LANDSTAR SYSTEM INC - Quarter Report: 2018 September (Form 10-Q)

 

 

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 29, 2018

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission File Number: 0-21238

 

 

 

LANDSTAR SYSTEM, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		06-1313069
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

13410 Sutton Park Drive South, Jacksonville, Florida

(Address of principal executive offices)

32224

(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)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):

Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the 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 22, 2018 was 41,114,477.

 

 

 

Index

 

PART I – Financial Information
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets as of September  29, 2018 and December 30, 2017			Page 4
Consolidated Statements of Income for the Thirty Nine and Thirteen Weeks Ended September 29, 2018 and September 30, 2017			Page 5
Consolidated Statements of Comprehensive Income for the Thirty Nine and Thirteen Weeks Ended September 29, 2018 and September 30, 2017			Page 6
Consolidated Statements of Cash Flows for the Thirty Nine Weeks Ended September 29, 2018 and September 30, 2017			Page 7
Consolidated Statement of Changes in Equity for the Thirty Nine Weeks Ended September 29, 2018			Page 8
Notes to Consolidated Financial Statements			Page 9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			Page 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk			Page 29
Item 4. Controls and Procedures			Page 30
PART II – Other Information
Item 1. Legal Proceedings			Page 30
Item 1A. Risk Factors			Page 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			Page 31
Item 6. Exhibits			Page 31
Signatures			Page 33
EX – 31.1 Section 302 CEO Certification
EX – 31.2 Section 302 CFO Certification
EX – 32.1 Section 906 CEO Certification
EX – 32.2 Section 906 CFO Certification

 

2

PART I - FINANCIAL INFORMATION

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 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 29, 2018 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 29, 2018.

These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2017 Annual Report on Form 10-K.

 

3

LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

		September 29, 2018				December 30, 2017
ASSETS
Current Assets
Cash and cash equivalents		$	213,974			$	242,416
Short-term investments			40,203				48,928
Trade accounts receivable, less allowance of $6,173 and $6,131			702,183				631,164
Other receivables, including advances to independent contractors, less allowance of $6,188 and $6,012			18,586				24,301
Other current assets			24,191				14,394
Total current assets			999,137				961,203
Operating property, less accumulated depreciation and amortization of $241,321 and $218,700			268,011				276,011
Goodwill			38,560				39,065
Other assets			85,004				76,181
Total assets		$	1,390,712			$	1,352,460
LIABILITIES AND EQUITY
Current Liabilities
Cash overdraft		$	39,759			$	42,242
Accounts payable			313,728				285,132
Current maturities of long-term debt			40,960				42,051
Insurance claims			43,268				38,919
Dividends payable			—				62,985
Accrued compensation			23,908				30,103
Other current liabilities			53,553				47,211
Total current liabilities			515,176				548,643
Long-term debt, excluding current maturities			72,887				83,062
Insurance claims			30,775				30,141
Deferred income taxes and other noncurrent liabilities			45,664				36,737
Equity
Landstar System, Inc. and subsidiary shareholders’ equity
Common stock, $0.01 par value, authorized 160,000,000 shares, issued 67,869,378 and 67,740,380 shares			679				677
Additional paid-in capital			221,563				209,599
Retained earnings			1,779,680				1,611,158
Cost of 26,755,001 and 25,749,493 shares of common stock in treasury			(1,273,512	)			(1,167,600	)
Accumulated other comprehensive loss			(4,569	)			(3,162	)
Total Landstar System, Inc. and subsidiary shareholders’ equity			723,841				650,672
Noncontrolling interest			2,369				3,205
Total equity			726,210				653,877
Total liabilities and equity		$	1,390,712			$	1,352,460

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 29, 2018				September 30, 2017				September 29, 2018				September 30, 2017
Revenue		$	3,432,793			$	2,594,772			$	1,202,081			$	943,430
Investment income			2,754				1,733				1,002				711
Costs and expenses:
Purchased transportation			2,658,710				1,989,938				931,473				726,827
Commissions to agents			275,828				210,678				99,304				76,598
Other operating costs, net of gains on asset sales/dispositions			24,176				22,497				8,966				8,097
Insurance and claims			57,718				46,333				18,819				17,927
Selling, general and administrative			140,948				123,179				46,699				43,995
Depreciation and amortization			32,520				29,961				10,754				10,130
Total costs and expenses			3,189,900				2,422,586				1,116,015				883,574
Operating income			245,647				173,919				87,068				60,567
Interest and debt expense			2,455				2,559				816				657
Income before income taxes			243,192				171,360				86,252				59,910
Income taxes			56,279				59,047				19,304				17,490
Net income			186,913				112,313				66,948				42,420
Less: Net loss attributable to noncontrolling interest			(112	)			(23	)			(37	)			(23	)
Net income attributable to Landstar System, Inc. and subsidiary		$	187,025			$	112,336			$	66,985			$	42,443
Earnings per common share attributable to Landstar System, Inc. and subsidiary		$	4.50			$	2.68			$	1.63			$	1.01
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary		$	4.50			$	2.67			$	1.63			$	1.01
Average number of shares outstanding:
Earnings per common share			41,530,000				41,924,000				41,101,000				41,957,000
Diluted earnings per share			41,576,000				42,013,000				41,137,000				42,028,000
Dividends per common share		$	0.465			$	0.280			$	0.165			$	0.100

