Item 2. Managements 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 Companys audited financial statements and notes thereto for the fiscal year ended December 31, 2016 and Managements Discussion and Analysis of Financial Condition
and Results of Operations included in the 2016 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 Managements 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 Landstars 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 Companys 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; acquired businesses; and other operational, financial or legal risks or uncertainties
detailed in Landstars Form
10-K
for the 2016 fiscal year,
16
described in Item 1A Risk Factors, in this report or in Landstars 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. (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 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 customers 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 Companys services emphasize safety, information coordination and customer service and are delivered through a network of independent commission sales agents and third party capacity providers
linked together by a series of technological applications which are provided and coordinated by the Company. The nature of the Companys 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. Landstars independent commission sales agents enter into contractual arrangements with the Company and are responsible for locating freight, making that freight
available to Landstars capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Companys 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 Landstars information technology systems, Landstar
operates an integrated transportation management solutions business primarily throughout North America with revenue of $3.2 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, project cargo and customs brokerage. Examples of the industries serviced by the transportation logistics segment include automotive products, building products, metals, chemicals,
foodstuffs, heavy machinery, retail, electronics, ammunition and explosives 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 the thirty-nine weeks ended September 30, 2017, revenue generated by BCO Independent Contractors,
Truck Brokerage Carriers and railroads represented approximately 47%, 47% and 3%, respectively, of the Companys consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3% of the
Companys consolidated revenue in the thirty-nine-week period ended September 30, 2017.
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. 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 in the aggregate for a 30% equity interest in each of Landstar Metro and Landstar Servicios. Landstar Metro provides freight and logistics services within the country of Mexico and in conjunction with Landstars
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 Companys transportation logistics segment. The Company expects that Landstar Metro and Landstar Servicios will not have a material effect on its revenues and earnings for the remainder of fiscal year 2017. Revenue from Landstar
Metro and Landstar Servicios represented less than 1% of the Companys transportation logistics segment revenue in the 2017 thirty-nine-week period.
17
The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore
insurance subsidiary (Signature), and Risk Management Claim Services, Inc. This segment provides risk and claims management services to certain of Landstars operating subsidiaries. In addition, it reinsures certain risks of the
Companys BCO Independent Contractors and provides certain property and casualty insurance directly to certain of Landstars 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 Companys consolidated
revenue for the thirty-nine-week period ended September 30, 2017.
Changes in Financial Condition and Results of Operations
Management believes the Companys 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 Companys 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. Managements 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 and increasing the revenue opportunities generated by existing independent commission sales
agents. During the 2016 fiscal year, 502 independent commission sales agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the 2016 fiscal year, the average revenue generated by a Million
Dollar Agent was $5,831,000 and revenue generated by Million Dollar Agents in the aggregate represented 92% of consolidated revenue.
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
|
|
|
|
September 30,
2017
|
|
|
September 24,
2016
|
|
|
September 30,
2017
|
|
|
September 24,
2016
|
|
