UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 25, 2021
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices)
(Zip Code)
(904 ) 398-9400
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
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 Yes
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): ☒ 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): | ☒ | 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 Exchange Act). Yes ☐ No The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of the close of business on October 18, 2021 was 38,108,586 .
Index
| PART I – Financial Information | ||
| Page 4 | ||
| Page 5 | ||
| Page 6 | ||
| Page 7 | ||
| Page 8 | ||
| Page 9 | ||
| Page 17 | ||
| Page 31 | ||
| Page 32 | ||
| Page 32 | ||
| Page 32 | ||
| Page 33 | ||
| Page 33 | ||
| Page 35 | ||
2
PART I -
Item 1. Financial Statements
The interim consolidated financial statements contained herein reflect all adjustments (all of a normal, recurring nature) which, in the opinion of management, are necessary for a fair statement of the financial condition, results of operations, cash flows and changes in shareholders’ equity for the periods presented. They have been prepared in accordance with Rule
10-01
of Regulation S-X
and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the thirty nine weeks ended September 25, 2021 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 25, 2021. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2020 Annual Report on Form
10-K.
3
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
September 25, 2021 |
December 26, 2020 |
|||||||
| ASSETS | ||||||||
| Current Assets |
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| Cash and cash equivalents |
$ | $ | ||||||
| Short-term investments |
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| Trade accounts receivable, less allowance of $ |
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| Other receivables, including advances to independent contractors, less allowance of $ |
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| Other current assets |
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| Total current assets |
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| Operating property, less accumulated depreciation and amortization of $ |
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| Goodwill |
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| Other assets |
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| Total assets |
$ | $ | ||||||
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| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities |
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| Cash overdraft |
$ | $ | ||||||
| Accounts payable |
||||||||
| Current maturities of long-term debt |
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| Insurance claims |
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| Dividends payable |
— | |||||||
| Other current liabilities |
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| Total current liabilities |
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| Long-term debt, excluding current maturities |
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| Insurance claims |
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| Deferred income taxes and other noncurrent liabilities |
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| Shareholders’ Equity |
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| Common stock, $ |
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| Additional paid-in capital |
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| Retained earnings |
||||||||
| Cost of |
( |
) | ( |
) | ||||
| Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
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| Total shareholders’ equity |
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| Total liabilities and shareholders’ equity |
$ | $ | ||||||
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See accompanying notes to consolidated financial statements.
4
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Thirty Nine Weeks Ended |
Thirteen Weeks Ended |
|||||||||||||||
September 25, 2021 |
September 26, 2020 |
September 25, 2021 |
September 26, 2020 |
|||||||||||||
| Revenue |
$ | $ | $ | $ | ||||||||||||
| Investment income |
||||||||||||||||
| Costs and expenses: |
||||||||||||||||
| Purchased transportation |
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| Commissions to agents |
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| Other operating costs, net of gains on asset sales/dispositions |
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| Insurance and claims |
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| Selling, general and administrative |
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| Depreciation and amortization |
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| Impairment of intangible and other assets |
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| Total costs and expenses |
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| Operating income |
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| Interest and debt expense |
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| Income before income taxes |
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| Income taxes |
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| Net income |
$ | $ | $ | $ | ||||||||||||
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| Diluted earnings per share |
$ | $ | $ | $ | ||||||||||||
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| Average diluted shares outstanding |
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| Dividends per common share |
$ | $ | $ | $ | ||||||||||||
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See accompanying notes to consolidated financial statements.
5
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Thirty Nine Weeks Ended |
Thirteen Weeks Ended |
|||||||||||||||
September 25, 2021 |
September 26, 2020 |
September 25, 2021 |
September 26, 2020 |
|||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive (loss) income: |
||||||||||||||||
| Unrealized holding (losses) gains on available-for-sale |
( |
) | ( |
) | ||||||||||||
| Foreign currency translation gains (losses) |
( |
) | ( |
) | ||||||||||||
| |
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| Other comprehensive (loss) income |
( |
) | ( |
) | ( |
) | ||||||||||
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| Comprehensive income |
$ | $ | $ | $ | ||||||||||||
| |
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|
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See accompanying notes to consolidated financial statements.
