10-K
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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form
10-K
 
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
For the Fiscal Year Ended December 28, 2019
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
 
 
 
 
 
 
For the transition period from
                    
to
                    
Commission File Number:
0-21238
 
 
Landstar System, Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
06-1313069
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
13410 Sutton Park Drive South
Jacksonville, Florida
 
32224
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
 
 
 
 
(904)
398-9400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
         
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock
 
LSTR
 
NASDAQ
 
 
 
 
 
 
 
 
 
Securities Registered Pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  
    No  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  
    No  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
    No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  
    No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act. (Check one): 
             
Large accelerated filer
 
 
Accelerated filer
 
             
Non-accelerated filer
 
 
Smaller reporting company
 
             
 
 
Emerging growth company
 
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Act).    Yes  
    No  
The aggregate market value of the voting stock held by
non-affiliates
of the registrant was $4,238,371,000 (based on the per share closing price on June 29, 2019, the last business day of the Company’s second fiscal quarter, as reported on the NASDAQ Global Select Market). In making this calculation, the registrant has assumed, without admitting for any purpose, that all directors and executive officers of the registrant, and no other persons, are affiliates.
The number of shares of the registrant’s common stock, par value $0.01 per share (the “Common Stock”), outstanding as of the close of business on January 24, 2020 was 39,483,360.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference in this Form
10-K
as indicated herein:
         
Document
 
Part of 10-K
Into Which Incorporated
 
Proxy Statement relating to Landstar System, Inc.’s Annual Meeting of Stockholders scheduled to be held on May 19, 2020
 
 
Part III
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents
LANDSTAR SYSTEM, INC.
2019 ANNUAL REPORT ON FORM
10-K
TABLE OF CONTENTS
             
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
Item 1.
 
 
 
3
 
Item 1A.
 
 
 
10
 
Item 1B.
 
 
 
16
 
Item 2.
 
 
 
16
 
Item 3.
 
 
 
17
 
Item 4.
 
 
 
17
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 5.
 
 
 
18
 
Item 6.
 
 
 
20
 
Item 7.
 
 
 
20
 
Item 7A.
 
 
 
33
 
Item 8.
 
 
 
35
 
Item 9.
 
 
 
62
 
Item 9A.
 
 
 
62
 
Item 9B.
 
 
 
65
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 10.
 
 
 
66
 
Item 11.
 
 
 
66
 
Item 12.
 
 
 
66
 
Item 13.
 
 
 
66
 
Item 14.
 
 
 
66
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 15.
 
 
 
67
 
 
 
70
 
 
 
EX – 31.1 Section 302 CEO Certification
 
EX – 31.2 Section 302 CFO Certification
 
EX – 32.1 Section 906 CEO Certification
 
EX – 32.2 Section 906 CFO Certification
 
 
 
 
 
 
 
2
 

Table of Contents
PART I
Item 1.
Business
 
 
General
Landstar System, Inc. was incorporated in January 1991 under the laws of the State of Delaware. It acquired all of the capital stock of its predecessor, Landstar System Holdings, Inc. (“LSHI”) on March 28, 1991. Landstar System, Inc. has been a publicly held company since its initial public offering in March 1993. LSHI owns directly or indirectly all of the common stock of the following companies collectively referred to herein as Landstar’s “Operating Subsidiaries”: Landstar Ranger, Inc. (“Landstar Ranger”), Landstar Inway, Inc. (“Landstar Inway”), Landstar Ligon, Inc. (“Landstar Ligon”), Landstar Gemini, Inc. (“Landstar Gemini”), Landstar Transportation Logistics, Inc. (“Landstar Transportation Logistics”), Landstar Global Logistics, Inc. (“Landstar Global Logistics”), Landstar Express America, Inc. (“Landstar Express America”), and Landstar Canada, Inc. (“Landstar Canada”). Landstar System, Inc., LSHI, the Operating Subsidiaries and the other affiliated companies referred to herein are collectively referred to as “Landstar” or the “Company,” unless the context otherwise requires. The Company’s principal executive offices are located at 13410 Sutton Park Drive South, Jacksonville, Florida 32224 and its telephone number is (904)
398-9400.
The Company makes available free of charge through its website its annual report on Form
10-K,
quarterly reports on Form
10-Q,
current reports on Form
8-K,
proxy statements on Schedule 14A and any amendments to those reports filed or furnished pursuant to Section 13(a) of 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”). The Company’s website is www.landstar.com. The SEC maintains a website at http://www.sec.gov that contains the Company’s current and periodic reports, proxy and information statements and other information filed electronically with the SEC.
On September 20, 2017, Landstar Metro, S.A.P.I. de C.V. (“Landstar Metro”), a recently formed subsidiary of the Company, acquired substantially all of the assets of the asset-light transportation logistics business of Fletes Avella, S.A. de C.V., a Mexican transportation logistics company (“Fletes Avella”). In connection with the acquisition, individuals affiliated with the seller subscribed for equity interests in Landstar Metro and Landstar Metro Servicios S.A.P.I. de C.V. (“Landstar Servicios”) and, as of December 29, 2018, owned in the aggregate approximately 21% of the equity interests of each of them. On January 29, 2019, Landstar acquired all of the remaining equity interests in Landstar Metro and Landstar Servicios held by their former minority equityholders. Accordingly, as of such date, Landstar Metro and Landstar Servicios each became wholly owned subsidiaries of the Company. Landstar Metro provides freight and logistics services within the country of Mexico and in conjunction with Landstar’s U.S./Mexico cross-border services. Landstar Servicios provides various administrative, financial, operational, safety and compliance services to Landstar Metro.
Description of Business
Landstar is a worldwide asset-light provider of integrated transportation management solutions. The Company offers services to its customers across multiple transportation modes, with the ability to arrange for individual shipments of freight to enterprise-wide solutions to manage all of a customer’s transportation needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada and Mexico, and between the United States and Canada, Mexico and other countries around the world. The Company’s services emphasize safety, information coordination and customer service and are delivered through a network of over 1,200 independent commission sales agents and approximately 66,000 third party capacity providers, primarily truck capacity providers, linked together by a series of mobile and digital applications which are provided and coordinated by the Company.
Landstar markets its integrated transportation management solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport customers’ freight. Landstar’s independent commission sales agents enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under
non-exclusive
contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers and railroads. Through this network of agents and capacity providers linked together by Landstar’s information technology systems, Landstar operates an integrated transportation management solutions business primarily throughout North America with revenue of $4.1 billion during the most recently completed fiscal year. The nature of the Company’s business is such that a significant portion of its operating costs varies directly with revenue. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.
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Transportation Logistics Segment
The transportation logistics segment provides a wide range of integrated transportation management solutions. Transportation services offered by the Company include truckload and less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico cross-border, intra-Mexico, intra-Canada, project cargo and customs brokerage. Examples of the industries serviced by the transportation logistics segment include automotive parts and assemblies, building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics and military equipment. In addition, the transportation logistics segment provides transportation services to other transportation companies, including third party logistics and less-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Billings for freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight and are referred to as transportation revenue. See “Notes to Consolidated Financial Statements” for the amount of revenue from external customers, measure of profit and total assets attributable to the transportation logistics segment for the last three fiscal years.
Truck Services
. The transportation logistics segment’s truck transportation services include a full array of truckload transportation for a wide range of commodities and, to a lesser degree, less-than-truckload transportation services. A significant portion of the Company’s truckload services is delivered in the spot market over irregular or
non-repetitive
routes, while approximately 31% of the Company’s fiscal year 2019 truck transportation revenue was provided utilizing Landstar provided trailing equipment, which frequently is used on more routine, regular routes. The Company utilizes a broad assortment of equipment, including dry and specialty vans of various sizes, unsided/platform trailers (including flatbeds, drop decks and specialty trailers), temperature-controlled vans and containers. Available truck transportation services also include
short-to-long
haul movement of containers by truck and expedited ground and dedicated power-only truck capacity. During fiscal year 2019, revenue generated by BCO Independent Contractors and Truck Brokerage Carriers was 45% and 47%, respectively, of consolidated revenue. Also, during fiscal year 2019, truck transportation revenue generated via van equipment and unsided/platform trailing equipment was 63% and 34%, respectively, of truck transportation revenue and less-than-truckload revenue was 3% of truck transportation revenue. The Company’s truck services contributed 92% of consolidated revenue in fiscal year 2019 and 93% of consolidated revenue in both fiscal years 2018 and 2017.
Landstar Metro provides freight and logistics services within the country of Mexico and in conjunction with Landstar’s U.S./Mexico cross-border services. Landstar Servicios provides various administrative, financial, operational, safety and compliance services to Landstar Metro. The results of operations from Landstar Metro and Landstar Servicios are presented as part of the Company’s transportation logistics segment. Revenue from Landstar Metro represented less than 1% of the Company’s transportation logistics segment revenue in fiscal year 2019.
Rail Intermodal Services.
The transportation logistics segment has contracts with Class 1 domestic and Canadian railroads, certain short-line railroads and most major asset-based intermodal equipment providers, including agreements with stacktrain operators and container and trailing equipment companies. In addition, the transportation logistics segment has contracts with a vast network of local trucking companies that handle
pick-up
and delivery of rail freight. These contracts provide the transportation logistics segment the ability to transport freight via rail throughout the United States, Canada and Mexico. The transportation logistics segment’s rail intermodal service capabilities include trailer on flat car, container on flat car, box car and railcar. The transportation logistics segment’s rail intermodal services contributed 3% of consolidated revenue in each of fiscal years 2019, 2018 and 2017.
Air and Ocean Services.
The transportation logistics segment provides domestic and international air services and ocean services to its customers. The Company executes international air freight transportation as an International Air Transport Association (“IATA”) certified Indirect Air Carrier (“IAC”) and international ocean freight transportation as an Ocean Transportation Intermediary (“OTI”) licensed by the Federal Maritime Commission (“FMC”) as a
non-vessel
operating common carrier (“NVOCC”) and ocean freight forwarder. Through its network of independent commission sales agents, relationships within a global network of foreign freight forwarders and contracts with a number of airlines and ocean lines, the
transportation logistics segment provides efficient and cost effective
door-to-door
transportation to most points in the world for a vast array of cargo types such as
over-sized
break bulk, consolidations, full container loads, less-than container loads and refrigerated freight. The transportation logistics segment’s air and ocean services contributed 3% of consolidated revenue in each of fiscal years 2019, 2018 and 2017.
Insurance Segment
The insurance segment is comprised of Signature Insurance Company (“Signature”), a wholly owned offshore insurance subsidiary, and Risk Management Claim Services, Inc. (“RMCS”). The insurance segment provides risk and claims management services to certain of Landstar’s Operating Subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent
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Contractors and provides certain property and casualty insurance directly to certain of Landstar’s Operating Subsidiaries. Revenue at the insurance segment represents reinsurance premiums from third party insurance companies that provide insurance programs to BCO Independent Contractors where all or a portion of the risk of loss is ultimately borne by Signature. Revenue at the insurance segment represented approximately 1% of the Company’s consolidated revenue in each of fiscal years 2019, 2018 and 2017. See “Notes to Consolidated Financial Statements” for the amount of revenue from external customers, measure of profit and total assets attributable to the insurance segment for the last three fiscal years.
Factors Significant to the Company’s Operations
Management believes the following factors are particularly significant to the Company’s operations:
Agent Network
The Company’s primary
day-to-day
contact with its customers is through its network of independent commission sales agents and, to a lesser extent, through employees of the Company. The typical Landstar independent commission sales agent maintains a relationship with a number of shippers and services these shippers utilizing the Company’s information technology systems and the various modes of transportation made available through the Company’s network of third party capacity providers. The Company provides assistance to the agents in developing additional relationships with shippers and enhancing agent and Company relationships with larger shippers through the Company’s field employees, located throughout the United States and Canada. The Operating Subsidiaries provide programs to support the agents’ operations and tools and data to assist agents in establishing pricing for freight hauled by the various modes of transportation available to the agents. It is important to note that the Operating Subsidiaries, and not the Company’s agents, contract directly with customers and generally assume the related credit risk and potential liability for freight losses or damages when the Company is providing transportation services as a motor carrier.
Management believes the Company has more independent commission sales agents than any other asset-light integrated transportation management solutions company in the United States. Landstar’s vast network of independent commission sales agent locations provides the Company regular contact with shippers at the local level and the capability to be highly responsive to shippers’ changing needs. The Company’s large fleet of available capacity provides the agent network the resources needed to service both large and small shippers. Through its agent network, the Company offers smaller shippers a level of service comparable to that typically enjoyed only by larger customers. Examples include the ability to provide transportation services on short notice, multiple
pick-up
and delivery points, automated information flow, access to specialized equipment, spotted van trailers and
drop-and-hook
operations. In addition, a number of the Company’s agents specialize in certain types of freight and transportation services (such as oversized or heavy loads and/or rail, air and international freight transportation). Each independent commission sales agent has the opportunity to market all of the services provided by the transportation logistics segment.
The independent commission sales agents use a variety of proprietary and third party information technology applications provided by the Company to service the requirements of shippers. For truckload services, the Company’s independent commission sales agents primarily use Landstar proprietary software which enables agents to enter available freight, dispatch capacity and process most administrative procedures and then communicate that information to Landstar and its capacity providers via the internet. The Company’s
web-based
available truck information system provides a listing of available truck capacity to the Company’s independent commission sales agents. The Company also offers independent commission sales agents with a variety of proprietary
web-based
pricing, operational and financial tools. For modes of transportation other than truckload, the independent commission sales agents utilize both proprietary and third party information technology applications provided by the Company.
Commissions to agents are based on contractually agreed-upon percentages of revenue or net revenue, defined as revenue less the cost of purchased transportation, or net revenue less a contractually agreed upon percentage of revenue retained by Landstar. Commissions to agents as a percentage of consolidated revenue will vary directly with fluctuations in the percentage of consolidated revenue generated by the various modes of transportation and reinsurance premiums and with changes in net revenue margin, defined as net revenue divided by revenue, on services provided by Truck Brokerage Carriers, railroads, air cargo carriers and ocean cargo carriers. Commissions to agents are recognized over the freight transit period as the performance obligation to the customer is completed.
The Company had 555 and 608 agents who each generated at least $1 million in Landstar revenue (the “Million Dollar Agents”) during fiscal years 2019 and 2018, respectively. Landstar revenue from the Million Dollar Agents in the aggregate represented 93% and 94% of consolidated revenue in 2019 and 2018, respectively. Annually, the Company has experienced very
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few terminations of its Million Dollar Agents, whether such terminations are initiated by the agent or the Company. Annual terminations of Million Dollar Agents are typically less than 3% of the total number of Million Dollar Agents. Management believes that the majority of the Million Dollar Agents choose to represent the Company exclusively.
Third Party Capacity
The Company relies exclusively on independent third parties for its hauling capacity other than for trailing equipment owned or leased by the Company and utilized primarily by the BCO Independent Contractors. These third party transportation capacity providers consist of BCO Independent Contractors, Truck Brokerage Carriers, air and ocean cargo carriers and railroads. Landstar’s use of capacity provided by third parties allows it to maintain a lower level of capital investment, resulting in lower fixed costs. During fiscal year 2019, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 45%, 47% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3% of the Company’s consolidated revenue during fiscal year 2019. Historically, the gross profit margin (defined as gross profit, which is defined as revenue less the cost of purchased transportation and commissions to agents, divided by revenue) generated from freight hauled by BCO Independent Contractors has been greater than that from freight hauled by other third party capacity providers. However, the Company’s insurance and claims costs, depreciation costs and other operating costs are incurred primarily in support of BCO Independent Contractor capacity. In addition, as further described in the “Corporate Services” section that follows, the Company incurs significantly higher selling, general and administrative costs in support of BCO Independent Contractor capacity as compared to the other modes of transportation. Purchased transportation costs are recognized over the freight transit period as the performance obligation to the customer is completed.
BCO Independent Contractors.
Management believes the Company has the largest fleet of truckload BCO Independent Contractors in the United States. BCO Independent Contractors provide truck capacity to the Company under exclusive lease arrangements. Each BCO Independent Contractor operates under the motor carrier operating authority issued by the U.S. Department of Transportation (“DOT”) to Landstar’s Operating Subsidiary to which such BCO Independent Contractor provides services and has leased his or her equipment. The Company’s network of BCO Independent Contractors provides marketing, operating, safety, recruiting and retention advantages to the Company.
The Company’s BCO Independent Contractors are compensated primarily based on a contractually agreed-upon percentage of revenue generated by loads they haul. This percentage generally ranges from 62% to 74% where the BCO Independent Contractor provides only a tractor and 73% to 76% where the BCO Independent Contractor provides both a tractor and trailing equipment. The BCO Independent Contractor must pay substantially all of the expenses of operating his/her equipment, including driver wages and benefits, fuel, physical damage insurance, maintenance, highway use taxes and debt service, if applicable. The Company passes 100% of fuel surcharges billed to customers for freight hauled by BCO Independent Contractors to its BCO Independent Contractors. During fiscal year 2019, the Company billed customers $225.4 million in fuel surcharges and passed 100% of such fuel surcharges to the BCO Independent Contractors. These fuel surcharges are excluded from revenue and the cost of purchased transportation.
The Company maintains internet-based applications for mobile and desktop devices through which BCO Independent Contractors can view a comprehensive listing of the Company’s available freight, allowing them to consider rate, size, origin and destination when planning trips. The Landstar Contractors’ Advantage Purchasing Program (“LCAPP”) leverages Landstar’s purchasing power to provide discounts to eligible BCO Independent Contractors when they purchase equipment, fuel, tires and other items. In addition, Landstar Contractor Financing, Inc. provides a source of funds at competitive interest rates to the BCO Independent Contractors to purchase trailing equipment.
The number of trucks provided to the Company by BCO Independent Contractors was 10,243 at December 28, 2019, compared to 10,599 at December 29, 2018. At December 28, 2019, approximately 97% of the trucks provided by BCO Independent Contractors were provided by BCO Independent Contractors who provided five or fewer trucks to the Company. The number of trucks provided by BCO Independent Contractors fluctuates daily as a result of truck recruiting and truck terminations. More trucks were recruited in fiscal year 2019 than in fiscal year 2018 but trucks terminated were higher in fiscal year 2019 than in fiscal year 2018, resulting in an overall net decrease of 356 trucks during fiscal year 2019. Landstar’s BCO Independent Contractor truck turnover was approximately 36% in fiscal year 2019 compared to 24% in fiscal year 2018. Approximately 46% of 2019 turnover was attributable to BCO Independent Contractors who had been with the Company for less than one year. Management believes that factors that have historically favorably impacted turnover include the Company’s extensive agent network, the quality of available freight, the Company’s programs to reduce the operating costs of its BCO Independent Contractors and Landstar’s reputation for quality, service, reliability and financial strength.
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Truck Brokerage Carriers.
At December 28, 2019, the Company maintained a database of over 56,000 approved Truck Brokerage Carriers who provide truck capacity to the Company. Truck Brokerage Carriers provide truck capacity to the Company under
non-exclusive
contractual arrangements and each operates under its own
DOT-issued
motor carrier operating authority. Truck Brokerage Carriers are paid either a negotiated rate for each load hauled or, to a lesser extent, a contractually agreed-upon fixed rate per load. The Company recruits, approves, establishes contracts with and tracks safety ratings and service records of these third party trucking companies. In addition to providing additional capacity to the Company, the use of Truck Brokerage Carriers enables the Company to pursue different types and quality of freight such as temperature-controlled, short-haul traffic and less-than-truckload and, in certain instances, lower-priced freight that generally would not be handled by the Company’s BCO Independent Contractors.
The Company maintains an internet site through which Truck Brokerage Carriers can view a listing of the Company’s freight that is available to them. The Landstar Savings Plus Program leverages Landstar’s purchasing power to provide discounts to eligible Truck Brokerage Carriers when they purchase fuel and equipment and provides the Truck Brokerage Carriers with an electronic payment option.
Railroads and Air and Ocean Cargo Carriers.
The Company has contracts with Class 1 domestic and Canadian railroads, certain short-line railroads and domestic and international airlines and ocean lines. These relationships allow the Company to pursue the freight best serviced by these forms of transportation capacity. Railroads are paid either a negotiated rate for each load hauled or a contractually agreed-upon fixed rate per load. Air cargo carriers are generally paid a negotiated rate for each load hauled. Ocean cargo carriers are generally paid contractually agreed-upon fixed rates per load. The Company also contracts with other third party capacity providers, such as air charter service providers, when required by specific customer needs.
Trailing Equipment
The Company offers its customers a large and diverse fleet of trailing equipment. The following table illustrates the mix of the trailing equipment as of December 28, 2019, either provided by the BCO Independent Contractors or owned or leased by the Company and made available primarily to BCO Independent Contractors. In general, Truck Brokerage Carriers utilize their own trailing equipment when providing transportation services on behalf of Landstar. Truck Brokerage Carrier trailing equipment is not included in the following table:
         