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 29, 2018				September 30, 2017				September 29, 2018				September 30, 2017
Net income attributable to Landstar System, Inc. and subsidiary		$	187,025			$	112,336			$	66,985			$	42,443
Other comprehensive (loss) income:
Unrealized holding (losses) gains on available-for-sale investments, net of tax (benefit) expense of ($231), $136, $2 and $47			(876	)			251				7				86
Foreign currency translation (losses) gains			(531	)			1,130				708				545
Other comprehensive (loss) income			(1,407	)			1,381				715				631
Comprehensive income attributable to Landstar System, Inc. and subsidiary		$	185,618			$	113,717			$	67,700			$	43,074

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 29, 2018				September 30, 2017
OPERATING ACTIVITIES
Net income		$	186,913			$	112,313
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of operating property and intangible assets			32,520				29,961
Non-cash interest charges			190				189
Provisions for losses on trade and other accounts receivable			5,360				5,643
Gains on sales/disposals of operating property			(1,025	)			(900	)
Deferred income taxes, net			7,459				(708	)
Stock-based compensation			13,003				3,660
Changes in operating assets and liabilities:
Increase in trade and other accounts receivable			(60,785	)			(89,504	)
Increase in other assets			(9,779	)			(8,671	)
Increase in accounts payable			22,121				53,290
Increase in other liabilities			3,245				12,980
Increase in insurance claims			4,983				14,011
NET CASH PROVIDED BY OPERATING ACTIVITIES			204,205				132,264
INVESTING ACTIVITIES
Sales and maturities of investments			34,259				42,917
Purchases of investments			(36,296	)			(44,423	)
Purchases of operating property			(7,325	)			(8,800	)
Proceeds from sales of operating property			3,542				3,594
Consideration paid for acquisitions			—				(8,199	)
NET CASH USED BY INVESTING ACTIVITIES			(5,820	)			(14,911	)
FINANCING ACTIVITIES
Decrease in cash overdraft			(2,483	)			(2,398	)
Dividends paid			(82,261	)			(11,739	)
Proceeds from exercises of stock options			1,397				2,531
Taxes paid in lieu of shares issued related to stock-based compensation plans			(3,936	)			(371	)
Purchases of common stock			(105,488	)			—
Principal payments on capital lease obligations			(32,663	)			(35,662	)
Payment of contingent consideration			(985	)			—
NET CASH USED BY FINANCING ACTIVITIES			(226,419	)			(47,639	)
Effect of exchange rate changes on cash and cash equivalents			(408	)			1,130
(Decrease) increase in cash and cash equivalents			(28,442	)			70,844
Cash and cash equivalents at beginning of period			242,416				178,897
Cash and cash equivalents at end of period		$	213,974			$	249,741

See accompanying notes to consolidated financial statements.

 

7

LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Thirty Nine Weeks Ended September 29, 2018

(Dollars in thousands)

(Unaudited)

 

		Landstar System, Inc. and Subsidiary Shareholders
		Common Stock								Additional Paid-In				Retained				Treasury Stock at Cost								Accumulated Other Comprehensive				Non- controlling
		Shares				Amount				Capital				Earnings				Shares				Amount				Loss				Interests				Total
Balance December 30, 2017			67,740,380			$	677			$	209,599			$	1,611,158				25,749,493			$	(1,167,600	)		$	(3,162	)		$	3,205			$	653,877
Adoption of accounting standards (Note 12)															773																				773
Net income (loss)															187,025																(112	)			186,913
Dividends ($0.465 per share)															(19,276	)																			(19,276	)
Purchases of common stock																			1,000,000				(105,488	)											(105,488	)
Transaction with noncontrolling interests											1,078																				(1,078	)			—
Issuance of stock related to stock-based compensation plans			128,998				2				(2,117	)							5,508				(424	)											(2,539	)
Stock-based compensation											13,003																								13,003
Other comprehensive (loss) income																											(1,407	)			354				(1,053	)
Balance September 29, 2018			67,869,378			$	679			$	221,563			$	1,779,680				26,755,001			$	(1,273,512	)		$	(4,569	)		$	2,369			$	726,210

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.

Landstar owns, through various subsidiaries, a controlling interest in 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. Given Landstar’s controlling interest in each of Landstar Metro and Landstar Servicios, the accounts of Landstar Metro and Landstar Servicios have been consolidated herein and a noncontrolling interest has been recorded for the noncontrolling investors’ interests in the net assets and operations of Landstar Metro and Landstar Servicios.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09—Revenue from Contracts with Customers (“ASU 2014-09”). The new comprehensive revenue recognition standard supersedes all existing revenue recognition guidance under U.S. GAAP. The Company adopted ASU 2014-09 on December 31, 2017 under the modified retrospective transition method resulting in a $773,000 cumulative adjustment to retained earnings. The Company has updated our revenue recognition policy included in our Annual Report on Form 10-K for the year ended December 30, 2017, as set forth below in footnote 1 to our unaudited financial statements.

