011 and 2010 third quarters.
Revenue hauled by Truck Brokerage Carriers, excluding less-than-truckload substitute line haul revenue was 38% and 31% of revenue in the 2011 and 2010 third quarters. The decrease in the cost of purchased transportation as a percent of revenue was primarily due to the significant decrease in less-than-truckload substitute line haul revenue, which has the highest rate of purchased transportation probably offset by increased truck brokerage revenue as a percent of revenue, excluding less-than-truckload substitute line haul revenue, which has a higher rate of purchased transportation compared to revenue generated through BCOs.
In addition, the rate of purchased transportation on truck brokerage revenue, excluding substitute line haul revenue in the 2011 third quarter was 50 basis points lower when compared to the 2010 third quarter. Commission to agents was 8% of revenue in the 2011 third quarter compared to 7.6% in the 2010 quarter.
This increase was primarily due to the significant decrease in the company's less-than-truckload substitute line haul revenue, which has a lower rate of agent commissions, and increased net revenue representing revenue less the cost of purchased transportation on truck brokerage revenue, excluding less-than-truckload substitute line haul revenue. Other operating costs were 5.8% of gross profit in the 2011 quarter compared to 6.4% in the 2010 quarter.
This decrease was primarily attributable to increased gross profit. Insurance and claims costs were 8.5% of gross profit in the 2011 quarter compared to 11.4% in the 2010 third quarter.
The decrease in insurance and claims as a percent of gross profit was primarily due to an increase in the percent of total gross profit contributed by revenue hauled by third-party Truck Brokerage Carriers, which has a lower claims-risk profile, and favorable development of prior year claims in the 2011 quarter and non-favorable development of prior claims in the 2010 quarter, partially offset by an increased cost of cargo claims in the 2011 third quarter. Selling, general and administrative costs were 35.4% of gross profit in the 2011 quarter and 40.7% of gross profit in the 2010 quarter.
The decrease in selling, general and administrative costs as a percent of gross profit, was primarily attributable to increased gross profit in the 2011 quarter, and costs of $3.8 million reported in the 2010 third quarter that went to the buyout of the company's remaining contingent purchase obligation from an acquisition made in 2009. Depreciation and amortization was 5.9% of gross profit in the 2011 quarter compared to 6.4% in the 2010 quarter.
This decrease was due to the effect of increased gross profit. Investment income was $373,000 in the 2011 quarter compared to $495,000 in the 2010 period.
The decrease in investment income was primarily due to a decrease in the amount of investments held by the Insurance segment during the 2011 quarter. The effective income tax rate was 38.2% in both the 2011 and 2010 third quarters.
Looking at our balance sheet, we ended the quarter with cash and short-term investments of $98 million and borrowings of $90 million on the company's senior credit facility. 2011 year-to-date cash flow from operations was $84 million.
Cash capital expenditures was $3.5 million in the year-to-date period ended September 24, 2011. Trailing 12-month return on average shareholders' equity was 39%, and trailing 12-month return on invested capital representing net income divided by the sum of average equity plus average debt was 27%.
During the 2011 quarter, the company purchased 870,000 shares of its common stock at a total cost of $32.7 million, bringing the total of number of shares purchased during the 2011 period to 1,014,000 shares. The company currently has 709,000 shares available for purchase under its authorized share repurchase program.
At September 24, 2011, shareholders' equity represented 69% of total capitalization. Back to you.
Henry H. Gerkens
Thanks, Jim. The talk of an economic slowdown continues to intensify.
Landstar continues to outperform. The load volume increase in the first several weeks of the 2011 fiscal fourth quarter over the same period in 2010 has been similar to the load volume increase in the 2011 fiscal month of September over the prior year September.
Additionally, pricing is still strong and capacity remains tight. All that being said, the fourth quarter of any fiscal year over the past several years has been the most difficult quarter to forecast, and all too fresh in everyone's memory is the fourth quarter of 2008.
I believe, however, the current environment is very different than 2008. And as such, I am very confident.
Assuming trends experienced in the 2011 third quarter and the first several weeks of the 2011 fourth quarter continue, I would anticipate earnings per diluted share in the -- for the 2011 fourth quarter to be in a range of $0.62 to $0.67 per diluted share. Terry, I think we can it open it up for questions.
Operator
[Operator Instructions] Your first question comes from a Jason Seidl of Dahlman Rose.
Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division
Can I focus a little bit on the platform segment? Obviously, it's been strong here for a while and you said you would anticipate that pricing was going to continue to be strong for the near future here.
Can you talk a little bit about what's driving that strength in some of the end markets? Because I guess just traditionally, you wouldn't think of it to be strong at this point in the economy.