6
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Thirty Nine Weeks Ended |
||||||||
September 25, 2021 |
September 26, 2020 |
|||||||
| OPERATING ACTIVITIES |
||||||||
| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
| Depreciation and amortization of operating property and intangible assets |
||||||||
| Non-cash interest charges |
||||||||
| Provisions for losses on trade and other accounts receivable |
||||||||
| Gains on sales/disposals of operating property |
( |
) | ( |
) | ||||
| Impairment of intangible and other assets |
||||||||
| Deferred income taxes, net |
||||||||
| Stock-based compensation |
||||||||
| Changes in operating assets and liabilities: |
||||||||
| Increase in trade and other accounts receivable |
( |
) | ( |
) | ||||
| Increase in other assets |
( |
) | ( |
) | ||||
| Increase in accounts payable |
||||||||
| Increase in other liabilities |
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| (Decrease) increase in insurance claims |
( |
) | ||||||
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| NET CASH PROVIDED BY OPERATING ACTIVITIES |
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| INVESTING ACTIVITIES |
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| Net changes in other short-term investments |
||||||||
| Sales and maturities of investments |
||||||||
| Purchases of investments |
( |
) | ( |
) | ||||
| Purchases of operating property |
( |
) | ( |
) | ||||
| Proceeds from sales of operating property |
||||||||
| Consideration paid for acquisition |
( |
) | ||||||
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| NET CASH USED BY INVESTING ACTIVITIES |
( |
) | ( |
) | ||||
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| FINANCING ACTIVITIES |
||||||||
| Increase (decrease) in cash overdraft |
( |
) | ||||||
| Dividends paid |
( |
) | ( |
) | ||||
| Payment for debt issue costs |
( |
) | ||||||
| Proceeds from exercises of stock options |
||||||||
| Taxes paid in lieu of shares issued related to stock-based compensation plans |
( |
) | ( |
) | ||||
| Purchases of common stock |
( |
) | ( |
) | ||||
| Principal payments on finance lease obligations |
( |
) | ( |
) | ||||
| Payment of deferred consideration |
( |
) | ||||||
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| NET CASH USED BY FINANCING ACTIVITIES |
( |
) | ( |
) | ||||
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| Effect of exchange rate changes on cash and cash equivalents |
( |
) | ||||||
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| Decrease in cash and cash equivalents |
( |
) | ( |
) | ||||
| Cash and cash equivalents at beginning of period |
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|
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
| |
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|
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See accompanying notes to consolidated financial statements.
7
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Thirty Nine and Thirteen Weeks Ended September 25, 2021 and September 26, 2020
(Dollars in thousands)
(Unaudited)
Common Stock |
Additional Paid-In |
Retained |
Treasury Stock at Cost |
Accumulated Other Comprehensive |
||||||||||||||||||||||||||||
Shares |
Amount |
Capital |
Earnings |
Shares |
Amount |
(Loss) Income |
Total |
|||||||||||||||||||||||||
| Balance December 26, 2020 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| Net income |
||||||||||||||||||||||||||||||||
| Dividends ($ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Issuance of stock related to stock-based compensation plans |
— | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Stock-based compensation |
||||||||||||||||||||||||||||||||
| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| |
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| Balance March 27, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
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| Net income |
||||||||||||||||||||||||||||||||
| Dividends ($ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Purchases of common stock |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Issuance of stock related to stock-based compensation plans |
— | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Stock-based compensation |
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| Other comprehensive income |
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| Balance June 26, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
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| Net income |
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| Dividends ($ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Purchases of common stock |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Issuance of stock related to stock-based compensation plans |
— | — | ||||||||||||||||||||||||||||||
| Stock-based compensation |
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| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||||||||||||||
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| Balance September 25, 2021 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
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| Balance December 28, 2019 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
| Adoption of accounting standard |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Net income |
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| Dividends ($ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Purchases of common stock |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Issuance of stock related to stock-based compensation plans |
( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||
| Stock-based compensation |
||||||||||||||||||||||||||||||||
| Other comprehensive loss |
( |
) | ( |
) | ||||||||||||||||||||||||||||
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| Balance March 28, 2020 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
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| Net income |
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| Dividends ($ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Issuance of stock related to stock-based compensation plans |
— | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||
| Stock-based compensation |
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| Other comprehensive income |
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| Balance June 27, 2020 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
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| Net income |
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| Dividends ($ |
( |
) | ( |
) | ||||||||||||||||||||||||||||
| Issuance of stock related to stock-based compensation plans |
— | ( |
) | |||||||||||||||||||||||||||||
| Stock-based compensation |
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| Other comprehensive income |
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| Balance September 26, 2020 |
$ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ||||||||||||||||||||||
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See accompanying notes to consolidated financial statements.