 

(1)	Significant Accounting Policies

Revenue Recognition

The nature of the Company’s freight transportation services and its performance obligations to customers, regardless of the mode of transportation used to perform such services, relate to the safe and on-time pick-up and delivery of a customer’s freight on a shipment-by-shipment basis. Landstar customers are typically invoiced on a shipment-by-shipment basis at a pre-defined rate, payable thirty to sixty (30-60) days after the customer’s receipt of such invoice. Payment terms to customers do not contain a significant financing component and the amount owed by the customer does not contain variable terms, embedded or otherwise. We have determined that revenue recognition over the transit period provides a faithful depiction of the transfer of services to the customer as our obligation for which we are primarily responsible for fulfilling is performed over the transit period. Accordingly, transportation revenue billed to a customer for the physical transportation of freight and related direct freight expenses are recognized on a gross basis over the transit period as the performance obligation is satisfied. The Company determines the transit period for a given shipment based upon the pick-up date and the delivery date, which may be estimated if delivery has not occurred as of the reporting date. Determining the transit period and how much of it has been completed as of a given reporting date may therefore require management to make judgments that affect the timing of revenue recognized. With respect to shipments with a pick-up date in one reporting period and a delivery date in another, the Company recognizes such transportation revenue based on relative transit time in each reporting period. A days in transit output method is used to measure the progress of the performance of the Company’s freight transportation services as of the reporting date and a portion of the total revenue that will be billed to the customer once a load is delivered is recognized in each reporting period based on the percentage of total transit time that has been completed at the end of the applicable reporting period.

 

(2)	Acquired Business and Noncontrolling Interests

During 2017, the Company incorporated each of Landstar Metro and Landstar Servicios. On September 20, 2017, Landstar Metro acquired substantially all of the assets of the asset-light transportation logistics business of Fletes Avella, S.A. de C.V., a Mexican transportation logistics company (the “Mexican Asset Acquisition”). At December 30, 2017, there was approximately $1,900,000 in liabilities outstanding consisting of additional contingent purchase price and associated indirect taxes. In connection with the Mexican Asset Acquisition, individuals affiliated with the seller subscribed in the aggregate for equity interests in Landstar Metro and Landstar Servicios and, as of September 29, 2018, own in the aggregate approximately 21% of the equity interests of each of them. The Mexican Asset Acquisition was accounted for as a business combination in accordance with Accounting Standards Codification 805, Business

 

9

Combinations (“ASC 805”). The resulting goodwill arising from the acquisition was approximately $7,900,000 as of September 29, 2018. A significant portion of this goodwill is expected to be deductible by the Company for U.S. income tax purposes, and following a purchase of the noncontrolling interests by the Company, up to 100% of this goodwill would be expected to be deductible by the Company. Pro forma financial information for prior periods is not presented as the Company does not believe the Mexican Asset Acquisition to be material to our consolidated results. The results of operations from Landstar Metro and Landstar Servicios are presented as part of the Company’s transportations logistics segment.

As it relates to the noncontrolling 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.    

 

(3)	Share-based Payment Arrangements

As of September 29, 2018, the Company had two employee equity incentive plans, the 2002 employee stock option and stock incentive plan (the “ESOSIP”) and the 2011 equity incentive plan (the “2011 EIP”). No further grants can be made under the ESOSIP. 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 ESOSIP, 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 29, 2018				September 30, 2017				September 29, 2018				September 30, 2017
Total cost of the Plans during the period		$	13,003			$	3,660			$	4,901			$	1,423
Amount of related income tax benefit recognized during the period			(5,305	)			(2,492	)			(1,837	)			(678	)
Net cost of the Plans during the period		$	7,698			$	1,168			$	3,064			$	745

Included in income tax benefits recognized in the thirty-nine-week periods ended September 29, 2018 and September 30, 2017 were income tax benefits of $80,000 and $310,000, respectively, recognized on disqualifying dispositions of the Company’s common stock by employees who obtained shares of common stock through exercises of incentive stock options. Also included in income tax benefits recognized in the thirty-nine-week periods ended September 29, 2018 and September 30, 2017 were excess tax benefits from stock-based awards of $2,046,000 and $868,000, respectively.

As of September 29, 2018, there were 72,742 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 4,439,761 shares of the Company’s common stock reserved for issuance in the aggregate under the ESOSIP and 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 RSUs				Weighted Average Grant Date Fair Value
Outstanding at December 30, 2017			387,372			$	55.75
Granted			65,494			$	96.08
Vested			(67,971	)		$	53.92
Forfeited			(92,880	)		$	52.36
Outstanding at September 29, 2018			292,015			$	66.30

 

10

During the thirty-nine-week period ended September 29, 2018, the Company granted RSUs with a performance condition and RSUs with a market condition, as further described below. Outstanding RSUs at both December 30, 2017 and September 29, 2018 include RSUs with a performance condition and RSUs with a market condition, as further described in the Company’s 2017 Annual Report on Form 10-K.

RSUs with a performance condition granted on February 2, 2018 may vest on January 31 of 2021, 2022 and 2023 based on growth in operating income and pre-tax income per share from continuing operations attributable to Landstar System, Inc. and subsidiary as compared to the results from the 2017 fiscal year.