Henry H. Gerkens
Well, I think there's a couple of things. I mean GE -- there's a couple of customers that I think isn't very strong.
GE, if you listened to the Caterpillar report, I mean, this morning, again very strong, predicted to be strong. We -- going forward from GE, that's the type of stuff.
It's the heavy machinery-type of stuff that -- Pat, do you want to add anything to that?
Patrick J. O’Malley
Yes, Jason. I think if you look at whether it's commodities and mining and farming, and you look at all the alternative energy production, we're really seeing some strength along those markets.
If you couple that with the fact that the capacity in that platform arena remains very tight, and the various entry I believe are significant, not the least of which is the capital it costs to get engaged in the business, and the operator. You can't back in and deliver a load of groceries today and pick up a windmill blade tomorrow.
So the skill level is fundamentally different for the operator in that segment. And so we believe that the capacity is going to remain tight.
Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division
Pat, is there anyway to break out what percentage that you guys are holding for unconventional drilling now versus prior year?
Patrick J. O’Malley
I couldn't do that for you, Jason. You're talking about these Marcellus Shale and all the fracking business?
Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division
Yes.
Patrick J. O’Malley
I couldn't break that out for you.
Jason H. Seidl - Dahlman Rose & Company, LLC, Research Division
Okay, and a follow-up question, Henry, you mentioned that your current network can hold a lot more revenues with really adding a lot of incremental costs. When you look at over the next, call it, 3 to 5 years, where do you think some of these layered-on revenues are really going to come from?
From where are your fastest-growing segments likely going to be?
Henry H. Gerkens
Well, look, I think it's going to be typical of how Landstar has gone in this business before. It's agent about agent.
But what I think the big thing as we move forward into the future, is going to be leverage we're going to get off of putting in these systems for customers that's going to generate more revenue, i.e, our supply chain management, freight-on-the-management type of work. That is going to create more hauling opportunities for Landstar, I mean.
And that clearly, over the next 3 to 5 years, is where we're going to start to leverage our current cost structure. And as you've seen back in 2005, when we had the hurricane stuff, I didn't have to add a lot of people to basically haul more revenue.
There will be some additional expenditure from the technology side. But as far as actually the hauling of the freight, I mean clearly, we have the ability to take more revenue over our existing cost structure.
Operator
Your next question comes from Justin Yagerman, Deutsche Bank.
Robert H. Salmon - Deutsche Bank AG, Research Division
It's Robby, sitting in for Justin. When we were at the AK last week, we had heard a lot from traditional truckers talking about shippers who are making contingency plans ahead of the, kind of, peak season.
Have you been hearing this from your customers on both the drive-in and flatbed standpoint? And could you give us a sense, if you are seeing that, what the delta is you guys are talking to on pricing as well as, kind of, what percentage of your businesses are looking for that?
Patrick J. O’Malley
Well, I can tell you that -- this is Pat. I can tell you that I think the customers have been concerned about capacity for the entirety of 2011 -- frankly, the fourth quarter of 2010 through 2011.
We're getting a number of questions from customers about what can they expect in terms of our platform capacity, can they lock in on some of that platform capacity. Less so on the van side, I think there's still some belief that there might be some slack in the van side of the business.
But clearly, the capacity -- excuse me, the customers are concerned about capacity and particularly on the platform side.
Robert H. Salmon - Deutsche Bank AG, Research Division
Is there a rate you guys are quoting relative to your contracted rate for some of the bigger customers on the platform side right now?
Patrick J. O’Malley
It's largely a spot market pricing.
Robert H. Salmon - Deutsche Bank AG, Research Division
Okay, I guess that's fair. Shifting gears a little bit to the cost side of the equation.
You guys had briefly mentioned insurance and claims, that was an item which jumped out. Could you talk a little bit about the different puts and takes and a little bit more detail as it, kind of, came through Q3?
And how should we be thinking about that as we look out to Q4 and 2012?
Henry H. Gerkens
Actually, it's pretty simple. And if you understand the business model, you should understand why the insurance is the way it is.
The -- if you understood the revenue piece, all right? 51% of our revenue was generated through BCOs.
That means 49% of our revenue was generated through capacity other than BCOs, which has a much lower claims profile. So once you get that mix moving, all right, you should expect that, that insurance and claims number is going to come down.
In addition, when you look at the numbers as far as, if you track back to 3 quarters -- the third quarter, since back to 19 -- let's say 2006, the range has been anywhere from 1.1, to 2. All right?
2 being the highest of 2009, and 1.1 being the lowest in 2008. So at 1.4, it's pretty much within that range.