Revenue generated through (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truck transportation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truckload:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Van equipment
|
|
$
|
1,529,402
|
|
|
$
|
1,351,980
|
|
|
$
|
550,484
|
|
|
$
|
465,785
|
|
Unsided/platform equipment
|
|
|
825,194
|
|
|
|
700,369
|
|
|
|
304,536
|
|
|
|
248,939
|
|
Less-than-truckload
|
|
|
65,397
|
|
|
|
54,066
|
|
|
|
22,598
|
|
|
|
18,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total truck transportation
|
|
|
2,419,993
|
|
|
|
2,106,415
|
|
|
|
877,618
|
|
|
|
732,863
|
|
Rail intermodal
|
|
|
68,570
|
|
|
|
76,987
|
|
|
|
24,213
|
|
|
|
24,650
|
|
Ocean and air cargo carriers
|
|
|
70,708
|
|
|
|
56,500
|
|
|
|
29,523
|
|
|
|
18,790
|
|
Other (1)
|
|
|
35,501
|
|
|
|
34,903
|
|
|
|
12,076
|
|
|
|
11,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,594,772
|
|
|
$
|
2,274,805
|
|
|
$
|
943,430
|
|
|
$
|
787,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue on loads hauled via BCO Independent Contractors included in total truck
transportation
|
|
$
|
1,211,564
|
|
|
$
|
1,086,848
|
|
|
$
|
435,479
|
|
|
$
|
379,196
|
|
|
|
|
|
|
Number of loads:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truck transportation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truckload:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Van equipment
|
|
|
942,894
|
|
|
|
847,208
|
|
|
|
329,329
|
|
|
|
291,089
|
|
Unsided/platform equipment
|
|
|
362,936
|
|
|
|
331,226
|
|
|
|
126,509
|
|
|
|
112,192
|
|
Less-than-truckload
|
|
|
98,740
|
|
|
|
84,316
|
|
|
|
34,232
|
|
|
|
28,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total truck transportation
|
|
|
1,404,570
|
|
|
|
1,262,750
|
|
|
|
490,070
|
|
|
|
431,870
|
|
Rail intermodal
|
|
|
32,040
|
|
|
|
36,120
|
|
|
|
11,080
|
|
|
|
11,940
|
|
Ocean and air cargo carriers
|
|
|
18,150
|
|
|
|
14,910
|
|
|
|
6,210
|
|
|
|
5,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,454,760
|
|
|
|
1,313,780
|
|
|
|
507,360
|
|
|
|
448,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loads hauled via BCO Independent Contractors included in total truck transportation
|
|
|
686,830
|
|
|
|
630,880
|
|
|
|
232,970
|
|
|
|
216,220
|
|
|
|
|
|
|
Revenue per load:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truck transportation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truckload:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Van equipment
|
|
$
|
1,622
|
|
|
$
|
1,596
|
|
|
$
|
1,672
|
|
|
$
|
1,600
|
|
Unsided/platform equipment
|
|
|
2,274
|
|
|
|
2,114
|
|
|
|
2,407
|
|
|
|
2,219
|
|
Less-than-truckload
|
|
|
662
|
|
|
|
641
|
|
|
|
660
|
|
|
|
634
|
|
Total truck transportation
|
|
|
1,723
|
|
|
|
1,668
|
|
|
|
1,791
|
|
|
|
1,697
|
|
Rail intermodal
|
|
|
2,140
|
|
|
|
2,131
|
|
|
|
2,185
|
|
|
|
2,064
|
|
Ocean and air cargo carriers
|
|
|
3,896
|
|
|
|
3,789
|
|
|
|
4,754
|
|
|
|
3,663
|
|
Revenue per load on loads hauled via BCO Independent Contractors
|
|
$
|
1,764
|
|
|
$
|
1,723
|
|
|
$
|
1,869
|
|
|
$
|
1,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by capacity type (as a % of total revenue):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Truck capacity providers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BCO Independent Contractors
|
|
|
47
|
%
|
|
|
48
|
%
|
|
|
46
|
%
|
|
|
48
|
%
|
Truck Brokerage Carriers
|
|
|
47
|
%
|
|
|
45
|
%
|
|
|
47
|
%
|
|
|
45
|
%
|
Rail intermodal
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
Ocean and air cargo carriers
|
|
|
3
|
%
|
|
|
2
|
%
|
|
|
3
|
%
|
|
|
2
|
%
|
Other
|
|
|
1
|
%
|
|
|
2
|
%
|
|
|
1
|
%
|
|
|
1
|
%
|
(1)
|
Includes primarily reinsurance premium revenue generated by the insurance segment.
|
Also critical to the Companys 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 on the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
September 24,
2016
|
|
BCO Independent Contractors
|
|
|
8,939
|
|
|
|
8,889
|
|
Truck Brokerage Carriers:
|
|
|
|
|
|
|
|
|
Approved and active
(1)
|
|
|
32,925
|
|
|
|
30,860
|
|
Other approved
|
|
|
15,138
|
|
|
|
15,691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,063
|
|
|
|
46,551
|
|
|
|
|
|
|
|
|
|
|
Total available truck capacity providers
|
|
|
57,002
|
|
|
|
55,440
|
|
|
|
|
|
|
|
|
|
|
Trucks provided by BCO Independent Contractors
|
|
|
9,548
|
|
|
|
9,510
|
|
(1)
|
Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal quarter 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. 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
19
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 upon the completion of freight delivery.
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 upon the completion of freight delivery.