On April 24, 2018, the Company granted 9,324 RSUs that vest based on a market condition. These RSUs may vest on June 30 of 2022, 2023 and 2024 based on the Company’s total shareholder return (“TSR”) compound annual growth rate over the vesting periods, adjusted to reflect dividends (if any) paid during such periods and capital adjustments as may be necessary. The maximum number of common shares available for issuance under the April 24, 2018 grant equals 150% of the number of RSUs granted. The fair value of this RSU award was determined at the time of grant based on the expected achievement of the market condition at the end of each vesting period. With respect to these RSU awards, the Company reports compensation expense ratably over the life of the award based on an estimated number of units that will vest over the life of the award, multiplied by the fair value of the RSU. Previously recognized compensation cost would be reversed only if the employee terminated employment prior to completing the requisite service period.

The Company recognized approximately $11,303,000 and $2,254,000 of share-based compensation expense related to RSU awards in the thirty-nine-week periods ended September 29, 2018 and September 30, 2017, respectively. As of September 29, 2018, there was a maximum of $23.1 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 3.3 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.

Stock Options

The following table summarizes information regarding the Company’s outstanding stock options under the Plans:

 

		Number of Options				Weighted Average Exercise Price per Share				Weighted Average Remaining Contractual Term (years)				Aggregate Intrinsic Value (000s)
Options outstanding at December 30, 2017			189,040			$	49.34
Exercised			(97,676	)		$	48.38
Options outstanding at September 29, 2018			91,364			$	50.36				3.3			$	6,546
Options exercisable at September 29, 2018			90,364			$	50.27				3.3			$	6,482

The total intrinsic value of stock options exercised during the thirty-nine-week periods ended September 29, 2018 and September 30, 2017 was $6,584,000 and $5,303,000, respectively.

As of September 29, 2018, there was no unrecognized compensation cost related to non-vested stock options granted under the Plans.

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 30, 2017			54,755			$	78.02
Granted			22,803			$	113.35
Vested			(19,814	)		$	75.11
Forfeited			(1,757	)		$	71.12
Non-vested at September 29, 2018			55,987			$	93.66

 

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The fair value of each share of non-vested restricted stock issued and Deferred Stock Unit granted under the Plans is based on the fair value of a share of the Company’s common stock on the date of grant. Shares of 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 100% on the first anniversary of the date of the grant. For restricted stock awards granted under the 2013 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 separation from service from the Board of Directors, or, if earlier, upon a change in control event of the Company. Deferred Stock Units become vested 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 will 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.

As of September 29, 2018, there was $3,756,000 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 2.3 years.

 

(4)	Income Taxes

The Tax Cuts and Jobs Act (the “Tax Reform Act”) permanently reduced the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. The provisions for income taxes for the 2018 and 2017 thirty-nine-week periods were based on estimated annual effective income tax rates of 24.5% and 37.8%, respectively, adjusted for discrete events, such as benefits resulting from stock-based awards. The applicable effective income tax rates for the 2018 and 2017 thirty-nine-week periods were 23.1% and 34.5%, respectively. The effective income tax rate for the 2018 thirty-nine week period was higher than the statutory federal income tax rate primarily as a result of state taxes, the elimination of the performance-based compensation exception under Section 162(m) included in the Tax Reform Act and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock based awards and favorable adjustments recognized during the 2018 period relating to federal domestic production activities deductions and research and development credits during the thirteen-week period ended September 29, 2018. The effective income tax rate for the 2017 thirty-nine 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.

 

(5)	Earnings Per Share

Earnings per common share attributable to Landstar System, Inc. and subsidiary 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 attributable to Landstar System, Inc. and subsidiary 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.

The following table provides a reconciliation of the average number of common shares outstanding used to calculate earnings per common share attributable to Landstar System, Inc. and subsidiary to the average number of common shares and common share equivalents outstanding used to calculate diluted earnings per share attributable to Landstar System, Inc. and subsidiary (in thousands):

 

		Thirty Nine Weeks Ended								Thirteen Weeks Ended
		September 29, 2018				September 30, 2017				September 29, 2018				September 30, 2017
Average number of common shares outstanding			41,530				41,924				41,101				41,957
Incremental shares from assumed exercises of stock options			46				89				36				71
Average number of common shares and common share equivalents outstanding			41,576				42,013				41,137				42,028

For both of the thirty-nine-week periods ended September 29, 2018 and September 30, 2017, no options outstanding to purchase shares of common stock were antidilutive. Outstanding RSUs were excluded from the calculation of diluted earnings per share attributable to Landstar System, Inc. and subsidiary for all periods because the performance metric requirements or market condition for vesting had not been satisfied.

 

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(6)	Additional Cash Flow Information

During the 2018 thirty-nine-week period, Landstar paid income taxes and interest of $56,083,000 and $2,737,000, respectively. During the 2017 thirty-nine-week period, Landstar paid income taxes and interest of $65,688,000 and $2,981,000, respectively. Landstar acquired operating property by entering into capital leases in the amounts of $21,397,000 and $14,760,000 in the 2018 or 2017 thirty-nine-week periods. During the 2018 thirty-nine-week period, Landstar paid $2,162,000 relating to the completion of its freight staging and transload facility in Laredo, Texas, for which the Company accrued a corresponding liability included in accounts payable at December 30, 2017. Capital expenditure purchases are recorded as cash outflows from investing activities in the consolidated statement of cash flows in the period in which they are paid.