8
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all adjustments (all of a normal, recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. The preparation of the consolidated financial statements requires the use of management’s estimates. Actual results could differ from those estimates. Landstar System, Inc. and its subsidiary are herein referred to as “Landstar” or the “Company.” Significant intercompany accounts have been eliminated in consolidation.
(1) Significant Accounting Policies
Revenue from Contracts with Customers – Disaggregation of Revenue
The following table summarizes (i) the percentage of consolidated revenue generated by mode of transportation and (ii) the total amount of truck transportation revenue hauled by BCO Independent Contractors and Truck Brokerage Carriers generated by equipment type during the thirty-nine-week and thirteen-week periods ended September 25, 2021 and September 26, 2020 (dollars in thousands):
Thirty Nine Weeks Ended |
Thirteen Weeks Ended |
|||||||||||||||
September 25, 2021 |
September 26, 2020 |
September 25, 2021 |
September 26, 2020 |
|||||||||||||
| Mode |
||||||||||||||||
| Truck – BCO Independent Contractors |
% | % | % | % | ||||||||||||
| Truck – Truck Brokerage Carriers |
% | % | % | % | ||||||||||||
| Rail intermodal |
% | % | % | % | ||||||||||||
| Ocean and air cargo carriers |
% | % | % | % | ||||||||||||
| Truck Equipment Type |
||||||||||||||||
| Van equipment |
$ | $ | $ | $ | ||||||||||||
| Unsided/platform equipment |
$ | $ | $ | $ | ||||||||||||
| Less-than-truckload |
$ | $ | $ | $ | ||||||||||||
| Other truck transportation (1) |
$ | $ | $ | $ | ||||||||||||
| (1) | Includes power-only, expedited, straight truck, cargo van, and miscellaneous other truck transportation revenue generated by the transportation logistics segment. Power-only refers to shipments where the Company furnishes a power unit and an operator but not trailing equipment, which is typically provided by the shipper or consignee. |
9
(2) Share-based Payment Arrangements
As of September 25, 2021, the Company has an employee equity incentive plan, the 2011 equity incentive plan (the “2011 EIP”). The Company also has a stock compensation plan for members of its Board of Directors, the Amended and Restated 2013 Directors Stock Compensation Plan (as amended and restated as of May 17, 2016, the “2013 DSCP”). 6,000,000 shares of the Company’s common stock were authorized for issuance under the 2011 EIP and 115,000 shares of the Company’s common stock were authorized for issuance under the 2013 DSCP. The 2011 EIP and 2013 DSCP are each referred to herein as a “Plan,” and, collectively, as the “Plans.” Amounts recognized in the financial statements with respect to these Plans are as follows (in thousands):
Thirty Nine Weeks Ended |
Thirteen Weeks Ended |
|||||||||||||||
September 25, |
September 26, |
September 25, |
September 26, |
|||||||||||||
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Total cost of the Plans during the period |
$ | $ | $ | $ | ||||||||||||
| Amount of related income tax benefit recognized during the period |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
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|
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| Net cost of the Plans during the period |
$ | $ | $ | $ | ||||||||||||
| |
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|
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Included in income tax benefits recognized in the thirty-nine-week periods ended September 25, 2021 and September 26, 2020 were excess tax benefits from stock-based awards of $1,039,000 and $927,000 , respectively.
As of September 25, 2021, there were 56,782 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 3,505,880 shares of the Company’s common stock reserved for issuance under the 2011 EIP.