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 Companys 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 carriers, ocean cargo carriers and Truck Brokerage Carriers, other than those under retention
contracts, is variable in nature as the Companys contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of net revenue for these type of loads. Approximately 54% of the
Companys consolidated revenue in the thirty-nine-week period ended September 30, 2017 was generated under contracts that have a fixed gross profit margin while 46% 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 commercial trucking claims, Landstar retains liability up to $5,000,000 per occurrence. In addition, for commercial trucking claims exceeding its
$5,000,000 per occurrence self-insured retention, the Company retains liability up to an additional $700,000 in the aggregate on any claims incurred on or after May 1, 2016 through April 30, 2017, and up to an additional $500,000 in the
aggregate on any claims incurred on or after May 1, 2017 through April 30, 2018. 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. The Companys 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 Landstars cost of insurance and claims and its results of operations.
During the thirty-nine-week period ended September 30, 2017, employee compensation and benefits accounted for approximately seventy
percent of the Companys selling, general and administrative costs.
Depreciation and amortization primarily relate to depreciation
of trailing equipment and information technology hardware and software.
20
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirty Nine Weeks Ended
|
|
|
Thirteen Weeks Ended
|
|
|
|
September 30,
2017
|
|
|
September 24,
2016
|
|
|
September 30,
2017
|
|
|
September 24,
2016
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Purchased transportation
|
|
|
76.7
|
|
|
|
76.1
|
|
|
|
77.0
|
|
|
|
76.3
|
|
Commissions to agents
|
|
|
8.1
|
|
|
|
8.3
|
|
|
|
8.1
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit margin
|
|
|
15.2
|
%
|
|
|
15.6
|
%
|
|
|
14.8
|
%
|
|
|
15.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Investment income
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
0.3
|
|
Indirect costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating costs, net of gains on asset sales/dispositions
|
|
|
5.7
|
|
|
|
6.1
|
|
|
|
5.8
|
|
|
|
6.2
|
|
Insurance and claims
|
|
|
11.8
|
|
|
|
12.1
|
|
|
|
12.8
|
|
|
|
10.3
|
|
Selling, general and administrative
|
|
|
31.3
|
|
|
|
29.9
|
|
|
|
31.4
|
|
|
|
28.5
|
|
Depreciation and amortization
|
|
|
7.6
|
|
|
|
7.4
|
|
|
|
7.2
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
56.3
|
|
|
|
55.4
|
|
|
|
57.2
|
|
|
|
52.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin
|
|
|
44.1
|
%
|
|
|
44.9
|
%
|
|
|
43.3
|
%
|
|
|
48.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management believes that a discussion of indirect costs as a percentage of gross profit is useful and
meaningful to potential 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 Companys 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
Companys 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 Companys 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 Discussion and Analysis, which represents revenue less the cost of purchased transportation. The difference between the Companys use of the term gross
profit and 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 a year-over-year 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 Managements Discussion and Analysis of Financial Condition and Results of Operations considers the
Companys 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 Companys 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.
THIRTY NINE WEEKS ENDED SEPTEMBER 30, 2017 COMPARED TO THIRTY NINE WEEKS ENDED SEPTEMBER 24, 2016
Revenue for the 2017 thirty-nine-week period was $2,594,772,000, an increase of $319,967,000, or 14%, compared to the 2016 thirty-nine-week
period. Transportation revenue increased $319,678,000, or 14%. The increase in transportation revenue was attributable to an increased number of loads hauled of approximately 11% and increased revenue per load of approximately 3%. Reinsurance
premiums were $34,925,000 and $34,636,000 for the 2017 and 2016 thirty-nine-week periods, respectively.
21
Truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage
Carriers (together, the third party truck capacity providers) for the 2017 thirty-nine-week period was $2,419,993,000, representing 93% of total revenue, an increase of $313,578,000, or 15%, compared to the 2016 thirty-nine-week period.