 

(7)	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 29, 2018 and September 30, 2017 (in thousands):

 

		Thirty Nine Weeks Ended
		September 29, 2018												September 30, 2017
		Transportation Logistics				Insurance				Total				Transportation Logistics				Insurance				Total
External revenue		$	3,394,298			$	38,495			$	3,432,793			$	2,559,847			$	34,925			$	2,594,772
Internal revenue							30,413				30,413								29,773				29,773
Investment income							2,754				2,754								1,733				1,733
Operating income			227,176				18,471				245,647				148,693				25,226				173,919
Expenditures on long-lived assets			7,325								7,325				8,800								8,800
Goodwill			38,560								38,560				39,914								39,914
		Thirteen Weeks Ended
		September 29, 2018												September 30, 2017
		Transportation Logistics				Insurance				Total				Transportation Logistics				Insurance				Total
External revenue		$	1,188,737			$	13,344			$	1,202,081			$	931,692			$	11,738			$	943,430
Internal revenue							7,496				7,496								7,335				7,335
Investment income							1,002				1,002								711				711
Operating income			80,878				6,190				87,068				54,181				6,386				60,567
Expenditures on long-lived assets			3,204								3,204				2,172								2,172

In the thirty-nine-week and thirteen-week periods ended September 29, 2018 and September 30, 2017, no single customer accounted for more than 10% of the Company’s consolidated revenue.

 

(8)	Other Comprehensive Income

The following table presents the components of and changes in accumulated other comprehensive income attributable to Landstar System, Inc. and subsidiary, net of related income taxes, as of and for the thirty-nine-week period ended September 29, 2018 (in thousands):

 

		Unrealized Holding Losses  on Available-for-Sale Securities				Foreign Currency Translation				Total
Balance as of December 30, 2017		$	(144	)		$	(3,018	)		$	(3,162	)
Other comprehensive loss			(876	)			(531	)			(1,407	)
Balance as of September 29, 2018		$	(1,020	)		$	(3,549	)		$	(4,569	)

 

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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 29, 2018.

 

(9)	Investments

Investments include primarily investment-grade corporate bonds having maturities of up to five years (the “bond portfolio”) and money market investments. Investments in the bond portfolio are reported as available-for-sale 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 available-for-sale investments to determine whether such losses are other-than-temporary. 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 other-than-temporary, are to be included as a charge in the statement of income, while unrealized losses considered to be temporary are to be included as a component of 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 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 money market investments and Level 2 inputs related to investment-grade corporate bonds, asset-backed securities and direct obligations of government agencies. Unrealized losses, net of unrealized gains, on the investments in the bond portfolio were $1,299,000 and $223,000 at September 29, 2018 and December 30, 2017, respectively.

The amortized cost and fair values of available-for-sale investments are as follows at September 29, 2018 and December 30, 2017 (in thousands):    

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
September 29, 2018
Money market investments		$	12,430			$	—			$	—			$	12,430
Asset-backed securities			728				—				5				723
Corporate bonds and direct obligations of government agencies			99,833				15				1,309				98,539
Total		$	112,991			$	15			$	1,314			$	111,692
December 30, 2017
Money market investments		$	27,895			$	—			$	—			$	27,895
Asset-backed securities			2,805				—				5				2,800
Corporate bonds and direct obligations of government agencies			80,442				117				335				80,224
Total		$	111,142			$	117			$	340			$	110,919

 

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For those available-for-sale investments with unrealized losses at September 29, 2018 and December 30, 2017, the following table summarizes the duration of the unrealized loss (in thousands):

 

		Less than 12 months								12 months or longer								Total
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
September 29, 2018
Asset-backed securities		$	300			$	2			$	423			$	3			$	723			$	5
Corporate bonds and direct obligations of government agencies			73,890				831				20,368				478				94,258				1,309
Total		$	74,190			$	833			$	20,791			$	481			$	94,981			$	1,314
December 30, 2017
Asset-backed securities		$	1,864			$	4			$	632			$	1			$	2,496			$	5
Corporate bonds and direct obligations of government agencies			41,322				220				14,016				115				55,338				335
Total		$	43,186			$	224			$	14,648			$	116			$	57,834			$	340

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 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, the Company does not consider the unrealized losses on these securities to be other-than-temporary at September 29, 2018.

 

(10)	Commitments and Contingencies

Short-term investments include $40,203,000 in current maturities of investments held by the Company’s insurance segment at September 29, 2018. The non-current portion of the bond portfolio of $71,489,000 is included in other assets. The short-term investments, together with $29,194,000 of non-current investments, provide collateral for the $62,457,000 of letters of credit issued to guarantee payment of insurance claims. As of September 29, 2018, Landstar also had $34,370,000 of additional letters of credit outstanding under the Company’s Credit Agreement.