So it really doesn't surprise me at all because you have a lot of volume in the third quarter and you've had a lot of brokerage revenue as far as the mix. When you look at a year-to-date calculation, I think we've always said that it's about 2% of revenue.
So far, year-to-date is about 1.8%. If you look at that range from an annual basis, it's run from 1.4% all the way up to 2.3% in 2009.
And if you recall in 2009, we had -- it was 3.1% of revenue because we call them the way we see them when the accidents happen. So, in fact, when the accident occurs, we book it.
When it doesn't occur, you don't book it. So it's simple.
Jim B. Gattoni
One thing to just touch on, too, is just recall and I know, I know we tell everybody this, but twice a year, we use a third-party actuary to take a look at our claims reserves. And we're probably one of the only ones in the industry that does that.
Operator
Your next question comes from Tom Wadewitz, JPMC.
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
Let's see. So I wanted to ask you on the growth and you saw more growth in platform but you also -- it look likes you saw some decent growth in the drive-in.
What are the customer segment scenarios that are driving the gross in drive-in? And how do you look -- do you expect those to continue or not?
Patrick J. O’Malley
Tom, this is Pat. I would tell you that the growth on the van side is spread among all of our base of customers.
There's not one particular segment that's going to jump out at you, but I think it's a great execution on behalf of the agents. And I will tell you that it's, kind of, across a broad spectrum on the van side.
Thomas R. Wadewitz - JP Morgan Chase & Co, Research Division
Okay, and then a question in terms of how we think about 2012. I guess it seems like things are playing out well going into the fourth quarter for you.
I don't know how much visibility you have on 2012. But what would your view be on 2012 in terms of the driver of revenue?
Do you think that a lot of that is going to come from the pricing side? Or do you think that you'll end up with a pretty good growth from the volume side?
And I guess if you want any kind of a margin, comment on just for a kind of a 2012 modeling framework, how we might think about it.
Henry H. Gerkens
I always like that. I'll tell you some macro things, as far as what I think.
I truly believe that capacity is going to remain tight, all right? I think from the platform side, I think Pat's already discussed that.
I mean, we're getting requests to try to lock in if they can. And we know that we've got some customers that are lined up into 2012 that want that capacity.
So we're pretty confident in that. It's sort of -- it's a matter of what you're economic forecast is.
I can tell you if the economy picks up a little bit, it's just going to get a lot better. Our agent pipeline remains pretty strong so I'm confident from that standpoint.
And as I said, we just barely tapped the leverage, I think, we're going to get off of our supply chains. So from my perspective over the next 3 to 5 years, I'm more confident than I have ever been at Landstar as far as what we're doing.
From a margin standpoint, I already gave my numbers out there that I wanted to be at 45%. We're going to move past that as we move forward into the future.
I'm not promising that for 2012, but when we go out further -- where we are now, I can see that getting much better.
Operator
Your next question comes from Chris Ceraso, Crédit Suisse.
Christopher J. Ceraso - Crédit Suisse AG, Research Division
Just one follow-up on the mix of your business. It seems that brokerage is growing quite a bit faster than BCO.
Maybe you could comment on what's happening in the market that's driving that? And then you mentioned the positive aspects of that to your margin as you get lower insurance and claims associated with brokerage.
But is there a flip side, say down the road, that maybe your margin profile gets a little bit more volatile if brokerage becomes a bigger share of your business?
Henry H. Gerkens
I think, look, I think obviously when capacity is tight, you do have some issues as far as what you got to pay for that capacity. And it takes -- it's the delay as you well know, it's first getting that cost turned into revenue through the customers for a price increase.
So you've got that squeeze. Eventually you catch it, and then depending on how tight things get.
So you play that gain from that standpoint -- look, from our standpoint, we want to grow both capacity, BCO and brokerage. However, when we started brokerage way back in early 2001, when we really got into that, I mean -- if we're going to grow our revenue, you have to get into the brokerage avenue, another third-party capacity because there's not just enough qualified owner operators out there that are going to make it into the Landstar system.
We look every day to try to move more people in but that's just the dynamics. And Joe, I don't know if you want to add anything on capacity.
Joseph Beacom
Just the fact, you know as capacity remains tight, more and more customers are open to that discussion, maybe they were previously a BCO-only account but that opens their eyes for capabilities in a different front. And one of the statistics that we look at, is we've got a pretty good size base of broker-carrier capacity.
But the number that's pretty meaningful is if you look at Q3 year-over-year basis, we had over 1,000 more carriers who hauled alone in the last 6 months, year-over-year. So I think we're doing a better job of finding carriers that can fit and do fit into the freight volumes that we have.