The number of loads hauled by third party truck capacity providers increased approximately 11% in the 2017 thirty-nine-week period compared to the 2016 thirty-nine-week period, and revenue per load increased approximately 3% compared to the 2016
thirty-nine-week period. The increase in the number of loads hauled via truck compared to the 2016 thirty-nine-week period was due to a broad-based increase in demand across many customers and industries for Landstars various truck service
offerings. The increase in revenue per load on loads hauled via truck of 3% was primarily due to an 8% increase in revenue per load on loads hauled via unsided/platform equipment, inclusive of a 10% increase in heavy/specialized revenue per load,
and the impact of higher diesel fuel costs on loads hauled via Truck Brokerage Carriers. 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 $46,479,000 and $37,723,000 in the 2017 and 2016 thirty-nine-week periods, respectively. It should be noted that many
customers of truck brokerage services require a single
all-in
rate that does not separately identify fuel surcharges. 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 the 2017 thirty-nine-week period was $139,278,000, or 5% of total revenue, an increase of $5,791,000, or 4%, compared to the 2016 thirty-nine-week period. Revenue
per load on revenue generated by multimode capacity providers increased approximately 6% in the 2017 thirty-nine-week period compared to the 2016 thirty-nine-week period, while the number of loads hauled by multimode capacity providers decreased
approximately 2% over the same period. The increase in revenue per load of 6% was primarily driven by an increase in revenue per load generated by air cargo carriers, entirely attributable to the impact of air loadings provided in support of
disaster relief efforts during the 2017 thirty-nine-week period. 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. The decrease in loads hauled by multimode capacity providers was due to an 11% decrease in rail intermodal loads, entirely attributable to decreased
loadings at two specific agencies, partially offset by a 22% increase in loads hauled by air and ocean cargo carriers. The 22% increase in loads hauled by air and ocean cargo carriers was broad-based across many customers.
Purchased transportation was 76.7% and 76.1% of revenue in the 2017 and 2016 thirty-nine-week periods, respectively. The increase in purchased
transportation as a percentage of revenue was primarily due to an increased rate of purchased transportation paid to Truck Brokerage Carriers and 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 8.1% and 8.3% of revenue in the 2017 and 2016 thirty-nine-week periods, respectively. The decrease in commissions to agents as a
percentage of revenue was primarily attributable to a decreased net revenue margin on revenue generated by Truck Brokerage Carriers.
Investment income was $1,733,000 and $1,100,000 in the 2017 and 2016 thirty-nine-week periods, respectively. The increase in investment income
was primarily due to higher average rates of return on investments during the 2017 period and a higher average investment balance held by the insurance segment in the 2017 period.
Other operating costs increased $1,013,000 in the 2017 thirty-nine-week period compared to the 2016 thirty-nine-week period and represented
5.7% of gross profit in the 2017 period compared to 6.1% of gross profit in the 2016 period. The increase in other operating costs compared to the prior year was primarily due to decreased gains on sales of used trailing equipment and an increased
provision for contractor bad debt, partially offset by decreased trailing equipment maintenance costs due to a lower average age of the Company-owned trailer fleet. 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
$3,538,000 in the 2017 thirty-nine-week period compared to the 2016 thirty-nine-week period and represented 11.8% of gross profit in the 2017 period compared to 12.1% of gross profit in the 2016 period. The increase in insurance and claims expense
compared to prior year was due to increased severity of current year claims in the 2017 period, increased net unfavorable development of prior years claims in the 2017 period and increased insurance premiums on the Companys commercial
trucking liability coverage. Unfavorable development of prior years claims was $1,327,000 and $698,000 in the 2017 and 2016 thirty-nine-week periods, respectively. The decrease in insurance and claims as a percent of gross profit was caused by
the effect of increased gross profit, partially offset by the increase in insurance and claims costs.
22
Selling, general and administrative costs increased $16,968,000 in the 2017 thirty-nine-week
period compared to the 2016 thirty-nine-week period and represented 31.3% of gross profit in the 2017 period compared to 29.9% of gross profit in the 2016 period. The increase in selling, general and administrative costs compared to prior year was
attributable to a $13,634,000 provision for incentive compensation in the 2017 thirty-nine-week period compared to an $875,000 provision in the 2016 thirty-nine-week period and increased wages. The increase in selling, general and administrative
costs as a percent of gross profit was due primarily to the increase in selling, general and administrative costs, partially offset by the effect of increased gross profit.
Depreciation and amortization increased $3,852,000 in the 2017 thirty-nine-week period compared to the 2016 thirty-nine-week period and
represented 7.6% of gross profit in the 2017 period compared to 7.4% of gross profit in the 2016 period. The increase in depreciation and amortization expenses was due to an increased number of owned trailers in response to increased customer demand
for the Companys drop and hook services and a lower average age of the trailer fleet during the 2017 thirty-nine-week period as compared to the 2016 thirty-nine-week period. The increase in depreciation and amortization as a percentage of
gross profit was primarily due to the increased depreciation costs, partially offset by the effect of increased gross profit.