Restricted Stock Units
The following table summarizes information regarding the Company’s outstanding restricted stock unit (“RSU”) awards with either a performance condition or a market condition under the Plans:
Number of |
Weighted Average Grant Date |
|||||||
RSUs |
Fair Value |
|||||||
| Outstanding at December 26, 2020 |
$ | |||||||
| Granted |
$ | |||||||
| Shares earned in excess of target (1) |
$ | |||||||
| Vested shares |
( |
) | $ | |||||
| Forfeited |
( |
) | $ | |||||
| |
|
|||||||
| Outstanding at September 25, 2021 |
$ | |||||||
| |
|
|||||||
(1) |
Represents shares earned in excess of target under the May 1, 2015 RSU award as total shareholder return exceeded the target under the award. |
During the thirty-nine-week period ended September 25, 2021, the Company granted RSUs with a performance condition. Outstanding RSUs at both December 26, 2020 and September 25, 2021 include RSUs with a performance condition and RSUs with a market condition, as further described below and in the Company’s 2020 Annual Report on Form
10-K.
RSUs with a performance condition granted on January 29, 2021 may vest on January 31 of 2024, 2025 and 2026 based on growth in operating income and
pre-tax
income per diluted share from continuing operations as compared to the results from the 2020 fiscal year, adjusted to reflect the add back of non-cash
impairment charges recorded in the Company’s 2020 fiscal year related to certain assets, primarily customer contract and related customer relationship intangible assets, held by the Company’s Mexican subsidiaries. The Company recognized
approximately $
and $
of share-based compensation expense related to RSU awards in the thirty-nine-week periods ended September
25,
2021 and September
26,
2020, respectively. As of September
25,
2021, there was a maximum of $
million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately
years. With respect to RSU awards with a performance condition, the amount of future compensation expense to be recognized will
be
determined based on future operating results.
10
Non-vested
Restricted Stock and Deferred Stock Units The following table summarizes information regarding the Company’s outstanding shares of
non-vested
restricted stock and Deferred Stock Units (defined below) under the Plans:Number of Shares and Deferred Stock Units |
Weighted Average Grant Date Fair Value |
|||||||
| Non-vested at December 26, 2020 |
$ | |||||||
| Granted |
$ | |||||||
| Vested |
( |
) | $ | |||||
| Forfeited |
( |
) | $ | |||||
| |
|
|||||||
| Non-vested at September 25, 2021 |
$ | |||||||
| |
|
|||||||
The fair value of each share of Company’s common stock on the date of grant. Shares of 100 % on the first or fifth anniversary of the date of the grant. For restricted stock awards granted under the 2013 from 100 % on the first anniversary of the date of the grant. Deferred Stock Units do not represent actual ownership in shares of the Company’s common stock and the recipient does not have voting rights or other incidents of ownership until the shares are issued. However, Deferred Stock Units do contain the right to receive dividend equivalent payments prior to settlement into shares.
non-vested
restricted stock issued and Deferred Stock Unit granted under the Plans is based on the fair value of a share of the non-vested
restricted stock are generally subject to vesting in three equal annual installments either on the first, second and third anniversary of the date of the grant or the third, fourth and fifth anniversary of the date of the grant, or DSCP
plan, each recipient may elect to defer receipt of shares and instead receive restricted stock units (“Deferred Stock Units”), which represent contingent rights to receive shares of the Company’s common stock on the date of recipient separationservice from
the Board of Directors, or, if earlier, upon a change in control event of the Company. Deferred Stock Units become vested As of September
25,
2021, there was $
of total unrecognized compensation cost related to
non-vested
shares of restricted stock and Deferred Stock Units granted under the Plans. The unrecognized compensation cost related to these
non-vested
shares of restricted stock and Deferred Stock Units is expected to be recognized over a weighted average period of
years.
Stock Options
The following table summarizes information regarding the Company’s outstanding stock options under the Plans:
Number of Options |
Weighted Average Exercise Price Share |
Weighted Average Remaining Contractual Term (years) |
Aggregate Intrinsic Value (000s) |
|||||||||||||
| Options outstanding at December 26, 2020 |
$ |
|||||||||||||||
| Exercised |
( |
) |
$ |
|||||||||||||
| |
|
|||||||||||||||
| Options outstanding at September 25, 2021 |
$ |
$ |
||||||||||||||
| |
|
|||||||||||||||
| Options exercisable at September 25, 2021 |
$ |
$ |
||||||||||||||
| |
|
|||||||||||||||
The total intrinsic value
25of
stock options exercised during the thirty-nine-week periods ended September ,
2021 and September
26,
2020 was $
and $
, respectively.
As of September
25,
2021, there was no unrecognized compensation cost related to stock options granted under the Plans.