Operator
Your next question comes from Matt Brooklier, Piper Jaffray.
Matthew Brooklier - Piper Jaffray Companies, Research Division
First question. I think you quoted your truck business x substitute line haul, the volume there being up 9% year-over-year in September.
What does that number look like in October?
Henry H. Gerkens
It's x substitute line haul, it's actually higher.
Matthew Brooklier - Piper Jaffray Companies, Research Division
So it's greater than the 9% in September?
Henry H. Gerkens
Yes. And one other comment, I don't plan and hopefully, this is accurate, but I don't plan on talking about x substitute line haul in the fourth quarter because all that should be behind us.
And the comparisons now will be -- although I've tried to spell it out for people -- so, I'm trying to look at what I'm going to call a continuing revenue basis because on a continuing, the things that we know is going to -- it was 16% in the quarter. The substitute line haul won't be as large and we won't talk about that.
But again, it's larger in October as far as the actual load volume increase.
Matthew Brooklier - Piper Jaffray Companies, Research Division
A welcome grandfathering of the substitute line haul business in the fourth quarter. And my second question, when I look at your gross yields or gross margins however you want to call it, and you look at third quarter BCO gross yields and the change there, I'm assuming they were up.
And then within your truck brokerage operations, potentially you got squeezed a little bit. Can you talk about those 2 margins separately and provide a little bit more color?
Henry H. Gerkens
I'll let Jim answer that, but I don't think what you just said is accurate.
Jim B. Gattoni
Yes, gross margin to us, to Landstar is revenue less what we pay the trucks less what we pay the agents, all right? And I think what you see is that was 16.2% in the third quarter.
And I think we're driving at, again, we were 16.5% in the second quarter and that was entirely due to mix. The BCO gross margin doesn't move a lot.
They're all contracted as freight, so if it's a $1,000 load, you keep so much percent. If it's $2,000, you keep that same percent, so that doesn't drive it.
Second quarter to third quarter, we saw a similar improvement in the PT rate on the Brokerage business -- we're -- not PT rate, on the gross margins, we picked up 0.5 basis point over prior year's truck brokerage gross profit. We did the same compared to the second quarter, a little bit better than that, actually.
So we're not getting squeezed on margins, it's entirely mix that's in our number that drove from 16.5% to 16.2%. There was more non-substitute line haul brokerage business in the third quarter compared to the second and that's really just mix.
And if you look, we keep more of those dollars because we grew the operating profit.
Operator
Your next question comes from Todd Fowler, KeyBanc Capital Markets.
Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division
Henry, with your fourth quarter guidance, I mean generally, you guys are pretty conservative with how you lay out your expectations. If I take the midpoint, you're up about $0.01 sequentially from what you did here in the third quarter on a GAAP basis, which is pretty consistent with how the fourth quarter has been relative to the third quarter historically.
But I guess I'm curious at the high end at $0.67. What do you have contemplated in there?
What would it take for you to see that high end from a peak standpoint and from, kind of, how the fourth quarter would play out?
Henry H. Gerkens
Well, we obviously go through our own modeling and it's just a matter of -- we get certain revenue numbers. We are safe.
And really those are the 2 drivers of our business. I mean, business, as you all know, is pretty easy to model given a revenue number.
And so we put a high-low based on what my people tell me as far as where they think the numbers are coming out and so we've derived it from there. So I mean that's how you get it.
I mean, and then the unknown, obviously is are you going to be safe. If we're safe like we were in the third quarter, that bodes very well.
Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division
Sure, maybe let me ask it this way. I mean, in the base case, kind of, taking the mid-point of the guidance, are you assuming kind of a modest peak maybe through mid-November?
Or what are your assumptions, I guess, for the peak that's in your guidance?
Henry H. Gerkens
I don't assume any peak because I've just -- I have been saying this for a long time, I think you know that, Todd. I just don't think there is a peak anymore.
And I think -- I mean, that's just the way I look at it based on what Pat is telling me, what he foresees and he gets his information from the field as far as what the revenue numbers are. We know where we think we're going with PT.
We understand how tight the capacity market is, so you factor that all in. You make an assumption for safety and it's just a matter of those numbers from the top line, hit and everything flows down.
Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division
Okay. That makes sense.
And then just for the follow-up on the SG&A line item, as a percent of revenue, it looks relatively in line. Sequentially, though, it did move up.
That's one line item where I think that you guys historically get some leverage. Was there anything coming through unusual this quarter either on the incentive compensation side?
Or anything that we should think about this quarter?