Trailers by Type
 
 
Van
   
13,841
 
Unsided/platform, including flatbeds, step decks, drop decks and low boys
   
3,092
 
Temperature-controlled
   
134
 
         
Total
   
17,067
 
         
 
 
Specialized services offered by the Company include those provided by a large fleet of flatbed trailers and multi-axle trailers capable of hauling extremely heavy or oversized loads. Management believes the Company, along with its network of capacity providers, offers one of the largest fleets of heavy/specialized trailing equipment in North America.
At December 28, 2019, 12,733 of the trailers available to the BCO Independent Contractors were owned by the Company and 290 were leased. In addition, at December 28, 2019, 4,044 trailers were provided by the BCO Independent Contractors. Approximately 31% of Landstar’s truck transportation revenue was generated on Landstar provided trailing equipment during fiscal year 2019.
Customers
The Company’s customer base is highly diversified and dispersed across many industries, commodities and geographic regions. The Company’s top 100 customers accounted for approximately 42% and 43%, respectively, of consolidated revenue during fiscal years 2019 and 2018. Management believes that the Company’s overall size, mobile and digital applications, geographic coverage, access to equipment and diverse service capability offer the Company significant competitive marketing and operating advantages. These advantages allow the Company to meet the needs of even the largest shippers. Larger shippers often consider reducing the number of authorized carriers they use in favor of a small number of “core carriers,” such as the Company, whose size and diverse service capabilities enable these core carriers to satisfy most of the shippers’ transportation needs. The
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Company’s national account customers include the United States Department of Defense and many of the companies included in the Fortune 500. Large shippers are also using third party logistics providers (“3PLs”) to outsource the management and coordination of their transportation needs. 3PLs and other transportation companies also utilize the Company’s available transportation capacity to satisfy their obligations to their shippers. There were ten transportation service providers, including 3PLs, included in the Company’s top 25 customers for fiscal year 2019. Management believes the Company’s network of agents and third party capacity providers allows it to efficiently attract and service smaller shippers which may not be as desirable to other large transportation providers (see above under “Agent Network”). No customer accounted for more than 3% of the Company’s 2019 revenue.
Technology
Management believes leadership in the development, operation and support of mobile and digital software applications is an ongoing part of providing high quality service. Landstar focuses on providing integrated transportation management solutions which emphasize customer service and information coordination among its independent commission sales agents, customers, capacity providers and employees. The Company continues to focus on identifying, purchasing or developing and implementing software applications and tools which are designed to: (i) assist Landstar independent commission sales agents in efficiently sourcing capacity, pricing transportation services and managing and analyzing their independent businesses, (ii) assist customers in meeting their transportation needs, (iii) assist our third party capacity providers in identifying desirable freight opportunities and operating their independent businesses, and (iv) improve operational and administrative efficiency throughout the Company. Landstar intends to continue to improve its technologies to meet the total needs of its agents, customers and third party capacity providers and remains engaged in various multi-year projects aimed at increasing efficiencies, primarily through technology, at Landstar and across our agent and third party capacity network.
The Company’s information technology systems used in connection with its operations are located in Jacksonville, Florida and, to a lesser extent, in Rockford, Illinois. In addition, the Company utilizes several third party data centers throughout the U.S. Landstar relies, in the regular course of its business, on the proper operation of its information technology systems.
Corporate Services
The Company provides many administrative support services to its network of independent commission sales agents, third party capacity providers and customers. Management believes that the mobile and digital applications purchased or developed and maintained by the Company and its administrative support services provide operational and financial advantages to its independent commission sales agents, third party capacity providers and customers. These, in turn, enhance the operational and financial efficiency of all aspects of the network.
Administrative support services that provide operational and financial advantages to the network include customer contract administration, customer credit review and approvals, pricing, customer billing, accounts receivable collections, third party capacity settlement, operator and equipment safety and compliance management for our network of BCO Independent Contractors, insurance claims handling, coordination of vendor discount programs and third party capacity sourcing programs. Marketing and advertising strategies are also provided by the Company. The Company’s practices of accepting customer credit risk and paying its agents and carriers promptly provides a significant competitive advantage to the Company in comparison to less capitalized competitors.
Competition
Landstar competes primarily in the transportation and logistics services industry with truckload carriers, third party logistics companies, digital freight matching companies, intermodal transportation and logistics service providers, railroads, less-than-truckload carriers and other asset-light transportation and logistics service providers. The transportation and logistics services industry is extremely competitive and fragmented.
Management believes that competition for freight transported by the Company is based on service, efficiency and freight rates, which are influenced significantly by the economic environment, particularly the amount of available transportation capacity and freight demand. Management believes that Landstar’s overall size, service offerings and availability of a wide range of equipment, together with its geographically dispersed local independent agent network, present the Company with significant competitive advantages over many transportation and logistics service providers.
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Self-Insured Claims
Potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. For periods prior to May 1, 2019, Landstar retains liability for commercial trucking claims up to $5,000,000 per occurrence and maintains various third party insurance arrangements for liabilities in excess of its $5,000,000 self-insured retention. Effective May 1, 2019, the Company entered into a new three year commercial auto liability insurance arrangement for losses incurred between $5,000,000 and $10,000,000 (the “Initial Excess Policy”) with a third party insurance company. For commercial trucking claims incurred on or after May 1, 2019 through April 30, 2022, the Initial Excess Policy provides for a limit for a single loss of $5,000,000, with an aggregate limit of $10,000,000 for each policy year, an aggregate limit of $15,000,000 for the
thirty-six
month term ended April 30, 2022, and options to increase such aggregate limits for
pre-established
amounts of additional premium. In the event paid aggregate losses under the Initial Excess Policy during any policy year (May 1 to April 30) exceed $10,000,000, the Company would retain liability of up to $10,000,000 per occurrence, inclusive of its $5,000,000 self-insured retention, for the remainder of such policy year. Moreover, in the event paid aggregate losses under the Initial Excess Policy during the three year period ending April 30, 2022 exceed a
pre-determined
threshold amount, the Company would be required to pay additional premium up to a maximum amount of $3,500,000.
As previously disclosed, BCO Independent Contractors with a subsidiary of the Company have been involved in two tragic accidents during the policy year ending April 30, 2020, the first of which occurred in the 2019 third quarter and the second of which occurred in the 2020 first quarter. With respect to the second accident, the Company is still in the process of obtaining all the facts concerning this incident and, as such, it is too soon to estimate the Company’s ultimate financial exposure. The Company’s
pre-tax
loss exposure at the time of the second accident included its $5,000,000 self-insured retention and up to $3,500,000 in additional premium relating to aggregate losses above its self-insured retention during the policy year ending April 30, 2020. If, as a result of these or additional accidents, aggregate losses under the Initial Excess Policy during the policy year ending April 30, 2020 exceed $10,000,000, Landstar would retain liability of up to $10,000,000 per occurrence, inclusive of its self-insured retention for commercial trucking claims during the remainder of such policy year. The Company continues to maintain third party insurance arrangements providing excess coverage on a per occurrence basis for commercial trucking liabilities in excess of $10,000,000.
The Company also retains liability of up to $1,000,000 for each general liability claim, up to $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. In addition, under reinsurance arrangements by Signature of certain risks of the Company’s BCO Independent Contractors, the Company retains liability of up to $500,000, $1,000,000 or $2,000,000 with respect to certain occupational accident claims and up to $750,000 with respect to certain workers’ compensation claims. The Company’s exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air and ocean cargo carriers who transport freight on behalf of the Company is reduced by various factors including the extent to which such carriers maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo claims or workers’ compensation claims or the material unfavorable development of existing claims could have a material adverse effect on Landstar’s cost of insurance and claims and its results of operations.
Regulation
Certain of the Operating Subsidiaries are considered motor carriers and/or brokers authorized to arrange for transportation services by motor carriers which are regulated by the Federal Motor Carrier Safety Administration (the “FMCSA”) and by various state agencies. The FMCSA has broad regulatory powers with respect to activities such as motor carrier operations, practices, periodic financial reporting and insurance. Subject to federal and state regulatory authorities or regulation, the Company’s capacity providers may transport most types of freight to and from any point in the United States over any route selected.
Interstate motor carrier operations are subject to safety requirements prescribed by the FMCSA. Each truck operator, whether working as a BCO Independent Contractor or for a Truck Brokerage Carrier, is required to have a commercial driver’s license and may be subject to mandatory drug and alcohol testing. The FMCSA’s commercial driver’s license and drug and alcohol testing requirements have not adversely affected the Company’s ability to source the capacity necessary to meet its customers’ transportation needs. However, on January 6, 2020 the FMCSA implemented new requirements applicable to drug and alcohol testing by motor carriers. The new regulation expands motor carrier reporting requirements to include reporting of all operators who test positive and/or refuse to submit to a test as prescribed in the regulation. The new regulation also expands rules relating to the obligation of motor carriers to conduct queries to check if current or prospective operators are prohibited from operating a commercial motor vehicle due to a positive or unresolved drug or alcohol test. The expanded reporting of positive results, or of an operator’s refusal to meet FMCSA testing requirements, to a centralized clearinghouse prescribed by FMCSA has the potential to remove operators from service that may otherwise have been undetected or unreported.
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In addition, FMCSA mandated the use of electronic logging devices (“ELDs”) in certain
over-the-road
commercial motor vehicles effective December 18, 2017. The FMCSA’s ELD mandate has not adversely affected the size of the Company’s fleet of BCO Independent Contractors or its ability to source truck capacity provided by Truck Brokerage Carriers.
Additionally, certain of the Operating Subsidiaries are licensed as Ocean Transportation Intermediaries by the U.S. Federal Maritime Commission as
non-vessel-operating
common carriers and/or as ocean freight forwarders. The Company’s air transportation activities in the United States are subject to regulation by the U.S. Department of Transportation as an indirect air carrier. One of the Operating Subsidiaries is licensed by the U.S. Department of Homeland Security through the Bureau of U.S. Customs and Border Protection (“U.S. Customs”) as a customs broker. The Company is also subject to regulations and requirements relating to safety and security promulgated by, among others, the U.S. Department of Homeland Security through U.S. Customs and the Transportation Security Administration, the Canada Border Services Agency and various state and local agencies and port authorities. In addition, because the U.S. government is one of the Company’s customers, the Company must comply with and is affected by laws and regulations relating to doing business with the federal government.
The transportation industry is subject to other potential regulatory and legislative changes (such as the possibility of more stringent environmental, climate change and/or safety/security regulations, limits on vehicle weight and size and regulations relating to the health and wellness of commercial truck operators) that may affect the economics of the industry by requiring changes in operating practices, by changing the demand for motor carrier services or the cost of providing truckload or other transportation or logistics services, or by adversely impacting the number of available commercial truck operators.
Seasonality
Landstar’s operations are subject to seasonal trends common to the trucking industry. Truckload volumes for the quarter ending in March are typically lower than for the quarters ending in June, September and December.
Employees
As of December 28, 2019, the Company and its subsidiaries employed 1,333 individuals. Four Landstar Ranger drivers (out of a Company total of approximately 10,243 drivers for BCO Independent Contractors) are members of the International Brotherhood of Teamsters. The Company considers relations with its employees to be good.
Item 1A.
Risk Factors
 