(3) Income Taxes
The provisions for income taxes for the 2021 and 2020 thirty-nine-week periods were based on estimated annual effective income tax rates of 24.4 % and 24.2 %, respectively, adjusted for discrete events, such as benefits resulting from stock-based awards. The increase in the estimated annual effective income tax rate was primarily attributable to increased anticipated nondeductible executive compensation during the 2021 period. The effective income tax rate for the 2021 thirty-nine-week period was 24.2 %, which was higher than the statutory federal income tax rate of 21 % primarily attributable to state taxes and nondeductible executive compensation, partially offset by excess tax benefits realized on stock-based awards. The effective income tax rate for the 2020 thirty-nine-week period was 23.3 %, 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 and state tax refunds.
11
(4) Earnings Per Share
Earnings per common share are based on the weighted average number of shares outstanding, including outstanding
non-vested
restricted stock and outstanding Deferred Stock Units. Diluted earnings per share are based on the weighted average number of common shares and Deferred Stock Units outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options. During the 2021 and 2020 thirty-nine-week and thirteen-week periods, in reference to the determination of diluted earnings per share, the future compensation cost attributable to outstanding shares of non-vested
restricted stock exceeded the impact of incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options. For each of the thirty-nine-week periods ended September 25, 2021 and September 26, 2020, no
(5) Additional Cash Flow Information
During the 2021 thirty-nine-week period, Landstar paid income taxes and interest of $71,823,000 and $2,780,000 , respectively. During the 2020 thirty-nine-week period, Landstar paid income taxes and interest of $28,761,000 and $3,087,000 , respectively. Landstar acquired operating property by entering into finance leases in the amounts of $23,080,000 and $7,485,000 in the 2021 and 2020 thirty-nine-week periods, respectively.
(6) Segment Information
The following table summarizes information about the Company’s reportable business segments as of and for the thirty-nine-week and thirteen-week periods ended September 25, 2021 and September 26, 2020 (in thousands):
Thirty Nine Weeks Ended |
||||||||||||||||||||||||
September 25, 2021 |
September 26, 2020 |
|||||||||||||||||||||||
Transportation Logistics |
Insurance |
Total |
Transportation Logistics |
Insurance |
Total |
|||||||||||||||||||
| External revenue |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | |
||||||||||||
| Internal revenue |
||||||||||||||||||||||||
| Investment income |
||||||||||||||||||||||||
| Operating income |
||||||||||||||||||||||||
| Expenditures on long-lived assets |
||||||||||||||||||||||||
| Goodwill |
||||||||||||||||||||||||
Thirteen Weeks Ended |
||||||||||||||||||||||||
September 25, 2021 |
September 26, 2020 |
|||||||||||||||||||||||
Transportation Logistics |
Insurance |
Total |
Transportation Logistics |
Insurance |
Total |
|||||||||||||||||||
| External revenue |
$ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Internal revenue |
||||||||||||||||||||||||
| Investment income |
||||||||||||||||||||||||
| Operating income |
||||||||||||||||||||||||
| Expenditures on long-lived assets |
||||||||||||||||||||||||
In the thirty-nine-week and thirteen-week periods ended September 25, 2021 and September 26, 2020, no 10
12
(7) Other Comprehensive Income
The following table presents the components of and changes in accumulated other comprehensive income (loss), net of related income taxes, as of and for the thirty-nine-week period ended September 25, 2021 (in thousands):
Unrealized Holding Gains (Losses) on Available-for-Sale Securities |
Foreign Currency Translation |
Total |
||||||||||
| Balance as of December 26, 2020 |
$ | $ | ( |
) | $ | ( |
) | |||||
| Other comprehensive (loss) gain |
( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|||||||
| Balance as of September 25, 2021 |
$ | $ | ( |
) | $ | ( |
) | |||||
| |
|
|
|
|
|
|||||||
Amounts reclassified from accumulated other comprehensive income to investment income due to the realization of previously unrealized gains and losses in the accompanying consolidated statements of income were not significant for the thirty-nine-week period ended September 25, 2021.