Henry H. Gerkens
Yes, I will. Obviously, since we had a little bit higher anticipated revenue, there was a little bit more of a bonus accrual in there in the third quarter.
But other than that, I'm not aware of anything else that was...
Jim B. Gattoni
We had a little bit of a tick-up in legal fees compared to the second quarter. Just -- we're tidying up some stuff around here with some issues we're having, but nothing significant.
I think you saw on the K, we had talked about the Kentucky CIDs. It's not material but it does make that line grow a little bit.
So it's basically the incentive comp being higher in the third quarter and a little bit of legal fees.
Todd C. Fowler - KeyBanc Capital Markets Inc., Research Division
Okay, and so for the fourth quarter is the place holding in that $39 million on an absolute dollar basis?
Jim B. Gattoni
It would probably be okay if that's where you were thinking, somewhere around there.
Operator
Your next question comes from Peter Nesvold, Jefferies.
H. Peter Nesvold - Jefferies & Company, Inc., Research Division
This is Todd Uohedley [ph] in for Peter Nesvold. I was wondering what impact Hurricane Irene had either on your business or the overall flatbed market?
Henry H. Gerkens
I can't pinpoint anything specific that Hurricane Irene had. I mean I, think it probably put -- my guess is it, made the overall flatbed market a little tighter because of a lot of things going on.
But it didn't have in the material impact that would move the needle for us at all. Pat?
I mean...
Patrick J. O’Malley
No, Todd. As much as they're -- for all the disruptions there would have been, it would have been offset by any revenue opportunities to take freight in there.
But if it's a push, it's a wash. It had no material effect on the third quarter results.
Unknown Analyst -
Okay, and my follow-up, some of the construction-related data points seem to look a little bit better in the past couple of months. Have you seen any evidence of that?
Patrick J. O’Malley
No.
Operator
Your next question will come from Scott Group of Wolfe Trahan.
Scott H. Group - Wolfe Trahan & Co.
I just want to follow up on that earlier question on insurance. Assuming there is no real mix changes going forward from here, is that, kind of, $9.5 million number a quarter, a good spot to be?
Or does it go back up?
Henry H. Gerkens
It depends on your -- as I said, your mix and it also depends on the amount of accidents you have. I mean, and if you have an accident.
I mean, we book the accident within the quarter it occurs or make an estimate for that. I mean, there's a lot of other companies that do it differently, all right?
But it's booked when it happens. So as far as an estimate, I would take a revenue piece.
And I've always said it can run anywhere from about, all right,? pick a number, 1.5, 1.4, 1.3 to 3.
I mean we were at 3.1 in the fourth quarter of 2009. Don't anticipate that.
We had some really adverse development in the fourth quarter and we booked it. This quarter was extremely safe and we had just excellent -- we had excellent experience and we had a lot of brokerage.
And if that brokerage continues in a 49%, 51% mix, you would anticipate that you would have a lower claims profile and therefore, lower insurance. That's all based on the fact that I'm also safe on the 51% side.
Did you follow me, Scott?
Scott H. Group - Wolfe Trahan & Co.
Yes, that makes sense. That makes sense.
Okay, and then just last thing, actually, 2 quick things. Can you talk about the tax rate you're assuming for fourth quarter?
And then Jim, I think you mentioned that brokerage margins, brokerage gross margin x line haul was down 50 basis points year-over-year. Do you have that number sequentially rounded to the second quarter?
Jim B. Gattoni
The second quarter to third quarter was a little bit better than 50 basis points. Pick up on that non-substitute line haul brokerage.
Scott H. Group - Wolfe Trahan & Co.
So the margins got better sequentially second to third?
Jim B. Gattoni
Yes. And on the tax rate question, I just assume that we'll continue with we're we've been for the year.
Scott H. Group - Wolfe Trahan & Co.
So still on that 38 range, not the 31 like we've done in the past 2 years in the fourth quarter?
Jim B. Gattoni
That's the assumption, yes.
Operator
Your next question comes from Ben Hartford of Robert W. Baird.
Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division
Henry, I was hoping you could elaborate a little bit. I know that we've got this 45% EBIT margin target, 3-year target set in 2010 for leverage and you talked about the opportunity to an extent.
But it's certainly a good margin result this quarter. Thinking about getting to that 45%, how likely is it that we could see that sooner?
And is it simply a matter of the external environment continuing to improve? Or are there additional measures on the cost side you can take to get to that 45% target?
Henry H. Gerkens
Well, it's not so much measures on the cost side per se. I think it's more or less bringing more revenue in and then maintaining that cost.
And yes -- so that's a hard question because it's really all about increasing gross profit dollars. If I increased gross profit dollars and maintain a cost structure and we're safe, it should work.