Interest
and debt expense in the 2017 thirty-nine-week period decreased $166,000 compared to the 2016 thirty-nine-week period.
The provisions for
income taxes for the 2017 and 2016 thirty-nine-week periods were based on estimated annual effective income tax rates of 37.8% and 38.1%, respectively, adjusted for discrete events, such as benefits resulting from disqualifying dispositions of the
Companys common stock by employees who obtained the stock through exercises of incentive stock options. The effective income tax rates for the 2017 and 2016 thirty-nine-week periods were 34.5% and 37.6%, respectively. The effective income tax
rate for the 2017 thirty-nine week period was lower than the 35% statutory federal income tax rate primarily as a result of federal domestic production activities deductions and research and development credits recognized as discrete items during
the thirteen-week period ended September 30, 2017, partially offset by the effect of state taxes and the meals and entertainment exclusion. The effective income tax rate for the 2016 thirty-nine-week period was higher than the statutory federal
income tax rate primarily as a result of state taxes and the meals and entertainment exclusion. The effective income tax rate in the 2017 thirty-nine-week period of 34.5% was less than the 37.8% estimated annual effective income tax rate primarily
as a result of federal domestic production activities deductions and research and development credits recognized during 2017 of approximately $5,200,000, excess tax benefits recognized on stock-based compensation arrangements resulting from the
Companys adoption of ASU
2016-09
during 2017 and disqualifying dispositions of the Companys common stock by employees who obtained the stock through the exercises of incentive stock options in the
2017 period. The effective income tax rate in the 2016 thirty-nine-week period of 37.6% was less than the 38.1% estimated annual effective income tax rate primarily due to certain federal income tax credits realized in the 2016 period and
disqualifying dispositions of the Companys common stock by employees who obtained the stock through exercises of incentive stock options in the 2016 period.
The net loss attributable to noncontrolling interest of $23,000 in the 2017 thirty-nine-week period represents the noncontrolling
investors 30% share of the net loss incurred by Landstar Metro and Landstar Servicios.
Net income attributable to the Company was
$112,336,000, or $2.68 per common share ($2.67 per diluted share), in the 2017 thirty-nine-week period. Net income attributable to the Company was $97,776,000, or $2.32 per common share ($2.31 per diluted share), in the 2016 thirty-nine-week period.
THIRTEEN WEEKS ENDED SEPTEMBER 30, 2017 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 24, 2016
Revenue for the 2017 thirteen-week period was $943,430,000, an increase of $155,492,000, or 20%, compared to the 2016 thirteen-week period.
Transportation revenue increased $155,295,000, or 20%. The increase in transportation revenue was attributable to an increased number of loads hauled of approximately 13% and increased revenue per load of approximately 6%. The Company recognized
approximately $23,000,000 in revenue, on approximately 16,000 loads, in the 2017 third quarter in support of local, state and federal relief efforts related to recent hurricanes that impacted Texas, the southeastern United States and Puerto Rico.
Reinsurance premiums were $11,738,000 and $11,541,000 for the 2017 and 2016 thirteen-week periods, respectively.
Truck transportation
revenue generated by third party capacity providers for the 2017 thirteen-week period was $877,618,000, representing 93% of total revenue, an increase of $144,755,000, or 20%, compared to the 2016 thirteen-week period. The number of loads hauled by
third party truck capacity providers increased approximately 13% in the 2017 thirteen-week period compared to the 2016 thirteen-week period, and revenue per load increased approximately 6% compared to the 2016 thirteen-week period. The
23
increase in the number of loads hauled via truck compared to the 2016 thirteen-week period was due to a broad-based increase in demand across many customers and industries for Landstars
various truck service offerings and the impact of approximately 16,000 loads hauled in support of disaster relief efforts. The increase in revenue per load on loads hauled via truck of 6% was due to a tighter freight environment experienced during
the 2017 thirteen-week period, which resulted in less readily available truck capacity as compared to the 2016 thirteen-week period, and the impact of higher diesel fuel costs on loads hauled via Truck Brokerage Carriers. The freight environment
during the 2017 thirteen-week period was also impacted by the hurricanes experienced in Texas and the southeastern United States, which further tightened capacity in the latter part of the quarter. Revenue per load on loads hauled via
unsided/platform equipment increased 8%, revenue per load on loads hauled via van equipment increased 5% and revenue per load on less-than-truckload loadings increased 4% as compared to the 2016 thirteen-week period. Fuel surcharges on Truck
Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $16,171,000 and $14,016,000 in the 2017 and 2016 thirteen-week periods, respectively.