(8) Investments
Investments include primarily investment-grade corporate bonds and U.S. Treasury obligations having maturities of up to five years (the “bond portfolio”) and money market investments. Investments in the bond portfolio are reported as and are carried at fair value. Investments maturing less than one year from the balance sheet date are included in short-term investments and investments maturing more than one year from the balance sheet date are included in other assets in the consolidated balance sheets. Management performs an analysis of the nature of the unrealized losses on investments to determine whether an allowance for credit loss is necessary. Unrealized losses, representing the excess of the purchase price of an investment over its fair value as of the end of a period, considered to be a result of credit-related factors, are to be included as a charge in the statement of income, while unrealized losses considered to be a result of noncredit-related factors are to be included as a component of shareholders’ equity. Investments whose values are based on quoted market prices in active markets are classified within Level 1. Investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, are classified within Level 2. As Level 2 investments include positions that are not traded in active markets, valuations may be adjusted to reflect illiquidity and/or 1,971,000 at September 25, 2021 and $3,578,000 at December 26, 2020, respectively.
available-for-sale
available-for-sale
non-transferability,
which are generally based on available market information. Any transfers between levels are recognized as of the beginning of any reporting period. Fair value of the bond portfolio was determined using Level 1 inputs related to U.S. Treasury obligations and money market investments and Level 2 inputs related to investment-grade corporate bonds, asset-backed securities and direct obligations of government agencies. Unrealized gains, net of unrealized losses, on the investments in the bond portfolio were $13
The amortized cost and fair values of investments are as follows at September 25, 2021 and December 26, 2020 (in thousands):
available-for-sale
Gross |
Gross |
|||||||||||||||
Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value |
|||||||||||||
| September 25, 2021 |
||||||||||||||||
| Money market investments |
$ | $ | — | $ | — | $ | ||||||||||
| Asset-backed securities |
||||||||||||||||
| Corporate bonds and direct obligations of government agencies |
||||||||||||||||
| U.S. Treasury obligations |
— | |||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | |
$ | |
$ | $ | |
|||||||||
| |
|
|
|
|
|
|
|
|||||||||
| December 26, 2020 |
||||||||||||||||
| Money market investments |
$ | $ | — | $ | — | $ | ||||||||||
| Asset-backed securities |
— | |||||||||||||||
| Corporate bonds and direct obligations of government agencies |
||||||||||||||||
| U.S. Treasury obligations |
— | |||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
For those investments with unrealized losses at September 25, 2021 and December 26, 2020, the following table summarizes the duration of the unrealized loss (in thousands):
available-for-sale
Less than 12 months |
12 months or longer |
Total |
||||||||||||||||||||||
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
|||||||||||||||||||
| September 25, 2021 |
||||||||||||||||||||||||
| Asset-backed securities |
$ | |
$ | $ | — | $ | — | $ | |
$ | ||||||||||||||
| Corporate bonds and direct obligations of government agencies |
— | — | ||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | $ | |
$ | — | $ | — | $ | $ | |
||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 26, 2020 |
||||||||||||||||||||||||
| Asset-backed securities |
$ | $ | $ | — | $ | — | $ | $ | ||||||||||||||||
| Corporate bonds and direct obligations of government agencies |
— | — | ||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
$ | $ | $ | — | $ | — | $ | $ | ||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
The Company believes unrealized losses on investments were primarily caused by rising interest rates rather than changes in credit quality. The Company expects to recover, through collection of all of the contractual cash flows of each security, the amortized cost basis of these securities as it does not intend to sell, and does not anticipate being required to sell, these securities before recovery of the cost basis. For these reasons, no losses have been recognized in the Company’s consolidated statements of income.
(9) Leases
Landstar’s noncancelable leases are primarily comprised of finance leases for the acquisition of new trailing equipment. Each finance lease for the acquisition of trailing equipment is a
lease with a $
purchase option for the applicable equipment at lease expiration. Substantially all of Landstar’s operating lease
right-of-use
assets and operating lease liabilities represent leases for facilities maintained in support of the Company’s network of BCO Independent Contractors and office space used to conduct Landstar’s business. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives or other
build-out
clauses.
14
Further, the leases do not contain contingent rent provisions. Landstar also leases certain trailing equipment to supplement the Company-owned trailer fleet under lease terms, which are not required to be recorded on the balance sheet due to the less than twelve month lease term exemption. Sublease income is primarily comprised of weekly trailing equipment rentals to our BCO Independent Contractors.