But I think we have the ability to go much higher than that as we move forward. But I still think when you looked over the next 3 to 5 years, I mean, you're going to be in a range to get to that 45% and then hopefully, go through that range.
But it's really about really, it's all around gross profit dollars.
Benjamin J. Hartford - Robert W. Baird & Co. Incorporated, Research Division
Yes, okay. Understood.
Good. And then Jim, just to clarify, the fourth quarter, this line haul revenue run rate, are we at $17 million, $18 million and that should be -- it's the placeholder going forward?
Jim B. Gattoni
Yes, 2% or 3% of revenue is what we expect.
Operator
Your next question comes from Nate Brochmann, William Blair & Company.
Nathan Brochmann - William Blair & Company L.L.C., Research Division
I wanted to talk a little bit -- we talked about some of the different drivers and a lot of the pricing. But it feels that clearly you guys are winning a fair amount of market share, I'm just wondering if you could elaborate a little bit on whether that's just the agent additions, whether it's just truly macro, or whether there's some more specific things that you're targeting somewhat behind the scenes a little bit that you can elaborate on?
Patrick J. O’Malley
Nate, this is Pat. I will tell you that I think it is -- some of it is agent additions clearly, that's one way to take market share.
But I think that it's about execution, and if you look at how we've been executing from the sales, to the execution of the operating side and to sourcing capacity, I think we've done a terrific job and we're starting to get some real traction along those lines. You heard what Joe talked about in terms of the number of additional broker carriers that transported the shipment in the third quarter in 2011 versus 2010.
So again I think we've got greater execution from a sales standpoint and greater execution from an operating standpoint that capacity is capacity is capacity. And so use all the capacity sourcing tools available to you from Landstar, and go out and take all three.
So I think it's a combination of things, the new agents, certainly, but I think the execution is really ramped up here.
Nathan Brochmann - William Blair & Company L.L.C., Research Division
And that's helpful, and then maybe just kind of a follow-on to that, if you could just provide an update us on some of the initiatives and goals of utilizing some of the other modes in terms of international and intermodal and things like that?
Patrick J. O’Malley
Well, I think that those initiatives continue to be a big part of what we're trying to accomplish. Then again, you'll see some traction on the intermodal side, 22% of our revenue came from agents.
This is year-to-date now that are not intermodal certified. So there are agents that haven't done intermodal before and now move to freight.
So you're seeing some traction along those lines. But I think it's also the traditional business that our agents have that they're going out, and they're saying, "Okay.
I'll take all the freight." Because again, as I mentioned some of the underlying capacity sourcing tools that we have and some of the initiatives that we've undertaken on the operations side to help the agents mind the capacity.
Take a look at what we've done on the international air ocean. Again, we've got some new sales initiatives along those lines that I think they're starting to pay off dividend.
Operator
Your next question comes from Jack Waldo of Stephens Inc.
Jack Waldo - Stephens Inc., Research Division
My 2 questions, the first one is on the share count and balance sheet. Where did you guys end on the share count for the quarter?
Jim B. Gattoni
Ending balance, 46,900,000.
Jack Waldo - Stephens Inc., Research Division
So would that be a good basis for fourth quarter assuming no share buybacks?
Jim B. Gattoni
Yes.
Jack Waldo - Stephens Inc., Research Division
Okay, 46,900,000. And then on the balance sheet side, it looks like you guys have bought it back, about $40 million -- may be close of $45 million of the stocks so far this year?
Jim B. Gattoni
Yes, $42 million.
Jack Waldo - Stephens Inc., Research Division
And that is about half, I guess, of your annual leverage in the last couple of years? I was wondering how much leverage you feel comfortable putting on the balance sheet either for acquisition through the buyback stock?
And is there any reason why we should look at your previous buybacks as a proxy for what you might end up doing this year.
Henry H. Gerkens
Look, we're always opportunistic as far as buying back stock. And we've been pretty consistent as far as buying back stock, and we've been buying back stock since 1997.
I think if you post or adjust for splits and whatnot, I mean I think we've taken the share count down from about -- over, $100 million, Jim? Down to $46 million.
I mean, we'll operate pretty consistently with that, as far as leverage. But obviously, Landstar can handle a lot more debt and we generate a lot of cash, which is really our model.
We generate cash. On the other hand, we're-- since I've been here, and I've been here since the beginning of '88.
As you might know, Jack, I'm a little debt adverse, because I was here when it was a highly leveraged transaction. But we can handle more debt.