Transportation revenue generated by multimode capacity providers for the thirteen-week period ended September 30, 2017 was $53,736,000,
or 6% of total revenue, an increase of $10,296,000, or 24%, compared to the 2016 thirteen-week period, primarily attributable to approximately $9,000,000 of revenue generated in support of disaster relief efforts. Revenue per load on revenue
generated by multimode capacity providers increased approximately 22% compared to the prior year period and the number of loads hauled by multimode capacity providers in the 2017 thirteen-week period increased approximately 1% compared to the 2016
thirteen-week period. The increase in revenue per load of 22% was primarily attributable to the impact of air loadings provided in support of disaster relief efforts during the 2017 thirteen-week period. The increase in loads hauled by multimode
capacity providers was primarily due to a 21% increase in loads hauled by air and ocean cargo carriers, where the demand was broad-based across many customers, partially offset by a 7% decrease in loads hauled by rail intermodal loads, entirely
attributable to decreased loadings at one specific agency.
Purchased transportation was 77.0% and 76.3% of revenue in the 2017 and 2016
thirteen-week periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily due to an increased rate of purchased transportation paid to Truck Brokerage Carriers and 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 8.1% and 8.3% of revenue in the 2017 and 2016 thirteen-week
periods, respectively. The decrease in commissions to agents as a percentage of revenue was primarily attributable to a decreased net revenue margin on revenue generated by Truck Brokerage Carriers.
Investment income was $711,000 and $357,000 in the 2017 and 2016 thirteen-week periods, respectively. The increase in investment income was
due to higher average rates of return on investments during the 2017 period and a higher average investment balance held by the insurance segment in the 2017 period.
Other operating costs increased $605,000 in the 2017 thirteen-week period compared to the 2016 thirteen-week period and represented 5.8% of
gross profit in the 2017 period compared to 6.2% of gross profit in the 2016 period. The increase in other operating costs compared to the prior year was primarily due to decreased gains on sales of used trailing equipment, partially offset by
decreased trailing equipment maintenance costs. 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 $5,439,000 in the 2017 thirteen-week period compared to the 2016 thirteen-week period and represented 12.8% of
gross profit in the 2017 period compared to 10.3% of gross profit in the 2016 period. The increase in insurance and claims expense compared to prior year was due to increased net unfavorable development of prior years claims in the 2017 period
and increased severity of current year claims, in particular, related to a single severe accident in the 2017 period. Unfavorable development of prior years claims was $1,124,000 in the 2017 thirteen-week period whereas favorable development
of prior years claims was $2,118,000 in the 2016 thirteen-week period. The increase in insurance and claims as a percent of gross profit was caused by the increase in insurance and claims costs, partially offset by the effect of increased
gross profit.
Selling, general and administrative costs increased $9,303,000 in the 2017 thirteen-week period compared to the 2016
thirteen-week period and represented 31.4% of gross profit in the 2017 period compared to 28.5% of gross profit in the 2016 period. The increase in selling, general and administrative costs compared to prior year was primarily attributable to a
$6,848,000 provision for incentive compensation in the 2017 thirteen-week period compared to a $427,000 provision in the 2016 thirteen-week period as the Company is significantly exceeding earnings targets during the 2017 period, an increased
provision for customer bad debt, increased stock-based compensation expense and increased wages. The increase in selling, general and administrative costs as a percent of gross profit was due primarily to the increase in selling, general and
administrative costs, partially offset by the effect of increased gross profit.
24
Depreciation and amortization increased $1,114,000 in the 2017 thirteen-week period compared to
the 2016 thirteen-week period and represented 7.2% of gross profit in the 2017 period compared to 7.4% of gross profit in the 2016 period. The increase in depreciation and amortization expenses was primarily due to an increased number of owned
trailers in response to increased customer demand for the Companys drop and hook services. 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 increased depreciation and amortization expense.