 
Increased severity or frequency of accidents and other claims or a material unfavorable development of existing claims.
As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Self-Insured Claims,” potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. For periods prior to May 1, 2019, Landstar retains liability for commercial trucking claims up to $5,000,000 per occurrence and maintains various third party insurance arrangements for liabilities in excess of its $5,000,000 self-insured retention. Effective May 1, 2019, the Company entered into a new three year commercial auto liability insurance arrangement for losses incurred between $5,000,000 and $10,000,000 (the “Initial Excess Policy”) with a third party insurance company. For commercial trucking claims incurred on or after May 1, 2019 through April 30, 2022, the Initial Excess Policy provides for a limit for a single loss of $5,000,000, with an aggregate limit of $10,000,000 for each policy year, an aggregate limit of $15,000,000 for the
thirty-six
month term ended April 30, 2022, and options to increase such aggregate limits for
pre-established
amounts of additional premium. In the event paid aggregate losses under the Initial Excess Policy during any policy year (May 1 to April 30) exceed $10,000,000, the Company would retain liability of up to $10,000,000 per occurrence, inclusive of its $5,000,000 self-insured retention, for the remainder of such policy year. Moreover, in the event paid aggregate losses under the Initial Excess Policy during the three year period ending April 30, 2022 exceed a
pre-determined
threshold amount, the Company would be required to pay additional premium up to a maximum amount of $3,500,000.
As previously disclosed, BCO Independent Contractors with a subsidiary of the Company have been involved in two tragic accidents during the policy year ending April 30, 2020, the first of which occurred in the 2019 third quarter and the second of which occurred in the 2020 first quarter. With respect to the second accident, the Company is still in the process of obtaining all the facts concerning this incident and, as such, it is too soon to estimate the Company’s ultimate financial exposure. The
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Company’s
pre-tax
loss exposure at the time of the second accident included its $5,000,000 self-insured retention and up to $3,500,000 in additional premium relating to aggregate losses above its self-insured retention during the policy year ending April 30, 2020. If, as a result of these or additional accidents, aggregate losses under the Initial Excess Policy during the policy year ending April 30, 2020 exceed $10,000,000, Landstar would retain liability of up to $10,000,000 per occurrence, inclusive of its self-insured retention for commercial trucking claims during the remainder of such policy year. The Company continues to maintain third party insurance arrangements providing excess coverage on a per occurrence basis for commercial trucking liabilities in excess of $10,000,000.
The Company also retains liability of up to $1,000,000 for each general liability claim, up to $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. In addition, under reinsurance arrangements by Signature of certain risks of the Company’s BCO Independent Contractors, the Company retains liability of up to $500,000, $1,000,000 or $2,000,000 with respect to certain occupational accident claims and up to $750,000 with respect to certain workers’ compensation claims. The Company’s exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air and ocean cargo carriers who transport freight on behalf of the Company is reduced by various factors including the extent to which such carriers maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo claims or workers’ compensation claims or the material unfavorable development of existing claims could have a material adverse effect on Landstar’s cost of insurance and claims and its results of operations.
Dependence on third party insurance companies.
The Company is dependent on a limited number of third party insurance companies to provide insurance coverage in excess of its self-insured retention amounts. Historically, the Company has maintained insurance coverage for commercial trucking claims in excess of its self-insured retention, up to various maximum amounts, with a limited number of third party insurance companies. In an attempt to manage the cost of insurance and claims, the Company has historically increased or decreased the level of its financial exposure to commercial trucking claims by increasing or decreasing its level of self-insured retention based on the estimated cost differential between proposed premiums from third party insurance companies and historical and actuarially projected losses experienced by the Company at various levels of self-insured retention. Similarly, in its excess insurance layers, the Company may increase or decrease the level of its financial exposure to commercial trucking claims, including through the use of additional self-insurance as well as deductibles, aggregate loss limits and other arrangements with third party insurance companies, based on the estimated cost differential between proposed premiums from third party insurance companies and historical and actuarially projected losses experienced by the Company at various levels of excess insurance coverage. To the extent that the third party insurance companies propose increases to their premiums for coverage of commercial trucking claims, the Company may decide to pay such increased premiums or increase its financial exposure on an aggregate, per occurrence or other basis, including by increasing the amount of its self-insured retention. In fact, in 2016, two of the largest third party insurers providing excess coverage for commercial trucking claims in the United States announced that in light of increased severity trends related to the increase in losses attributable to unfavorable verdicts, they would no longer provide such coverage. This decision by these two third party insurers had a significant negative impact on the availability and pricing of excess coverage for commercial trucking claims in the United States. No assurances can be given that other third party insurers will not also decide to exit the market as a provider of excess coverage for commercial trucking claims in the United States, which could have a further negative effect on the availability and pricing of such coverage. Accordingly, no assurance can be given that insurance coverage from third party insurers for claims in excess of the Company’s current $5 million self-insured retention will continue to be available on commercially reasonable terms.
Dependence on independent commission sales agents.
As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Agent Network,” the Company markets its services primarily through independent commission sales agents. During fiscal year 2019, 555 agents generated revenue for Landstar of at least $1 million each, or in the aggregate approximately 93% of Landstar’s consolidated revenue. Landstar competes with motor carriers and other third parties for the services of these independent commission sales agents. Landstar has historically experienced very limited agent turnover in the number of its Million Dollar Agents. There can be no assurances, however, that Landstar will continue to experience very limited turnover of its Million Dollar Agents in the future. Landstar’s contracts with its agents, including its Million Dollar Agents, are typically terminable without cause upon 10 to 30 days’ notice by either party and generally contain significant but not unqualified
non-compete
provisions limiting the ability of a former agent to compete with Landstar for a specified period of time post-termination, and other restrictive covenants. The loss of some of the Company’s Million Dollar Agents and/or a significant decrease in revenue generated by Million Dollar Agents could have a material adverse effect on Landstar, including its results of operations and revenue.
Dependence on third party capacity providers.
As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Transportation Capacity,” Landstar does not own trucks or other transportation equipment (other than trailing
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equipment) and relies on third party capacity providers, including BCO Independent Contractors, Truck Brokerage Carriers, railroads and air and ocean cargo carriers, to transport freight for its customers. The Company competes with motor carriers and other third parties for the services of BCO Independent Contractors and other third party capacity providers. The market for qualified truck owner-operators and other third party truck capacity providers is very competitive among motor carriers and no assurances can be given that the Company will be able to maintain or expand the number of BCO Independent Contractors or other third party truck capacity providers. Additionally, the Company’s third party capacity providers other than BCO Independent Contractors can be expected, under certain circumstances, to charge higher prices to cover increased operating expenses, such as any increases in the cost of fuel, and the Company’s operating income may decline without a corresponding increase in price to the customer. A significant decrease in available capacity provided by either the Company’s BCO Independent Contractors or other third party capacity providers, or increased rates charged by other third party capacity providers that cannot be passed through to customers, could have a material adverse effect on Landstar, including its results of operations and revenue.
Decreased demand for transportation services; U.S. trade relationships.
The transportation industry historically has experienced cyclical financial results as a result of slowdowns in economic activity, the business cycles of customers, and other economic factors beyond Landstar’s control. If a slowdown in economic activity or a downturn in the Company’s customers’ business cycles cause a reduction in the volume of freight shipped by those customers, the Company’s operating results could be materially adversely affected.
In addition, Landstar hauls a significant number of shipments that have either been imported into the United States or are destined for export from the United States. Any decision by the U.S. government to adopt actions such as a border tax on imports, an increase in customs duties or tariffs, the renegotiation of U.S. trade agreements or any other action that could have a negative impact on international trade could cause a reduction in the volume of freight shipped by many Landstar customers. Any changes in tax and trade policies in the United States and corresponding actions by other countries could adversely affect our financial performance.
Substantial industry competition.
As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Competition,” Landstar competes primarily in the transportation and logistics services industry. This industry is extremely competitive and fragmented. Landstar competes primarily with truckload carriers, intermodal transportation service providers, railroads, less-than-truckload carriers, third party logistics companies, digital freight matching companies and other asset-light transportation and logistics service providers. Management believes that competition for the freight transported by the Company is based on service, efficiency and freight rates, which are influenced significantly by the economic environment, particularly the amount of available transportation capacity and freight demand. Historically, competition has created downward pressure on freight rates. In addition, many large shippers are using third party logistics providers (“3PLs”) other than the Company to outsource the management and coordination of their transportation needs rather than directly arranging for transportation services with carriers. As noted above, there were ten transportation service providers, including 3PLs, included in the Company’s top 25 customers for the fiscal year ended December 28, 2019. Usage by large shippers of 3PLs often provides carriers, such as the Company, with a less direct relationship with the shipper and, as a result, may increase pressure on freight rates while making it more difficult for the Company to compete primarily based on service and efficiency. A decrease in freight rates could have a material adverse effect on Landstar, including its revenue and operating income.
Status of independent contractors.
In recent years, the topic of the classification of individuals as employees or independent contractors has gained increased attention among federal and state regulators as well as the plaintiffs’ bar. Various legislative or regulatory proposals have been introduced at the federal and state levels that may affect the classification status of individuals as independent contractors or employees for either employment tax purposes (e.g., withholding, social security, Medicare and unemployment taxes) or other benefits available to employees (most notably, workers’ compensation benefits). Recently, certain states (most prominently, California) have seen significant increased activity by tax and other regulators and numerous class action lawsuits filed against transportation companies that engage independent contractors. For example, on January 25, 2019, a purported class action was filed in the Superior Court of the State of California for the County of San Bernardino by Hany Tanious, as an individual and on behalf of all others similarly situated, against Landstar System, Inc. and Landstar Ranger, Inc. See Part I, Item 3, “Legal Proceedings”, for further information.
There are many different tests and standards that may apply to the determination of whether a relationship is that of an independent contractor or one of employment. For example, different standards may be applied by the Internal Revenue Service, the U.S. Department of Labor, the National Labor Relations Board, state unemployment agencies, state departments of labor, state taxing authorities, the Equal Employment Opportunity Commission, state discrimination or disability benefit administrators and
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state workers compensation boards, among others. For federal tax purposes, most individuals are classified as employees or independent contractors based on a multi-factor
“common-law”
analysis rather than any definition found in the Internal Revenue Code or Internal Revenue Service regulations. In addition, under Section 530 of the Revenue Act of 1978, a taxpayer that meets certain criteria may treat an individual as an independent contractor for employment tax purposes if the taxpayer has been audited without being told to treat similarly situated workers as employees, if the taxpayer has received a ruling from the Internal Revenue Service or a court decision affirming the taxpayer’s treatment of the individual as an independent contractor, or if the taxpayer is following a long-standing recognized practice.
The Company classifies its BCO Independent Contractors and independent commission sales agents as independent contractors for all purposes, including employment tax and employee benefits. There can be no assurance that legislative, judicial, administrative or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change the employee/independent contractor classification of BCO Independent Contractors or independent commission sales agents doing business with the Company. On September 18, 2019, California enacted Assembly Bill (AB) 5 into law, codifying the strict “ABC” test for purposes of determining a worker’s status as an independent contractor or employee under California law. While new in California, versions of the ABC test have existed in a number of other states over the years and have been challenged in various courts as violating the federal government’s exclusive right to regulate trucking in certain areas of law and interstate commerce. The Company continues to monitor and analyze the impact of the new law, which became effective as of January 1, 2020, including what steps may be necessary or advisable to adapt to a changing legal and regulatory environment in California. The Company has BCO Independent Contractors, Truck Brokerage Carriers and independent commission sales agents who reside in and/or principally operate their business in California that could be impacted by AB 5 or similar laws, which could eventually affect our relationship with them. Additionally, the new law may have a significant impact on our Truck Brokerage Carriers based in California who utilize owner-operators to provide various types of transportation services such as drayage, regional or local delivery. Since the Company is neither incorporated nor headquartered in California and the vast majority of BCO Independent Contractors, Truck Brokerage Carriers and independent commission sales agents currently doing business with the Company reside and principally operate outside of California, we do not expect AB 5 to have a material impact on Landstar’s overall network of BCO Independent Contractors, Truck Brokerage Carriers and independent commission sales agents. Nevertheless, there remains significant uncertainty regarding many aspects of the new law, including how the law will be interpreted and enforced by state and local governments as well as by courts.
Potential changes, if any, that could impact the legal classification of the independent contractor relationship between the Company and BCO Independent Contractors or independent commission sales agents could have a material adverse effect on Landstar’s operating model. Further, the costs associated with any such potential changes could have a material adverse effect on the Company’s results of operations and financial condition if Landstar were unable to pass through to its customers an increase in price corresponding to such increased costs. Moreover, class action litigation in this area against other transportation companies has resulted in significant damage awards and/or monetary settlements for workers who have been allegedly misclassified as independent contractors and the legal and other related expenses associated with litigating these cases can be substantial.
Regulatory and legislative changes.
As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Regulation,” certain of the Operating Subsidiaries are motor carriers and/or property brokers authorized to arrange for transportation services by motor carriers which are regulated by the Federal Motor Carrier Safety Administration (“FMCSA”), an agency of the U.S. Department of Transportation, and by various state agencies. Certain of the Operating Subsidiaries are licensed as Ocean Transportation Intermediaries by the U.S. Federal Maritime Commission as
non-vessel-
operating common carriers and/or as ocean freight forwarders. The Company’s air transportation activities in the United States are subject to regulation by the U.S. Department of Transportation as an indirect air carrier. One of the Company’s subsidiaries is licensed by the U.S. Department of Homeland Security through the Bureau of U.S. Customs and Border Protection (“U.S. Customs”) as a customs broker. The Company is also subject to regulations and requirements relating to safety and security promulgated by, among others, the U.S. Department of Homeland Security through U.S. Customs and the Transportation Security Administration, the Canada Border Services Agency and various state and local agencies and port authorities.
The transportation industry is subject to other potential regulatory and legislative changes (such as the possibility of more stringent environmental, climate change and/or safety/security regulations, limits on vehicle weight and size and regulations relating to the health and wellness of commercial truck operators) that may affect the economics of the industry by requiring changes in operating practices, by changing the demand for motor carrier services or the cost of providing truckload or other transportation or logistics services, or by adversely impacting the number of available commercial truck operators.
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In particular, the FMCSA in recent years proposed a number of regulatory changes that affect the operation of commercial motor carriers across the United States. It is difficult to predict in what form FMCSA regulations may be implemented, modified or enforced and what impact any such regulations may have on motor carrier operations or the aggregate number of trucks that provide hauling capacity to the Company. For example, on January 6, 2020, the FMCSA implemented new requirements applicable to drug and alcohol testing by motor carriers. The new regulation expands motor carrier reporting requirements to include reporting of all operators who test positive and/or refuse to submit to a test as prescribed in the regulation. The new regulation also expands rules relating to the obligation of motor carriers to conduct queries to check if current or prospective operators are prohibited from operating a commercial motor vehicle due to a positive or unresolved drug or alcohol test. The expanded reporting of positive results, or of an operator’s refusal to meet FMCSA testing requirements, to a centralized clearinghouse prescribed by FMCSA has the potential to remove operators from service that may otherwise have been undetected or unreported.
In addition, in December 2010, the FMCSA introduced the Compliance Safety Accountability (“CSA”) motor carrier oversight program. The Company believes the intent of this program is to improve regulatory oversight of motor carriers and commercial drivers using a safety measurement system methodology that is fundamentally different from the methodology that the FMCSA historically relied upon. Under CSA, the FMCSA monitors seven Behavior Analysis and Safety Improvement Categories, or BASICs, under which a motor carrier may be evaluated against established threshold scores for each such BASIC. In the event a motor carrier has one or more BASIC scores that exceeds the applicable threshold, the motor carrier has an increased risk of roadside inspection and/or compliance review by FMCSA. Under the Fixing America’s Surface Transportation Act, or the “FAST Act” signed into law on December 4, 2015, the FMCSA was required to engage the National Research Council to conduct a study of CSA and the Safety Measurement System (“SMS”) utilized by the CSA program. As a result of the FAST Act, the FMCSA announced the removal of the BASIC scores from public view and that such scores are expected to remain hidden from public view while changes to CSA are considered. In 2018, the FMCSA announced significant anticipated changes to CSA that if enacted would be expected to have a material impact on the current program. No assurances can be given with respect to the changes that may be made to the CSA program, or any replacement or supplemental program, in the future and what impact a new or revised motor carrier oversight program implemented by the FMCSA could have on the Company, its motor carrier operations or the aggregate number of trucks that provide hauling capacity to the Company.
Regulations focused on diesel emissions and other air quality matters.
Focus on diesel emissions, climate change and related air quality matters has led to efforts by federal, state and local governmental agencies to support legislation and regulations to limit the amount of carbon emissions, including emissions created by diesel engines utilized in tractors such as those operated by the Company’s BCO Independent Contractors and Truck Brokerage Carriers. Moreover, federal, state and local governmental agencies may also focus on regulation in relation to trailing equipment specifications in an effort to achieve, among other things, lower carbon emissions. For example, under the federal Clean Air Act, the U.S. Environmental Protection Agency (“EPA”) is responsible for prescribing national ambient air quality standards (“NAAQS”) for certain air pollutants, and each state is responsible for implementing those standards within its borders. Specifically, each state must adopt, and submit for the EPA’s approval, a state implementation plan (“SIP”) that provides for the implementation, maintenance, and enforcement of the NAAQS. In connection with its efforts to comply with the NAAQS, the California Air Resources Board (“CARB”) has implemented regulations that restrict the ability of certain tractors and trailers from operating in California and that impose emission standards on nearly all diesel-fueled trucks with gross vehicle weight ratings in excess of 14,000 lbs. that operate in California. Moreover, these emission standards are scheduled to become increasingly stringent such that by January 1, 2023, nearly all diesel-fueled trucks with gross vehicle weight ratings in excess of 14,000 lbs. that operate in California will be required to have a 2010 or newer model year engine. In 2012, the EPA formally approved certain CARB regulations as part of California’s SIP, including CARB’s “Regulation to Reduce Emissions of Diesel Particulate Matter, Oxides of Nitrogen and Other Criteria Pollutants from
In-Use
Heavy-Duty Diesel-Fueled Vehicles” (commonly referred to as the “Truck and Bus Regulation”) and “Regulation to Reduce Emissions of Diesel Particulate Matter, Oxides of Nitrogen and Other Criteria Pollutants from
In-Use
Heavy-Duty Diesel-Fueled Drayage Trucks” (commonly referred to as the “Drayage Truck Regulation”). The EPA thereafter received express authorization to enforce California’s SIP, including the Truck and Bus Regulation and the Drayage Truck Regulation.
In June 2016, Landstar Ranger, Inc. received an information request from the EPA to determine the Clean Air Act compliance status of Landstar Ranger, Inc. with respect to the Truck and Bus Regulation and the Drayage Truck Regulation in the state of California. Landstar Ranger, Inc. believes it complied with this information request; however, the timing and outcome of the review by the EPA and any subsequent action by the EPA, if any, cannot be predicted. The Company may incur significant legal and other professional fees in connection with the EPA’s review. If the Company is found to be in noncompliance with CARB regulations, the EPA and CARB may seek to impose significant fines and penalties, or injunctive relief, on the Company.
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Further, the Company reorganized its entire fleet of van trailing equipment to maintain CARB-compliant trailer operations. Moreover, no assurances can be given with respect to the extent BCO Independent Contractors will choose to become CARB-compliant by purchasing a new or used CARB-compliant tractor, replacing the engine in their existing tractor with a CARB-compliant engine or performing an exhaust retrofit of their existing tractor by installing a particulate matter filter. Accordingly, many of the Company’s BCO Independent Contractors may choose not to haul loads that would require travel within California, which could affect the ability of the Company to service customer freight needs for freight originating from, delivering to or traveling through California. Furthermore, increased regulation of tractor or trailing equipment specifications, including emissions created by diesel engines, could create substantial costs for the Company’s third party capacity providers and, in turn, increase the cost of purchased transportation to the Company. An increase in the costs to purchase, lease or maintain tractor or trailing equipment or in purchased transportation cost caused by existing or new regulations without a corresponding increase in price to the customer could adversely affect Landstar, including its results of operations and financial condition.
Disruptions or failures in the Company’s computer systems; cyber and other information security incidents.
As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Technology,” the Company’s information technology systems used in connection with its operations are located in Jacksonville, Florida and to a lesser extent in Rockford, Illinois. In addition, the Company utilizes several third party data centers throughout the U.S. Landstar relies, in the regular course of its business, on the proper operation of its information technology systems to link its extensive network of customers, agents and third party capacity providers, including its BCO Independent Contractors. Although the Company has redundant systems for its critical operations, any significant disruption or failure of its technology systems or those of third party data centers on which it relies could significantly disrupt the Company’s operations and impose significant costs on the Company. Moreover, it is critical that the data processed by or stored in the Company’s information technology systems or otherwise in the Company’s possession remain confidential, as it often includes confidential, proprietary and/or competitively sensitive information regarding our customers, agents and third party capacity providers, employee records and key financial and operational results and statistics. Cyber incidents that impact the security, availability, reliability, speed, accuracy or other proper functioning of these systems and data, including outages, computer viruses,
break-ins
and similar disruptions, could have a significant impact on our operations. Accordingly, information security and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. Although we believe that we have robust security procedures and other safeguards in place, as threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any security vulnerabilities. For example, in the first quarter of 2016, we were subject to “spear-phishing” attacks through which third parties were able to obtain personal employee data. We have undertaken a number of remedial measures in response, including enhancing our security systems and additional training for our employees. Additional incidents may occur in the future and may have a material adverse effect on our business and operations. A significant incident, including system failure, security breach, disruption by malware, or other damage, could interrupt or delay our operations, damage our reputation, cause a loss of customers, agents and/or third party capacity providers, expose us to a risk of loss or litigation, and/or cause us to incur significant time and expense to remedy such an event, any of which could have a material adverse impact on our results of operations and financial condition.
Dependence on key vendors.
As described above under “
Dependence on third party insurance companies
and “
Disruptions or failures in the Company’s computer systems; cyber and other information security incidents,
” the Company is dependent on certain vendors, including third party insurance companies, third party data center providers, third party information technology application providers and third party payment disbursement providers. Any inability to negotiate satisfactory terms with one of these key vendors or any other significant disruption to or termination of a relationship with one of these key vendors could disrupt the Company’s operations and impose significant costs on the Company.
Potential changes in taxes.
From time to time, various legislative proposals are introduced to increase federal, state, or local taxes. On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”). The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. With respect to the change in corporate tax rates, the Tax Reform Act permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. In connection with this reduction in the U.S. corporate income tax rate, the Company revalued its ending net deferred tax liabilities at December 30, 2017 resulting in a provisional $20,430,000 tax benefit in the Company’s consolidated statement of income for the fiscal year ended December 30, 2017. The Company cannot predict whether, or in what form, any increase in corporate income tax rates, motor fuel tax rates or other tax rates applicable to the transportation services provided by the Company will be enacted and, if enacted, how such increased tax rates may impact the Company. With respect to potential increases in fuel and similar taxes, it is unclear whether or not the Company’s Truck
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Brokerage Carriers would attempt to pass the increase on to the Company or if the Company will be able to reflect this potential increased cost of capacity, if any, in prices to customers. Any such increase in fuel taxes, without a corresponding increase in price to the customer, could have a material adverse effect on Landstar, including its results of operations and financial condition. Moreover, competition from other transportation service companies including those that provide
non-trucking
modes of transportation would likely increase if state or federal taxes on fuel were to increase without a corresponding increase in taxes imposed upon other modes of transportation.
Catastrophic loss of a Company facility.
The Company faces the risk of a catastrophic loss of the use of all or a portion of its facilities located in Jacksonville, Florida, Laredo, Texas and Rockford, Illinois due to hurricanes, flooding, tornados, other weather conditions, natural disasters, terrorist attacks or otherwise. The Company’s corporate headquarters and approximately
two-thirds
of the Company’s employees are located in its Jacksonville, Florida facility. In particular, a significant hurricane or similar catastrophic event that impacts the Jacksonville, Florida metropolitan area could significantly disrupt the Company’s operations and impose significant costs on the Company.
The Company cannot predict the effect on its business of threatened or real terrorist attacks. It is possible that such threats could result in the catastrophic loss or disruption in use of facilities, roadways, railroads, borders or ports where the Company operates. Also, anti-terrorism security measures could slow freight movements and negatively affect consumer confidence, the overall economy and the transportation industry. Such events could adversely affect Landstar, including its results of operations and financial condition.
Although the Company maintains insurance covering its facilities, including business interruption insurance, the Company’s insurance may not be adequate to cover all losses that may be incurred in the event of a catastrophic loss of one of the Company’s facilities. In addition, such insurance, including business interruption insurance, could in the future become more expensive and difficult to maintain and may not be available on commercially reasonable terms or at all.
Intellectual property.
The Company uses both internally developed and purchased technology in conducting its business. Whether internally developed or purchased, it is possible that the use of these technologies could be claimed to infringe upon or violate the intellectual property rights of third parties. In the event that a claim is made against the Company by a third party for the infringement of intellectual property rights, any settlement or adverse judgment against the Company either in the form of increased costs of licensing or a cease and desist order in using the technology could have an adverse effect on the Company’s business and its results of operations.
Unclaimed property
. The Company is subject to federal and state laws relating to abandoned and unclaimed property. States routinely audit the records of companies to assess compliance with such laws. The Company is currently undergoing a multi-state unclaimed property audit, and in connection with such audit, has entered into a voluntary disclosure agreement (“VDA”) with the Delaware Department of Finance (“DOF”). The timing and outcome of this multi-state unclaimed property audit cannot be predicted. The Company may incur significant professional fees in connection with the audit and VDA. If the Company is found to be in noncompliance with applicable unclaimed property laws or the manner in which such laws are interpreted or applied, states may determine that they are entitled to the remittance by the Company of significant amounts of unclaimed or abandoned property and further may seek to impose other significant costs on the Company, including penalties and interest.
Item 1B.
Unresolved Staff Comments
 