I mean, I wouldn't take anything as far as what we've done in the past, as far as to calculate how much we're going to buy because I think we're opportunistic. We'll buy more when we think it's appropriate.
And we'll buy less when it's not.
Jack Waldo - Stephens Inc., Research Division
Fair enough. And Henry, I wanted to ask you, and Pat, on one of the big issues you're entering in this year that hasn't got as much attention lately is CSA and the impact it might have on everybody but on owner-operators as well.
Do you think that we've seen the impact we're going to see because of it or the initial impact? Or do you think that the momentum of change is still either building or has it flatlined a little bit?
Henry H. Gerkens
I'll let Joe answer that one. Joe?
Joseph Beacom
Yes, I'm going to answer that. First, from a BCO standpoint, we think that we've got pretty high standards, anyway.
Our average BCO is 51. He's not a rookie.
He knows what he's doing. So when we implemented and prepared for CSA, we've been through that so we don't expect any additional fallout from that.
When you look across the landscape of the carriers that are out there, I think most of your larger carriers are probably in the same position we are. Some of your smaller carriers, I think, are just now getting familiar with it.
And I think at this point, it's going to be a little bit of a wait-and-see as to how the FMCSA reacts to the data and the new findings and the new scores. What are they going to do and then what domino effect will that have on, particularly the smaller carriers is what I would look for.
But there really is no crystal clear answer to that question as we see here today.
Operator
Your next question comes from John Larkin, Stifel Nicolaus.
John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
Yes, there's been a lot in the press, not only about CSA, but also the on-board trepid quarters, that is tied up in a lawsuit right now, looks like it's going to be delayed. What's your read on that?
And what percentage of your other operators currently have on-board trepid quarters already?
Joseph Beacom
John, this is Joe Beacom. A very, very few of our BCOs.
We got some guys who wanted one, and -- or are volunteering to put them in and we're trying to accommodate that. But I think the way I'd look at on-board recorders is not so much -- or at least how we're looking at it, not so much about what the law will be but about what your CSA fatigue basic score will require you to do.
That's how we're looking at it. I think that is why you see many carriers going after the on-board recorders the way they are.
And not necessarily because of some mandate but because they need to work on their fatigue basic score. So our fatigue basic scores are in -- below the threshold.
And we have the luxury of trying and evaluating what works well with our BCOs. But we are seriously looking now, and we've got some in test and it is our intent to move forward on that.
You probably won't see anything meaningful from us until 2012.
John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
Would you put those into the out cap program and help the other operators buy the electronics a little more cheaply? Would you provide it for them directly?
How would you handle that?
Joseph Beacom
We will have a couple of options. It, clearly, will be part of the out cap program and we're in discussions with the vendors on negotiating a larger volume pricing and we'll pass on to the BCO's, absolutely.
John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
Got it, and then just one question on what could be considered sort of a pop-up volume opportunity, the President has announced we're going to be spooling down operations in Iraq. Historically, Landstar has handled a lot of military hardware.
These are being deployed internationally or coming back home. Do you anticipate a big opportunity there over the next say, 6 months or so?
Patrick J. O’Malley
John, this is Pat. Our government representatives were at SDDC headquarters last week.
SDDC is briefing the carriers on that. They don't believe that they can get all of the materials out of the theater at the same time that they bring the troops out.
So that's currently being looked at. And I really couldn't tell you, pending what SDDC and TRANSCOM decides do.
John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
But you are going to be a big player in that, one way or the other?
Patrick J. O’Malley
We would anticipate. That is correct.
Henry H. Gerkens
Hey, John, I thought you were going to call me -- call Landstar, the Obama carrier again.
John G. Larkin - Stifel, Nicolaus & Co., Inc., Research Division
I'll reserve that for October. I want to keep some bullets for -- just before the election.
Operator
Your next question comes from Anthony Gallo of Wells Fargo Securities.
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division
Question around the agent revenue. I thought I heard $28 million in revenue from new agents.
Was that for the quarter or year-to-date?
Henry H. Gerkens
Quarter.
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division
For the quarter. And then can you -- you mentioned the agent pipeline, can you maybe put into buckets what that agent pipeline looks like today?
Is it independent freight brokers? Is it size barriers within the LTL operation?
Or generally what does that look like? And maybe any characteristics around the size of the typical agent you come across?
Patrick J. O’Malley
Anthony, this is Pat. I would say that most of -- or a good portion of the agent prospects that we find in the pipeline that we believe are going to be able to convert, 50-50 chance of converting are folks that currently have their own business.
And they've got either their own small brokerage or small IMC [ph] or they're trying to touch their customer across all of those modes. They find it appealing then to come to Landstar because of the scale, systems and support that we offer.