During 2017, the Company incorporated each of Landstar Metro and Landstar Servicios. On September 20, 2017, Landstar Metro acquired substantially all of the assets of the asset-light transportation logistics business of Fletes Avella, S.A. de C.V., a Mexican transportation logistics company. In connection with the Mexican Asset Acquisition, individuals affiliated with the seller subscribed in the aggregate for equity interests in Landstar Metro and Landstar Servicios and, as of September 29, 2018, own in the aggregate approximately 21% of the equity interests of each of them. As it relates to the noncontrolling 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.

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.

 

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(11)	Change in Accounting Estimate for Self-Insured Claims

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.

The following table summarizes the effect of the increase in the cost of insurance claims resulting from unfavorable development of prior year self-insured claims estimates on operating income, net income attributable to Landstar System, Inc. and subsidiary and earnings per share attributable to Landstar System, Inc. and subsidiary amounts in the consolidated statements of income for the thirty-nine-week and thirteen-week periods ended September 29, 2018 and September 30, 2017 (in thousands, except per share amounts):

 

		Thirty Nine Weeks Ended								Thirteen Weeks Ended
		September 29, 2018				September 30, 2017				September 29, 2018				September 30, 2017
Operating income		$	11,596			$	1,327			$	3,352			$	1,124
Net income attributable to Landstar System, Inc. and subsidiary			8,755				825				2,531				699
Earnings per share attributable to Landstar System, Inc. and subsidiary		$	0.21			$	0.02			$	0.06			$	0.02
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary		$	0.21			$	0.02			$	0.06			$	0.02

The unfavorable development of prior years’ claims in the thirty-nine-week period ended September 29, 2018 was primarily attributable to five claims.

 

(12)	Recent Accounting Pronouncements

Adoption of New Accounting Standards

In May 2014, the FASB issued ASU 2014-09. ASU 2014-09 is a comprehensive revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. The standard requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 became effective for us December 31, 2017 and permits either a full retrospective or a modified retrospective transition approach. The Company adopted ASU 2014-09 for our transportation services using the modified retrospective method. The adoption of this standard has changed the timing of revenue recognition for most of our transportation business from at delivery to over the transit period as the performance obligation is completed. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company had no material contract assets, contract liabilities or deferred contract costs recorded on the consolidated balance sheets at December 30, 2017 or September 29, 2018. During the thirty nine weeks ended September 29, 2018, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 44%, 49% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 2% of the Company’s consolidated revenue in the thirty-nine-week period ended September 29, 2018. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the thirty-nine-week period ended September 29, 2018 was $2,086,523,000 hauled via van equipment, $1,039,784,000 hauled via unsided/platform equipment and $76,448,000 of less-than-truckload. As of September 29, 2018, the Company had no material remaining performance obligations. The Company does not expect the adoption of the new standard to have a material impact on its net income in future periods.

 

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The cumulative effect of the changes made to our consolidated December 31, 2017 balance sheet for the adoption of ASU 2014-09 was as follows (in thousands):

 

		Balance at December 30, 2017				Adjustments Due to ASU 2014-09				Balance at December 31, 2017
Balance Sheet
Assets
Trade accounts receivable, net		$	631,164			$	9,879			$	641,043
Other current assets			14,394				(469	)			13,925
Liabilities
Accounts payable			285,132				8,637				293,769
Equity
Retained earnings			1,611,158				773				1,611,931

In accordance with the new revenue standard requirements, the impact of adoption on our consolidated income statement and balance sheet was as follows (in thousands):

 

		For the Thirty Nine Weeks ended September 29, 2018
		As Reported				Balances Without Adoption of ASU 2014-09				Effect of Change Higher/(Lower)
Income statement
Revenues
Transportation		$	3,394,298			$	3,390,242			$	4,056
Insurance			38,495				38,495				—
Costs and expenses
Purchased transportation			2,658,710				2,655,491				3,219
Commissions to agents			275,828				275,538				290
Income taxes			56,279				56,145				134
Net income attributable to Landstar System, Inc. and subsidiary			187,025				186,612				413

 

		September 29, 2018
		As Reported				Balances Without Adoption of ASU 2014-09				Effect of Change Higher/(Lower)
Balance Sheet
Assets
Trade accounts receivable, net		$	702,183			$	688,248			$	13,935
Other current assets			24,191				24,794				(603	)
Liabilities
Accounts payable			313,728				301,582				12,146
Equity
Retained earnings			1,779,680				1,778,494				1,186

 

17

Accounting Standards Issued But Not Yet Adopted

In February 2016, the FASB issued Accounting Standards Update 2016-02 – Leases (“ASU 2016-02”). ASU 2016-02 requires a company to recognize a right-of-use asset and lease liability for the obligation to make lease payments measured at the present value of the lease payments for all leases with terms greater than twelve months. Companies are required to use a modified retrospective transition approach to recognize leases at the beginning of the earliest period presented. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, and interim periods therein, and early adoption is permitted. ASU 2016-02 is not expected to have a material impact on the Company’s financial statements.

