LANDSTAR SYSTEM INC
10-Qs and 10-Ks
PROXIES
Index
| PART I – Financial Information | ||
| Page 4 | ||
| Page 5 | ||
| Page 6 | ||
| Page 7 | ||
| Page 8 | ||
| Page 10 | ||
| Page 19 | ||
| Page 32 | ||
| Page 32 | ||
| PART II – Other Information | ||
| Page 33 | ||
| Page 33 | ||
| Page 34 | ||
| Page 34 | ||
| Page 36 | ||
| 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 -
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 26, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 26, 2020.These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2019 Annual Report on Form
10-K.
3
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
September 26, 2020 |
December 28, 2019 |
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| ASSETS | ||||||||
| Current Assets |
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| Cash and cash equivalents |
$ | $ | ||||||
| Short-term investments |
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| Trade accounts receivable, less allowance of $ |
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| Other receivables, including advances to independent contractors, less allowance of $ |
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| Other current assets |
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| Total current assets |
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| Operating property, less accumulated depreciation and amortization of $ |
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| Goodwill |
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| Other assets |
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| Total assets |
$ | $ | ||||||
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| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities |
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| Cash overdraft |
$ | $ | ||||||
| Accounts payable |
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| Current maturities of long-term debt |
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| Insurance claims |
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| Dividends payable |
— | |||||||
| Contractor escrow |
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| Other current liabilities |
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| Total current liabilities |
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| Long-term debt, excluding current maturities |
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| Insurance claims |
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| Deferred income taxes and other noncurrent liabilities |
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| Shareholders’ Equity |
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| Common stock, $ |
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| Additional paid-in capital |
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| Retained earnings |
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| Cost of |
( |
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| Accumulated other comprehensive loss |
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| Total shareholders’ equity |
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| Total liabilities and shareholders’ equity |
$ | $ | ||||||
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See accompanying notes to consolidated financial statements.
4
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
Thirty Nine Weeks Ended |
Thirteen Weeks Ended |
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September 26, 2020 |
September 28, 2019 |
September 26, 2020 |
September 28, 2019 |
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| Revenue |
$ | $ | $ | $ | ||||||||||||
| Investment income |
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| Costs and expenses: |
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| Purchased transportation |
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| Commissions to agents |
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| Other operating costs, net of gains/losses on asset sales/dispositions |
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| Insurance and claims |
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| Selling, general and administrative |
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| Depreciation and amortization |
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| Impairment of intangible and other assets |
— | — | — | |||||||||||||
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| Total costs and expenses |
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| Operating income |
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| Interest and debt expense |
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| Income before income taxes |
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| Income taxes |
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| Net income |
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| Less: Net loss attributable to noncontrolling interest |
— | ( |
) | — | — | |||||||||||
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| Net income attributable to Landstar System, Inc. and subsidiary |
$ | $ | $ | $ | ||||||||||||
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| Earnings per common share attributable to Landstar System, Inc. and subsidiary |
$ | $ | $ | $ | ||||||||||||
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| Diluted earnings per share attributable to Landstar System, Inc. and subsidiary |
$ | $ | $ | $ | ||||||||||||
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| Average number of shares outstanding: |
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| Earnings per common share |
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| Diluted earnings per share |
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| Dividends per common share |
$ | $ | $ | $ | ||||||||||||
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See accompanying notes to consolidated financial statements.
5
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Thirty Nine Weeks Ended |
Thirteen Weeks Ended |
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September 26, 2020 |
September 28, 2019 |
September 26, 2020 |
September 28, 2019 |
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| N et income attributable to Landstar System, Inc. and subsidiary |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive (loss) income: |
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| Unrealized holding gains on available-for-sale |
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| Foreign currency translation (losses) gains |
( |
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| Other comprehensive (loss) income |
( |
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| Comprehensive income attributable to Landstar System, Inc. and subsidiary |
$ | $ | $ | $ | ||||||||||||
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See accompanying notes to consolidated financial statements.
6
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Thirty Nine Weeks Ended |
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September 26, 2020 |
September 28, 2019 |
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| OPERATING ACTIVITIES |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: |
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| Depreciation and amortization of operating property and intangible assets |
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| Non-cash interest charges |
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| Provisions for losses on trade and other accounts receivable |
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| Gains on sales/disposals of operating property |
( |
) | ( |
) | ||||
| Impairment of intangible and other assets |
— | |||||||
| Deferred income taxes, net |
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| Stock-based compensation |
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| Changes in operating assets and liabilities: |
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| (Increase) decrease in trade and other accounts receivable |
( |
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| Increase in other assets |
( |
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| Increase (decrease) in accounts payable |
( |
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| Increase (decrease) in other liabilities |
( |
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| Increase in insurance claims |
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| NET CASH PROVIDED BY OPERATING ACTIVITIES |
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| INVESTING ACTIVITIES |
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| Net changes in other short-term investments |
— | |||||||
| Sales and maturities of investments |
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| Purchases of investments |
( |
) | ( |
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| Purchases of operating property |
( |
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| Proceeds from sales of operating property |
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| Consideration paid for acquisition |
( |
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| NET CASH USED BY INVESTING ACTIVITIES |
( |
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| FINANCING ACTIVITIES |
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| Decrease in cash overdraft |
( |
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| Dividends paid |
( |
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| Payment for debt issue costs |
( |
) | — | |||||
| Proceeds from exercises of stock options |
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| Taxes paid in lieu of shares issued related to stock-based compensation plans |
( |
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| Purchases of common stock |
( |
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| Principal payments on finance lease obligations |
( |
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| Purchase of noncontrolling interest |
— | ( |
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| NET CASH USED BY FINANCING ACTIVITIES |
( |
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| Effect of exchange rate changes on cash and cash equivalents |
( |
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| (Decrease) increase in cash and cash equivalents |
( |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
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See accompanying notes to consolidated financial statements.
7
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Thirty Nine and Thirteen Weeks Ended September 26, 2020 and
September
28, 2019 (In thousands, except share and per share amounts)
(Unaudited)
Common Stock |
Additional Paid-In |
Retained |
Treasury Stock at Cost |
Accumulated Other Comprehensive |
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Shares |
Amount |
Capital |
Earnings |
Shares |
Amount |
(Loss) Income |
Total |
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| Balance December 28, 2019 |
$ | $ | $ | $ | ( |
) | $ |
( |
) |
$ | |
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| Adoption of accounting standard (Note 15 ) |
( |
( |
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| Net income |
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| Dividends ($ |
( |
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| Purchases of common stock |
( |
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| Issuance of stock related to stock-based compensation plans |
( |
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| Stock-based compensation |
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| Other comprehensive loss |
( |
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| Balance March 28, 2020 |
$ | $ | $ | $ | ( |
) | $ |
( |
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$ | ||||||||||||||||||||||
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| Net income |
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| Dividends ($ |
( |
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| Issuance of stock related to stock-based compensation plans |
— | ( |
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| Stock-based compensation |
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| Other comprehensive income |
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| Balance June 27, 2020 |
$ | $ | $ | $ | ( |
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( |
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| Net income |
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| Dividends ($ |
( |
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| Issuance of stock related to stock-based compensation plans |
— | ( |
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| Stock-based compensation |
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| Other comprehensive income |
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| Balance September 26, 2020 |
$ | $ | $ |
$ | ( |
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( |
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8
Landstar System, Inc. and Subsidiary Shareholders |
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Common Stock |
Additional Paid-In |
Retained |
Treasury Stock at Cost |
Accumulated Other Comprehensive |
Non-controlling |
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Shares |
Amount |
Capital |
Earnings |
Shares |
Amount |
(Loss) Income |
Interests |
Total |
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| Balance December 29, 2018 |
$ | $ | $ | $ | ( |
) | $ |
( |
) |
$ | $ | |
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| Net income (loss) |
( |
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| Dividends ($ share) |
( |
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| Purchases of common stock |
( |
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| Purchase of noncontrolling interests |
( |
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| Issuance of stock related to stock-based compensation plans |
( |
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| Stock-based compensation |
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| Other comprehensive income |
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| Balance March 30, 2019 |
$ | $ | $ | |
$ | ( |
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( |
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$ | $ | ||||||||||||||||||||||||
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| Net income |
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| Dividends ($ share) |
( |
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| Purchases of common stock |
( |
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| Issuance of stock related to stock-based compensation plans |
( |
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| Stock-based compensation |
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| Other comprehensive income |
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| Balance June 29, 2019 |
$ | $ | $ | $ | ( |
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( |
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$ | $ | |||||||||||||||||||||||||
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| Net income |
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| Dividends ($ share) |
( |
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| Purchases of common stock |
( |
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| Issuance of stock related to stock-based compensation plans |
— | ( |
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| Stock-based compensation |
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| Other comprehensive loss |
( |
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| Balance September 28, 2019 |
$ | $ | $ | $ | ( |
) | $ |
( |
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$ | $ | |||||||||||||||||||||||||
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See accompanying notes to consolidated financial statements.
9
LANDSTAR SYSTEM, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc., and reflect all adjustments (all of a normal, recurring nature) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. The preparation of the consolidated financial statements requires the use of management’s estimates. Actual results could differ from those estimates. Landstar System, Inc. and its subsidiary are herein referred to as “Landstar” or the “Company.” Significant intercompany accounts have been eliminated in consolidation.