So they can take part in our buying power, they can take part in our systems that help them source capacity, and they can sell all services to their customers. So we find that to be somewhat of an advantage to the prospect of agents coming to Landstar.
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division
That's helpful. And then, Henry is there a number you would like us to think about in terms of what portion of your revenue growth each year should come from new agents?
Is it a 0.25 of the revenue growth? Is it 10% of the revenue growth?
Is there a way to think about that? Or is it going to change too much?
Henry H. Gerkens
Historically, Jim?
Jim B. Gattoni
Historically, if you look at any given quarter, revenue contributed by new agents is anywhere with 4% to 6% of total revenue in the quarter. But I don't think we have a specific target on new agent revenue.
Anthony P. Gallo - Wells Fargo Securities, LLC, Research Division
Okay. 4% to 6% of total revenue, not 4% to 6% of the growth?
Jim B. Gattoni
Right.
Operator
Your next question comes from Tom Albrecht of BB&T.
Thomas S. Albrecht - BB&T Capital Markets, Research Division
I wanted to just make sure I got a couple numbers right. I know you gave the LTL line haul substitute revenues.
In the last couple of quarters, you've also given us loads just as we kind of complete this, weird side of comparisons. What was the loads for that in the quarter?
Henry H. Gerkens
7,400.
Thomas S. Albrecht - BB&T Capital Markets, Research Division
And then I guess the second question, I'll combine the -- I was a little confused on what you said the load growth was -- scratch that. Where did you finish the quarter for agents?
You used to give that and you no longer give that.
Henry H. Gerkens
Yes, we don't give that because it's not the count that is important. It's the quality and the productive agent.
I mean, I'd rather -- rather than talking about adding 200 agents and contribute no revenue, I'd rather talk about one. However, the way street reacts to one versus 200, I'm using extremes, is negative, so I'd rather talk about the revenue, which is what we did.
Thomas S. Albrecht - BB&T Capital Markets, Research Division
All right. And that LTL business was primarily in the brokerage arena, right?
Henry H. Gerkens
Yes.
Operator
Your next question comes from David Campbell of Thompson Davis & Company.
David P. Campbell
I just wanted to ask about this substitute line haul business. You seem to think 2% to 3% is the normal rate that you will continue to have.
I just wondered, how do you know that? Is it something you control?
Do you get some requests for that business and turn them down because you want to keep it at the 2% to 3%? I mean, how do you know?
Henry H. Gerkens
No. No.
No. Way back when, it seems like way back when -- about 1.5 years ago, we were told by one large customer -- the largest customer that we provide substitute line haul, was that they wanted to take that back in-house.
So they began a plan to basically take that back in-house, and as we moved through 2010, if you will, because of certain other things, they actually increased our business and then they started taking it away pursuant to their plan. And so now you've got these comparisons between 2011 and 2010, that it's just the way it is.
And that cycles out in the fourth quarter or just about cycles out in the fourth quarter to where it's an apples to apples. It wasn't anything actively that we said, "Hey, we don't want this business."
It was decided by that the particular carrier that, "Hey, I'm going to bring it in-house and do it myself."
David P. Campbell
Okay. So, the remaining -- the remaining customers using it -- the substitute line haul now ends up being about 2% or 3% of your revenue?
Henry H. Gerkens
That's correct.
David P. Campbell
And it's something that could be more or less depending upon what those customers want, it's not predictable completely?
Henry H. Gerkens
Well, it's like -- nothing is predictable in this world today, as you well know. So yes, I mean for all I know, they could take the 2% away.
They could make it 10%. But I anticipate, based on the knowledge-base that we have right now, that it should maintain in a range from 2% to 3% as we knew that we were going to have a big reduction when they told us that.
So I don't anticipate any major change in that.
Operator
At this time, I show no further questions. I would like to turn the call back over to you, sir, for closing remarks.
Henry H. Gerkens
Thank you. We are right on time, 2:57.
Hey, any closing comments from anybody here? Jim?
Jim B. Gattoni
We followed a record second quarter with a record third quarter. And the volumes and pricing feel real good right now.
And I just -- I think we'll be able to continue the momentum throughout the fourth quarter.
Henry H. Gerkens
I echo those comments and I really believe the future is in front of us at this point in time. We got a lot of good things going.
And I think on behalf of the management team next year, we're pretty confident as we move forward into 2012. And with that, we're looking forward to talking to you again in the fourth quarter, on our mid-quarter update call.
Thanks. Have a great afternoon.
Operator
Thank you for joining the conference call today. Have a good afternoon.
Please disconnect your lines at this time.