 
None.
Item 2.
Properties
 
 
The Company owns or leases various properties in the U.S., Canada and Mexico for the Company’s operations and administrative staff that support its independent commission sales agents, BCO Independent Contractors and other third party capacity providers. The transportation logistics segment’s primary facilities are located in Jacksonville, Florida and Rockford, Illinois. In addition, the Company’s corporate headquarters are located in Jacksonville, Florida. The Company also maintains a key freight staging and transload facility in Laredo, Texas. The Jacksonville, Florida, Rockford, Illinois and Laredo, Texas facilities are owned by the Company. Management believes that Landstar’s owned and leased properties are adequate for its current needs and that leased properties can be retained or replaced at an acceptable cost.
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Item 3.
Legal Proceedings
 
 
On January 25, 2019, a purported class action was filed in the Superior Court of the State of California for the County of San Bernardino against Landstar System, Inc. and Landstar Ranger, Inc. (together, the “Defendants”). The complaint purports to bring this action on behalf of Hany Tanious, as an individual, and “all owner operators who performed work for the Defendants, and who were classified as independent contractors, during the four years preceding the filing of this action through the present.” The complaint asserts claims based on the alleged misclassification of Mr. Tanious as an independent contractor and alleges violations under California law relating to overtime, minimum wage, meal and rest breaks, failure to reimburse certain expenses, wage statements, waiting time and unfair competition. Mr. Tanious was a truck owner-operator and formerly an independent contractor who was a party to an independent contractor operating agreement with Landstar Ranger, Inc. On June 11, 2019, the Defendants filed a Notice of Removal that resulted in the removal of the case from state court to federal court, where it was assigned to Judge Dale S. Fischer of the United State District Court for the Central District of California. On August 22, 2019, the Court issued an order, among other things, striking all class allegations from the complaint and stating that this matter would proceed as an individual action. Due to a number of factors including the preliminary status of this matter, the Company does not believe it is in a position to conclude whether or not there is a reasonable possibility of an adverse outcome in this case or what damages, if any, the plaintiff would be awarded should he prevail on all or any part of his claims. However, the Company believes it has meritorious defenses and it intends to assert these defenses vigorously.
The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Many of these claims are covered in whole or in part by insurance. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
Item 4.
Mine Safety Disclosures
 