(1) |
Significant Accounting Policies |
Revenue from Contracts with Customers – Disaggregation of Revenue
The following table summarizes the percentage of consolidated revenue generated by
mode of transportation
and the dollar amount included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers hauled via equipment type during the thirty-nine-week and thirteen-week periods ended September 26, 2020 and September 28, 2019 (dollars
in thousands): Thirty Nine Weeks Ended |
Thirteen Weeks Ended |
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Mode |
September 26, 2020 |
September 28, 2019 |
September 26, 2020 |
September 28, 2019 |
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BCO Independent Contractors – |
% | % | % | % | ||||||||||||
Brokerage Carriers - |
% | % | % | % | ||||||||||||
Rail intermodal |
% | % | % | % | ||||||||||||
Ocean and air cargo carriers |
% | % | % | % | ||||||||||||
Equipment Type - Truck |
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Van equipment |
$ | |
$ | |
$ | |
$ | |
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Unsided/platform equipment |
$ | $ | $ | $ | ||||||||||||
Less-than-truckload |
$ | $ | $ | $ | ||||||||||||
(2) |
Acquired Business |
On May 6, 2020, Landstar System Holdings, Inc. formed a new subsidiary that was subsequently renamed Landstar Blue, LLC (“Landstar Blue”). Landstar Blue arranges truckload brokerage services while helping the Company to develop and test digital technologies and processes for the benefit of all Landstar independent commission sales agents. On June 15, 2020, Landstar Blue completed the acquisition of an independent agent of the Company whose business focused on truckload brokerage services. Cash consideration paid for the acquisition was approximately $2,766 ,000. In addition, the Company assumed approximately $200,000 in liabilities consisting of additional contingent purchase price. The resulting goodwill arising from the acquisition was approximately $2,871,000 . With respect to this goodwill, 100 % is expected to be deductible by the Company for U.S. income tax purposes. Pro forma financial information for prior periods is not presented as the Company does not believe the acquisition to be material to the Company’s consolidated results. The results of operations for Landstar Blue are presented as part of the Company’s transportations logistics segment. Transaction costs for the acquisition were insignificant.
(3) |
Share-based Payment Arrangements |
As of September 26, 2020, 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
10
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 Thirty Nine Weeks Ended |
Thirteen Weeks Ended |
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September 26, 2020 |
September 28, 2019 |
September 26, 2020 |
September 28, 2019 |
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Total cost of the Plans during the period |
$ | $ | $ | |
$ | |
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Amount of related income tax benefit recognized during the period |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
Net cost of the Plans during the period |
$ |
$ | $ | $ | ||||||||||||
Included in income tax benefits recognized in the thirty-nine-week periods ended September 26, 2020 and September 28, 2019 were excess tax benefits from stock-based awards of $927,000 and $2,968,000 , respectively.
As of September 26, 2020, there were 60,586 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 3,675,862 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 |
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Outstanding at December 28, 2019 |
$ | |||||||
Granted |
$ | |
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Shares earned in excess of target (1) |
$ | |||||||
Vested shares, including shares earned in excess of target |
( |
) | $ | |||||
Forfeited |
( |
) | $ | |||||
Outstanding at September 26, 2020 |
$ | |||||||
(1) |
Represents additional shares earned under the February 2, 2017 RSU awards as 2019 financial results exceeded target performance level. |
During the thirty-nine-week period ended September 26, 2020, the Company granted RSUs with a performance condition. Outstanding RSUs at both December 28, 2019 and September 26, 2020 include RSUs with a performance condition and RSUs with a market condition, as further described below and in the Company’s 2019 Annual Report on Form
10-K.
RSUs with a performance condition granted on January 31, 2020 may vest on January 31 of 2023, 2024 and 2025 based on growth in operating income and
pre-tax
income per diluted share from continuing operations attributable to Landstar System, Inc. and subsidiary as compared to the results from the 2019 fiscal year.The Company recognized approximately $415,000 and $2,477,000 of share-based compensation expense related to RSU awards in the thirty-nine-week periods ended September 26, 2020 and September 28, 2019, respectively. As of September 26, 2020, there was a maximum of $34.6 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 3.1 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.
11
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 28, 2019 |
$ | |
||||||||||||||
Exercised |
( |
) | $ | |||||||||||||
Options outstanding at September 26, 2020 |
$ | $ | |
|||||||||||||
Options exercisable at September 26, 2020 |
$ | $ | ||||||||||||||
The total intrinsic value of stock options exercised during the thirty-nine-week periods ended September 26, 2020 and September 28, 2019 was $1,599,000 and $1,877,000 , respectively.
As of September 26, 2020, there was no unrecognized compensation cost related to 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 28, 2019 |
$ | |||||||
Granted |
$ | |||||||
Vested |
( |
) | $ | |||||
Forfeited |
( |
) | $ | |||||
Non-vested at September 26, 2020 |
$ | |||||||
The fair value of each share of 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 or fifth 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 does not have voting rights or other incidents of ownership until the shares are issued. However, Deferred Stock Units do contain the right to receive dividend equivalent payments prior to settlement into shares.
non-vested
restricted stock issued and Deferred Stock Unit granted under the Plans is based on the fair value of a share of the As of September 26, 2020, there was $4,074,000 of total unrecognized compensation cost related to 1.9 years.
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 (4) |
Income Taxes |
The provisions for income taxes for the 2020 and 2019 thirty-nine-week periods were each based on an estimated annual effective income tax rate of 24.2 23.3 %, which was higher than the statutory federal income tax rate of 21 % primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock-based awards and state
12
tax
refunds. The provision for income taxes for the 2020 thirty-nine-week period was favorably impacted by $927,000 of excess tax benefits from stock-based awards. The effective income tax rate for the 2019 thirty-nine-week period was 22.8 %, which was higher than the statutory
federal
in
come
tax rate of 21 % primarily attributable to state taxes and the meals and 2,968,000 of excess tax benefits from stock-based awards.
entertainment
exclusion, partially offset by excess tax benefits realized on stock-based awards. The provision for income taxes for the 2019 thirty-nine-week period was favorably impacted by $(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. During the 2020 and 2019 thirty-nine-week and thirteen-week periods,in reference to the determination of diluted earnings per share,
the future compensation cost attributable to outstanding
shares of non-vested
restricted stock exceeded theimpact
of
incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options.For each of the thirty-nine-week periods ended September 26, 2020 and September 28, 2019, no
(6) |
Additional Cash Flow Information |
During the 2020 thirty-nine-week period, Landstar paid income taxes and interest of $28,761,000 and $3,087,000 , respectively. During the 2019 thirty-nine-week period, Landstar paid income taxes and interest of $54,877,000 and $3,302,000 , respectively. Landstar acquired operating property by entering into finance leases in the amounts of $7,485,000 and $6,481,000 in the 2020 and 2019 thirty-nine-week periods, respectively. In addition, during the 2020 thirty-nine-week period, Landstar acquired $1,068,000 of operating property for which the Company accrued a corresponding liability in accounts payable as of September 26, 2020. Capital expenditures 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 26, 2020 and September 28, 2019 (in thousands):
Thirty Nine Weeks Ended |
||||||||||||||||||||||||
September 26, 2020 |
September 28, 2019 |
|||||||||||||||||||||||
Transportation Logistics |
Insurance |
Total |
Transportation Logistics |
Insurance |
Total |
|||||||||||||||||||
External revenue |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | |
||||||||||||
Internal revenue |
||||||||||||||||||||||||
Investment income |
||||||||||||||||||||||||
Operating income |
||||||||||||||||||||||||
Expenditures on long-lived assets |
||||||||||||||||||||||||
Goodwill |
||||||||||||||||||||||||
Thirteen Weeks Ended |
||||||||||||||||||||||||
September 26, 2020 |
September 28, 2019 |
|||||||||||||||||||||||
Transportation Logistics |
Insurance |
Total |
Transportation Logistics |
Insurance |
Total |
|||||||||||||||||||
External revenue |
$ | |
$ | |
$ | |
$ | |
$ | |
$ | |
||||||||||||
Internal revenue |
||||||||||||||||||||||||
Investment income |
||||||||||||||||||||||||
Operating income |
||||||||||||||||||||||||
Expenditures on long-lived assets |
||||||||||||||||||||||||
13
In the thirty-nine-week periods ended no 10
September
26, 2020 and September 28, 2019, accounted
for more than (8) |
Other Comprehensive Income |
The following table
presents
the components
of and changes in accumulated other comprehensive income (loss), net of related income taxes, as of and for the thirty-nine-week period ended September 26, 2020 (in thousands): Unrealized Holding Gains on Available-for-Sale Securities |
Foreign Currency Translation |
Total |
||||||||||
Balance as of December 28, 2019 |
$ | |
$ | ( |
) | $ | ( |
) | ||||
Other comprehensive gain (loss) |
( |
) | ( |
) | ||||||||
Balance as of September 26, 2020 |
$ | $ | ( |
) | $ | ( |
) | |||||
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 26, 2020.
(9) |
Investments |
Investments include primarily investment-grade corporate bonds and U.S. Treasury obligations having maturities of up to five years (the “bond portfolio”) and money market investments. Investments in the bond portfolio are reported as and are carried at fair value. Investments maturing less than one year from the balance sheet date are included in short-term investments and investments maturing more than one year from the balance sheet date are included in other assets in the consolidated balance sheets. Management performs an analysis of the nature of the unrealized losses on investments to determine whether an allowance for credit loss is necessary. Unrealized losses, representing the excess of the purchase price of an investment over its fair value as of the end of a period, considered to be a result of credit-related factors, are to be included as a charge in the statement of income, while unrealized losses considered to be a result of noncredit-related factors are to be included as a component of shareholders’ equity. Investments whose values are based on quoted market prices in active markets are classified within Level 1. Investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, are classified within Level 2. As Level 2 investments include positions that are not traded in active markets, valuations may be adjusted to reflect illiquidity and/or 3,350,000 and $1,427,000 at September 26, 2020 and December 28, 2019, respectively.