“month-to-month”
Most of Landstar’s operating leases include one or more options to renew. The exercise of lease renewal options is typically at Landstar’s sole discretion, and, as such, the majority of renewals to extend the lease terms are not included in the assets and lease liabilities as they are not reasonably certain of exercise. Landstar regularly evaluates the renewal options, and when they are reasonably certain of exercise, Landstar includes the renewal period in the lease term.
right-of-use
As most of Landstar’s operating leases do not provide an implicit rate, Landstar utilized its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. Landstar has a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.
The components of lease cost for finance leases and operating leases for the thirty nine weeks ended September 25, 2021 were (in thousands):
| Finance leases: |
||||
| Amortization of right-of-use |
$ | |
||
| Interest on lease liability |
||||
| |
|
|||
| Total finance lease cost |
||||
| Operating leases: |
||||
| Lease cost |
||||
| Variable lease cost |
— | |||
| Sublease income |
( |
) | ||
| |
|
|||
| Total net operating lease income |
( |
) | ||
| |
|
|||
| Total net lease cost |
$ | |||
| |
|
A summary of the lease classification on our consolidated balance sheet as of September 25, 2021 is as follows (in thousands):
Assets:
Operating right-of-use |
Other assets | $ | ||||
Finance lease assets |
Operating property, less accumulated depreciation and amortization | |||||
Total lease assets |
$ | |||||
Liabilities:
The following table reconciles the undiscounted cash flows for the finance and operating leases to the finance and operating lease liabilities recorded on the balance sheet at September 25, 2021 (in thousands):
Finance Leases |
Operating Leases |
|||||||
2021 Remainder |
$ | $ | ||||||
2022 |
||||||||
2023 |
||||||||
2024 |
||||||||
2025 |
||||||||
Thereafter |
||||||||
Total future minimum lease payments |
||||||||
Less amount representing interest ( |
||||||||
Present value of minimum lease payments |
$ | $ | ||||||
Current maturities of long-term debt |
||||||||
Long-term debt, excluding current maturities |
||||||||
Other current liabilities |
||||||||
Deferred income taxes and other noncurrent liabilities |
||||||||
15
The weighted average remaining lease term and the weighted average discount rate for finance and operating leases as of September 25, 2021 were:
| Finance Leases | Operating Leases | |||||||
Weighted average remaining lease term (years) |
||||||||
Weighted average discount rate |
% | % | ||||||
(10) Debt
Other than the finance lease obligations as presented on the consolidated balance sheets, the Company had no
On August 18, 2020 , Landstar entered into an amended and restated 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 August 18, 2023, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $35,000,000 of which may be utilized in the form of letters of credit. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing capacity of $400,000,000 .
The revolving credit loans under the Credit Agreement, at the option of Landstar, bear interest at (i) the Eurocurrency rate plus an applicable margin ranging from 1.25 % to 2.00 %, or (ii) an alternate base rate plus an applicable margin ranging from 0.25 % to 1.00 %, in each case with the applicable margin determined based upon the Company’s Leverage Ratio, as defined in the Credit Agreement, at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. The revolving credit facility bears a commitment fee, payable quarterly in arrears, of 0.25 % to 0.35 %, based on the Company’s Leverage Ratio at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. As of September 25, 2021 and December 26, 2020, the Company had no
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 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 the 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.
The interest rates on borrowings under the revolving credit facility are typically tied to short-term interest rates that adjust monthly and, as such, carrying value approximates fair value. Interest rates on borrowings under finance leases approximate the interest rates that would currently be available to the Company under similar terms and, as such, carrying value approximates fair value.
(11) Commitments and Contingencies
Short-term investments include $36,644,000 in current maturities of investments held by the Company’s insurance segment at September 25, 2021. The 136,157,000 is included in other assets. The short-term investments, together with $40,505,000 of 69,434,000 of letters of credit issued to guarantee payment of insurance claims. As of September 25, 2021, Landstar also had $33,577,000 of additional letters of credit outstanding under the Company’s Credit Agreement.
non-current
portion of the bond portfolio of $non-current
investments, provide collateral for the $16
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.