 
Not applicable.
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PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
The Common Stock of the Company is listed and traded on the NASDAQ Global Select Market under the symbol “LSTR.”
The reported last sale price per share of the Common Stock as reported on the NASDAQ Global Select Market on January 24, 2020 was $113.86 per share. As of such date, Landstar had 39,483,360 shares of Common Stock outstanding and had 104 stockholders of record of its Common Stock. However, the Company estimates that it has a significantly greater number of stockholders because a substantial number of the Company’s shares are held by brokers or dealers for their customers in street name.
Purchases of Equity Securities by the Company
The Company did not purchase any shares of its Common Stock during the period from September 29, 2019 to December 28, 2019, the Company’s fourth fiscal quarter.
On December 11, 2017, the Landstar System, Inc. Board of Directors authorized the Company to purchase up to 1,963,875 shares of the Company’s Common Stock from time to time in the open market and in privately negotiated transactions. On January 23, 2019, the Landstar System, Inc. Board of Directors authorized the Company to purchase up to 1,000,000 additional shares of the Company’s Common Stock from time to time in the open market and in privately negotiated transactions. On December 9, 2019, the Landstar System, Inc. Board of Directors authorized the Company to purchase up to 1,849,068 additional shares of the Company’s Common Stock from time to time in the open market and in privately negotiated transactions. As of December 28, 2019, the Company had authorization to purchase in the aggregate up to 3,000,000 shares of its Common Stock under these programs. No specific expiration date has been assigned to the December 11, 2017, January 23, 2019 or December 9, 2019 authorizations.
Equity Compensation Plan Information
The Company maintains a stock compensation plan for members of its Board of Directors and two employee equity incentive plans. The following table presents information related to securities authorized for issuance under these plans at December 28, 2019:
                         
Plan Category
 
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options
 
 
Weighted-average
Exercise Price of
Outstanding Options
 
 
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans
 
Equity Compensation Plans Approved by Security Holders
   
44,467
    $
51.24
     
3,625,196
 
Equity Compensation Plans Not Approved by Security Holders
   
0
     
0
     
0
 
 
 
Under the 2011 Equity Incentive Plan (the “2011 EIP”), the issuance of (i) a
non-vested
share of Landstar Common Stock issued in the form of restricted stock and (ii) a share of Landstar Common Stock issued upon the vesting of a previously granted restricted stock unit each counts as the issuance of two securities against the number of securities available for future issuance. Included in the number of securities remaining available for future issuance under equity compensation plans were 66,454 shares of Common Stock reserved for issuance under the 2013 Directors’ Stock Compensation Plan.
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Financial Model Shareholder Returns
The following graph illustrates the return that would have been realized, assuming reinvestment of dividends, by an investor who invested $100 in each of the Company’s Common Stock, the Standard and Poor’s 500 Stock Index and the Dow Jones Transportation Stock Index for the period commencing December 27, 2014 through December 28, 2019.
 
 
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Item 6.
Selected Financial Data
 
 
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
                                         
 
Fiscal Years
 
Income Statement Data:
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
Revenue
  $
4,084,577
    $
4,615,144
    $
3,646,364
    $
3,167,634
    $
3,321,091
 
Investment income
   
5,041
     
3,816
     
2,498
     
1,502
     
1,396
 
Costs and expenses:
   
     
     
     
     
 
Purchased transportation
   
3,127,474
     
3,569,961
     
2,805,109
     
2,415,663
     
2,551,343
 
Commissions to agents
   
342,226
     
378,002
     
297,410
     
264,205
     
270,260
 
Other operating costs, net of gains on asset sales/dispositions
   
37,274
     
31,803
     
28,687
     
29,702
     
31,618
 
Insurance and claims
   
80,319
     
75,677
     
62,545
     
57,280
     
48,754
 
Selling, general and administrative
   
158,953
     
188,212
     
170,583
     
143,239
     
149,704
 
Depreciation and amortization
   
44,468
     
43,570
     
40,560
     
35,796
     
29,102
 
                                         
Total costs and expenses
   
3,790,714
     
4,287,225
     
3,404,894
     
2,945,885
     
3,080,781
 
                                         
Operating income
   
298,904
     
331,735
     
243,968
     
223,251
     
241,706
 
Interest and debt expense
   
3,141
     
3,354
     
3,166
     
3,794
     
2,949
 
                                         
Income before income taxes
   
295,763
     
328,381
     
240,802
     
219,457
     
238,757
 
Income taxes
   
68,060
     
73,168
     
63,806
     
82,107
     
91,068
 
                                         
Net income
   
227,703
     
255,213
     
176,996
     
137,350
     
147,689
 
Less: Net loss attributable to noncontrolling interest
   
(17
)    
(68
)    
(92
)    
—  
     
—  
 
                                         
Net income attributable to Landstar System, Inc. and subsidiary
  $
227,720
    $
255,281
    $
177,088
    $
137,350
    $
147,689
 
                                         
Earnings per common share attributable to Landstar System, Inc. and subsidiary
  $
5.72
    $
6.19
    $
4.22
    $
3.26
    $
3.38
 
                                         
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary
  $
5.72
    $
6.18
    $
4.21
    $
3.25
    $
3.37
 
                                         
Dividends per common share
  $
2.70
    $
0.63
    $
1.88
    $
0.34
    $
0.30
 
 
 
                                         
Balance Sheet Data:
 
Dec. 28,
2019
 
 
Dec. 29,
2018
 
 
Dec. 30,
2017
 
 
Dec. 31,
2016
 
 
Dec. 26,
2015
 
Total assets
  $
1,427,711
    $
1,380,564
    $
1,352,460
    $
1,096,591
    $
991,518
 
Long-term debt, including current maturities
   
112,844
     
128,425
     
125,113
     
138,304
     
124,292
 
Equity
   
721,469
     
689,133
     
653,877
     
542,557
     
466,237
 
 
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
Forward-Looking Statements
The following is a “safe harbor” statement under the Private Securities Litigation Reform Act of 1995. Statements contained in this document that are not based on historical facts are “forward-looking statements.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form
10-K
contain forward-looking statements, such as statements which relate to Landstar’s business objectives, plans, strategies and expectations. Terms such as “anticipates,” “believes,” “estimates,” “intention,” “expects,” “plans,” “predicts,” “may,” “should,” “could,” “will,” the negative thereof and similar expressions are intended to identify forward-looking statements. Such statements are by nature subject to uncertainties and risks, including but not limited to: an increase in the frequency or severity of accidents or other claims; unfavorable development of existing accident claims; dependence on third party insurance companies; dependence on independent commission sales agents; dependence on third party capacity providers; decreased demand for transportation services; U.S. foreign trade relationships; substantial industry competition;
disruptions or failures in the Company’s computer systems; cyber and other information security incidents; dependence on key vendors; changes in fuel taxes; status of independent contractors; regulatory and legislative changes; regulations focused on diesel emissions and other air quality matters; catastrophic loss of a Company facility; intellectual property; unclaimed property; and other operational, financial or legal risks or uncertainties detailed in this and Landstar’s other SEC filings from time to time and described in Item 1A in this Form
10-K
under the heading “Risk Factors.” 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 the Company undertakes no obligation to publicly update or revise any forward-looking statements.
Introduction
Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (together, referred to herein as “Landstar” or the “Company”), is a worldwide asset-light provider of integrated transportation management solutions. The Company offers services to
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its customers across multiple transportation modes, with the ability to arrange for individual shipments of freight to enterprise-wide solutions to manage all of a customer’s transportation needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada and Mexico, and between the United States and Canada, Mexico and other countries around the world. The Company’s services emphasize safety, information coordination and customer service and are delivered through a network of over 1,200 independent commission sales agents and approximately 66,000 third party capacity providers, primarily truck capacity providers, linked together by a series of mobile and digital applications which are provided and coordinated by the Company. The nature of the Company’s business is such that a significant portion of its operating costs varies directly with revenue.
Landstar markets its integrated transportation management solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport customers’ freight. Landstar’s independent commission sales agents enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under
non-exclusive
contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers and railroads. Through this network of agents and capacity providers linked together by Landstar’s information technology systems, Landstar operates an integrated transportation management solutions business primarily throughout North America with revenue of $4.1 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.
The transportation logistics segment provides a wide range of integrated transportation management solutions. Transportation services offered by the Company include truckload and less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico cross-border, intra-Mexico, intra-Canada, project cargo and customs brokerage. Examples of the industries serviced by the transportation logistics segment include automotive parts and assemblies, building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics and military equipment. In addition, the transportation logistics segment provides transportation services to other transportation companies, including third party logistics and less-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Billings for freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight and are referred to as transportation revenue. During fiscal year 2019, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 45%, 47% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3% of the Company’s consolidated revenue during fiscal year 2019.
During 2017, the Company incorporated Landstar Metro, S.A.P.I. de C.V., a transportation logistics company (“Landstar Metro”), and Landstar Metro Servicios S.A.P.I. de C.V., a services company (“Landstar Servicios”), each based in Mexico City, Mexico. Landstar Metro provides freight and logistics services within the country of Mexico and in conjunction with Landstar’s U.S./Mexico cross-border services. Landstar Servicios provides various administrative, financial, operational, safety and compliance services to Landstar Metro. The results of operations from Landstar Metro and Landstar Servicios are presented as part of the Company’s transportation logistics segment. On September 20, 2017, Landstar Metro acquired substantially all of the assets of the asset-light transportation logistics business of a Mexican transportation logistics company. In connection with the acquisition, individuals affiliated with the seller subscribed for equity interests in Landstar Metro and Landstar Servicios, and as of December 29, 2018, owned in the aggregate approximately 21% of the equity interests of each of them. On January 29, 2019, Landstar acquired all of the remaining equity interests in Landstar Metro and Landstar Servicios held by their former minority equityholders. Accordingly, as of such date, Landstar Metro and Landstar Servicios each became wholly owned subsidiaries of the Company. Revenue from Landstar Metro represented less than 1% of the Company’s transportation logistics segment revenue during fiscal year 2019.
The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore insurance subsidiary (“Signature”), and Risk Management Claim Services, Inc. The insurance segment provides risk and claims management services to certain of Landstar’s Operating Subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to certain of Landstar’s Operating Subsidiaries. Revenue at the insurance segment represents reinsurance premiums from third party insurance companies that provide insurance programs to BCO Independent Contractors where all or a portion of the risk is ultimately borne by Signature. Revenue at the insurance segment represented approximately 1% of the Company’s consolidated revenue for fiscal year 2019.
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Changes in Financial Condition and Results of Operations
Management believes the Company’s success principally depends on its ability to generate freight through its network of independent commission sales agents and to safely and efficiently deliver that freight utilizing third party capacity providers. Management believes the most significant factors to the Company’s success include increasing revenue, sourcing capacity and controlling costs, including insurance and claims.
While customer demand, which is subject to overall economic conditions, ultimately drives increases or decreases in revenue, the Company primarily relies on its independent commission sales agents to establish customer relationships and generate revenue opportunities. Management’s emphasis with respect to revenue growth is on revenue generated by independent commission sales agents who on an annual basis generate $1 million or more of Landstar revenue. Management believes future revenue growth is primarily dependent on its ability to increase both the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a combination of recruiting new agents, increasing the revenue opportunities generated by existing independent commission sales agents and providing its independent commission sales agents with technology-based tools they may use to grow revenue and increase efficiencies at their businesses. The following table shows the number of Million Dollar Agents, the average revenue generated by these agents and the percent of consolidated revenue generated by these agents during the past three fiscal years:
                         
 
Fiscal Years
 
 
2019
 
 
2018
 
 
2017
 
Number of Million Dollar Agents
   
555
     
608
     
542
 
                         
Average revenue generated per Million Dollar Agent
  $
6,880,000
    $
7,150,000
    $
6,191,000
 
                         
Percent of consolidated revenue generated by Million Dollar Agents
   
93
%    
94
%    
92
%
                         
 
 
The change in the number of Million Dollar Agents on a year-over-year basis is influenced by many factors and is not solely the result of terminations of contractual relationships between agents and the Company, whether such terminations are initiated by the agent or the Company. Such other factors include consolidations among agencies or transactions in connection with ownership changes often due to retirement planning, estate planning or similar transitional issues. The change in the number of Million Dollar Agents on a year-over-year basis may also be affected by agents that remain with the Company yet experienced lower year-over-year revenue that resulted in such agent moving below the Million Dollar Agent category. In general, the number of agents in the million dollar category who terminate in a given year has been less than 3% of the total number of Million Dollar Agents. Revenue from accounts formerly handled by terminated Million Dollar Agents is often retained by the Company as the customer may choose to transfer its account to an existing Landstar agent.
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Management monitors business activity by tracking the number of loads (volume) and revenue per load by mode of transportation. Revenue per load can be influenced by many factors other than a change in price. Those factors include the average length of haul, freight type, special handling and equipment requirements, fuel costs and delivery time requirements. For shipments involving two or more modes of transportation, revenue is generally classified by the mode of transportation having the highest cost for the load. The following table summarizes this information by trailer type for truck transportation and by mode for all others for the past three fiscal years:
                         
 
Fiscal Years
 
 
2019
 
 
2018
 
 
2017
 
Revenue generated through (in thousands):
   
     
     
 
Truck transportation
   
     
     
 
Truckload:
   
     
     
 
Van equipment
  $
 2,371,188
    $
 2,791,494
    $
 2,163,832
 
Unsided/platform equipment
   
1,295,817
     
1,386,387
     
1,134,660
 
Less-than-truckload
   
98,324
     
102,531
     
89,041
 
                         
Total truck transportation
   
3,765,329
     
4,280,412
     
3,387,533
 
Rail intermodal
   
118,305
     
128,976
     
96,416
 
Ocean and air cargo carriers
   
121,485
     
134,577
     
110,898
 
Other (1)
   
79,458
     
71,179
     
51,517
 
                         
  $
 4,084,577
    $
 4,615,144
    $
 3,646,364
 
                         
Revenue on loads hauled via BCO Independent Contractors included in total truck transportation
  $
1,831,752
    $
2,001,665
    $
1,655,026
 
                         
Number of loads:
   
     
     
 
Truck transportation
   
     
     
 
Truckload:
   
     
     
 
Van equipment
   
1,337,089
     
1,398,388
     
1,282,632
 
Unsided/platform equipment
   
513,579
     
516,613
     
487,652
 
Less-than-truckload
   
155,592
     
145,269
     
132,776
 
                         
Total truck transportation
   
2,006,260
     
2,060,270
     
1,903,060
 
Rail intermodal
   
47,590
     
53,030
     
45,000
 
Ocean and air cargo carriers
   
30,110
     
28,970
     
25,420
 
                         
   
2,083,960
     
2,142,270
     
1,973,480
 
                         
Loads hauled via BCO Independent Contractors included in total truck transportation
   
954,990
     
949,330
     
916,190
 
                         
Revenue per load:
   
     
     
 
Truck transportation
   
     
     
 
Truckload:
   
     
     
 
Van equipment
  $
1,773
    $
1,996
    $
1,687
 
Unsided/platform equipment
   
2,523
     
2,684
     
2,327
 
Less-than-truckload
   
632
     
706
     
671
 
Total truck transportation
   
1,877
     
2,078
     
1,780
 
Rail intermodal
   
2,486
     
2,432
     
2,143
 
Ocean and air cargo carriers
   
4,035
     
4,645
     
4,363
 
                         
Revenue per load on loads hauled via BCO Independent Contractors
  $
  1,918
    $
  2,109
    $
  1,806
 
                         
Revenue by capacity type (as a % of total revenue):
   
     
     
 
Truck capacity providers:
   
     
     
 
BCO Independent Contractors
   
45
%    
43
%    
45
%
Truck Brokerage Carriers
   
47
%    
49
%    
48
%
Rail intermodal
   
3
%    
3
%    
3
%
Ocean and air cargo carriers
   
3
%    
3
%    
3
%
Other
   
2
%    
2
%    
1
%
 
 
(1)
Includes primarily reinsurance premium revenue generated by the insurance segment and intra-Mexico transportation services revenue generated by Landstar Metro.
 