Interest and debt expense in the 2017 thirteen-week period decreased $291,000
compared to the 2016 thirteen-week period. The decrease in interest and debt expense was primarily attributable to increased interest income earned on deposits held at the transportation logistics segment.
The provisions for income taxes for the 2017 and 2016 thirteen-week periods were based on estimated annual effective income tax rates of 37.8%
and 38.1%, respectively, adjusted for discrete events, such as benefits resulting from disqualifying dispositions of the Companys common stock by employees who obtained the stock through exercises of incentive stock options. The effective
income tax rates for the 2017 and 2016 thirteen-week periods were 29.2% and 36.9%, respectively. The effective income tax rate for the 2017 thirteen-week period was lower than the statutory federal income tax rate primarily as a result of federal
domestic production activities deductions and research and development credits recognized as discrete items during the thirteen-week period ended September 30, 2017, partially offset by the effect of state taxes and the meals and entertainment
exclusion. The effective income tax rate for the 2016 thirteen-week period was higher than the 35% statutory federal income tax rate primarily as a result of state taxes and the meals and entertainment exclusion. The effective income tax rate in the
2017 thirteen-week period of 29.2% was less than the 37.8% estimated annual effective income tax rate primarily as a result of federal domestic production activities deductions and research and development credits recognized as discrete items during
the thirteen-week period ended September 30, 2017, excess tax benefits recognized on stock-based compensation arrangements resulting from the Companys adoption of ASU
2016-09
during 2017 and
disqualifying dispositions of the Companys common stock by employees who obtained the stock through the exercises of incentive stock options in the 2017 period. The effective income tax rate in the 2016 thirteen-week period of 36.9% was less
than the 38.1% estimated annual effective income tax rate primarily due to certain federal income tax credits realized in the 2016 period and disqualifying dispositions of the Companys common stock by employees who obtained the stock through
exercises of incentive stock options in the 2016 period.
The net loss attributable to noncontrolling interest of $23,000 in the 2017
thirteen-week period represents the noncontrolling investors 30% share of the net loss incurred by Landstar Metro and Landstar Servicios.
Net income attributable to the Company was $42,443,000, or $1.01 per common share ($1.01 per diluted share), in the 2017 thirteen-week period.
Net income attributable to the Company was $36,278,000, or $0.86 per common share ($0.86 per diluted share), in the 2016 thirteen-week period.
CAPITAL
RESOURCES AND LIQUIDITY
Working capital and the ratio of current assets to current liabilities were $430,966,000 and 2.0 to 1,
respectively, at September 30, 2017, compared with $357,096,000 and 1.9 to 1, respectively, at December 31, 2016. 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 $132,264,000 in the 2017 thirty-nine-week period compared with $171,297,000 in the 2016 thirty-nine-week period. The decrease in cash flow provided by operating activities was primarily attributable to the timing of collections of
trade receivables.
The Company declared and paid $0.28 per share, or $11,739,000 in the aggregate, in cash dividends during the
thirty-nine-week period ended September 30, 2017. The Company declared and paid $0.25 per share, or $10,572,000 in the aggregate, in cash dividends during the thirty-nine-week period ended September 24, 2016. During the thirty-nine-week
period ended September 30, 2017, the Company did not purchase any shares of its common stock. As of September 30, 2017, the Company may purchase up to 1,036,125 shares of its common stock under its authorized stock purchase program.
Long-term debt, including current maturities, was $117,402,000 at September 30, 2017, $20,902,000 lower than at December 31, 2016.
Equity was $653,973,000, or 85% of total capitalization (defined as long-term debt including current maturities plus equity), at
September 30, 2017, compared to $542,557,000, or 80% of total capitalization, at December 31, 2016. The increase in equity was primarily a result of net income, partially offset by dividends declared by the Company in the 2017
thirty-nine-week period.
25
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys operations, capital resources or liquidity. The Company is currently in compliance with all of the debt covenants under the Credit Agreement.