In June 2016, the FASB issued Accounting Standards Update 2016-13– Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires measurement and recognition of expected versus incurred credit losses for financial assets held. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, and interim periods therein. The Company is currently evaluating the impact of ASU 2016-13 on its financial statements.

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 30, 2017 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2017 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: 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 2017 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. (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 customer’s transportation needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada and Mexico, and between the United States and Canada, Mexico and other countries around the world. The Company’s services emphasize safety, information coordination and customer service and are delivered through a network of 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 Company’s business is such that a significant portion of its operating costs varies directly with revenue.

 

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Landstar markets its integrated transportation management solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport customers’ freight. Landstar’s independent commission sales agents enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under non-exclusive contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers and railroads. Through this network of agents and capacity providers linked together by Landstar’s information technology systems, Landstar operates an integrated transportation management solutions business primarily throughout North America with revenue of $3.6 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.

The transportation logistics segment provides a wide range of integrated transportation management solutions. Transportation services offered by the Company include truckload and less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico cross-border, intra-Mexico, intra-Canada, project cargo and customs brokerage. Examples of the industries serviced by the transportation logistics segment include automotive products, building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics and military equipment. In addition, the transportation logistics segment provides transportation services to other transportation companies, including third party logistics and less-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Billings for freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight and are referred to as transportation revenue. During the thirty nine weeks ended September 29, 2018, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 44%, 49% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 2% of the Company’s consolidated revenue in the thirty-nine-week period ended September 29, 2018.

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 for equity interests in Landstar Metro and Landstar Servicios, and as of September 29, 2018, own in the aggregate approximately 21% of the equity interests of each of them. Landstar Metro provides freight and logistics services within the country of Mexico and in conjunction with Landstar’s U.S./Mexico cross-border services. Landstar Servicios provides various administrative, financial, operational, safety and compliance services to Landstar Metro. The results of operations from Landstar Metro and Landstar Servicios are presented as part of the Company’s transportation logistics segment. Revenue from Landstar Metro represented less than 1% of the Company’s transportation logistics segment revenue in the thirty-nine-week period ended September 29, 2018.

The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore insurance subsidiary (“Signature”), and Risk Management Claim Services, Inc. The insurance segment provides risk and claims management services to certain of Landstar’s operating subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to certain of Landstar’s operating subsidiaries. Revenue at the insurance segment represents reinsurance premiums from third party insurance companies that provide insurance programs to BCO Independent Contractors where all or a portion of the risk is ultimately borne by Signature. Revenue at the insurance segment represented approximately 1% of the Company’s consolidated revenue for the thirty-nine-week period ended September 29, 2018.

Changes in Financial Condition and Results of Operations

Management believes the Company’s success principally depends on its ability to generate freight through its network of independent commission sales agents and to safely and efficiently deliver that freight utilizing third party capacity providers. Management believes the most significant factors to the Company’s success include increasing revenue, sourcing capacity and controlling costs, including insurance and claims.

While customer demand, which is subject to overall economic conditions, ultimately drives increases or decreases in revenue, the Company primarily relies on its independent commission sales agents to establish customer relationships and generate revenue opportunities. Management’s emphasis with respect to revenue growth is on revenue generated by independent commission sales agents who on an annual basis generate $1 million or more of Landstar revenue (“Million Dollar Agents”). Management believes future revenue

 

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growth is primarily dependent on its ability to increase both the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a combination of recruiting new agents, increasing the revenue opportunities generated by existing independent commission sales agents and providing its independent commission sales agents with technology-based tools they may use to grow revenue and increase efficiencies at their businesses. During the 2017 fiscal year, 542 independent commission sales agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the 2017 fiscal year, the average revenue generated by a Million Dollar Agent was $6,191,000 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 29, 2018				September 30, 2017				September 29, 2018				September 30, 2017
Revenue generated through (in thousands):
Truck transportation
Truckload:
Van equipment		$	2,086,523			$	1,529,402			$	717,047			$	550,484
Unsided/platform equipment			1,039,784				825,194				375,739				304,536
Less-than-truckload			76,448				65,397				25,500				22,598
Total truck transportation			3,202,755				2,419,993				1,118,286				877,618
Rail intermodal			96,026				68,570				34,439				24,213
Ocean and air cargo carriers			82,719				70,708				31,213				29,523
Other (1)			51,293				35,501				18,143				12,076
		$	3,432,793			$	2,594,772			$	1,202,081			$	943,430
Revenue on loads hauled via BCO Independent Contractors included in total truck transportation		$	1,519,344			$	1,211,564			$	520,391			$	435,479
Number of loads:
Truck transportation
Truckload:
Van equipment			1,045,322				942,894				353,456				329,329
Unsided/platform equipment			388,759				362,936				133,425				126,509
Less-than-truckload			106,639				98,740				35,969				34,232
Total truck transportation			1,540,720				1,404,570				522,850				490,070
Rail intermodal			40,260				32,040				13,420				11,080
Ocean and air cargo carriers			21,250				18,150				8,220				6,210
			1,602,230				1,454,760				544,490				507,360
Loads hauled via BCO Independent Contractors included in total truck transportation			717,470				686,830				236,580				232,970
Revenue per load:
Truck transportation
Truckload:
Van equipment		$	1,996			$	1,622			$	2,029			$	1,672
Unsided/platform equipment			2,675				2,274				2,816				2,407
Less-than-truckload			717				662				709				660
Total truck transportation			2,079				1,723				2,139				1,791
Rail intermodal			2,385				2,140				2,566				2,185
Ocean and air cargo carriers			3,893				3,896				3,797				4,754
Revenue per load on loads hauled via BCO Independent Contractors		$	2,118			$	1,764			$	2,200			$	1,869
Revenue by capacity type (as a % of total revenue):
Truck capacity providers:
BCO Independent Contractors			44	%			47	%			43	%			46	%
Truck Brokerage Carriers			49	%			47	%			50	%			47	%
Rail intermodal			3	%			3	%			3	%			3	%
Ocean and air cargo carriers			2	%			3	%			3	%			3	%
Other			1	%			1	%			2	%			1	%