 
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Also critical to the Company’s success is its ability to secure capacity, particularly truck capacity, at rates that allow the Company to profitably transport customers’ freight. The following table summarizes the number of available truck capacity providers as of the end of the three most recent fiscal years:
                         
 
Dec. 28,
2019
 
 
Dec. 29,
2018
 
 
Dec. 30,
2017
 
BCO Independent Contractors
   
9,554
     
9,884
     
9,087
 
Truck Brokerage Carriers:
   
     
     
 
Approved and active
(1)
   
39,497
     
41,069
     
34,243
 
Other approved
   
16,820
     
17,985
     
15,691
 
                         
   
56,317
     
59,054
     
49,934
 
                         
Total available truck capacity providers
   
65,871
     
68,938
     
59,021
 
                         
Trucks provided by BCO Independent Contractors
   
10,243
     
10,599
     
9,696
 
 
 
(1) Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal year end.
 
 
The Company incurs costs that are directly related to the transportation of freight that include purchased transportation and commissions to agents. The Company incurs indirect costs associated with the transportation of freight that include other operating costs and insurance and claims. In addition, the Company incurs selling, general and administrative costs essential to administering its business operations. Management continually monitors all components of the costs incurred by the Company and establishes annual cost budgets which, in general, are used to benchmark costs incurred on a monthly basis.
Purchased transportation represents the amount a BCO Independent Contractor or other third party capacity provider is paid to haul freight. The amount of purchased transportation paid to a BCO Independent Contractor is primarily based on a contractually agreed-upon percentage of revenue generated by loads hauled by the BCO Independent Contractor. Purchased transportation paid to a Truck Brokerage Carrier is based on either a negotiated rate for each load hauled or, to a lesser extent, a contractually agreed-upon fixed rate per load. Purchased transportation paid to railroads is based on either a negotiated rate for each load hauled or a contractually agreed-upon fixed rate per load. Purchased transportation paid to air cargo carriers is generally based on a negotiated rate for each load hauled and purchased transportation paid to ocean cargo carriers is generally based on contractually agreed-upon fixed rates per load. Purchased transportation as a percentage of revenue for truck brokerage, rail intermodal and ocean cargo services is normally higher than that of BCO Independent Contractor and air cargo services. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases as a percentage of consolidated revenue in proportion to changes in the percentage of consolidated revenue generated through BCO Independent Contractors and other third party capacity providers and external revenue from the insurance segment, consisting of reinsurance premiums. Purchased transportation as a percent of revenue also increases or decreases in relation to the availability of truck brokerage capacity and with changes in the price of fuel on revenue generated by Truck Brokerage Carriers. The Company passes 100% of fuel surcharges billed to customers for freight hauled by BCO Independent Contractors to its BCO Independent Contractors. These fuel surcharges are excluded from revenue and the cost of purchased transportation. Purchased transportation costs are recognized over the freight transit period as the performance obligation to the customer is completed.
Commissions to agents are based on contractually agreed-upon percentages of revenue or net revenue, defined as revenue less the cost of purchased transportation, or net revenue less a contractually agreed upon percentage of revenue retained by Landstar. Commissions to agents as a percentage of consolidated revenue will vary directly with fluctuations in the percentage of consolidated revenue generated by the various modes of transportation and reinsurance premiums and with changes in net revenue margin, defined as net revenue divided by revenue, on services provided by Truck Brokerage Carriers, railroads, air cargo carriers and ocean cargo carriers. Commissions to agents are recognized over the freight transit period as the performance obligation to the customer is completed.
The Company defines gross profit as revenue less the cost of purchased transportation and commissions to agents. Gross profit divided by revenue is referred to as gross profit margin. The Company’s operating margin is defined as operating income divided by gross profit.
In general, gross profit margin on revenue generated by BCO Independent Contractors represents a fixed percentage of revenue due to the nature of the contracts that pay a fixed percentage of revenue to both the BCO Independent Contractors and independent commission sales agents. For revenue generated by Truck Brokerage Carriers, gross profit margin is either fixed or variable as a percent of revenue, depending on the contract with each individual independent commission sales agent. Under certain contracts with independent commission sales agents, the Company retains a fixed percentage of revenue and the agent retains the amount remaining less the cost of purchased transportation (the “retention contracts”). Gross profit margin on revenue generated by railroads, air cargo
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carriers, ocean cargo carriers and Truck Brokerage Carriers, other than those under retention contracts, is variable in nature as the Company’s contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of net revenue for these types of loads. Approximately 51% of the Company’s consolidated revenue in fiscal year 2019 was generated under contracts that have a fixed gross profit margin while 49% was under contracts that have a variable gross profit margin.
Maintenance costs for Company-provided trailing equipment and BCO Independent Contractor recruiting and qualification costs are the largest components of other operating costs. Also included in other operating costs are trailer rental costs, the provision for uncollectible advances and other receivables due from BCO Independent Contractors and independent commission sales agents and gains/losses, if any, on sales of Company-owned trailing equipment.
With respect to insurance and claims cost, potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable.
For periods prior to May 1, 2019, Landstar retains liability for commercial trucking claims up to $5,000,000 per occurrence and maintains various third party insurance arrangements for liabilities in excess of its $5,000,000 self-insured retention. Effective May 1, 2019, the Company entered into a new three year commercial auto liability insurance arrangement for losses incurred between $5,000,000 and $10,000,000 (the “Initial Excess Policy”) with a third party insurance company. For commercial trucking claims incurred on or after May 1, 2019 through April 30, 2022, the Initial Excess Policy provides for a limit for a single loss of $5,000,000, with an aggregate limit of $10,000,000 for each policy year, an aggregate limit of $15,000,000 for the
thirty-six
month term ended April 30, 2022, and options to increase such aggregate limits for
pre-established
amounts of additional premium. In the event paid aggregate losses under the Initial Excess Policy during any policy year (May 1 to April 30) exceed $10,000,000, the Company would retain liability of up to $10,000,000 per occurrence, inclusive of its $5,000,000 self-insured retention, for the remainder of such policy year. Moreover, in the event paid aggregate losses under the Initial Excess Policy during the three year period ending April 30, 2022 exceed a
pre-determined
threshold amount, the Company would be required to pay additional premium up to a maximum amount of $3,500,000.
As previously disclosed, BCO Independent Contractors with a subsidiary of the Company have been involved in two tragic accidents during the policy year ending April 30, 2020, the first of which occurred in the 2019 third quarter and the second of which occurred in the 2020 first quarter. With respect to the second accident, the Company is still in the process of obtaining all the facts concerning this incident and, as such, it is too soon to estimate the Company’s ultimate financial exposure. The Company’s
pre-tax
loss exposure at the time of the second accident included its $5,000,000 self-insured retention and up to $3,500,000 in additional premium relating to aggregate losses above its self-insured retention during the policy year ending April 30, 2020. If, as a result of these or additional accidents, aggregate losses under the Initial Excess Policy during the policy year ending April 30, 2020 exceed $10,000,000, Landstar would retain liability of up to $10,000,000 per occurrence, inclusive of its self-insured retention for commercial trucking claims during the remainder of such policy year. The Company continues to maintain third party insurance arrangements providing excess coverage on a per occurrence basis for commercial trucking liabilities in excess of $10,000,000.
The Company also retains liability of up to $1,000,000 for each general liability claim, up to $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. In addition, under reinsurance arrangements by Signature of certain risks of the Company’s BCO Independent Contractors, the Company retains liability of up to $500,000, $1,000,000 or $2,000,000 with respect to certain occupational accident claims and up to $750,000 with respect to certain workers’ compensation claims. The Company’s exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air and ocean cargo carriers who transport freight on behalf of the Company is reduced by various factors including the extent to which such carriers maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo claims or workers’ compensation claims or the material unfavorable development of existing claims could have a material adverse effect on Landstar’s cost of insurance and claims and its results of operations.
During the 2019 fiscal year, employee compensation and benefits accounted for approximately sixty-five percent of the Company’s selling, general and administrative costs.
Depreciation and amortization primarily relate to depreciation of trailing equipment and information technology hardware and software.
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The following table sets forth the percentage relationship of purchased transportation and commissions to agents, both being direct costs, to revenue and indirect costs as a percentage of gross profit for the periods indicated:
                         
 
Fiscal Years
 
 
2019
 
 
2018
 
 
2017
 
Revenue
   
100.0
%    
100.0
%    
100.0
%
                         
Purchased transportation
   
76.6
     
77.4
     
76.9
 
Commissions to agents
   
8.4
     
8.2
     
8.2
 
                         
Gross profit margin
   
15.1
%    
14.5
%    
14.9
%
                         
Gross profit
   
100.0
%    
100.0
%    
100.0
%
Investment income
   
0.8
     
0.6
     
0.5
 
Indirect costs and expenses:
   
     
     
 
Other operating costs, net of gains on asset sales/dispositions
   
6.1
     
4.8
     
5.3
 
Insurance and claims
   
13.1
     
11.3
     
11.5
 
Selling, general and administrative
   
25.9
     
28.2
     
31.4
 
Depreciation and amortization
   
7.2
     
6.5
     
7.5
 
                         
Total costs and expenses
   
52.2
     
50.9
     
55.6
 
                         
Operating margin
   
48.6
%    
49.7
%    
44.9
%
                         
 
 