At September 30, 2017, the Company had no borrowings outstanding and $33,127,000 of letters of credit outstanding under the Credit
Agreement. At September 30, 2017, there was $216,873,000 available for future borrowings under the Credit Agreement. In addition, the Company has $59,999,000 in letters of credit outstanding as collateral for insurance claims that are secured
by investments totaling $66,666,000 at September 30, 2017. 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 Companys 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 Companys capital requirements. During the 2017 thirty-nine-week period, the Company purchased $8,800,000 of operating property. Included in the $8,800,000 of purchases of
operating property during the 2017 thirty-nine-week period is $4,255,000 related to a freight staging and transload facility in Laredo, Texas for which the Company accrued a corresponding liability in accounts payable as of December 31, 2016.
Landstar also acquired $945,000 of operating property relating to the completion of the Laredo property for which the Company accrued a corresponding liability in accounts payable as of September 30, 2017. Landstar anticipates acquiring either
by purchase or lease financing during the remainder of fiscal year 2017 approximately $36,000,000 in operating property, consisting primarily of new trailing equipment to replace older trailing equipment and information technology equipment. On
September 20, 2017 the Company completed the Landstar Metro acquisition, as described in footnote 1 to our unaudited consolidated financial statements. Cash consideration paid in the quarter for the acquisition was approximately $8,199,000. In
addition, the Company assumed approximately $2,200,000 in liabilities consisting of additional contingent purchase price and associated indirect taxes.
As it relates to the
non-controlling
interests of Landstar Metro and Landstar Servicios, the Company
has the option to purchase, and the minority equityholders have the option to sell, during the period commencing on the third anniversary of September 20, 2017, the closing date of the subscription by the minority equityholders (the
Closing Date), and at any time after the fourth anniversary of the Closing Date, at fair value all but not less than all of the noncontrolling interests in Landstar Metro and Landstar Servicios. The noncontrolling interests are also
subject to customary restrictions on transfer, including a right of first refusal in favor of the Company.
Management believes that cash
flow from operations combined with the Companys borrowing capacity under the Credit Agreement will be adequate to meet Landstars debt service requirements, fund continued growth, both internal and through acquisitions, pay dividends,
complete the authorized share purchase program and meet working capital needs.
26
LEGAL MATTERS
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
The allowance for doubtful accounts for both trade and other receivables represents managements estimate of the amount of outstanding
receivables that will not be collected. Historically, managements estimates for uncollectible receivables have been materially correct. Although management believes the amount of the allowance for both trade and other receivables at
September 30, 2017 is appropriate, a prolonged period of low or no economic growth may adversely affect the collection of these receivables. In addition, liquidity concerns and/or unanticipated bankruptcy proceedings at any of the
Companys larger customers in which the Company is carrying a significant receivable could result in an increase in the provision for uncollectible receivables and have a significant impact on the Companys results of operations in a given
quarter or year. However, it is not expected that an uncollectible accounts receivable resulting from an individual customer would have a significant impact on the Companys financial condition. Conversely, a more robust economic environment or
the recovery of a previously provided for uncollectible receivable from an individual customer may result in the realization of some portion of the estimated uncollectible receivables.
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 the 2017 and 2016 thirty-nine-week periods, insurance and claims costs included $1,327,000 and $698,000 of net unfavorable adjustments to prior years claims estimates, respectively. It is reasonably likely that the ultimate outcome of
settling all outstanding claims will be more or less than the estimated claims reserve at September 30, 2017.
The Company utilizes
certain income tax planning strategies to reduce its overall cost of income taxes. If the Company were to be subject to an audit, it is possible that certain strategies might be disallowed resulting in an increased liability for income taxes.
Certain of these tax planning strategies result in a level of uncertainty as to whether the related tax positions taken by the Company would result in a recognizable benefit. The Company has provided for its estimated exposure attributable to such
tax positions due to the corresponding level of uncertainty with respect to the amount of income tax benefit that may ultimately be realized. Management believes that the provision for liabilities resulting from the uncertainty in certain income tax
positions is appropriate. To date, the Company has not experienced an examination by governmental revenue authorities that would lead management to believe that the Companys past provisions for exposures related to the uncertainty of such
income tax positions are not appropriate.
Significant variances from managements estimates for the amount of uncollectible
receivables, the ultimate resolution of self-insured claims and the provision for uncertainty in income tax positions could each be expected to positively or negatively affect Landstars 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 historic trends might have an adverse effect on the Companys results of
operations in the future.
SEASONALITY
Landstars operations are subject to seasonal trends common to the trucking industry. Results of operations for the quarter ending in
March are typically lower than for the quarters ending June, September and December.
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