(12) Impairment of Intangible and Other Assets
During the 2020 second fiscal quarter, the Company recorded a 2,582 ,000 in respect of certain assets, primarily customer contract and related customer relationship intangible assets, acquired on September 20, 2017, along with substantially all of the other assets of the asset-light transportation logistics business of Fletes Avella, S.A. de C.V. (“Fletes Avella”). As previously disclosed in Item 1A. Risk Factors in the Company’s Form 2,582 ,000, as the negative macroeconomic trends in Mexico caused financial projections as of the end of the 2020 second quarter relating to these intangible assets to be substantially below those originally anticipated at the acquisition date. There was no corresponding goodwill impairment charge recorded as the fair value of the Company’s Mexico and cross-border reporting unit significantly exceeded its carrying value as of June 27, 2020. The fair value of the Company’s Mexico and cross-border reporting unit continues to significantly exceed its carrying value as of September 25, 2021.
non-cash
impairment charge of $10-Q
for the 2020 first quarter, negative macroeconomic trends in Mexico during the first half of 2020, including issues in the international oil and gas sector, caused significant disruptions in the Mexican economy. Accordingly, management performed impairment tests of the carrying values of certain assets that primarily related to intra-Mexico business acquired as a part of the Fletes Avella acquisition. The impairment tests resulted in an impairment charge of $Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the interim consolidated financial statements and notes thereto included herein, and with the Company’s audited financial statements and notes thereto for the fiscal year ended December 26, 2020 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2020 Annual Report on Form
10-K.
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-Q
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: the impact of the coronavirus (COVID-19)
pandemic; 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 Landstar’s Form 10-K
for the 2020 fiscal year, described in Item 1A “Risk Factors”, in this report or in Landstar’s other Securities and Exchange Commission filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking statements and 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. (collectively referred to herein with their subsidiaries and other affiliated companies as “Landstar” or the “Company”), is a worldwide technology enabled 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 comprehensive third party logistics solutions to meet 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
17
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 over 94,000 third party capacity providers, primarily truck capacity providers, linked together by a series of digital technologies 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 ecosystem of digital technologies, 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 are provided by Landstar’s “Operating Subsidiaries”: Landstar Ranger, Inc., Landstar Inway, Inc., Landstar Ligon, Inc., Landstar Gemini, Inc., Landstar Transportation Logistics, Inc., Landstar Global Logistics, Inc., Landstar Express America, Inc., Landstar Canada, Inc., Landstar Metro, S.A.P.I. de C.V., and as further described below, Landstar Blue. Transportation services offered by the Company include truckload, less-than-truckload and power-only 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, consumer durables, 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. The independent commission sales agents market 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 the thirty nine weeks ended September 25, 2021, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 41%, 50% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 4% of the Company’s consolidated revenue in the thirty-nine-week period ended September 25, 2021.
On May 6, 2020, the Company formed a new subsidiary that was subsequently renamed Landstar Blue, LLC (“Landstar Blue”). Landstar Blue arranges truckload brokerage services while helping the Company to develop and test digital technologies and processes for the benefit of all Landstar independent commission sales agents. On June 15, 2020, Landstar Blue completed the acquisition of an independent agent of the Company whose business focused on truckload brokerage services. The results of operations from Landstar Blue are presented as part of the Company’s transportation logistics segment. Revenue from Landstar Blue represented less than 1% of the Company’s transportation logistics segment revenue in the thirty-nine-week period ended September 25, 2021.
The insurance segment is comprised of Signature Insurance Company (“Signature”), a wholly owned offshore insurance subsidiary, 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 the thirty-nine-week period ended September 25, 2021.
Changes in Financial Condition and Results of Operations
Management believes the Company’s success principally depends on its ability to generate freight revenue through its network of independent commission sales agents and to safely and efficiently deliver 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.
18
Revenue
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 (“Million Dollar Agents”). 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 digital technologies they may use to grow revenue and increase efficiencies at their businesses. During the 2020 fiscal year, 508 independent commission sales agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the 2020 fiscal year, the average revenue generated by a Million Dollar Agent was $7,489,000 and revenue generated by Million Dollar Agents in the aggregate represented 92% of consolidated revenue.
19
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:
Thirty Nine Weeks Ended |
Thirteen Weeks Ended |
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September 25, 2021 |
September 26, 2020 |
September 25, 2021 |
September 26, 2020 |
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| Revenue generated through (in thousands): |
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| Truck transportation |
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| Truckload: |
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| Van equipment |
$ | 2,502,025 | $ | 1,485,553 | $ | 918,115 | $ | 578,166 | ||||||||
| Unsided/platform equipment |
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