Management believes that a discussion of indirect costs as a percentage of gross profit is useful and meaningful to investors for the following principal reasons: (1) disclosure of these relative measures (i.e., each indirect operating cost line item as a percentage of gross profit) allows investors to better understand the underlying trends in the Company’s results of operations; (2) due to the generally fixed nature of these indirect costs (other than insurance and claims costs), these relative measures are meaningful to investors’ evaluations of the Company’s management of its indirect costs attributable to operations; (3) management considers this financial information in its decision-making, such as budgeting for infrastructure, trailing equipment and selling, general and administrative costs; and (4) this information facilitates comparisons by investors of the Company’s results to the results of other
non-asset
or asset-light companies in the transportation and logistics services industry who report “net revenue” in Management’s Discussion and Analysis, which represents revenue less the cost of purchased transportation. The difference between the Company’s use of the term “gross profit” and the use of the term “net revenue” by other companies in the transportation and logistics services industry is due to the direct cost of commissions to agents under the Landstar business model, whereas other companies in this industry generally have no commissions to agents.
Also, as previously mentioned, the Company reports two operating segments: the transportation logistics segment and the insurance segment. External revenue at the insurance segment, representing reinsurance premiums, has historically been relatively consistent on an annual basis at 2% or less of consolidated revenue and generally corresponds directly with the number of trucks provided by BCO Independent Contractors. The discussion of indirect cost line items in Management’s Discussion and Analysis of Financial Condition and Results of Operations considers the Company’s costs on a consolidated basis rather than on a segment basis. Management believes this presentation format is the most appropriate to assist users of the financial statements in understanding the Company’s business for the following reasons: (1) the insurance segment has no other operating costs; (2) discussion of insurance and claims at either segment without reference to the other may create confusion amongst investors and potential investors due to intercompany arrangements and specific deductible programs that affect comparability of financial results by segment between various fiscal periods but that have no effect on the Company from a consolidated reporting perspective; (3) selling, general and administrative costs of the insurance segment comprise less than 10% of consolidated selling, general and administrative costs and have historically been relatively consistent on a year-over-year basis; and (4) the insurance segment has no depreciation and amortization.
Fiscal Year Ended December 28, 2019 Compared to Fiscal Year Ended December 29, 2018
Revenue for fiscal year 2019 was $4,084,577,000, a decrease of $530,567,000, or 11%, compared to fiscal year 2018. Transportation revenue decreased $534,460,000, or 12%. The decrease in transportation revenue was attributable to decreased revenue per load of approximately 9% and a decreased number of loads hauled of approximately 3% in fiscal year 2019 compared to fiscal year 2018. Reinsurance premiums were $56,241,000 and $52,348,000 for fiscal years 2019 and 2018, respectively. The increase in revenue from reinsurance premiums was primarily attributable to the increase in the average number of trucks provided by BCO Independent Contractors and an increase in the aggregate value of equipment insured by BCO Independent Contractors under a physical damage program reinsured by Signature in the 2019 fiscal year compared to the 2018 fiscal year.
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Truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers (together, the “third party truck capacity providers”) for fiscal year 2019 was $3,765,329,000, representing 92% of total revenue, a decrease of $515,083,000, or 12%, compared to fiscal year 2018. Revenue per load on loads hauled by third party truck capacity providers decreased approximately 10% in fiscal year 2019 compared to fiscal year 2018, and the number of loads hauled by third party truck capacity providers decreased approximately 3% in fiscal year 2019 compared to fiscal year 2018. The decrease in revenue per load on loads hauled via truck was primarily due to a softer freight demand environment experienced during the 2019 fiscal year, which resulted in more readily available truck capacity as compared to the 2018 fiscal year. Revenue per load on loads hauled via van equipment decreased 11%, revenue per load on loads hauled via unsided/platform equipment decreased 6% and revenue per load on less-than-truckload loadings decreased 10% as compared to the 2018 fiscal year. The decrease in the number of loads hauled via truck compared to fiscal year 2018 was primarily attributable to a decrease in demand for the Company’s truckload services provided via van equipment. Fuel surcharges billed to customers on revenue generated by BCO Independent Contractors are excluded from revenue. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $79,486,000 and $101,346,000 in fiscal years 2019 and 2018, respectively. It should be noted that billings to many customers of the Company’s truck brokerage services include a single
all-in
rate that does not separately identify fuel surcharges on loads hauled via Truck Brokerage Carriers. Accordingly, the overall impact of changes in fuel prices on revenue and revenue per load on loads hauled via truck is likely to be greater than that indicated.
Transportation revenue generated by rail intermodal, air cargo and ocean cargo carriers (collectively, the “multimode capacity providers”) for fiscal year 2019 was $239,790,000, or 6% of total revenue, a decrease of $23,763,000, or 9%, compared to fiscal year 2018. The number of loads hauled by multimode capacity providers decreased approximately 5% in the 2019 fiscal year compared to the 2018 fiscal year, and revenue per load on revenue generated by multimode capacity providers decreased approximately 4% over the same period. The decrease in the number of loads hauled by multimode capacity providers was primarily due to a 10% decrease in rail intermodal loadings, mostly attributable to decreased loadings at three specific agencies. The decrease in revenue per load of 4% on loads hauled by multimode capacity providers was primarily attributable to decreased revenue per load on air loadings due to the impact of air loadings provided in support of disaster relief efforts during fiscal year 2018. Also, revenue per load on revenue generated by multimode capacity providers is influenced by many factors, including revenue mix among the various modes of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity.
Purchased transportation was 76.6% and 77.4% of revenue in fiscal years 2019 and 2018, respectively. The decrease in purchased transportation as a percentage of revenue was primarily due to a decreased rate of purchased transportation paid on Truck Brokerage Carrier revenue and an increased percentage of revenue contributed by BCO Independent Contractors, which typically has a lower rate of purchased transportation than revenue generated by Truck Brokerage Carriers. Commissions to agents were 8.4% and 8.2% of revenue in fiscal years 2019 and 2018, respectively. The increase in commissions to agents as a percentage of revenue was primarily attributable to an increased net revenue margin on revenue generated by Truck Brokerage Carriers.
Investment income was $5,041,000 and $3,816,000 in fiscal years 2019 and 2018, respectively. The increase in investment income was primarily attributable to higher average rates of return on investments and a higher average investment balance held by the insurance segment during fiscal year 2019.
Other operating costs increased $5,471,000 in fiscal year 2019 compared to fiscal year 2018 and represented 6.1% of gross profit in fiscal year 2019 compared to 4.8% in fiscal year 2018. The increase in other operating costs compared to the prior fiscal year was primarily due to increased trailing equipment maintenance costs as a result of an increased number of Company-owned trailers and an increased provision for contractor bad debt. The increase in other operating costs as a percentage of gross profit was caused by the increase in other operating costs and the effect of decreased gross profit.
Insurance and claims increased $4,642,000 in fiscal year 2019 compared to fiscal year 2018 and represented 13.1% of gross profit in fiscal year 2019 compared to 11.3% in fiscal year 2018. The increase in insurance and claims expense compared to the prior fiscal year was primarily due to increased net unfavorable development of prior years’ claims and increased severity of current year claims in the BCO programs reinsured by Signature. Net unfavorable development of prior years’ claims was $16,679,000 and $13,960,000 in fiscal years 2019 and 2018, respectively. The increase in insurance and claims as a percentage of gross profit was caused by the increase in insurance and claims costs and the effect of decreased gross profit.
Selling, general and administrative costs decreased $29,259,000 in fiscal year 2019 compared to fiscal year 2018 and represented 25.9% of gross profit in fiscal year 2019 compared to 28.2% of gross profit in fiscal year 2018. The decrease in selling, general and administrative costs compared to prior fiscal year was attributable to a decreased provision for incentive compensation and decreased stock-based compensation expense, partially offset by increased wages. Included in selling, general and administrative costs was
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incentive compensation expense of $1,517,000 and $19,210,000 for the 2019 and 2018 fiscal years, respectively, and stock-based compensation expense of $4,236,000 and $18,256,000 for the 2019 and 2018 fiscal years, respectively. The decrease in selling, general and administrative costs as a percentage of gross profit was due to the decrease in selling, general and administrative costs, partially offset by the effect of decreased gross profit.
Depreciation and amortization increased $898,000 in fiscal year 2019 compared to fiscal year 2018 and represented 7.2% of gross profit in fiscal year 2019 compared to 6.5% of gross profit in fiscal year 2018. The increase in depreciation and amortization expenses was primarily due to increased depreciation on information technology assets. The increase in depreciation and amortization as a percentage of gross profit was due to the effect of decreased gross profit and increased depreciation costs.
Interest and debt expense in fiscal year 2019 decreased $213,000 compared to fiscal year 2018. The decrease in interest and debt expense was primarily attributable to increased interest income earned on cash balances held by the transportation logistics segment.
The provisions for income taxes for the 2019 and 2018 fiscal years were based on estimated annual effective income tax rates of 24.2% and 24.5%, respectively, adjusted for discrete events, such as benefits resulting from stock-based awards. The actual effective income tax rate for fiscal year 2019 was 23.0%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock-based awards. The actual effective income tax rate for fiscal year 2018 was 22.3%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes, the Tax Cuts and Jobs Act’s (the “Tax Reform Act”) elimination of the performance-based compensation exception under Section 162(m) and the meals and entertainment exclusion. The effective income tax rate in the 2019 fiscal year of 23.0% was lower than the 24.2% estimated effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2019 fiscal year. The effective income tax rate in the 2018 fiscal year of 22.3% was lower than the 24.5% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2018 fiscal year, favorable adjustments recognized during the 2018 fiscal year relating to federal domestic production activities deductions and research and development credits and the favorable resolution of certain tax matters during the 2018 fiscal year.
The net loss attributable to noncontrolling interest of $17,000 and $68,000 in the 2019 and 2018 fiscal years, respectively, represents the former noncontrolling investors’ share of the net loss incurred by Landstar Metro and Landstar Servicios.
Net income attributable to the Company was $227,720,000, or $5.72 per common share ($5.72 per diluted share), in fiscal year 2019. Net income attributable to the Company was $255,281,000, or $6.19 per common share ($6.18 per diluted share), in fiscal year 2018.
Fiscal Year Ended December 29, 2018 Compared to Fiscal Year Ended December 30, 2017
Revenue for fiscal year 2018 was $4,615,144,000, an increase of $968,780,000, or 27%, compared to fiscal year 2017. Transportation revenue increased $963,414,000, or 27%. The increase in transportation revenue was attributable to an increased number of loads hauled of approximately 9% and increased revenue per load of approximately 16% in fiscal year 2018 compared to fiscal year 2017. Reinsurance premiums were $52,348,000 and $46,982,000 for fiscal years 2018 and 2017, respectively. The increase in revenue from reinsurance premiums was primarily attributable to the increase in the average number of trucks provided by BCO Independent Contractors in the 2018 fiscal year compared to the 2017 fiscal year.
Truck transportation revenue generated by third party truck capacity providers for fiscal year 2018 was $4,280,412,000, representing 93% of total revenue, an increase of $892,879,000, or 26%, compared to fiscal year 2017. The number of loads hauled by third party truck capacity providers increased approximately 8% in fiscal year 2018 compared to fiscal year 2017, and revenue per load on loads hauled by third party truck capacity providers increased approximately 17% in fiscal year 2018 compared to fiscal year 2017. The increase in the number of loads hauled via truck compared to fiscal year 2017 was due to a broad-based increase in demand across many customers and industries for Landstar’s various truck service offerings. The increase in revenue per load on loads hauled via truck was due to a tighter freight environment experienced during the 2018 fiscal year, which resulted in less readily available truck capacity as compared to the 2017 fiscal year, and the impact of higher diesel fuel costs on loads hauled via Truck Brokerage Carriers. Revenue per load on loads hauled via van equipment increased 18%, revenue per load on loads hauled via unsided/platform equipment increased 15% and revenue per load on less-than-truckload loadings increased 5% as compared to the 2017 fiscal year. Fuel surcharges billed to customers on revenue generated by BCO Independent Contractors are excluded from revenue. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $101,346,000 and $70,304,000 in fiscal years 2018 and 2017, respectively. It should be noted that
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billings to many customers of the Company’s truck brokerage services include a single
all-in
rate that does not separately identify fuel surcharges on loads hauled via Truck Brokerage Carriers. Accordingly, the overall impact of changes in fuel prices on revenue and revenue per load on loads hauled via truck is likely to be greater than that indicated.
Transportation revenue generated by multimode capacity providers for fiscal year 2018 was $263,553,000, or 6% of total revenue, an increase of $56,239,000, or 27%, compared to fiscal year 2017. The number of loads hauled by multimode capacity providers increased approximately 16% in the 2018 fiscal year compared to the 2017 fiscal year, and revenue per load on revenue generated by multimode capacity providers increased approximately 9% over the same period. The increase in the number of loads hauled by multimode capacity providers was primarily due to an 18% increase in rail intermodal loads and a 23% increase in ocean loads. The increase in both rail intermodal and ocean loads was broad-based across many customers. The increase in revenue per load of 9% on loads hauled by multimode capacity providers was primarily attributable to increased revenue per load on rail intermodal loads; however, revenue per load on loads hauled by multimode capacity providers increased for all modes. Also, revenue per load on revenue generated by multimode capacity providers is influenced by many factors, including revenue mix among the various modes of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity.
Purchased transportation was 77.4% and 76.9% of revenue in fiscal years 2018 and 2017, respectively. The increase in purchased transportation as a percentage of revenue was primarily due to a decrease in the percentage of revenue contributed by BCO Independent Contractors, which typically has a lower rate of purchased transportation than revenue generated by Truck Brokerage Carriers. Commissions to agents were 8.2% of revenue in both fiscal years 2018 and 2017.
Investment income was $3,816,000 and $2,498,000 in fiscal years 2018 and 2017, respectively. The increase in investment income was primarily due to higher average rates of return on investments during fiscal year 2018.
Other operating costs increased $3,116,000 in fiscal year 2018 compared to fiscal year 2017 and represented 4.8% of gross profit in fiscal year 2018 compared to 5.3% in fiscal year 2017. The increase in other operating costs compared to the prior fiscal year was primarily due to increased trailing equipment maintenance costs due to an increased number of Company-owned trailers in response to increased customer demand for the Company’s drop and hook services. The decrease in other operating costs as a percentage of gross profit was caused by the effect of increased gross profit, partially offset by the increase in other operating costs.
Insurance and claims increased $13,132,000 in fiscal year 2018 compared to fiscal year 2017 and represented 11.3% of gross profit in fiscal year 2018 compared to 11.5% in fiscal year 2017. The increase in insurance and claims expense compared to prior fiscal year was primarily due to increased net unfavorable development of prior years’ claims and increased severity of current year claims in fiscal year 2018. Net unfavorable development of prior years’ claims was $13,960,000 and $4,144,000 in fiscal years 2018 and 2017, respectively. The decrease in insurance and claims as a percentage of gross profit was caused by the effect of increased gross profit, partially offset by the increase in insurance and claims costs.
Selling, general and administrative costs increased $17,629,000 in fiscal year 2018 compared to fiscal year 2017 and represented 28.2% of gross profit in fiscal year 2018 compared to 31.4% of gross profit in fiscal year 2017. The increase in selling, general and administrative costs compared to prior fiscal year was attributable to increased stock-based compensation expense and increased wages and employee benefits. Included in selling, general and administrative costs is stock-based compensation expense of $18,256,000 and $7,721,000 for the 2018 and 2017 fiscal years, respectively, and incentive compensation expense of $19,210,000 and $20,538,000 for the 2018 and 2017 fiscal years, respectively. The decrease in selling, general and administrative costs as a percentage of gross profit was due primarily to the effect of increased gross profit, partially offset by the increase in selling, general and administrative costs.
Depreciation and amortization increased $3,010,000 in fiscal year 2018 compared to fiscal year 2017 and represented 6.5% of gross profit in fiscal year 2018 compared to 7.5% of gross profit in fiscal year 2017. The increase in depreciation and amortization expenses was due to an increased number of Company-owned trailers in response to increased customer demand for the Company’s drop and hook services and increased depreciation on information technology assets placed in service during the second half of fiscal year 2017. The decrease in depreciation and amortization as a percentage of gross profit was primarily due to the effect of increased gross profit, partially offset by the increased depreciation costs.
Interest and debt expense in fiscal year 2018 increased $188,000 compared to fiscal year 2017. The increase in interest and debt expense was entirely attributable to decreased interest income earned on cash balances held by the transportation logistics segment.
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The Tax Reform Act permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The Company’s estimated annual effective income tax rate reflects a provision for both federal income taxes and state and local income taxes. The provisions for income taxes for the 2018 and 2017 fiscal years were based on estimated annual effective income tax rates of 24.5% and 37.8%, respectively, adjusted for discrete events, such as benefits resulting from stock-based awards. The actual effective income tax rate for fiscal year 2018 was 22.3%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes, the Tax Reform Act’s elimination of the performance-based compensation exception under Section 162(m) and the meals and entertainment exclusion. The effective income tax rate in the 2018 fiscal year of 22.3% was lower than the 24.5% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2018 fiscal year, favorable adjustments recognized during the 2018 fiscal year relating to federal domestic production activities deductions and research and development credits and the favorable resolution of certain tax matters during the 2018 fiscal year. The actual effective income tax rate for fiscal year 2017 was 26.5%, which was lower than the statutory federal income tax rate of 35% and the estimated annual effective income tax rate of 37.8% primarily as a result of (i) the enactment of the Tax Reform Act during fiscal year 2017, which resulted in
one-time
tax benefits of approximately $19,500,000 related to the Company’s reasonable estimate of the change in future tax rates on net deferred tax liabilities, (ii) federal domestic production activities deductions and research and development credits, (iii) excess tax benefits recognized on stock-based compensation arrangements resulting from the Company’s adoption of Accounting Standards Update
2016-09
(“ASU
2016-09”)
during fiscal year 2017 and (iv) disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options in the 2017 period, partially offset by (v) the effect of state taxes and (vi) the meals and entertainment exclusion.
The net loss attributable to noncontrolling interest of $68,000 and $92,000 in the 2018 and 2017 fiscal years, respectively, represents the former noncontrolling investors’ share of the net loss incurred by Landstar Metro and Landstar Servicios.
Net income attributable to the Company was $255,281,000, or $6.19 per common share ($6.18 per diluted share), in fiscal year 2018. Net income attributable to the Company was $177,088,000, or $4.22 per common share ($4.21 per diluted share), in fiscal year 2017. Net income attributable to the Company was favorably impacted by the enactment of the Tax Reform Act by approximately $43,675,000, or $1.06 per common share ($1.06 per diluted share), in fiscal year 2018, as a result of the permanent reduction of the U.S. corporate income tax rate from a maximum of 35% to a flat 21%. Net income attributable to the Company was favorably impacted by approximately $19,500,000, or $0.46 per common share ($0.46 per diluted share), in fiscal year 2017, related to the Company’s reasonable estimate of the change in future tax rates on net deferred tax liabilities.
Capital Resources and Liquidity
Working capital and the ratio of current assets to current liabilities were $444,984,000 and 1.8 to 1, respectively, at December 28, 2019, compared with $435,611,000 and 1.8 to 1, respectively, at December 29, 2018, and $412,560,000 and 1.8 to 1, respectively, at December 30, 2017. Landstar has historically operated with current ratios within the range of 1.5 to 1 to 2.0 to 1. Cash provided by operating activities was $307,840,000, $297,901,000, and $138,963,000 in fiscal years 2019, 2018 and 2017, respectively. The increase in cash flow provided by operating activities for fiscal year 2019 was primarily attributable to the timing of collections of trade receivables. The increase in cash flow provided by operating activities for fiscal year 2018 compared to fiscal year 2017 was primarily attributable to increased net income and the timing of collections of trade receivables.
The Company declared and paid $0.70 per share, or $27,891,000 in the aggregate, in cash dividends during fiscal year 2019. In addition, on December 10, 2019, the Company announced that its Board of Directors declared a special cash dividend of $2.00 per share, or $78,947,000 in the aggregate, payable on January 24, 2020 to stockholders of record of its Common Stock as of January 10, 2020. Dividends payable of $78,947,000 related to this special dividend were included in current liabilities in the consolidated balance sheet at December 28, 2019. The Company declared and paid $0.63 per share, or $25,933,000 in the aggregate, in cash dividends during fiscal year 2018 and, during such period, also paid $62,985,000 of dividends payable which were declared during fiscal year 2017 and included in current liabilities in the consolidated balance sheet at December 30, 2017. The Company declared and paid $0.38 per share, or $15,938,000 in the aggregate, in cash dividends during fiscal year 2017. Since paying its first cash dividend in August 2005, the Company has paid approximately $319,000,000 in cash dividends in the aggregate to its stockholders.
During fiscal year 2019, the Company purchased 849,068 shares of its Common Stock at a total cost of $88,578,000. During fiscal year 2018, the Company purchased 2,000,000 shares of its Common Stock at a total cost of $208,087,000. During fiscal year 2017, the Company did not purchase any shares of its Common Stock. The Company has used cash provided by operating activities to fund the purchases. Since January 1997, the Company has purchased approximately $1,675,000,000 of its Common Stock under programs authorized by the Board of Directors of the Company in open market and private block transactions. As of December 28, 2019, the
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Company may purchase in the aggregate up to 3,000,000 shares of its Common Stock under its authorized stock purchase programs. Long-term debt, including current maturities, was $112,844,000 at December 28, 2019, compared to $128,425,000 at December 29, 2018 and $125,113,000 at December 30, 2017.
Equity was $721,469,000, or 86% of total capitalization (defined as long-term debt including current maturities plus equity), at December 28, 2019, compared to $689,133,000, or 84% of total capitalization, at December 29, 2018 and $653,877,000, or 84% of total capitalization, at December 30, 2017. The increase in equity in fiscal year 2019 was primarily the result of net income, partially offset by purchases of shares of the Company’s Common Stock and dividends declared by the Company in fiscal year 2019. The increase in equity in fiscal year 2018 was primarily the result of net income, partially offset by purchases of shares of the Company’s Common Stock and dividends declared by the Company in fiscal year 2018.
On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures on June 2, 2021, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing amount of $400,000,000. The Company’s prior credit agreement was terminated on June 2, 2016.
The Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness. The Company is required to, among other things, maintain a minimum Fixed Charge Coverage Ratio, as defined in the Credit Agreement, and maintain a Leverage Ratio, as defined in the Credit Agreement, below a specified maximum. The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock to the extent there is a default under the Credit Agreement. In addition, the Credit Agreement under certain circumstances limits the amount of such cash dividends and other distributions to stockholders to the extent that, after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter. The Credit Agreement provides for an event of default in the event that, among other things, a person or group acquires 35% or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company’s directors or directors cease to consist of a majority of Continuing Directors, as defined in the Credit Agreement. None of these covenants are presently considered by management to be materially restrictive to the Company’s operations, capital resources or liquidity. The Company is currently in compliance with all of the debt covenants under the Credit Agreement.
At December 28, 2019, the Company had no borrowings outstanding and $34,368,000 of letters of credit outstanding under the Credit Agreement. At December 28, 2019, there was $215,632,000 available for future borrowings under the Credit Agreement. In addition, the Company has $61,503,000 in letters of credit outstanding as collateral for insurance claims that are secured by investments and cash equivalents totaling $68,322,000 at December 28, 2019. Investments, all of which are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Fair value of investments is based primarily on quoted market prices. See “Notes to Consolidated Financial Statements” included herein for further discussion on measurement of fair value of investments.
Historically, the Company has generated sufficient operating cash flow to meet its debt service requirements, fund continued growth, both organic and through acquisitions, complete or execute share purchases of its Common Stock under authorized share purchase programs, pay dividends and meet working capital needs. As an asset-light provider of integrated transportation management solutions, the Company’s annual capital requirements for operating property are generally for trailing equipment and information technology hardware and software. In addition, a significant portion of the trailing equipment used by the Company is provided by third party capacity providers, thereby reducing the Company’s capital requirements. During fiscal years 2019, 2018 and 2017, the Company acquired $29,054,000, $46,595,000 and $33,560,000, respectively, of trailing equipment by entering into finance leases. During fiscal years 2019, 2018 and 2017, the Company also purchased $19,416,000, $9,747,000 and $15,586,000, respectively, of operating property. Landstar anticipates acquiring either by purchase or lease financing approximately $54,000,000 in operating property in fiscal year 2020, consisting primarily of new trailing equipment to replace older trailing equipment and information technology equipment.
Included in the $9,747,000 of purchases of operating property during the 2018 fiscal year was $2,162,000 related to the completion of its Laredo, Texas facility for which the Company accrued a corresponding liability in accounts payable as of December 30, 2017. Included in the $15,586,000 of purchases of operating property during fiscal year 2017 was $4,255,000 related to the Laredo facility for which the Company accrued a corresponding liability in accounts payable as of December 31, 2016. Landstar also acquired an additional $1,119,000 of operating property in fiscal year 2017 relating to the completion of the Laredo facility for which the Company accrued a corresponding liability in accounts payable as of December 30, 2017.
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On September 20, 2017, the Company completed the Mexican Asset Acquisition, as described in “Notes to Consolidated Financial Statements.” Cash consideration paid in fiscal year 2017 for the acquisition was approximately $8,460,000. In connection with the Mexican Asset Acquisition, the Company assumed approximately $2,200,000 in liabilities consisting of additional contingent purchase price and associated indirect taxes, none of which remained outstanding at December 29, 2018. As it relates to the
non-controlling
interests of Landstar Metro and Landstar Servicios, on August 10, 2018, Landstar acquired approximately 9% of each of Landstar Metro and Landstar Servicios from the minority equityholders in connection with the settlement of certain penalties relating to post-closing operating commitments of Fletes Avella to Landstar Metro. In connection with the settlement of several matters relating to the wind-down of the commercial relationship between Fletes Avella, its owners and Landstar Metro, on January 29, 2019, Landstar acquired all of the remaining equity interests in Landstar Metro and Landstar Servicios held by their former minority equityholders. Accordingly, as of such date, Landstar Metro and Landstar Servicios each became wholly owned subsidiaries of the Company. Cash consideration paid in the 2019 fiscal year to purchase these remaining equity interests was $600,000.
Management believes that cash flow from operations combined with the Company’s borrowing capacity under the Credit Agreement will be adequate to meet Landstar’s debt service requirements, fund continued growth, both internal and through acquisitions, pay dividends, complete the authorized share purchase programs and meet working capital needs.
Contractual Obligations and Commitments
At December 28, 2019, the Company’s material obligations and commitments to make future payments under contracts, such as debt and lease agreements, were as follows (in thousands):
                                         