available-for-sale
available-for-sale
non-transferability,
which are generally based on available market information. Any transfers between levels are recognized as of the beginning of any reporting period. Fair value of the bond portfolio was determined using Level 1 inputs related to U.S. Treasury obligations and money market investments and Level 2 inputs related to investment-grade corporate bonds, asset-backed securities and direct obligations of government agencies. Unrealized gains, net of unrealized losses, on the investments in the bond portfolio were $1
4
The amortized cost and fair values of investments are as follows at September 26, 2020 and December 28, 2019 (in thousands):
available-for-sale
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
September 26, 2020 |
||||||||||||||||
Money market investments |
$ | $ | — | $ | — | $ | ||||||||||
Asset-backed securities |
— | |||||||||||||||
Corporate bonds and direct obligations of government agencies |
||||||||||||||||
U.S. Treasury obligations |
— | |||||||||||||||
Total |
$ | |
$ | |
$ | $ | |
|||||||||
December 28, 2019 |
||||||||||||||||
Money market investments |
$ | $ | — | $ | — | $ | ||||||||||
Asset-backed securities |
— | |||||||||||||||
Corporate bonds and direct obligations of government agencies |
||||||||||||||||
U.S. Treasury obligations |
||||||||||||||||
Total |
$ | $ | $ | $ | ||||||||||||
For those investments with unrealized losses at September 26, 2020 and December 28, 2019, the following table summarizes the duration of the unrealized loss (in thousands):
available-for-sale
Less than 12 months |
12 months or longer |
Total |
||||||||||||||||||||||
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
|||||||||||||||||||
September 26, 2020 |
||||||||||||||||||||||||
Asset-backed securities |
$ | $ | $ | — | $ | — | $ | $ | ||||||||||||||||
Corporate bonds and direct obligations of government agencies |
— | — | ||||||||||||||||||||||
Total |
$ | $ | |
$ | — | $ | — | $ | $ | |
||||||||||||||
December 28, 2019 |
||||||||||||||||||||||||
Asset-backed securities |
$ | $ | $ | — | $ | — | $ | $ | ||||||||||||||||
Corporate bonds and direct obligations of government agencies |
||||||||||||||||||||||||
U.S. Treasury obligations |
— | — | ||||||||||||||||||||||
Total |
$ | |
$ | $ | |
$ | $ | |
$ | |||||||||||||||
The Company expects to recover, through collection of all of the contractual cash flows of each security, the amortized cost basis of these securities as it does not intend to sell, and does not anticipate being required to sell, these securities before recovery of the cost basis. For these reasons, no losses have been recognized in the Company’s consolidated statements of income.
(10) |
Leases |
Landstar’s noncancelable leases are primarily comprised of finance leases for the acquisition of new trailing equipment. Each finance lease for the acquisition of trailing equipment is a five year lease with a $1 purchase option for the applicable equipment at lease expiration. Substantially all of Landstar’s operating lease assets and operating lease liabilities represent leases for
right-of-use
facilities
maintained in support of the Company’s network of
BCO Independent Contractors and office space used to conduct Landstar’s business. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives or other build-out
clauses. Further, the leases do not contain contingent rent provisions. Landstar also leases certain trailing equipment to supplement the Company-15
owned trailer fleet under lease terms, which are not required to be recorded on the balance sheet due to the less than twelve month lease term exemption. Sublease income is primarily comprised of weekly trailing equipment rentals to our BCO Independent Contractors.
“month-to-month”
Most of Landstar’s operating leases include one or more options to renew. The exercise of lease renewal options is typically at Landstar’s sole discretion, and, as such, the majority of renewals to extend the lease terms are not included in the assets and lease liabilities as they are not reasonably certain of exercise. Landstar regularly evaluates the renewal options, and when they are reasonably certain of exercise, Landstar includes the renewal period in the lease term.
right-of-use
As most of Landstar’s operating leases do not provide an implicit rate, Landstar utilized its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. Landstar has a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.
The components of lease cost for finance leases and operating leases for the thirty nine weeks ended September 26, 2020 were (in thousands):
Finance leases: |
||||
Amortization of right-of-use |
$ | |
||
Interest on lease liability |
||||
Total finance lease cost |
||||
Operating leases: |
||||
Lease cost |
||||
Variable lease cost |
— | |||
Sublease income |
( |
) | ||
Total net operating lease income |
( |
) | ||
Total net lease cost |
$ | |||
16
A summary of the lease classification on our consolidated balance sheet as of September 26, 2020 is as follows (in thousands):
Assets:
Operating lease right-of-use assets |
Other assets | $ | ||||||
Finance lease assets |
Operating property, less accumulated depreciation and amortization | |||||||
Total lease assets |
$ | |||||||
Liabilities:
The following table reconciles the undiscounted cash flows for the finance and operating leases to the finance and operating lease liabilities recorded on the balance sheet at September 26, 2020 (in thousands):
Finance Leases |
Operating Leases |
|||||||
2020 Remainder |
$ | |
$ | |||||
2021 |
||||||||
2022 |
||||||||
2023 |
||||||||
2024 |
||||||||
Thereafter |
||||||||
Total future minimum lease payments |
||||||||
Less amount representing interest ( |
||||||||
Present value of minimum lease payments |
$ | $ | ||||||
Current maturities of long-term debt |
||||||||
Long-term debt, excluding current maturities |
||||||||
Other current liabilities |
||||||||
Deferred income taxes and other noncurrent liabilities |
||||||||
The weighted average remaining lease term and the weighted average discount rate for finance and operating leases as of September 26, 2020 were:
Finance Leases |
Operating Leases |
|||||||
Weighted average remaining lease term (years) |
||||||||
Weighted average discount rate |
% | % | ||||||
(11) |
Debt |
Other than the finance lease obligations as presented on the consolidated balance sheets, the Company had no
On June 2, 2016 , Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent, which was amended and restated on August 18, 2020 to extend the maturity date to August 2023 and amend certain other terms (as so amended and restated, the “Credit Agreement”). The Credit Agreement provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $35,000,000 of which may be utilized in the form of letters of credit. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing capacity of $400,000,000 .
The revolving credit loans under the Credit Agreement, at the option of Landstar, bear interest at (i) the Eurocurrency rate plus an applicable margin ranging from 1.25 % to 2.00 %, or (ii) an alternate base rate plus an applicable margin ranging from 0.25 % to 1.00 %, in each case with the applicable margin determined based upon the Company’s Leverage Ratio, as defined in the Credit Agreement, at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. The revolving credit facility bears a commitment fee, payable quarterly in arrears, of 0.25 % to 0.35 %, based on the Company’s Leverage Ratio at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. As of September 26, 2020 and December 28, 2019, the Company had no
17
The Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness. The Company is required to, among other things, maintain a minimum Fixed Charge Coverage Ratio, as defined in the Credit Agreement, and maintain a Leverage Ratio, as defined in the Credit Agreement, below a specified maximum. The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock to the extent there is a default under the Credit Agreement. In addition, the Credit Agreement under certain circumstances limits the amount of such cash dividends and other distributions to stockholders to the extent that, after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio would exceed to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter. The Credit Agreement provides for an event of default in the event that, among other things, a person or group acquires 35 % or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company’s directors or the directors cease to consist of a majority of Continuing Directors, as defined in the Credit Agreement. None of these covenants are presently considered by management to be materially restrictive to the Company’s operations, capital resources or liquidity. The Company is currently in compliance with all of the debt covenants under the Credit Agreement .
The interest rates on borrowings under the revolving credit facility are typically tied to short-term interest rates that adjust monthly and, as such, carrying value approximates fair value. Interest rates on borrowings under finance leases approximate the interest rates that would currently be available to the Company under similar terms and, as such, carrying value approximates fair value.
(12) |
Commitments and Contingencies |
Short-term investments include $39,068,000 in current maturities of investments held by the Company’s insurance segment at September 26, 2020. The 82,734,000 is included in other assets. The short-term investments, together with $26,969,000 of 59,434,000 of letters of credit issued to guarantee payment of insurance claims. As of September 26, 2020, Landstar also had $33,618,000 of additional letters of credit outstanding under the Company’s Credit Agreement.
non-current
portion of the bond portfolio of $non-current
investments, provide collateral for the $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.
(1 3 ) |
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 set forth in the consolidated statements of income for the thirty-nine-week and thirteen-week periods ended September 26, 2020 and September 28, 2019 (in thousands, except per share amounts):
Thirty Nine Weeks Ended |
Thirteen Weeks Ended |
|||||||||||||||
September 26, 2020 |
September 28, 2019 |
September 26, 2020 |
September 28, 2019 |
|||||||||||||
Operating income |
$ | $ | $ | $ | ||||||||||||
Net income attributable to Landstar System, Inc. and subsidiary |
$ | $ | $ | $ |
||||||||||||
Earnings per share attributable to Landstar System, Inc. and subsidiary |
$ | $ | $ | $ | ||||||||||||
Diluted earnings per share attributable to Landstar System, Inc. and subsidiary |
$ | $ | $ | $ | ||||||||||||
18
The unfavorable
development
of prior years’ claims in the thirty-nine-week period ended September 26, 2020 and the thirty
-nine-week period ended September 28, 2019 were each attributable to several claims as well as actuarially determined adjustments to prior year commercial trucking loss estimates.(14) |
Impairment of Intangible and Other Assets |
During the 2020 second fiscal quarter, the Company recorded a 2,582 ,000 in respect of certain assets, primarily customer contract and related customer relationship intangible assets, acquired on September 20, 2017, along with substantially all of the other assets of the asset-light transportation logistics business of Fletes Avella, S.A. de C.V. (“Fletes Avella”). As previously disclosed in Item 1A. Risk Factors in the Company’s Form 2,582 ,000, as the negative macroeconomic trends in Mexico have caused current financial projections relating to these intangible assets to be substantially below those originally anticipated at the acquisition date. There was no corresponding goodwill impairment charge recorded as the fair value of the Company’s Mexico and cross-border reporting unit continues to significantly exceed its carrying value as of September 26, 2020.
non-cash
impairment charge of $10-Q
for the 2020 first quarter, negative macroeconomic trends in Mexico have caused significant disruptions in the Mexican economy. Accordingly, management performed impairment tests of the carrying values of certain assets that primarily relate to intra-Mexico business acquired as a part of the Fletes Avella acquisition. The impairment tests resulted in an impairment charge of $(1 5 ) |
Recent Accounting Pronouncements |
Adoption of New Accounting Standards
In June 2016, the FASB issued Accounting Standards Update (“ASU 702,000 cumulative adjustment to retained earnings.
2016-13–
Financial Instruments –
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
2016-13”),
which requires measurement and recognition of expected versus incurred credit losses for financial assets held. The Company adopted ASU 2016-13
on December 29, 2019, under the modified retrospective transition method resulting in a $(1 6 ) |
Subsequent Event |
In October 2020, the Company announced a new initiative in support of its BCO Independent Contractor network relating to its regional field operations centers located in the United States and Canada. It is the intent of the Company that this network of field operations centers will further support the Company’s efforts in recruiting and retaining BCO Independent Contractors. In connection with this initiative, the Company expects to record a provision of approximately
$
during the 2020 fourth fiscal quarter relating to anticipated buyouts of certain incentive commission arrangements with several of its independent commission sales agents due to the Company’s discontinuation of a BCO recruitment and retention program that involved those agents.
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 28, 2019 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2019 Annual Report on Form
10-K.
FORWARD-LOOKING STATEMENTS
The following is a “safe harbor” statement under the Private Securities Litigation Reform Act of 1995. Statements contained in this document that are not based on historical facts are “forward-looking statements.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form
10-Q
contain forward-looking statements, such as statements which relate to Landstar’s business objectives, plans, strategies and expectations. Terms such as “anticipates,” “believes,” “estimates,” “intention,” “expects,” “plans,” “predicts,” “may,” “should,” “could,” “will,” the negative thereof and similar expressions are intended to identify forward-looking statements. Such statements are by nature subject to uncertainties and risks, including but not limited to: the impact of the coronavirus (COVID-19)
pandemic; an increase in the frequency or severity of accidents or other claims; unfavorable development of existing accident claims; dependence on third party insurance companies; dependence on independent commission sales agents; dependence on third party capacity providers; decreased demand for transportation services; U.S. foreign trade relationships; substantial industry competition; disruptions or failures in the Company’s computer systems; cyber and other information security 19
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 2019 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 comprehensive third party logistics solutions to meet all of a customer’s transportation needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada and Mexico, and between the United States and Canada, Mexico and other countries around the world. The Company’s services emphasize safety, information coordination and customer service and are delivered through a network of over 1,200 independent commission sales agents and approximately 73,000 third party capacity providers, primarily truck capacity providers, linked together by a series of digital technologies which are provided and coordinated by the Company. The nature of the Company’s business is such that a significant portion of its operating costs varies directly with revenue.
Landstar markets its integrated transportation management solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport customers’ freight. Landstar’s independent commission sales agents enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under
non-exclusive
contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers and railroads. Through this network of agents and capacity providers linked together by Landstar’s series of digital technologies, Landstar operates an integrated transportation management solutions business primarily throughout North America with revenue of $4.1 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.The transportation logistics segment provides a wide range of integrated transportation management solutions. Transportation services offered by the Company include truckload and less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico cross-border, intra-Mexico, intra-Canada, project cargo and customs brokerage. Examples of the industries serviced by the transportation logistics segment include automotive parts and assemblies, building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics and military equipment. In addition, the transportation logistics segment provides transportation services to other transportation companies, including third party logistics and less-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Billings for freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight and are referred to as transportation revenue. During the thirty nine weeks ended September 26, 2020, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 46%, 46% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3% of the Company’s consolidated revenue in the thirty-nine-week period ended September 26, 2020.
Landstar Metro, S.A.P.I. de C.V. (“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 Metro Servicios S.A.P.I. de C.V. (“Landstar Servicios”) provides various administrative, financial, operational, safety and compliance services to Landstar Metro. The results of operations from Landstar Metro and Landstar Servicios are presented as part of the Company’s transportation logistics segment. On January 29, 2019, Landstar acquired all of the remaining equity interests in Landstar Metro and Landstar Servicios held by their former minority equityholders. Accordingly, as of such date, Landstar Metro and Landstar Servicios each became wholly owned subsidiaries of the Company. Revenue from Landstar Metro represented less than 1% of the Company’s transportation logistics segment revenue in the thirty-nine-week period ended September 26, 2020.
20
On May 6, 2020, Landstar System Holdings, Inc. formed a new subsidiary that was subsequently renamed Landstar Blue, LLC (“Landstar Blue”). Landstar Blue arranges truckload brokerage services while helping the Company to develop and test digital technologies and processes for the benefit of all Landstar independent commission sales agents. The results of operations from Landstar Blue are presented as part of the Company’s transportations logistics segment. The Company expects that Landstar Blue will not have a material effect on its revenues and earnings for the remainder of fiscal year 2020. Revenue from Landstar Blue represented less than 1% of the Company’s transportation logistics segment revenue in the thirty-nine-week period ended September 26, 2020.
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 26, 2020.
Changes in Financial Condition and Results of Operations
Management believes the Company’s success principally depends on its ability to generate freight revenue through its network of independent commission sales agents and to safely and efficiently deliver freight utilizing third party capacity providers. Management believes the most significant factors to the Company’s success include increasing revenue, sourcing capacity and controlling costs, including insurance and claims.
While customer demand, which is subject to overall economic conditions, ultimately drives increases or decreases in revenue, the Company primarily relies on its independent commission sales agents to establish customer relationships and generate revenue opportunities. Management’s emphasis with respect to revenue growth is on revenue generated by independent commission sales agents who on an annual basis generate $1 million or more of Landstar revenue (“Million Dollar Agents”). Management believes future revenue growth is primarily dependent on its ability to increase both the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a combination of recruiting new agents, increasing the revenue opportunities generated by existing independent commission sales agents and providing its independent commission sales agents with digital technologies they may use to grow revenue and increase efficiencies at their businesses. During the 2019 fiscal year, 555 independent commission sales agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the 2019 fiscal year, the average revenue generated by a Million Dollar Agent was $6,880,000 and revenue generated by Million Dollar Agents in the aggregate represented 93% of consolidated revenue.
21
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 26, 2020 |
September 28, 2019 |
September 26, 2020 |
September 28, 2019 |
|||||||||||||
| Revenue generated through (in thousands): |
||||||||||||||||
| Truck transportation |
||||||||||||||||
| Truckload: |
||||||||||||||||
| Van equipment |
$ | 1,694,916 | $ | 1,799,421 | $ | 666,582 | $ | 575,042 | ||||||||
| Unsided/platform equipment |
848,187 | 980,615 | 314,471 | 331,787 | ||||||||||||
| Less-than-truckload |
70,984 | 73,475 | 25,125 | 25,367 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total truck transportation |
2,614,087 | 2,853,511 | 1,006,178 | 932,196 | ||||||||||||
| Rail intermodal |
81,747 | 87,555 | 30,432 | 28,970 | ||||||||||||
| Ocean and air cargo carriers |
89,002 | 89,258 | 31,752 | 30,365 | ||||||||||||
| Other (1) |
51,790 | 59,374 | 17,184 | 20,127 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| $ | 2,836,626 | $ | 3,089,698 | $ | 1,085,546 | $ | 1,011,658 | |||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Revenue on loads hauled via BCO Independent Contractors included in total truck transportation |
$ | 1,312,003 | $ | 1,390,135 | $ | 502,224 | $ | 466,207 | ||||||||
| Number of loads: |
||||||||||||||||
| Truck transportation |
||||||||||||||||
| Truckload: |
||||||||||||||||
| Van equipment |
946,117 | 1,014,572 | 345,598 | 327,671 | ||||||||||||
| Unsided/platform equipment |
356,670 | 391,112 | 125,548 | 130,192 | ||||||||||||
| Less-than-truckload |
119,533 | 115,616 | 41,454 | 41,067 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total truck transportation |
1,422,320 | 1,521,300 | 512,600 | 498,930 | ||||||||||||
| Rail intermodal |
33,410 | 35,370 | 11,900 | 11,490 | ||||||||||||
| Ocean and air cargo carriers |
22,720 | 22,150 | 8,290 | 7,340 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| 1,478,450 | 1,578,820 | 532,790 | 517,760 | |||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Loads hauled via BCO Independent Contractors included in total truck transportation |
693,860 | 722,870 | 250,030 | 239,210 | ||||||||||||
| Revenue per load: |
||||||||||||||||
| Truck transportation |
||||||||||||||||
| Truckload: |
||||||||||||||||
| Van equipment |
$ | 1,791 | $ | 1,774 | $ | 1,929 | $ | 1,755 | ||||||||
| Unsided/platform equipment |
2,378 | 2,507 | 2,505 | 2,548 | ||||||||||||
| Less-than-truckload |
594 | 636 | 606 | 618 | ||||||||||||
| Total truck transportation |
1,838 | 1,876 | 1,963 | 1,868 | ||||||||||||
| Rail intermodal |
2,447 | 2,475 | 2,557 | 2,521 | ||||||||||||
| Ocean and air cargo carriers |
3,917 | 4,030 | 3,830 | 4,137 | ||||||||||||
| Revenue per load on loads hauled via BCO Independent Contractors |
$ | 1,891 | $ | 1,923 | $ | 2,009 | $ | 1,949 | ||||||||
| Revenue by capacity type (as a % of total revenue): |
||||||||||||||||
| Truck capacity providers: |
||||||||||||||||
| BCO Independent Contractors |
46 | % | 45 | % | 46 | % | 46 | % | ||||||||
| Truck Brokerage Carriers |
46 | % | 47 | % | 46 | % | 46 | % | ||||||||
| Rail intermodal |
3 | % | 3 | % | 3 | % | 3 | % | ||||||||
| Ocean and air cargo carriers |
3 | % | 3 | % | 3 | % | 3 | % | ||||||||
| Other |
2 | % | 2 | % | 2 | % | 2 | % | ||||||||
(1) |
Includes primarily reinsurance premium revenue generated by the insurance segment and intra-Mexico transportation services revenue generated by Landstar Metro. |
22
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 26, 2020 |
September 28, 2019 |
|||||||
| BCO Independent Contractors |
9,866 | 9,738 | ||||||
| Truck Brokerage Carriers: |
||||||||
| Approved and active (1) |
41,246 | 39,963 | ||||||
| Other approved |
22,181 | 16,984 | ||||||
| |
|
|
|
|||||
| 63,427 | 56,947 | |||||||
| |
|
|
|
|||||
| Total available truck capacity providers |
73,293 | 66,685 | ||||||
| |
|
|
|
|||||
| Trucks provided by BCO Independent Contractors |
10,571 | 10,441 | ||||||
(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 a contractually agreed-upon fixed rate per load. Purchased transportation as a percentage of revenue for truck brokerage, rail intermodal and ocean cargo services is normally higher than that of BCO Independent Contractor and air cargo services. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases as a percentage of consolidated revenue in proportion to changes in the percentage of consolidated revenue generated through BCO Independent Contractors and other third party capacity providers and external revenue from the insurance segment, consisting of reinsurance premiums. Purchased transportation as a percent of revenue also increases or decreases in relation to the availability of truck brokerage capacity and with changes in the price of fuel on revenue generated from shipments hauled by Truck Brokerage Carriers. The Company passes 100% of fuel surcharges billed to customers for freight hauled by BCO Independent Contractors to its BCO Independent Contractors. These fuel surcharges are excluded from revenue and the cost of purchased transportation. Purchased transportation costs are recognized over the freight transit period as the performance obligation to the customer is completed.
Commissions to agents are based on contractually agreed-upon percentages of revenue or net revenue, defined as revenue less the cost of purchased transportation, or net revenue less a contractually agreed upon percentage of revenue retained by Landstar. Commissions to agents as a percentage of consolidated revenue will vary directly with fluctuations in the percentage of consolidated revenue generated by the various modes of transportation and reinsurance premiums and with changes in net revenue margin, defined as net revenue divided by revenue, on services provided by Truck Brokerage Carriers, railroads, air cargo carriers and ocean cargo carriers. Commissions to agents are recognized over the freight transit period as the performance obligation to the customer is completed.
The Company defines gross profit as revenue less the cost of purchased transportation and commissions to agents. Gross profit divided by revenue is referred to as gross profit margin. The Company’s operating margin is defined as operating income divided by gross profit.
In general, gross profit margin on revenue generated by BCO Independent Contractors represents a fixed percentage of revenue due to the nature of the contracts that pay a fixed percentage of revenue to both the BCO Independent Contractors and independent commission sales agents. For revenue generated by Truck Brokerage Carriers, gross profit margin is either fixed or variable as a percent of revenue, depending on the contract with each individual independent commission sales agent. Under certain contracts with independent commission sales agents, the Company retains a fixed percentage of revenue and the agent retains the amount remaining less the cost of purchased transportation (the “retention contracts”). Gross profit margin on revenue generated from shipments hauled by railroads, air cargo carriers, ocean cargo carriers and Truck Brokerage Carriers, other than those under retention contracts, is variable in nature as the
23
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 shipments. Approximately 52% of the Company’s consolidated revenue in the thirty-nine-week period ended September 26, 2020 was generated under contracts that have a fixed gross profit margin while 48% was under contracts that have a variable gross profit margin.
Maintenance costs for Company-provided trailing equipment and BCO Independent Contractor recruiting and qualification costs are the largest components of other operating costs. Also included in other operating costs are trailer rental costs, the provision for uncollectible advances and other receivables due from BCO Independent Contractors and independent commission sales agents and gains/losses, if any, on sales of Company-owned trailing equipment.
With respect to insurance and claims cost, potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable.
For periods prior to May 1, 2019, Landstar retains liability for commercial trucking claims up to $5,000,000 per occurrence and maintains various third party insurance arrangements for liabilities in excess of its $5,000,000 self-insured retention.
Effective May 1, 2019, the Company entered into a new three year commercial auto liability insurance arrangement for losses incurred between $5,000,000 and $10,000,000 (the “Initial Excess Policy”) with a third party insurance company. For commercial trucking claims incurred on or after May 1, 2019 through April 30, 2022, the Initial Excess Policy provides for a limit for a single loss of $5,000,000, with an aggregate limit of $15,000,000 for each policy year, an aggregate limit of $20,000,000 for the
thirty-six
month term ended April 30, 2022, and options to increase such aggregate limits for pre-established
amounts of additional premium. If aggregate losses under the Initial Excess Policy exceed either the annual aggregate limit or the aggregate limit for the three year period ending April 30, 2022, and the Company did not elect to increase such aggregate limits for a pre-established
amount of additional premium, Landstar would retain liability of up to $10,000,000 per occurrence, inclusive of its $5,000,000 self-insured retention for commercial trucking claims during the remainder of the applicable policy year(s). Moreover, in the event paid aggregate losses under the Initial Excess Policy during the three year period ending April 30, 2022 exceed a pre-determined
threshold amount, the Initial Excess Policy would require the Company to pay additional premium up to a maximum amount of $3,500,000. As a result of the Company’s aggregate loss experience since it entered into the Initial Excess Policy, the Company believes it is probable it will be required to pay additional premium under the Initial Excess Policy, which amount of additional premium was provided for in insurance and claims costs for the Company’s 2020 fiscal first quarter.The Company also maintains third party insurance arrangements providing excess coverage for commercial trucking liabilities in excess of $10,000,000. These third party arrangements provide coverage on a per occurrence or aggregated basis. Due to the increasing cost of commercial auto liability claims throughout the United States in recent years, the availability of such excess coverage has significantly decreased and the pricing associated with such excess coverage, to the extent available, has significantly increased. Effective May 1, 2020 with respect to the annual policy year ending April 30, 2021, the Company experienced an increase of approximately $14 million, or over 170%, in the premiums charged by third party insurance companies to the Company for excess coverage for commercial trucking liabilities in excess of $10,000,000. No assurances can be given that the availability of excess coverage for commercial trucking claims will not continue to deteriorate, that the pricing associated with such excess coverage, to the extent available, will not continue to increase, nor that insurance coverage from third party insurers for excess coverage of commercial trucking claims will even be available on commercially reasonable terms at certain levels.
Further, the Company retains liability of up to $1,000,000 for each general liability claim, up to $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. In addition, under reinsurance arrangements by Signature of certain risks of the Company’s BCO Independent Contractors, the Company retains liability of up to $500,000, $1,000,000 or $2,000,000 with respect to certain occupational accident claims and up to $750,000 with respect to certain workers’ compensation claims. The Company’s exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air and ocean cargo carriers who transport freight on behalf of the Company is reduced by various factors including the extent to which such carriers maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo claims or workers’ compensation claims or the material unfavorable development of existing claims could have a material adverse effect on Landstar’s cost of insurance and claims and its results of operations.
During the thirty-nine-week period ended September 26, 2020, employee compensation and benefits accounted for approximately
sixty-six
percent of the Company’s selling, general and administrative costs.24
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 26, 2020 |
September 28, 2019 |
September 26, 2020 |
September 28, 2019 |
|||||||||||||
| Revenue |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Purchased transportation |
77.0 | 76.6 | 77.3 | 76.6 | ||||||||||||
| Commissions to agents |
8.3 | 8.3 | 7.9 | 8.4 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Gross profit margin |
14.7 | % | 15.1 | % | 14.8 | % | 15.1 | % | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Gross profit |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Investment income |
0.7 | 0.8 | 0.4 | 0.9 | ||||||||||||
| Indirect costs and expenses: |
||||||||||||||||
| Other operating costs, net of gains/losses on asset sales/dispositions |
5.5 | 6.1 | 4.6 | 6.8 | ||||||||||||
| Insurance and claims |
16.0 | 11.9 | 13.6 | 15.7 | ||||||||||||
| Selling, general and administrative |
29.9 | 25.9 | 24.1 | 25.0 | ||||||||||||
| Depreciation and amortization |
8.2 | 7.1 | 7.0 | 7.0 | ||||||||||||
| Impairment of intangible and other assets |
0.6 | — | — | — | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total costs and expenses |
60.2 | 51.0 | 49.3 | 54.6 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Operating margin |
40.4 | % | 49.8 | % | 51.2 | % | 46.3 | % | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
Management believes that a discussion of indirect costs as a percentage of gross profit is useful and meaningful to investors for the following principal reasons: (1) disclosure of these relative measures (i.e., each indirect operating cost line item as a percentage of gross profit) allows investors to better understand the underlying trends in the Company’s results of operations; (2) due to the generally fixed nature of these indirect costs (other than insurance and claims costs), these relative measures are meaningful to investors’ evaluations of the Company’s management of its indirect costs attributable to operations; (3) management considers this financial information in its decision-making, such as budgeting for infrastructure, trailing equipment and selling, general and administrative costs; and (4) this information facilitates comparisons by investors of the Company’s results to the results of other
non-asset
or asset-light companies in the transportation and logistics services industry who report “net revenue” in Management Discussion and Analysis, which represents revenue less the cost of purchased transportation. The difference between the Company’s use of the term “gross profit” and 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 at 2% or less of consolidated revenue and generally corresponds directly with the number of trucks provided by BCO Independent Contractors. The discussion of indirect cost line items in Management’s Discussion and Analysis of Financial Condition and Results of Operations considers the Company’s costs on a consolidated basis rather than on a segment basis. Management believes this presentation format is the most appropriate to assist users of the financial statements in understanding the Company’s business for the following reasons: (1) the insurance segment has no other operating costs; (2) discussion of insurance and claims at either segment without reference to the other may create confusion amongst investors and potential investors due to intercompany arrangements and specific deductible programs that affect comparability of financial results by segment between various fiscal periods but that have no effect on the Company from a consolidated reporting perspective; (3) selling, general and administrative costs of the insurance segment comprise less than 10% of consolidated selling, general and administrative costs and have historically been relatively consistent on a year-over-year basis; and (4) the insurance segment has no depreciation and amortization.
25
THIRTY NINE WEEKS ENDED SEPTEMBER 26, 2020 COMPARED TO THIRTY NINE WEEKS ENDED SEPTEMBER 28, 2019
Revenue for the 2020 thirty-nine-week period was $2,836,626,000, a decrease of $253,072,000, or 8%, compared to the 2019 thirty-nine-week period. Transportation revenue decreased $252,273,000, or 8%. The decrease in transportation revenue was attributable to a decreased number of loads hauled of approximately 6% and decreased revenue per load of approximately 2% compared to the 2019 thirty-nine-week period. Reinsurance premiums were $41,570,000 and $42,369,000 for the 2020 and 2019 thirty-nine-week periods, respectively. The decrease in revenue from reinsurance premiums was primarily attributable to the decrease in the average number of trucks provided by BCO Independent Contractors in the 2020 thirty-nine-week period compared to the 2019 thirty-nine-week period.
Truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers (together, the “third party truck capacity providers”) for the 2020 thirty-nine-week period was $2,614,087,000, representing 92% of total revenue, a decrease of $239,424,000, or 8%, compared to the 2019 thirty-nine-week period. The number of loads hauled by third party truck capacity providers decreased approximately 7% in the 2020 thirty-nine-week period compared to the 2019 thirty-nine-week period, and revenue per load on loads hauled by third party truck capacity providers decreased approximately 2% compared to the 2019 thirty-nine-week period. The decrease in the number of loads hauled via truck compared to the 2019 thirty-nine-week period was due to relative softness in the U.S. manufacturing sector in the 2020 period compared to the 2019 period and the unfavorable impact of the
COVID-19
pandemic on demand for the Company’s truck transportation services, which significantly accelerated during the last week of the Company’s first fiscal quarter. However, following the demand lows experienced by the Company in April and May 2020, demand for the Company’s truck transportation services sequentially increased throughout the remainder of the thirty-nine week period. This significant, rapid decrease in demand followed by a similarly significant yet more gradual sequential increase in demand was unprecedented in the history of the Company. During the 2020 thirty-nine week period as compared to the 2019 thirty-nine-week period, loads hauled via van equipment decreased 7% and loads hauled via unsided/platform equipment decreased 9%, while less-than-truckload volumes increased 3%. The decrease in revenue per load on loads hauled via truck was primarily due to less demand for unsided/platform and heavy specialized freight services during the 2020 thirty-nine-week period. While revenue per load on loads hauled via van equipment increased 1%, revenue per load on loads hauled via unsided/platform equipment decreased 5% and revenue per load on less-than-truckload loadings decreased 7% as compared to the 2019 thirty-nine-week period. Revenue per load on heavy specialized loadings, which is included as a component of unsided/platform loadings, decreased 10% as compared to the 2019 thirty-nine-week period. 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 $43,570,000 and $60,206,000 in the 2020 and 2019 thirty-nine-week periods, respectively. It should be noted that billings to many customers of the Company’s truck brokerage services include a single all-in
rate that does not separately identify fuel surcharges on loads hauled via Truck Brokerage Carriers. Accordingly, the overall impact of changes in fuel prices on revenue and revenue per load on loads hauled via truck is likely to be greater than that indicated.Transportation revenue generated by rail intermodal, air cargo and ocean cargo carriers (collectively, the “multimode capacity providers”) for the 2020 thirty-nine-week period was $170,749,000, or 6% of total revenue, a decrease of $6,064,000, or 3%, compared to the 2019 thirty-nine-week period. The number of loads hauled by multimode capacity providers decreased approximately 2% in the 2020 thirty-nine-week period compared to the 2019 thirty-nine-week period, and revenue per load on revenue generated by multimode capacity providers decreased approximately 1% over the same period. The decrease in the number of loads hauled by multimode capacity providers was primarily due to a 6% decrease in rail intermodal loadings, mostly attributable to decreased loadings at four specific agencies, and a 4% decrease in ocean loadings, primarily due to decreased shipments originating in China for export to the United States. The decrease in revenue per load of 1% on loads hauled by multimode capacity providers was primarily attributable to decreased revenue per load on air shipments. Also, revenue per load on revenue generated by multimode capacity providers is influenced by many factors, including revenue mix among the various modes of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity.
Purchased transportation was 77.0% and 76.6% of revenue in the 2020 and 2019 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 on BCO Independent Contractor revenue due to the impact of
COVID-19
pandemic relief incentive payments and an increased rate of purchased transportation paid on Truck Brokerage Carrier revenue. Under the pandemic relief program, for each load delivered by a BCO Independent Contractor with a confirmed delivery date from April 1, 2020 through May 30, 2020, the Company paid each of the BCO Independent Contractor who hauled the load and the independent commission sales agent who dispatched the load an extra $50. Commissions to agents were 8.3% of revenue in each of the 2020 and 2019 thirty-nine-week periods. Commissions to agents on BCO Independent Contractor revenue were higher during the 2020 thirty-nine-week period due to the impact of COVID-19
pandemic relief incentive payments, whereas commissions to agents on Truck Brokerage Carrier revenue were lower as compared to the 2019 thirty-nine-week period due to the impact of a decreased net revenue margin on revenue generated by Truck Brokerage Carriers. The Company paid a total of $12,593,000 in COVID-19
pandemic relief incentive payments during the 2020 thirty-nine week period.26
Investment income was $2,716,000 and $3,736,000 in the 2020 and 2019 thirty-nine-week periods, respectively. The decrease in investment income was primarily attributable to lower average rates of return on investments in the 2020 thirty-nine-week period, partially offset by a higher average investment balance held by the insurance segment in the 2020 thirty-nine week period.
Other operating costs decreased $5,496,000 in the 2020 thirty-nine-week period compared to the 2019 thirty-nine-week period and represented 5.5% of gross profit in the 2020 period compared to 6.1% of gross profit in the 2019 period. The decrease in other operating costs compared to the prior year was primarily due to a decreased provision for contractor bad debt, the impact of the cancellation of an event for the Company’s BCO Independent Contractors due to the
COVID-19
pandemic, increased gains on the sales of used trailing equipment and decreased trailer rental costs. The decrease in other operating costs as a percentage of gross profit was caused by the decrease in other operating costs, partially offset by the effect of decreased gross profit.Insurance and claims increased $11,315,000 in the 2020 thirty-nine-week period compared to the 2019 thirty-nine-week period and represented 16.0% of gross profit in the 2020 period compared to 11.9% of gross profit in the 2019 period. The increase in insurance and claims expense compared to the prior year was primarily due to a $5,000,000 charge for the Company’s self-insured retention with respect to a tragic vehicular accident involving a fatality, a $3,500,000 charge relating to anticipated additional premium the Company expects to pay under the Initial Excess Policy in connection with certain aggregated losses, increased insurance premiums incurred for commercial trucking liability coverage following the Company’s May 1, 2020 insurance renewal and increased severity of current year claims, partially offset by decreased net unfavorable development of prior years’ claims in the 2020 period. During the 2020 and 2019 thirty-nine-week periods, insurance and claims costs included $6,162,000 and $9,497,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. The increase in insurance and claims as a percent of gross profit was caused by the increase in insurance and claims costs and the effect of decreased gross profit.
Selling, general and administrative costs increased $4,062,000 in the 2020 thirty-nine-week period compared to the 2019 thirty-nine-week period and represented 29.9% of gross profit in the 2020 period compared to 25.9% of gross profit in the 2019 period. The increase in selling, general and administrative costs compared to prior year was attributable to an increased provision for incentive compensation, increased information technology costs and an increased provision for customer bad debt, partially offset by decreased agent convention costs, decreased stock-based compensation expense and decreased travel and entertainment costs related to the impact of the
COVID-19
pandemic. Included in selling, general and administrative costs was incentive compensation expense of $6,190,000 and $1,588,000 for the 2020 and 2019 thirty-nine-week periods, respectively, and stock-based compensation expense of $2,691,000 and $4,470,000 for the 2020 and 2019 thirty-nine-week periods, respectively. The increase in selling, general and administrative costs as a percent of gross profit was due to the effect of decreased gross profit and the increase in selling, general and administrative costs.Depreciation and amortization increased $1,167,000 in the 2020 thirty-nine-week period compared to the 2019 thirty-nine-week period and represented 8.2% of gross profit in the 2020 period compared to 7.1% of gross profit in the 2019 period. The increase in depreciation and amortization expenses was primarily due to increased depreciation on information technology assets, partially offset by a decrease in trailing equipment depreciation. The increase in depreciation and amortization as a percentage of gross profit was due to the effect of decreased gross profit and increased depreciation.
During the 2020 second fiscal quarter, the Company recorded a
non-cash
impairment charge of $2,582,000 in respect of certain assets, primarily customer contract and related customer relationship intangible assets, acquired on September 20, 2017, along with substantially all of the other assets of the asset-light transportation logistics business of Fletes Avella, S.A. de C.V. (“Fletes Avella”). As previously disclosed in Item 1A. Risk Factors in the Company’s Form 10-Q
for the 2020 first quarter, negative macroeconomic trends in Mexico have caused significant disruptions in the Mexican economy. Accordingly, management performed impairment tests of the carrying values of certain assets that primarily relate to intra-Mexico business acquired as a part of the Fletes Avella acquisition. The impairment tests resulted in an impairment charge of $2,582,000, as the negative macroeconomic trends in Mexico have caused current financial projections relating to these intangible assets to be substantially below those originally anticipated at the acquisition date. There was no corresponding goodwill impairment charge recorded as the fair value of the Company’s Mexico and cross-border reporting unit continues to significantly exceed its carrying value as of September 26, 2020.Interest and debt expense in the 2020 thirty-nine-week period increased $658,000 compared to the 2019 thirty-nine-week period. The increase in interest and debt expense was primarily attributable to decreased interest income earned on cash balances held by the transportation logistics segment.
27
The provisions for income taxes for the 2020 and 2019 thirty-nine-week periods were each based on an estimated annual effective income tax rate of 24.2%, adjusted for discrete events, such as benefits resulting from stock-based awards. The effective income tax rate for the 2020 thirty-nine-week period was 23.3%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock-based awards and state tax refunds. The effective income tax rate for the 2019 thirty-nine-week period was 22.8%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock-based awards. The effective income tax rate in the 2020 thirty-nine-week period of 23.3% was lower than the 24.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements and state tax refunds in the 2020 thirty-nine-week period. The effective income tax rate in the 2019 thirty-nine-week period of 22.8% was lower than the 24.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2019 thirty-nine-week period.
The net loss attributable to noncontrolling interest of $17,000 in the 2019 thirty-nine-week period represents the former noncontrolling investors’ share of the net loss incurred by Landstar Metro and Landstar Servicios.
Net income was $127,035,000, or $3.28 per common share ($3.28 per diluted share), in the 2020 thirty-nine-week period. Net income attributable to the Company was $177,672,000, or $4.45 per common share ($4.45 per diluted share), in the 2019 thirty-nine-week period. Net income was unfavorably impacted by approximately $12,593,000, or $0.25 per common share ($0.25 per diluted share), during the 2020 thirty-nine-week period, related to the impact of the
COVID-19
pandemic relief incentive payments.THIRTEEN WEEKS ENDED SEPTEMBER 26, 2020 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 28, 2019
Revenue for the 2020 thirteen-week period was $1,085,546,000, an increase of $73,888,000, or 7%, compared to the 2019 thirteen-week period. Transportation revenue increased $73,822,000, or 7%. The increase in transportation revenue was attributable to increased revenue per load of approximately 5% and an increased number of loads hauled of approximately 3% compared to the 2019 thirteen-week period. Reinsurance premiums were $14,172,000 and $14,106,000 for the 2020 and 2019 thirteen-week periods, respectively.
Truck transportation revenue generated by third party truck capacity providers for the 2020 thirteen-week period was $1,006,178,000, representing 93% of total revenue, an increase of $73,982,000, or 8%, compared to the 2019 thirteen-week period. Revenue per load on loads hauled by third party truck capacity providers increased approximately 5% in the 2020 thirteen-week period compared to the 2019 thirteen-week period, and the number of loads hauled by third party truck capacity providers increased approximately 3% compared to the 2019 thirteen-week period. The increase in revenue per load on loads hauled via truck was primarily due to a comparatively tighter truck capacity environment during the 2020 thirteen-week period compared to the 2019 thirteen-week period, as the domestic economy began to
re-open
and recover from the actions taken earlier this year by governmental authorities and businesses to reduce the spread of COVID-19.
During the 2020 thirteen-week period, truck capacity throughout the United States gradually tightened on a sequential basis throughout the quarter, particularly with respect to the dry van spot market. Revenue per load on loads hauled via van equipment increased 10%, while revenue per load on loads hauled via unsided/platform equipment decreased 2% and revenue per load on less-than-truckload loadings decreased 2% as compared to the 2019 thirteen-week period. The increase in the number of loads hauled via truck compared to the 2019 thirteen-week period was due to increased demand for the Company’s truck transportation services, particularly those services provided via van equipment, as we moved through the third fiscal quarter. Loads hauled via van equipment increased 5%, and loads hauled via less-than-truckload increased 1%, while unsided/platform equipment volumes decreased 4% as compared to the 2019 thirteen-week period. The number of loads hauled via truck decreased 1%, increased 2% and increased 7% during fiscal July, August and September, respectively, as compared to the corresponding periods in 2019. 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 $14,268,000 and $18,885,000 in the 2020 and 2019 thirteen-week periods, respectively.Transportation revenue generated by multimode capacity providers for the 2020 thirteen-week period was $62,184,000, or 6% of total revenue, an increase of $2,849,000, or 5%, compared to the 2019 thirteen-week period. The number of loads hauled by multimode capacity providers increased approximately 7% in the 2020 thirteen-week period compared to the 2019 thirteen-week period, while revenue per load on revenue generated by multimode capacity providers decreased approximately 2% over the same period. The increase in the number of loads hauled by multimode capacity providers was primarily due to a 34% increase in air loadings, almost entirely attributable to increased loadings at one specific customer. The decrease in revenue per load of 2% on loads hauled by multimode capacity providers was primarily attributable to decreased revenue per load on air cargo shipments and a decrease in ocean loads as a percentage of
28
loads hauled by multimode capacity providers, as ocean loads typically generate a higher revenue per load compared to loads hauled by rail or air cargo carriers. Also, revenue per load on revenue generated by multimode capacity providers is influenced by many factors, including revenue mix among the various modes of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity.
Purchased transportation was 77.3% and 76.6% of revenue in the 2020 and 2019 thirteen-week periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily due to an increased rate of purchased transportation on revenue generated by Truck Brokerage Carriers. Commissions to agents were 7.9% and 8.4% of revenue in the 2020 and 2019 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 $714,000 and $1,315,000 in the 2020 and 2019 thirteen-week periods, respectively. The decrease in investment income was primarily attributable to lower average rates of return on investments in the 2020 thirteen-week period and a lower average investment balance held by the insurance segment in the 2020 thirteen-week period.
Other operating costs decreased $3,070,000 in the 2020 thirteen-week period compared to the 2019 thirteen-week period and represented 4.6% of gross profit in the 2020 period compared to 6.8% of gross profit in the 2019 period. The decrease in other operating costs compared to the prior year was primarily due to a decreased provision for contractor bad debt, the impact of the cancellation of an event for the Company’s BCO Independent Contractors due to the
COVID-19
pandemic and increased gains on the sales of used trailing equipment. The decrease in other operating costs as a percentage of gross profit was caused by the decrease in other operating costs and the effect of increased gross profit.Insurance and claims decreased $2,114,000 in the 2020 thirteen-week period compared to the 2019 thirteen-week period and represented 13.6% of gross profit in the 2020 period compared to 15.7% of gross profit in the 2019 period. The decrease in insurance and claims expense compared to the prior year was primarily due to decreased net unfavorable development of prior years’ claims and decreased severity of current year claims in the 2020 period, partially offset by increased insurance premiums incurred for commercial trucking liability coverage following the Company’s May 1, 2020 insurance renewal. During the 2020 and 2019 thirteen-week periods, insurance and claims costs included $1,123,000 and $6,597,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. The decrease in insurance and claims as a percent of gross profit was caused by the decrease in insurance and claims costs and the effect of increased gross profit.
Selling, general and administrative costs increased $699,000 in the 2020 thirteen-week period compared to the 2019 thirteen-week period and represented 24.1% of gross profit in the 2020 period compared to 25.0% of gross profit in the 2019 period. The increase in selling, general and administrative costs compared to prior year was attributable to an increased provision for incentive compensation, increased information technology costs and increased stock-based compensation expense, partially offset by a decreased provision for customer bad debt and decreased travel and entertainment costs related to the impact of the
COVID-19
pandemic. Included in selling, general and administrative costs was incentive compensation expense/(benefit) of $2,133,000 and ($323,000) for the 2020 and 2019 thirteen-week periods, respectively, and stock-based compensation expense of $1,490,000 and $1,102,000 for the 2020 and 2019 thirteen-week periods, respectively. The decrease in selling, general and administrative costs as a percent of gross profit was due to the effect of increased gross profit, partially offset by the increase in selling, general and administrative costs.Depreciation and amortization increased $545,000 in the 2020 thirteen-week period compared to the 2019 thirteen-week period and represented 7.0% of gross profit in each of the 2020 and 2019 periods. The increase in depreciation and amortization expenses was primarily due to increased depreciation on information technology assets, partially offset by a decrease in trailing equipment depreciation.
Interest and debt expense in the 2020 thirteen-week period increased $244,000 compared to the 2019 thirteen-week period. The increase in interest and debt expense was primarily attributable to decreased interest income earned on cash balances held by the transportation logistics segment.
The provisions for income taxes for the 2020 and 2019 thirteen-week periods were each based on an estimated annual effective income tax rate of 24.2%, adjusted for discrete events, such as benefits resulting from stock-based awards. The effective income tax rate for the 2020 thirteen-week period was 23.9%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock-based awards. The effective income tax rate for the 2019 thirteen-week period was 23.8%, which was higher than the statutory federal income tax rate of 21% primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock-based
29
awards. The effective income tax rate in the 2020 thirteen-week period of 23.9% was lower than the 24.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2020 thirteen-week period. The effective income tax rate in the 2019 thirteen-week period of 23.8% was lower than the 24.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2019 thirteen-week period.
Net income was $61,886,000, or $1.61 per common share ($1.61 per diluted share), in the 2020 thirteen-week period. Net income attributable to the Company was $53,255,000 or $1.35 per common share ($1.35 per diluted share), in the 2019 thirteen-week period.
CAPITAL RESOURCES AND LIQUIDITY
Working capital and the ratio of current assets to current liabilities were $420,519,000 and 1.8 to 1, respectively, at September 26, 2020, compared with $444,984,000 and 1.8 to 1, respectively, at December 28, 2019. 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 $185,548,000 in the 2020 thirty-nine-week period compared with $260,714,000 in the 2019 thirty-nine-week period. The decrease in cash flow provided by operating activities was primarily attributable to the timing of collections of receivables and decreased net income, partially offset by the timing of payments of accounts payable.
The Company declared and paid $0.58 per share, or $22,495,000 in the aggregate, in cash dividends during the thirty-nine-week period ended September 26, 2020 and, during such period, also paid $78,947,000 of dividends payable which were declared during fiscal year 2019 and included in current liabilities in the consolidated balance sheet at December 28, 2019. The Company declared and paid $0.515 per share, or $20,589,000 in the aggregate, in cash dividends during the thirty-nine-week period ended September 28, 2019. During the thirty-nine-week period ended September 26, 2020, the Company purchased 1,178,970 shares of its common stock at a total cost of $115,962,000. During the thirty-nine-week period ended September 28, 2019, the Company purchased 849,068 shares of its common stock at a total cost of $88,578,000. As of September 26, 2020, the Company may purchase in the aggregate up to 1,821,030 shares of its common stock under its authorized stock purchase program. Long-term debt, including current maturities, was $87,293,000 at September 26, 2020, $25,551,000 lower than at December 28, 2019.
Shareholders’ equity was $705,634,000, or 89% of total capitalization (defined as long-term debt including current maturities plus equity), at September 26, 2020, compared to $721,469,000, or 86% of total capitalization, at December 28, 2019. The decrease in equity was primarily the result of purchases of shares of the Company’s common stock and dividends declared by the Company in the 2020 thirty-nine-week period, partially offset by net income.
On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent, which was amended and restated on August 18, 2020 to extend the maturity date to August 2023 and amend certain other terms (as so amended and restated, the “Credit Agreement”). The Credit Agreement provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $35,000,000 of which may be utilized in the form of letters of credit. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing capacity of $400,000,000.
The Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness. The Company is required to, among other things, maintain a minimum Fixed Charge Coverage Ratio, as defined in the Credit Agreement, and maintain a Leverage Ratio, as defined in the Credit Agreement, below a specified maximum. The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock to the extent there is a default under the Credit Agreement. In addition, the Credit Agreement under certain circumstances limits the amount of such cash dividends and other distributions to stockholders to the extent that, after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter. The Credit Agreement provides for an event of default in the event that, among other things, a person or group acquires 35% or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company’s directors or the directors cease to consist of a majority of Continuing Directors, as defined in the Credit Agreement. None of these covenants are presently considered by management to be materially restrictive to the Company’s operations, capital resources or liquidity. The Company is currently in compliance with all of the debt covenants under the Credit Agreement.
At September 26, 2020, the Company had no borrowings outstanding and $33,618,000 of letters of credit outstanding under the Credit Agreement. At September 26, 2020, there was $216,382,000 available for future borrowings under the Credit Agreement. In addition, the Company has $59,434,000 in letters of credit outstanding as collateral for insurance claims that are secured by investments totaling
30
$66,037,000 at September 26, 2020. Investments, all of which are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Fair value of investments is based primarily on quoted market prices. See “Notes to Consolidated Financial Statements” included herein for further discussion on measurement of fair value of investments.
Historically, the Company has generated sufficient operating cash flow to meet its debt service requirements, fund continued growth, both organic and through acquisitions, complete or execute share purchases of its common stock under authorized share purchase programs, pay dividends and meet working capital needs. As an asset-light provider of integrated transportation management solutions, the Company’s annual capital requirements for operating property are generally for trailing equipment and information technology hardware and software. In addition, a significant portion of the trailing equipment used by the Company is provided by third party capacity providers, thereby reducing the Company’s capital requirements. During the 2020 thirty-nine-week period, the Company purchased $25,426,000 of operating property. In addition, during the 2020 thirty-nine-week period Landstar acquired $1,068,000 of operating property for which the Company accrued a corresponding liability in accounts payable as of September 26, 2020. In addition, on June 15, 2020, Landstar Blue completed the acquisition of an independent agent of the Company. Cash consideration paid for the acquisition was approximately $2,766,000. Landstar anticipates acquiring either by purchase or lease financing during the remainder of fiscal year 2020 approximately $44,000,000 in operating property, consisting primarily of new trailing equipment to replace older trailing equipment and information technology equipment.
Management believes that cash flow from operations combined with the Company’s borrowing capacity under the Credit Agreement will be adequate to meet Landstar’s debt service requirements, fund continued growth, both internal and through acquisitions, pay dividends, complete the authorized share purchase programs and meet working capital needs.
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
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 2020 and 2019 thirty-nine-week periods, insurance and claims costs included $6,162,000 and $9,497,000 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 liability at September 26, 2020.
Significant variances from management’s estimates for the ultimate resolution of self-insured claims could be expected to positively or negatively affect Landstar’s earnings in a given quarter or year. However, management believes that the ultimate resolution of these items, given a range of reasonably likely outcomes, will not significantly affect the long-term financial condition of Landstar or its ability to fund its continuing operations.
EFFECTS OF INFLATION
Management does not believe inflation has had a material impact on the results of operations or financial condition of Landstar in the past five years. However, inflation in excess of historic trends might have an adverse effect on the Company’s results of operations in the future.
SEASONALITY
Landstar’s operations are subject to seasonal trends common to the trucking industry. Truckload shipments for the quarter ending in March are typically lower than for the quarters ending June, September and December.
31
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates as a result of its financing activities, primarily its borrowings on its revolving credit facility, and investing activities with respect to investments held by the insurance segment.
On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent, which was amended and restated on August 18, 2020 to extend the maturity date to August 2023 and amend certain other terms. The Credit Agreement provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $35,000,000 of which may be utilized in the form of letters of credit. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing capacity of $400,000,000.
The revolving credit loans under the Credit Agreement, at the option of Landstar, bear interest at (i) the Eurocurrency rate plus an applicable margin ranging from 1.25% to 2.00%, or (ii) an alternate base rate plus an applicable margin ranging from 0.25% to 1.00%, in each case with the applicable margin determined based upon the Company’s Leverage Ratio, as defined in the Credit Agreement, at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. The revolving credit facility bears a commitment fee, payable in arrears, of 0.25% to 0.35%, based on the Company’s Leverage Ratio at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. As of September 26, 2020 and during the entire 2020 third quarter, the Company had no borrowings outstanding under the Credit Agreement.
Long-term investments, all of which are and are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Assuming that the long-term portion of investments remains at $82,734,000, the balance at September 26, 2020, a hypothetical increase or decrease in interest rates of 100 basis points would not have a material impact on future earnings on an annualized basis. Short-term investments consist of short-term investment-grade instruments and the current maturities of investment-grade corporate bonds and U.S. Treasury obligations. Accordingly, any future interest rate risk on these short-term investments would not be material to the Company’s operating results.
available-for-sale
Assets and liabilities of the Company’s Canadian and Mexican operations are translated from their functional currency to U.S. dollars using exchange rates in effect at the balance sheet date and revenue and expense accounts are translated at average monthly exchange rates during the period. Adjustments resulting from the translation process are included in accumulated other comprehensive income. Transactional gains and losses arising from receivable and payable balances, including intercompany balances, in the normal course of business that are denominated in a currency other than the functional currency of the operation are recorded in the statements of income when they occur. The assets held at the Company’s Canadian and Mexican subsidiaries at September 26, 2020 were collectively, as translated to U.S. dollars, approximately 3% of total consolidated assets. Accordingly, translation gains or losses of 25% or less related to the Canadian and Mexican operations would not be material.
Item 4. Controls and Procedures
As of the end of the period covered by this quarterly report on Form
10-Q,
an evaluation was carried out, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended). Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of September 26, 2020 to provide reasonable assurance that information required to be disclosed by the Company in reports that it filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.There were no significant changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended September 26, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
In designing and evaluating disclosure controls and procedures, Company management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Because of the inherent limitation in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.
32
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in certain claims and pending litigation arising from the normal conduct of business. Many of these claims are covered in whole or in part by insurance. Based on knowledge of the facts and, in certain cases, opinions of outside counsel, management believes that adequate provisions have been made for probable losses with respect to the resolution of all such claims and pending litigation and that the ultimate outcome, after provisions therefor, will not have a material adverse effect on the financial condition of the Company, but could have a material effect on the results of operations in a given quarter or year.
Item 1A. Risk Factors
Except as set forth below, there have been no material changes to the Risk Factors described in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form
10-K
for the fiscal year ended December 28, 2019 as filed with the SEC.The coronavirus
(“COVID-19”)
pandemic has had a significant adverse impact on our business.COVID-19
was first identified in Wuhan, China in December 2019. The COVID-19
outbreak was subsequently declared a pandemic by the World Health Organization on March 11, 2020. The COVID-19
pandemic has caused significant disruptions in the global economy, which significantly intensified in the United States in late March and continued into the summer months. The situation with respect to the COVID-19
pandemic continues to evolve and its effects, both short and long-term, remain unknown. Economic disruptions and other effects on the global or domestic economies caused by the COVID-19
pandemic could have a material adverse impact on the demand for our services and our ability to obtain financing on favorable terms or at all.In connection with the impact of the
COVID-19
pandemic, the Company experienced a significant decline in truckload volumes during the second quarter of 2020 compared to the corresponding period of 2019 followed by a similarly significant yet more gradual sequential increase in demand during the third quarter of 2020. This significant, rapid decrease in demand followed by the similarly significant yet more gradual increase was unprecedented in the history of the Company. The extent to which the COVID-19
pandemic impacts the Company’s results in future quarters will depend on future developments that are highly uncertain and cannot be predicted, including the duration of the pandemic, the actions taken by federal, state and local governments in response to the pandemic and the length of time necessary for the economy to transition back to more normal operating conditions. These and other factors could have a material adverse impact on our business, financial position, results of operations and cash flows.Moreover, the
COVID-19
virus continues to spread in areas where we provide services. The Landstar network includes over 1,200 independent agent locations throughout North America where such independent agents provide shipment coordination and dispatch services, freight tracking, trailer management and numerous other operational functions. Similarly, the Landstar network includes tens of thousands of truck capacity providers who operate throughout North America without any Landstar truck terminals. Management believes the decentralized nature of our model should insulate Landstar’s freight operations in an environment where social distancing can disrupt centralized business structures. A significant disruption to our independent agent network and/or a significant decrease in available truck capacity providers due to illness or government restrictions related to the COVID-19
pandemic could have a material adverse effect on our ability to source capacity to service our customers and could have a significant impact on Landstar, including our results of operations, revenue and cash flows.In addition, the
COVID-19
pandemic has caused significant disruptions in the Mexican economy. During the Company’s 2020 fiscal year, the value of the Mexican peso to the U.S. dollar significantly depreciated and may continue to depreciate further. No assurances can be given regarding the potential impact of the COVID-19
pandemic and other factors on the Mexican economy and the value of the Mexican peso relative to the U.S. dollar and could have a significant adverse impact on the financial condition and results of operations of our Mexican subsidiaries.33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Company
The Company did not purchase any shares of its common stock during the period from June 28, 2020 to September 26, 2020, the Company’s third fiscal quarter.
On December 9, 2019, the Landstar System, Inc. Board of Directors authorized the Company to purchase up to 1,849,068 shares of the Company’s common stock from time to time in the open market and in privately negotiated transactions. As of September 26, 2020, the Company had authorization to purchase in the aggregate up to 1,821,030 shares of its common stock under this program. No specific expiration date has been assigned to the December 9, 2019 authorization.
Dividends
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”). On August 18, 2020, Landstar amended and restated the Credit Agreement to extend the maturity date to August 2023 and amend certain other terms. The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock in the event 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, as defined in the Credit Agreement, would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits listed on the Exhibit Index are furnished as part of this quarterly report on Form
10-Q.
34
EXHIBIT INDEX
Registrant’s Commission File No.:
0-21238
| + | Management contract or compensatory plan or arrangement |
| * | Filed herewith |
| ** | Furnished herewith |
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| LANDSTAR SYSTEM, INC. | ||||||
| Date: October 30, 2020 | /s/ James B. Gattoni | |||||
| James B. Gattoni | ||||||
| President and | ||||||
| Chief Executive Officer | ||||||
| Date: October 30, 2020 | /s/ L. Kevin Stout | |||||
| L. Kevin Stout | ||||||
| Vice President and Chief | ||||||
| Financial Officer | ||||||
36
TABLE OF CONTENTS
Part I -printItem 1. Financial StatementsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart IIprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 3. Defaults Upon Senior SecuritiesprintItem 4. Mine Safety DisclosuresprintItem 5. Other InformationprintItem 6. Exhibitsprint