 

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(1)	Includes primarily reinsurance premium revenue generated by the insurance segment and intra-Mexico transportation services revenue generated by Landstar Metro.

Also critical to the Company’s success is its ability to secure capacity, particularly truck capacity, at rates that allow the Company to profitably transport customers’ freight. The following table summarizes the number of available truck capacity providers on the dates indicated:

 

		September 29, 2018				September 30, 2017
BCO Independent Contractors			9,751				8,939
Truck Brokerage Carriers:
Approved and active (1)			40,151				32,925
Other approved			16,803				15,138
			56,954				48,063
Total available truck capacity providers			66,705				57,002
Trucks provided by BCO Independent Contractors			10,443				9,548

 

(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 of revenue also increases or decreases in relation to the availability of truck brokerage capacity and with changes in the price of fuel on revenue generated by Truck Brokerage Carriers. The Company passes 100% of fuel surcharges billed to customers for freight hauled by BCO Independent Contractors to its BCO Independent Contractors. These fuel surcharges are excluded from revenue and the cost of purchased transportation. Purchased transportation costs are recognized over the transit period as the performance obligation is completed.

Commissions to agents are based on contractually agreed-upon percentages of revenue or net revenue, defined as revenue less the cost of purchased transportation, or net revenue less a contractually agreed upon percentage of revenue retained by Landstar. Commissions to agents as a percentage of consolidated revenue will vary directly with fluctuations in the percentage of consolidated revenue generated by the various modes of transportation and reinsurance premiums and with changes in net revenue margin, defined as net revenue divided by revenue, on services provided by Truck Brokerage Carriers, railroads, air cargo carriers and ocean cargo carriers. Commissions to agents are recognized over the transit period as the performance obligation is completed.

The Company defines gross profit as revenue less the cost of purchased transportation and commissions to agents. Gross profit divided by revenue is referred to as gross profit margin. The Company’s operating margin is defined as operating income divided by gross profit.

 

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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 Company’s contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of net revenue for these types of loads. Approximately 51% of the Company’s consolidated revenue in the thirty-nine-week period ended September 29, 2018 was generated under contracts that have a fixed gross profit margin while 49% was under contracts that have a variable gross profit margin.

Maintenance costs for Company-provided trailing equipment and BCO Independent Contractor recruiting and qualification costs are the largest components of other operating costs. Also included in other operating costs are trailer rental costs, the provision for uncollectible advances and other receivables due from BCO Independent Contractors and independent commission sales agents and gains/losses, if any, on sales of Company-owned trailing equipment.

With respect to insurance and claims cost, potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. For 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, up to an additional $500,000 in the aggregate on any claims incurred on or after May 1, 2017 through April 30, 2018 and up to an additional $350,000 in the aggregate on any claims incurred on or after May 1, 2018 through April 30, 2019. 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 Company’s exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air and ocean cargo carriers who transport freight on behalf of the Company is reduced by various factors including the extent to which such carriers maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo claims or workers’ compensation claims or the material unfavorable development of existing claims could have a material adverse effect on Landstar’s cost of insurance and claims and its results of operations.

During the thirty-nine-week period ended September 29, 2018, employee compensation and benefits accounted for approximately seventy percent of the Company’s selling, general and administrative costs.

Depreciation and amortization primarily relate to depreciation of trailing equipment and information technology hardware and software.

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 29, 2018				September 30, 2017				September 29, 2018				September 30, 2017
Revenue			100.0	%			100.0	%			100.0	%			100.0	%
Purchased transportation			77.5				76.7				77.5				77.0
Commissions to agents			8.0				8.1				8.3				8.1
Gross profit margin			14.5	%			15.2	%			14.3	%			14.8	%
Gross profit			100.0	%			100.0	%			100.0	%			100.0	%
Investment income			0.6				0.4				0.6				0.5
Indirect costs and expenses:
Other operating costs, net of gains on asset sales/dispositions			4.9				5.7				5.2				5.8
Insurance and claims			11.6				11.8				11.0				12.8
Selling, general and administrative			28.3				31.3				27.3				31.4
Depreciation and amortization			6.5				7.6				6.3				7.2
Total costs and expenses			51.3				56.3				49.8				57.2
Operating margin			49.3	%			44.1	%			50.8	%			43.3	%

 

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