Contractual Obligation
 
Total
 
 
Less Than
1 Year
 
 
1-3
Years
 
 
3-5
Years
 
 
More Than
5 Years
 
Finance lease obligations
  $
 119,327
    $
45,670
    $
 53,401
    $
 20,256
    $
 —  
 
Operating lease obligations
   
3,003
     
725
     
1,325
     
953
     
—  
 
Purchase obligations
   
10,127
     
4,970
     
3,851
     
1,306
     
—  
 
                                         
  $
 132,457
    $
 51,365
    $
 58,577
    $
 22,515
    $
 —  
 
                                         
 
 
Finance lease obligations above include $6,483,000 of imputed interest. Purchase obligations at December 28, 2019 are primarily commitments for information technology hardware and software. At December 28, 2019, the Company has gross unrecognized tax benefits of $3,014,000. This amount is excluded from the table above as the Company cannot reasonably estimate the period of cash settlement with the respective taxing authorities. At December 28, 2019, the Company has insurance claims liabilities of $78,107,000. This amount is excluded from the table above as the Company cannot reasonably estimate the period of cash settlement on these liabilities. The short-term portion of the insurance claims liability is reported on the consolidated balance sheets primarily on an actuarially determined basis.
Off-Balance
Sheet Arrangements
As of December 28, 2019, the Company had no
off-balance
sheet arrangements that have or are reasonably likely to have a current or future material effect on the Company’s financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.
Legal Matters
On January 25, 2019, a purported class action was filed in the Superior Court of the State of California for the County of San Bernardino against Landstar System, Inc. and Landstar Ranger, Inc. (together, the “Defendants”). The complaint purports to bring this action on behalf of Hany Tanious, as an individual, and “all owner operators who performed work for the Defendants, and who were classified as independent contractors, during the four years preceding the filing of this action through the present.” The complaint asserts claims based on the alleged misclassification of Mr. Tanious as an independent contractor and alleges violations under California law relating to overtime, minimum wage, meal and rest breaks, failure to reimburse certain expenses, wage statements, waiting time and unfair competition. Mr. Tanious was a truck owner-operator and formerly an independent contractor who was a party to an independent contractor operating agreement with Landstar Ranger, Inc. On June 11, 2019, the Defendants filed a Notice of Removal that resulted in the removal of the case from state court to federal court, where it was assigned to Judge Dale S. Fischer of the United State District Court for the Central District of California. On August 22, 2019, the Court issued an order, among other things, striking all class allegations from the complaint and stating that this matter would proceed as an individual action. Due to a number of factors including the preliminary status of this matter, the Company does not believe it is in a position to conclude whether or not there is a reasonable possibility of an adverse outcome in this case or what damages, if any, the plaintiff would be awarded should he prevail on all or any part of his claims. However, the Company believes it has meritorious defenses and it intends to assert these defenses vigorously.
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The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Many of these claims are covered in whole or in part by insurance. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
Critical Accounting Policies and Estimates
Landstar provides for the estimated costs of self-insured claims primarily on an actuarial basis. The amount recorded for the estimated liability for claims incurred is based upon the facts and circumstances known on the applicable balance sheet date. The ultimate resolution of these claims may be for an amount greater or less than the amount estimated by management. The Company continually revises its existing claim estimates as new or revised information becomes available on the status of each claim. Historically, the Company has experienced both favorable and unfavorable development of prior years’ claims estimates. During fiscal years 2019, 2018 and 2017, insurance and claims costs included $16,679,000, $13,960,000 and $4,144,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. The unfavorable development of prior years’ claims in the 2019 fiscal year related to a number of specific claims and actuarially determined adjustments to prior year commercial trucking loss estimates. The unfavorable development of prior years’ claims in the 2018 fiscal year primarily related to five claims. The unfavorable development of prior years’ claims in the 2017 fiscal year primarily related to five other claims. It is reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims liability at December 28, 2019.
Significant variances from management’s estimates for the ultimate resolution of self-insured claims could be expected to positively or negatively affect Landstar’s earnings in a given quarter or year. However, management believes that the ultimate resolution of these items, given a range of reasonably likely outcomes, will not significantly affect the long-term financial condition of Landstar or its ability to fund its continuing operations.
Effects of Inflation
Management does not believe inflation has had a material impact on the results of operations or financial condition of Landstar in the past five years. However, inflation in excess of historical trends might have an adverse effect on the Company’s results of operations in the future.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
 
 
The Company is exposed to changes in interest rates as a result of its financing activities, primarily its borrowings on its revolving credit facility, and investing activities with respect to investments held by the insurance segment.
On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures on June 2, 2021, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing amount of $400,000,000.
Depending upon the specific type of borrowing, borrowings under the Credit Agreement bear interest based on either (a) the prime rate, (b) the Federal Reserve Bank of New York rate plus 0.5% or (c) the London Interbank Offered Rate, plus 1.25%. As of both December 28, 2019 and December 29, 2018 and during all of fiscal years 2019 and 2018, the Company had no borrowings outstanding under the Credit Agreement.
Long-term investments, all of which are
available-for-sale
and are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Assuming that the long-term portion of investments remains at $84,838,000, the balance at December 28, 2019, a hypothetical increase or decrease in interest rates of 100 basis points would not have a material impact on future earnings on an annualized basis. Short-term investments consist of short-term investment-grade instruments and the current maturities of investment-grade corporate bonds and U.S. Treasury obligations. Accordingly, any future interest rate risk on these short-term investments would not be material to the Company’s operating results.
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Assets and liabilities of the Company’s Canadian and Mexican operations are translated from their functional currency to U.S. dollars using exchange rates in effect at the balance sheet date and revenue and expense accounts are translated at average monthly exchange rates during the period. Adjustments resulting from the translation process are included in accumulated other comprehensive income. Transactional gains and losses arising from receivable and payable balances, including intercompany balances, in the normal course of business that are denominated in a currency other than the functional currency of the operation are recorded in the statements of income when they occur. The assets held at the Company’s Canadian and Mexican subsidiaries at December 28, 2019 were collectively, as translated to U.S. dollars, less than 6% of total consolidated assets. Accordingly, translation gains or losses of 10% or less related to the Canadian and Mexican operations would not be material.
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Item 8.
Financial Statements and Supplementary Data
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
 
Dec. 28,
2019
 
 
Dec. 29,
2018
 
ASSETS
 
Current Assets
   
     
 
Cash and cash equivalents
  $
319,515
    $
199,736
 
Short-term investments
   
32,901
     
40,058
 
Trade accounts receivable, less allowance of $7,284 and $6,413
   
588,549
     
691,604
 
Other receivables, including advances to independent contractors, less allowance of $7,667 and $6,216
   
35,553
     
23,744
 
Other current assets
   
21,370
     
16,287
 
                 
Total current assets
   
997,888
     
971,429
 
                 
Operating property, less accumulated depreciation and amortization of $280,849 and $250,153
   
285,855
     
284,032
 
Goodwill
   
38,508
     
38,232
 
Other assets
   
105,460
     
86,871
 
                 
Total assets
  $
1,427,711
    $
1,380,564
 
                 
LIABILITIES AND EQUITY
 
Current Liabilities
   
     
 
Cash overdraft
  $
53,878
    $
55,339
 
Accounts payable
   
271,996
     
314,134
 
Current maturities of long-term debt
   
42,632
     
43,561
 
Insurance claims
   
44,532
     
40,176
 
Dividends payable
   
78,947
     
—  
 
Accrued compensation
   
9,884
     
29,489
 
Other current liabilities
   
51,035
     
53,119
 
                 
Total current liabilities
   
552,904
     
535,818
 
                 
Long-term debt, excluding current maturities
   
70,212
     
84,864
 
Insurance claims
   
33,575
     
30,429
 
Deferred income taxes and other noncurrent liabilities
   
49,551
     
40,320
 
                 
Equity
   
     
 
Landstar System, Inc. and subsidiary shareholders’ equity:
   
     
 
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 68,083,419 and 67,870,962 shares
   
681
     
679
 
Additional
paid-in
capital
   
226,123
     
226,852
 
Retained earnings
   
1,962,161
     
1,841,279
 
Cost of 28,609,926 and 27,755,001 shares of common stock in treasury
   
(1,465,284
)    
(1,376,111
)
Accumulated other comprehensive loss
   
(2,212
)    
(5,875
)
                 
Total Landstar System, Inc. and subsidiary shareholders’ equity
   
721,469
     
686,824
 
Noncontrolling interest
   
—  
     
2,309
 
                 
Total equity
   
721,469
     
689,133
 
                 
Total liabilities and equity
  $
1,427,711
    $
1,380,564
 
                 
See accompanying notes to consolidated financial statements.
 
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LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
                         
 
Fiscal Years Ended
 
 
Dec. 28,
2019
 
 
Dec. 29,
2018
 
 
Dec. 30,
2017
 
Revenue
  $
4,084,577
    $
4,615,144
    $
3,646,364
 
Investment income
   
5,041
     
3,816
     
2,498
 
Costs and expenses: