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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 24, 2016

OR

 

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

For the transition period from                      to                     

Commission File Number: 0-21238

 

 

 

LOGO

LANDSTAR SYSTEM, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware    06-1313069

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

13410 Sutton Park Drive South, Jacksonville, Florida

(Address of principal executive offices)

32224

(Zip Code)

(904) 398-9400

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):    Yes  ☒    No  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of the close of business on October 17, 2016 was 41,775,279.

 

 

 


Table of Contents

Index

 

PART I – Financial Information   

Item 1. Financial Statements (unaudited)

  

Consolidated Balance Sheets as of September 24, 2016 and December 26, 2015

     Page 4   

Consolidated Statements of Income for the Thirty Nine and Thirteen Weeks Ended September 24, 2016 and September 26, 2015

     Page 5   

Consolidated Statements of Comprehensive Income for the Thirty Nine and Thirteen Weeks Ended September 24, 2016 and September 26, 2015

     Page 6   

Consolidated Statements of Cash Flows for the Thirty Nine Weeks Ended September 24, 2016 and September 26, 2015

     Page 7   

Consolidated Statement of Changes in Shareholders’ Equity for the Thirty Nine Weeks Ended September 24, 2016

     Page 8   

Notes to Consolidated Financial Statements

     Page 9   

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Page 15   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Page 26   

Item 4. Controls and Procedures

     Page 26   
PART II – Other Information   

Item 1. Legal Proceedings

     Page 27   

Item 1A. Risk Factors

     Page 27   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     Page 27   

Item 6. Exhibits

     Page 28   

Signatures

     Page 30   

EX – 31.1 Section 302 CEO Certification

  

EX – 31.2 Section 302 CFO Certification

  

EX – 32.1 Section 906 CEO Certification

  

EX – 32.2 Section 906 CFO Certification

  

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

The interim consolidated financial statements contained herein reflect all adjustments (all of a normal, recurring nature) which, in the opinion of management, are necessary for a fair statement of the financial condition, results of operations, cash flows and changes in shareholders’ equity for the periods presented. They have been prepared in accordance with Rule 10-01 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the thirty nine weeks ended September 24, 2016 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 31, 2016.

These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2015 Annual Report on Form 10-K.

 

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

     September 24,
2016
    December 26,
2015
 
ASSETS     

Current Assets

    

Cash and cash equivalents

   $ 170,805      $ 114,520   

Short-term investments

     56,679        48,823   

Trade accounts receivable, less allowance of $4,881 and $4,327

     409,047        462,699   

Other receivables, including advances to independent contractors, less allowance of $4,871 and $4,143

     17,091        18,472   

Other current assets

     15,188        11,604   
  

 

 

   

 

 

 

Total current assets

     668,810        656,118   
  

 

 

   

 

 

 

Operating property, less accumulated depreciation and amortization of $187,566 and $182,591

     261,943        225,927   

Goodwill

     31,134        31,134   

Other assets

     65,871        78,339   
  

 

 

   

 

 

 

Total assets

   $ 1,027,758      $ 991,518   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current Liabilities

    

Cash overdraft

   $ 27,725      $ 35,609   

Accounts payable

     201,872        223,709   

Current maturities of long-term debt

     44,784        42,499   

Insurance claims

     27,941        19,757   

Other current liabilities

     48,027        47,963   
  

 

 

   

 

 

 

Total current liabilities

     350,349        369,537   
  

 

 

   

 

 

 

Long-term debt, excluding current maturities

     90,817        81,793   

Insurance claims

     23,765        21,477   

Deferred income taxes and other noncurrent liabilities

     56,097        52,474   

Shareholders’ Equity

    

Common stock, $0.01 par value, authorized 160,000,000 shares, issued 67,522,281 and 67,391,616 shares

     675        674   

Additional paid-in capital

     198,736        195,841   

Retained earnings

     1,477,179        1,389,975   

Cost of 25,747,002 and 24,972,079 shares of common stock in treasury

     (1,167,391     (1,116,765

Accumulated other comprehensive loss

     (2,469     (3,488
  

 

 

   

 

 

 

Total shareholders’ equity

     506,730        466,237   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,027,758      $ 991,518   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

(Unaudited)

 

     Thirty Nine Weeks Ended      Thirteen Weeks Ended  
     September 24,
2016
     September 26,
2015
     September 24,
2016
     September 26,
2015
 

Revenue

   $ 2,274,805       $ 2,472,489       $ 787,938       $ 841,726   

Investment income

     1,100         1,043         357         350   

Costs and expenses:

           

Purchased transportation

     1,730,745         1,900,313         601,002         645,583   

Commissions to agents

     189,075         199,113         65,144         69,297   

Other operating costs, net of gains on asset sales/dispositions

     21,484         24,388         7,492         8,718   

Insurance and claims

     42,795         37,610         12,488         10,502   

Selling, general and administrative

     106,211         111,797         34,692         36,811   

Depreciation and amortization

     26,109         21,253         9,016         7,185   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total costs and expenses

     2,116,419         2,294,474         729,834         778,096   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     159,486         179,058         58,461         63,980   

Interest and debt expense

     2,725         2,208         948         714   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     156,761         176,850         57,513         63,266   

Income taxes

     58,985         67,016         21,235         23,918   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 97,776       $ 109,834       $ 36,278       $ 39,348   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share

   $ 2.32       $ 2.50       $ 0.86       $ 0.91   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

   $ 2.31       $ 2.49       $ 0.86       $ 0.90   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average number of shares outstanding:

           

Earnings per common share

     42,223,000         43,975,000         42,039,000         43,446,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

     42,341,000         44,134,000         42,170,000         43,607,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends per common share

   $ 0.25       $ 0.22       $ 0.09       $ 0.08   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

 

     Thirty Nine Weeks Ended     Thirteen Weeks Ended  
     September 24,
2016
     September 26,
2015
    September 24,
2016
    September 26,
2015
 

Net income

   $ 97,776       $ 109,834      $ 36,278      $ 39,348   

Other comprehensive income (loss):

         

Unrealized holding gains (losses) on available-for-sale investments, net of tax expense (benefit) of $198, $38, ($19) and $3

     363         70        (34     6   

Foreign currency translation gains (losses)

     656         (1,628     (181     (930
  

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     1,019         (1,558     (215     (924
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 98,795       $ 108,276      $ 36,063      $ 38,424   
  

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Thirty Nine Weeks Ended  
     September 24,
2016
    September 26,
2015
 

OPERATING ACTIVITIES

    

Net income

   $ 97,776      $ 109,834   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization of operating property

     26,109        21,253   

Non-cash interest charges

     175        164   

Provisions for losses on trade and other accounts receivable

     4,076        4,667   

Gains on sales/disposals of operating property

     (3,221     (278

Deferred income taxes, net

     8,925        957   

Stock-based compensation

     2,718        4,939   

Changes in operating assets and liabilities:

    

Decrease in trade and other accounts receivable

     50,957        23,262   

Decrease in other assets

     3,820        5,830   

Decrease in accounts payable

     (25,074     (14,563

Decrease in other liabilities

     (5,436     (3,849

Increase (decrease) in insurance claims

     10,472        (4,132
  

 

 

   

 

 

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

     171,297        148,084   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Sales and maturities of investments

     30,580        29,545   

Purchases of investments

     (31,938     (34,751

Purchases of operating property

     (17,833     (3,798

Proceeds from sales of operating property

     8,622        1,567   
  

 

 

   

 

 

 

NET CASH USED BY INVESTING ACTIVITIES

     (10,569     (7,437
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Decrease in cash overdraft

     (7,884     (4,963

Dividends paid

     (10,572     (54,467

Payment for debt issue costs

     (1,048     —     

Proceeds from exercises of stock options

     1,440        1,076   

Taxes paid in lieu of shares issued related to stock-based compensation plans

     (1,715     (2,176

Excess tax benefits from stock-based awards

     343        652   

Purchases of common stock

     (50,516     (107,214

Principal payments on capital lease obligations

     (35,147     (26,972
  

 

 

   

 

 

 

NET CASH USED BY FINANCING ACTIVITIES

     (105,099     (194,064
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     656        (1,628
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     56,285        (55,045

Cash and cash equivalents at beginning of period

     114,520        163,944   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 170,805      $ 108,899   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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LANDSTAR SYSTEM, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Thirty Nine Weeks Ended September 24, 2016

(Dollars in thousands)

(Unaudited)

 

                            Treasury     Accumulated        
                Additional           Stock     Other        
    Common Stock     Paid-In     Retained     at Cost     Comprehensive        
    Shares     Amount     Capital     Earnings     Shares     Amount     Income (Loss)     Total  

Balance December 26, 2015

    67,391,616      $ 674      $ 195,841      $ 1,389,975        24,972,079      $ (1,116,765   $ (3,488   $ 466,237   

Net income

          97,776              97,776   

Dividends ($0.25 per share)

          (10,572           (10,572

Purchases of common stock

            773,281        (50,516       (50,516

Issuance of stock related to stock-based compensation plans, including excess tax effect

    130,665        1        177          1,642        (110       68   

Stock-based compensation

        2,718                2,718   

Other comprehensive income

                1,019        1,019   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 24, 2016

    67,522,281      $ 675      $ 198,736      $ 1,477,179        25,747,002      $ (1,167,391   $ (2,469   $ 506,730   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

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.” Certain prior year amounts have been reclassified for consistency with the current year presentation. Significant intercompany accounts have been eliminated in consolidation.

 

(1) Share-based Payment Arrangements

As of September 24, 2016, the Company had two employee equity incentive plans, the 2002 employee stock option and stock incentive plan (the “ESOSIP”) and the 2011 equity incentive plan (the “2011 EIP”). No further grants can be made under the ESOSIP. The Company also has a stock compensation plan for members of its Board of Directors, the Amended and Restated 2013 Directors Stock Compensation Plan (as amended and restated as of May 17, 2016, the “2013 DSCP”). 6,000,000 shares of the Company’s common stock were authorized for issuance under the 2011 EIP and 115,000 shares of the Company’s common stock were authorized for issuance under the 2013 DSCP. The ESOSIP, 2011 EIP and 2013 DSCP are each referred to herein as a “Plan,” and, collectively, as the “Plans.” Amounts recognized in the financial statements with respect to these Plans are as follows (in thousands):

 

     Thirty Nine Weeks Ended      Thirteen Weeks Ended  
     September 24,
2016
     September 26,
2015
     September 24,
2016
     September 26,
2015
 

Total cost of the Plans during the period

   $ 2,718       $ 4,939       $ 652       $ 1,696   

Amount of related income tax benefit recognized during the period

     (1,128      (1,721      (292      (451
  

 

 

    

 

 

    

 

 

    

 

 

 

Net cost of the Plans during the period

   $ 1,590       $ 3,218       $ 360       $ 1,245   
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in income tax benefits recognized in the thirty-nine-week periods ended September 24, 2016 and September 26, 2015 were income tax benefits of $261,000 and $348,000, respectively, recognized on disqualifying dispositions of the Company’s common stock by employees who obtained shares of common stock through exercises of incentive stock options.

As of September 24, 2016, there were 86,572 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 5,159,100 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 under the Plans:

 

     Number of
RSUs
     Weighted Average
Grant Date
Fair Value
 

Outstanding at December 26, 2015

     444,157       $ 51.10   

Granted

     79,810       $ 51.58   

Vested

     (81,344    $ 53.08   

Forfeited

     (64,523    $ 52.99   
  

 

 

    

Outstanding at September 24, 2016

     378,100       $ 50.46   
  

 

 

    

During the thirty-nine-week period ended September 24, 2016, the Company granted RSUs with a performance condition. RSUs with a performance condition granted on January 29, 2016 may vest on January 31 of 2019, 2020 and 2021 based on growth in operating

 

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income and diluted earnings per share from continuing operations as compared to the results from the 2015 fiscal year. Outstanding RSUs at both December 26, 2015 and September 24, 2016 include RSUs with a performance condition and RSUs with a market condition, as further described below.

RSUs with a performance condition vest over a 5 year period from the date of grant based on growth in operating income and diluted earnings per share as compared to a base year, being the year immediately preceding the year of grant. At the time of grant, the target number of common shares available for issuance under the January 29, 2016 and January 27, 2015 grants equals 100% of the number of RSUs granted, and the maximum number of common shares available for issuance under the January 29, 2016 and January 27, 2015 grants equals 200% of the number of RSUs granted. In the event actual results exceed the target, the number of shares that will be granted will exceed the number of RSUs granted. The maximum number of common shares available for issuance under grants made prior to 2015 equals 100% of the number of RSUs granted. The fair value of an RSU with a performance condition was determined based on the market value of the Company’s common stock on the date of grant, discounted for lack of marketability for a minimum post-vesting holding requirement. The discount rate due to lack of marketability used for RSU award grants with a performance condition for all periods was 7%. With respect to RSU awards with a performance condition, the Company reports compensation expense over the life of the award based on an estimated number of units that will vest over the life of the award, multiplied by the fair value of an RSU.

On May 1, 2015, the Company granted 20,000 RSUs that vest based on a market condition. These RSUs may vest on April 30 of 2019, 2020 and 2021 based on the Company’s total shareholder return (“TSR”) compound annual growth rate over the vesting periods, adjusted to reflect dividends (if any) paid during such periods and capital adjustments as may be necessary. The target number of common shares available for issuance under the May 1, 2015 grant equals 100% of the number of RSUs granted, and the maximum number of common shares available for issuance under the May 1, 2015 grant equals 150% of the number of RSUs granted. In the event actual results exceed the target TSR compound annual growth rate, the number of shares that will be granted will exceed the number of RSUs granted. The fair value of this RSU award was determined at the time of grant based on the expected achievement of the market condition at the end of each vesting period. With respect to these RSU awards with a market condition, compensation expense is recognized ratably over the requisite service period under an award based on the fair market value of the award at the time of grant, regardless of whether the market condition is satisfied. Previously recognized compensation cost would be reversed, however, if the employee terminated employment prior to completing such requisite service period.

The Company recognized approximately $1,322,000 and $3,446,000 of share-based compensation expense related to RSU awards in the thirty-nine-week periods ended September 24, 2016 and September 26, 2015, respectively. As of September 24, 2016, there was a maximum of $26.6 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 2.9 years. With respect to RSU awards with a performance condition, the amount of future compensation expense to be recognized will be determined based on future operating results.

Stock Options

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

 

                   Weighted Average         
     Number of      Weighted Average
Exercise Price
     Remaining
Contractual
     Aggregate Intrinsic  
     Options      per Share      Term (years)      Value (000s)  

Options outstanding at December 26, 2015

     637,221       $ 47.24         

Exercised

     (99,092    $ 46.01         

Forfeited

     (6,600    $ 53.51         
  

 

 

          

Options outstanding at September 24, 2016

     531,529       $ 47.39         4.5       $ 10,161   
  

 

 

          

Options exercisable at September 24, 2016

     439,029       $ 45.99         4.2       $ 9,008   
  

 

 

          

The total intrinsic value of stock options exercised during the thirty-nine-week periods ended September 24, 2016 and September 26, 2015 was $1,938,000 and $2,542,000, respectively.

As of September 24, 2016, there was $600,000 of total unrecognized compensation cost related to non-vested stock options granted under the Plans. The unrecognized compensation cost related to these non-vested options is expected to be recognized over a weighted average period of 1.0 year.

 

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Non-vested Restricted Stock

The following table summarizes information regarding the Company’s outstanding shares of non-vested restricted stock under the Plans:

 

     Number of     

Weighted Average

Grant Date

 
     Shares      Fair Value  

Outstanding at December 26, 2015

     18,060       $ 54.36   

Granted

     26,033       $ 58.53   

Vested

     (13,684    $ 52.48   
  

 

 

    

Outstanding at September 24, 2016

     30,409       $ 58.77   
  

 

 

    

The fair value of each share of non-vested restricted stock issued under the Plans is based on the fair value of a share of the Company’s common stock on the date of grant. Shares of non-vested restricted stock are generally subject to vesting in three equal annual installments or 100% on the first, third or fifth anniversary of the date of the grant.

As of September 24, 2016, there was $1,228,000 of total unrecognized compensation cost related to non-vested shares of restricted stock granted under the Plans. The unrecognized compensation cost related to these non-vested shares of restricted stock is expected to be recognized over a weighted average period of 1.7 years.

 

(2) Income Taxes

The provisions for income taxes for the 2016 and 2015 thirty-nine-week periods were based on estimated annual effective income tax rates of 38.1% and 38.2%, respectively, adjusted for discrete events, such as benefits resulting from disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options. The effective income tax rates for the 2016 and 2015 thirty-nine-week periods were 37.6% and 37.9%, respectively, which were higher than the statutory federal income tax rate primarily as a result of state taxes, the meals and entertainment exclusion and non-deductible stock-based compensation.

During the first fiscal quarter of 2016, the Company adopted Accounting Standards Update 2015-17 – Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which requires an entity to present deferred tax assets and deferred tax liabilities as noncurrent in a classified balance sheet. The Company reclassified $6,552,000 of current deferred tax assets to noncurrent to conform to the current year presentation and this amount is now included in deferred income taxes and other noncurrent liabilities in the December 26, 2015 consolidated balance sheet.

 

(3) Earnings Per Share

Earnings per common share are based on the weighted average number of shares outstanding, including outstanding non-vested restricted stock. Diluted earnings per share are based on the weighted average number of common shares outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options.

The following table provides a reconciliation of the average number of common shares outstanding used to calculate earnings per common share to the average number of common shares and common share equivalents outstanding used to calculate diluted earnings per share (in thousands):

 

     Thirty Nine Weeks Ended      Thirteen Weeks Ended  
     September 24,
2016
     September 26,
2015
     September 24,
2016
     September 26,
2015
 

Average number of common shares outstanding

     42,223         43,975         42,039         43,446   

Incremental shares from assumed exercises of stock options

     118         159         131         161   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average number of common shares and common share equivalents outstanding

     42,341         44,134         42,170         43,607   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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For each of the thirty-nine-week and thirteen-week periods ended September 24, 2016 and September 26, 2015, no options outstanding to purchase shares of common stock were antidilutive. Outstanding RSUs were excluded from the calculation of diluted earnings per share for all periods because the performance metric requirements or market condition for vesting had not been satisfied.

 

(4) Additional Cash Flow Information

During the 2016 thirty-nine-week period, Landstar paid income taxes and interest of $48,615,000 and $2,730,000, respectively. During the 2015 thirty-nine-week period, Landstar paid income taxes and interest of $50,197,000 and $2,252,000, respectively. Landstar acquired operating property by entering into capital leases in the amount of $46,456,000 and $11,869,000 in the 2016 and 2015 thirty-nine-week periods, respectively. In addition, Landstar acquired $3,237,000 of operating property for which the Company accrued a corresponding liability in accounts payable as of September 24, 2016 related to the construction in process of a freight staging and transload facility in Laredo, TX. Approximately $5,440,000 of the $112,654,000 of purchases of common stock during the 2015 thirty-nine-week period was accrued at September 26, 2015 and settled in the subsequent fiscal month.

 

(5) 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 24, 2016 and September 26, 2015 (in thousands):

 

     Thirty Nine Weeks Ended  
     September 24, 2016      September 26, 2015  
     Transportation
Logistics
     Insurance      Total      Transportation
Logistics
     Insurance      Total  

External revenue

   $ 2,240,169       $ 34,636       $ 2,274,805       $ 2,439,622       $ 32,867       $ 2,472,489   

Internal revenue

        28,890         28,890            24,946         24,946   

Investment income

        1,100         1,100            1,043         1,043   

Operating income

     133,342         26,144         159,486         154,880         24,178         179,058   

Expenditures on long-lived assets

     17,833            17,833         3,798            3,798   

Goodwill

     31,134            31,134         31,134            31,134   

 

     Thirteen Weeks Ended  
     September 24, 2016      September 26, 2015  
     Transportation
Logistics
     Insurance      Total      Transportation
Logistics
     Insurance      Total  

External revenue

   $    776,397       $ 11,541       $    787,938       $    830,397       $ 11,329       $    841,726   

Internal revenue

        7,229         7,229            6,392         6,392   

Investment income

        357         357            350         350   

Operating income

     47,541         10,920         58,461         53,767         10,213         63,980   

Expenditures on long-lived assets

     8,878            8,878         748            748   

In the thirty-nine and thirteen-week periods ended September 24, 2016 and September 26, 2015, no single customer accounted for more than 10% of the Company’s consolidated revenue.

 

(6) Other Comprehensive Income

The following table presents the components of and changes in accumulated other comprehensive income, net of related income taxes, as of and for the thirty-nine-week period ended September 24, 2016 (in thousands):

 

     Unrealized
Holding Gains

(Losses) on
Available-for-Sale
Securities
     Foreign Currency
Translation
     Total  

Balance as of December 26, 2015

   $ (94    $ (3,394    $ (3,488

Other comprehensive income

     363         656         1,019   
  

 

 

    

 

 

    

 

 

 

Balance as of September 24, 2016

   $ 269       $ (2,738    $ (2,469
  

 

 

    

 

 

    

 

 

 

 

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Amounts reclassified from accumulated other comprehensive income to investment income due to the realization of previously unrealized gains and losses in the accompanying consolidated statements of income were not significant for the thirty-nine-week period ended September 24, 2016.

 

(7) Investments

Investments include primarily investment-grade corporate bonds and U.S. Treasury obligations having maturities of up to five years (the “bond portfolio”). Investments in the bond portfolio are reported as available-for-sale and are carried at fair value. Investments maturing less than one year from the balance sheet date are included in short-term investments and investments maturing more than one year from the balance sheet date are included in other assets in the consolidated balance sheets. Management performs an analysis of the nature of the unrealized losses on available-for-sale investments to determine whether such losses are other-than-temporary. Unrealized losses, representing the excess of the purchase price of an investment over its fair value as of the end of a period, considered to be other-than-temporary, are to be included as a charge in the statement of income, while unrealized losses considered to be temporary are to be included as a component of 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 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 $416,000 at September 24, 2016, while unrealized losses, net of unrealized gains, on the investments in the bond portfolio were $145,000 at December 26, 2015.

The amortized cost and fair values of available-for-sale investments are as follows at September 24, 2016 and December 26, 2015 (in thousands):

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

September 24, 2016

           

Money market investments

   $ 7,268       $ —         $ —         $ 7,268   

Asset-backed securities

     4,224         6         9         4,221   

Corporate bonds and direct obligations of government agencies

     77,216         449         46         77,619   

U.S. Treasury obligations

     20,557         17         1         20,573   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 109,265       $ 472       $ 56       $ 109,681   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 26, 2015

           

Money market investments

   $ 7,594       $ —         $ —         $ 7,594   

Asset-backed securities

     4,523         1         58         4,466   

Corporate bonds and direct obligations of government agencies

     76,839         190         270         76,759   

U.S. Treasury obligations

     19,273         5         13         19,265   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 108,229       $ 196       $ 341       $ 108,084   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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For those available-for-sale investments with unrealized losses at September 24, 2016 and December 26, 2015, the following table summarizes the duration of the unrealized loss (in thousands):

 

     Less than 12 months      12 months or longer      Total  
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
     Fair
Value
     Unrealized
Loss
 

September 24, 2016

                 

Asset-backed securities

   $ 1,482       $ 1       $ 2,395       $ 8       $ 3,877       $ 9   

Corporate bonds and direct obligations of government agencies

     13,947         23         1,394         23         15,341         46   

U.S. Treasury obligations

     4,017         1         —           —           4,017         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,446       $ 25       $ 3,789       $ 31       $ 23,235       $ 56   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 26, 2015

                 

Asset-backed securities

   $ 4,422       $ 58       $ —         $ —         $ 4,422       $ 58   

Corporate bonds and direct obligations of government agencies

     39,276         217         562         53         39,838         270   

U.S. Treasury obligations

     15,093         13         —           —           15,093         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 58,791       $ 288       $ 562       $ 53       $ 59,353       $ 341   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company expects to recover the amortized cost basis of these securities as it does not intend to sell, and does not anticipate being required to sell, these securities before recovery of the cost basis. For these reasons, the Company does not consider the unrealized losses on these securities to be other-than-temporary at September 24, 2016.

 

(8) Commitments and Contingencies

Short-term investments include $56,679,000 in current maturities of investments held by the Company’s insurance segment at September 24, 2016. The non-current portion of the bond portfolio of $53,002,000 is included in other assets. The short-term investments, together with $11,221,000 of non-current investments, provide collateral for the $61,110,000 of letters of credit issued to guarantee payment of insurance claims. As of September 24, 2016, Landstar also had $35,601,000 of additional letters of credit outstanding under the Company’s Credit Agreement.

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.

 

(9) 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 (favorable) development of prior year self-insured claims estimates on operating income, net income and earnings per share amounts in the consolidated statements of income for the thirty-nine-week and thirteen-week periods ended September 24, 2016 and September 26, 2015 (in thousands, except per share amounts):

 

     Thirty Nine Weeks Ended      Thirteen Weeks Ended  
     September 24,
2016
     September 26,
2015
     September 24,
2016
     September 26,
2015
 

Operating income

   $ 698       $ 5,521       $ (2,118    $ 47   

Net income

     431         3,412         (1,309      29   

Earnings per share

   $ 0.01       $ 0.08       $ (0.03    $ 0.00   

Diluted earnings per share

   $ 0.01       $ 0.08       $ (0.03    $ 0.00   

 

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The unfavorable development of prior years’ claims in the thirty-nine-week period ended September 26, 2015 primarily related to the impact of the March 13, 2015 verdict further described in reports previously filed by the Company with the Securities and Exchange Commission.

 

(10) Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2014-09 - Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 is a comprehensive revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. On July 9, 2015, the FASB approved deferring the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also approved permitting early adoption of the standard, but not before the original effective date of December 15, 2016. ASU 2014-09 is not expected to have a material impact on the Company’s financial statements.

In November 2015, the FASB issued ASU 2015-17 – Balance Sheet Classification of Deferred Taxes. The Company adopted this guidance during the first fiscal quarter of 2016 and applied it retrospectively. Deferred tax assets in the prior period presented have been reclassified to conform to the current year presentation. See Note 2, Income Taxes, for further information.

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

In March 2016, the FASB issued Accounting Standards Update 2016-09 – Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods therein. The impact of adopting this standard on our financial statements will be dependent on the timing and intrinsic value of future share-based compensation award vesting and exercises.

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the interim consolidated financial statements and notes thereto included herein, and with the Company’s audited financial statements and notes thereto for the fiscal year ended December 26, 2015 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2015 Annual Report on Form 10-K.

FORWARD-LOOKING STATEMENTS

The following is a “safe harbor” statement under the Private Securities Litigation Reform Act of 1995. Statements contained in this document that are not based on historical facts are “forward-looking statements.” This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain forward-looking statements, such as statements which relate to Landstar’s business objectives, plans, strategies and expectations. Terms such as “anticipates,” “believes,” “estimates,” “intention,” “expects,” “plans,” “predicts,” “may,” “should,” “could,” “will,” the negative thereof and similar expressions are intended to identify forward-looking statements. Such statements are by nature subject to uncertainties and risks, including but not limited to: an increase in the frequency or severity of accidents or other claims; unfavorable development of existing accident claims; dependence on third party insurance companies; dependence on independent commission sales agents; dependence on third party capacity providers; decreased demand for transportation services; substantial industry competition; disruptions or failures in the Company’s computer

 

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systems; cyber and other information security incidents; dependence on key vendors; changes in fuel taxes; status of independent contractors; regulatory and legislative changes; catastrophic loss of a Company facility; intellectual property; unclaimed property; regulations focused on diesel emissions and other air quality matters and other operational, financial or legal risks or uncertainties detailed in Landstar’s Form 10-K for the 2015 fiscal year, described in Item 1A “Risk Factors”, in this report, our Form 10-Q for the quarterly period ended June 25, 2016 or in Landstar’s other Securities and Exchange Commission filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking statements and the Company undertakes no obligation to publicly update or revise any forward-looking statements.

Introduction

Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (together, referred to herein as “Landstar” or the “Company”), is a worldwide asset-light provider of integrated transportation management solutions. The Company offers services to its customers across multiple transportation modes, with the ability to arrange for individual shipments of freight to enterprise-wide solutions to manage all of a customer’s transportation needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada, and between the United States and Canada, Mexico and other countries around the world. The Company’s services emphasize safety, information coordination and customer service and are delivered through a network of independent commission sales agents and third party capacity providers linked together by a series of technological applications which are provided and coordinated by the Company. The nature of the Company’s business is such that a significant portion of its operating costs varies directly with revenue.

Landstar markets its integrated transportation management solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport customers’ freight. Landstar’s independent commission sales agents enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under non-exclusive contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers and railroads. Through this network of agents and capacity providers linked together by Landstar’s information technology systems, Landstar operates an integrated transportation management solutions business primarily throughout North America with revenue of $3.3 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment.

The transportation logistics segment provides a wide range of integrated transportation management solutions. Transportation services offered by the Company include truckload and less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico cross-border, project cargo and customs brokerage. Industries serviced by the transportation logistics segment include automotive products, building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics, ammunition and explosives and military equipment. In addition, the transportation logistics segment provides transportation services to other transportation companies, including third party logistics and less-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Billings for freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight and are referred to as transportation revenue. During the thirty-nine weeks ended September 24, 2016, revenue hauled by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 48%, 45% and 3%, respectively, of the Company’s consolidated revenue. Collectively, revenue hauled by air and ocean cargo carriers represented approximately 2% of the Company’s consolidated revenue in the thirty-nine-week period ended September 24, 2016.

The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore insurance subsidiary (“Signature”), and Risk Management Claim Services, Inc. This segment provides risk and claims management services to certain of 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 2% of the Company’s consolidated revenue for the thirty-nine-week period ended September 24, 2016.

 

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Table of Contents

Changes in Financial Condition and Results of Operations

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

While customer demand, which is subject to overall economic conditions, ultimately drives increases or decreases in revenue, the Company primarily relies on its independent commission sales agents to establish customer relationships and generate revenue opportunities. Management’s emphasis with respect to revenue growth is on revenue generated by independent commission sales agents who on an annual basis generate $1 million or more of Landstar revenue (“Million Dollar Agents”). Management believes future revenue growth is primarily dependent on its ability to increase both the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a combination of recruiting new agents and increasing the revenue opportunities generated by existing independent commission sales agents. During the 2015 fiscal year, 512 independent commission sales agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the 2015 fiscal year, the average revenue generated by a Million Dollar Agent was $5,998,000 and revenue generated by Million Dollar Agents in the aggregate represented 92% of consolidated revenue.

Management monitors business activity by tracking the number of loads (volume) and revenue per load by mode of transportation. Revenue per load can be influenced by many factors other than a change in price. Those factors include the average length of haul, freight type, special handling and equipment requirements, fuel costs and delivery time requirements. For shipments involving two or more modes of transportation, revenue is generally classified by the mode of transportation having the highest cost for the load. The following table summarizes this information by trailer type for truck transportation and by mode for all others:

 

    Thirty Nine Weeks Ended     Thirteen Weeks Ended  
    September 24,
2016
    September 26,
2015
    September 24,
2016
    September 26,
2015
 

Revenue generated through (in thousands):

       

Truck transportation

       

Truckload:

       

Van equipment

  $ 1,351,980      $ 1,412,824      $ 465,785      $ 466,226   

Unsided/platform equipment

    700,369        823,767        248,939        293,252   

Less-than-truckload

    54,066        61,297        18,139        20,341   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total truck transportation

    2,106,415        2,297,888        732,863        779,819   

Rail intermodal

    76,987        76,688        24,650        27,166   

Ocean and air cargo carriers

    56,500        64,725        18,790        23,315   

Other (1)

    34,903        33,188        11,635        11,426   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 2,274,805      $ 2,472,489      $ 787,938      $ 841,726   
 

 

 

   

 

 

   

 

 

   

 

 

 

Revenue on loads hauled via BCO Independent Contractors included in total truck transportation

  $ 1,086,848      $ 1,140,870      $ 379,196      $ 388,840   

Number of loads:

       

Truck transportation

       

Truckload:

       

Van equipment

    847,208        820,223        291,089        275,509   

Unsided/platform equipment

    331,226        359,769        112,192        130,317   

Less-than-truckload

    84,316        83,838        28,589        28,934   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total truck transportation

    1,262,750        1,263,830        431,870        434,760   

Rail intermodal

    36,120        32,350        11,940        11,670   

Ocean and air cargo carriers

    14,910        13,320        5,130        4,700   
 

 

 

   

 

 

   

 

 

   

 

 

 
    1,313,780        1,309,500        448,940        451,130   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loads hauled via BCO Independent Contractors included in total truck transportation

    630,880        616,410        216,220        210,180   

Revenue per load:

       

Truck transportation

       

Truckload:

       

Van equipment

  $ 1,596      $ 1,722      $ 1,600      $ 1,692   

Unsided/platform equipment

    2,114        2,290        2,219        2,250   

Less-than-truckload

    641        731        634        703   

Total truck transportation

    1,668        1,818        1,697        1,794   

Rail intermodal

    2,131        2,371        2,064        2,328   

Ocean and air cargo carriers

    3,789        4,859        3,663        4,961   

Revenue per load on loads hauled via BCO Independent Contractors

  $ 1,723      $ 1,851      $ 1,754      $ 1,850   

Revenue by capacity type (as a % of total revenue):

       

Truck capacity providers:

       

BCO Independent Contractors

    48     46     48     46

Truck Brokerage Carriers

    45     47     45     46

Rail intermodal

    3     3     3     3

Ocean and air cargo carriers

    2     3     2     3

Other

    2     1     1     1

 

(1) Includes primarily reinsurance premium revenue generated by the insurance segment.

 

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

 

     September 24, 2016      September 26, 2015  

BCO Independent Contractors

     8,889         8,869   

Truck Brokerage Carriers:

     

Approved and active (1)

     30,860         29,127   

Other approved

     15,691         13,813   
  

 

 

    

 

 

 
     46,551         42,940   
  

 

 

    

 

 

 

Total available truck capacity providers

     55,440         51,809   
  

 

 

    

 

 

 

Trucks provided by BCO Independent Contractors

     9,510         9,441   

 

(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. Purchased transportation paid to air cargo carriers is generally based on a negotiated rate for each load hauled and purchased transportation paid to ocean cargo carriers is generally based on contractually agreed-upon fixed rates. Purchased transportation as a percentage of revenue for truck brokerage, rail intermodal and ocean cargo services is normally higher than that of BCO Independent Contractor and air cargo services. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases as a percentage of consolidated revenue in proportion to changes in the percentage of consolidated revenue generated through BCO Independent Contractors and other third party capacity providers and external revenue from the insurance segment, consisting of reinsurance premiums. Purchased transportation as a percent of revenue also increases or decreases in relation to the availability of truck brokerage capacity and with changes in the price of fuel on revenue 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 upon the completion of freight delivery.

 

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

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

In general, gross profit margin on revenue hauled 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 hauled 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 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 Company’s contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of net revenue for these type of loads. Approximately 56% of the Company’s consolidated revenue in the thirty-nine-week period ended September 24, 2016 was generated under contracts that have a fixed gross profit margin while 44% was under contracts that have a variable gross profit margin.

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

With respect to insurance and claims cost, potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable. For commercial trucking claims, Landstar retains liability up to $5,000,000 per occurrence. The Company also retains liability of up to $1,000,000 for each general liability claim, up to $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. The Company’s exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air and ocean cargo carriers who transport freight on behalf of the Company is reduced by various factors including the extent to which such carriers maintain their own insurance coverage. A material increase in the frequency or severity of accidents, cargo claims or workers’ compensation claims or the material unfavorable development of existing claims could have a material adverse effect on Landstar’s cost of insurance and claims and its results of operations.

During the thirty-nine-week period ended September 24, 2016, employee compensation and benefits accounted for approximately sixty-five percent of the Company’s selling, general and administrative costs.

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

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 24,
2016
    September 26,
2015
    September 24,
2016
    September 26,
2015
 

Revenue

     100.0     100.0     100.0     100.0

Purchased transportation

     76.1        76.9        76.3        76.7   

Commissions to agents

     8.3        8.1        8.3        8.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit margin

     15.6     15.1     15.5     15.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     100.0     100.0     100.0     100.0

Investment income

     0.3        0.3        0.3        0.3   

Indirect costs and expenses:

        

Other operating costs, net of gains on asset sales/dispositions

     6.1        6.5        6.2        6.9   

Insurance and claims

     12.1        10.1        10.3        8.3   

Selling, general and administrative

     29.9        30.0        28.5        29.0   

Depreciation and amortization

     7.4        5.7        7.4        5.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     55.4        52.3        52.3        49.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     44.9     48.0     48.0     50.4
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Management believes that a discussion of indirect costs as a percentage of gross profit is useful and meaningful to potential investors for the following principal reasons: (1) disclosure of these relative measures (i.e., each indirect operating cost line item as a percentage of gross profit) allows investors to better understand the underlying trends in the 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 on a year-over-year basis at 2% or less of consolidated revenue and generally corresponds directly with the number of trucks provided by BCO Independent Contractors. The discussion of indirect cost line items in 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.

THIRTY NINE WEEKS ENDED SEPTEMBER 24, 2016 COMPARED TO THIRTY NINE WEEKS ENDED SEPTEMBER 26, 2015

Revenue for the 2016 thirty-nine-week period was $2,274,805,000, a decrease of $197,684,000, or 8%, compared to the 2015 thirty-nine-week period. Transportation revenue decreased $199,453,000, or 8%. The decrease in transportation revenue was attributable to decreased revenue per load of approximately 8%, while the number of loads hauled in the 2016 thirty-nine week period was approximately equal to the prior year period. Reinsurance premiums were $34,636,000 and $32,867,000 for the 2016 and 2015 thirty-nine-week periods, respectively. The increase in revenue from reinsurance premiums was primarily attributable to the net increase in the average number of BCO Independent Contractors in the 2016 thirty-nine-week period compared to the 2015 thirty-nine-week period.

Truck transportation revenue hauled by BCO Independent Contractors and Truck Brokerage Carriers (together, the “third party truck capacity providers”) for the 2016 thirty-nine-week period was $2,106,415,000, or 93% of total revenue, a decrease of $191,473,000, or 8%, compared to the 2015 thirty-nine-week period. Revenue per load on loads hauled by third party truck capacity providers decreased approximately 8% in the 2016 thirty-nine-week period compared to the 2015 thirty-nine-week period, while the number of loads hauled was approximately equal to the 2015 thirty-nine-week period. The decrease in revenue per load on loads hauled via truck was primarily attributable to the impact of lower diesel fuel costs on loads hauled via Truck Brokerage Carriers, a somewhat softer freight environment as compared to the 2015 thirty-nine-week period, which resulted in more readily available truck capacity, and a decrease in the number of loads hauled via heavy specialized equipment, which typically have a higher revenue per load, as a percentage of total truck loads. The number of loads hauled via van equipment increased 3%, while the number of loads hauled via unsided/platform equipment decreased 8% in the 2016 thirty-nine-week period compared to the 2015 thirty-nine-week period. Demand for van transportation services utilizing

 

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Company provided van trailers, primarily relating to drop and hook services, drove the growth in the number of loads hauled via van trailing equipment during the period. The decrease in the number of loads hauled via unsided/platform equipment was entirely attributable to the impact of approximately 33,000 loads hauled in the 2015 thirty-nine-week period related to a significant project for a single account in the automotive industry. That project was completed at the end of 2015. Excluding the impact of the project loads hauled during the 2015 period, the number of loads hauled via unsided/platform equipment increased 1% during the 2016 thirty-nine-week period. Fuel surcharges billed to customers on revenue hauled 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 $37,723,000 and $65,159,000 in the 2016 and 2015 thirty-nine-week periods, respectively. It should be noted that many customers of truck brokerage services require a single all-in rate that does not separately identify fuel surcharge. Accordingly, the overall impact of changes in fuel prices on revenue and revenue per load on loads hauled via truck may be greater than that indicated.

Transportation revenue hauled by rail intermodal, air cargo and ocean cargo carriers (collectively, the “multimode capacity providers”) for the thirty-nine-week period ended September 24, 2016, was $133,487,000, or 6% of total revenue, a decrease of $7,926,000, or 6%, compared to the 2015 thirty-nine-week period. The number of loads hauled by multimode capacity providers in the 2016 thirty-nine-week period increased approximately 12% compared to the 2015 thirty-nine-week period, while revenue per load on revenue hauled by multimode capacity providers decreased approximately 16% over the same period. The increase in loads hauled by multimode capacity providers was primarily due to increased rail intermodal loads, mostly attributable to increased loadings at one specific agency, and a 12% increase in loads hauled by air and ocean cargo carriers. Revenue per load on loads hauled by multimode capacity providers decreased for all modes, primarily due to softness in the U.S. and global economies. Also, revenue per load on revenue hauled by multimode capacity providers is influenced by many factors, including revenue mix among the various modes of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity.

Purchased transportation was 76.1% and 76.9% of revenue in the 2016 and 2015 thirty-nine-week periods, respectively. The decrease in purchased transportation as a percentage of revenue was primarily due to a decreased rate of purchased transportation paid to Truck Brokerage Carriers, primarily due to the impact of lower diesel fuel costs and more readily available capacity and an increase in the percentage of revenue contributed by BCO Independent Contractors, which typically has a lower rate of purchased transportation than revenue hauled by Truck Brokerage Carriers. Commissions to agents were 8.3% and 8.1% of revenue in the 2016 and 2015 thirty-nine-week periods, respectively. The increase in commissions to agents as a percentage of revenue was primarily attributable to an increased net revenue margin on revenue hauled by Truck Brokerage Carriers.

Investment income was $1,100,000 and $1,043,000 in the 2016 and 2015 thirty-nine-week periods, respectively.

Other operating costs decreased $2,904,000 in the 2016 thirty-nine-week period compared to the 2015 thirty-nine-week period and represented 6.1% of gross profit in the 2016 period compared to 6.5% of gross profit in the 2015 period. The decrease in other operating costs compared to the prior year was primarily due to increased gains on sales of used trailing equipment and decreased trailing equipment rental costs, partially offset by increased trailing equipment maintenance costs, as the Company increased its number of owned trailers in response to customer demand, and an increased provision for contractor bad debt. 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 $5,185,000 in the 2016 thirty-nine-week period compared to the 2015 thirty-nine-week period and represented 12.1% of gross profit in the 2016 period compared to 10.1% of gross profit in the 2015 period. The increase in insurance and claims compared to prior year was due to increased severity of current year claims in the 2016 period, partially offset by decreased net unfavorable development of prior years’ claims in the 2016 period as unfavorable development of prior year claims was $698,000 and $5,521,000 in the 2016 and 2015 thirty-nine-week periods, respectively. The increase in insurance and claims as a percent of gross profit was caused by the increase in insurance and claims costs related to the increased severity of current year claims in the 2016 period and the effect of decreased gross profit.

Selling, general and administrative costs decreased $5,586,000 in the 2016 thirty-nine-week period compared to the 2015 thirty-nine-week period and represented 29.9% of gross profit in the 2016 period compared to 30.0% of gross profit in the 2015 period. The decrease in selling, general and administrative costs compared to prior year was attributable to a decreased provision for bonuses under the Company’s incentive compensation plan, decreased stock compensation expense and a decreased provision for customer bad debt in the 2016 period, partially offset by costs during the 2016 period associated with the Company’s multi-year project designed to improve the Company’s information systems. The decrease in selling, general and administrative costs as a percent of gross profit was due primarily to the decrease in selling, general and administrative costs, partially offset by the effect of decreased gross profit.

 

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Depreciation and amortization increased $4,856,000 in the 2016 thirty-nine-week period compared to the 2015 thirty-nine-week period and represented 7.4% of gross profit in the 2016 period compared to 5.7% of gross profit in the 2015 period. The increase in depreciation and amortization costs was due to depreciation on new trailing equipment as the Company increased its number of owned trailers in response to increased customer demand for the Company’s drop and hook services using Company owned van trailers. The increase in depreciation and amortization as a percentage of gross profit was primarily due to the increased depreciation costs and the effect of decreased gross profit.

Interest and debt expense in the 2016 thirty-nine-week period was $517,000 higher than the 2015 thirty-nine-week period. The increase in interest and debt expense was primarily attributable to increased interest related to increased capital lease obligations as the Company increased its number of owned trailers in response to customer demand.

The provisions for income taxes for the 2016 and 2015 thirty-nine-week periods were based on estimated annual effective income tax rates of 38.1% and 38.2%, respectively, adjusted for discrete events, such as benefits resulting from disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options. The effective income tax rate in the 2016 thirty-nine-week period of 37.6% was less than the 38.1% estimated annual effective income tax rate primarily due to certain federal income tax credits realized in the 2016 period and disqualifying dispositions of the Company’s common stock by employees who obtained the stock through the exercises of incentive stock options in the 2016 period. The effective income tax rate in the 2015 thirty-nine-week period of 37.9% was less than the 38.2% estimated annual effective income tax rate primarily due to disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options in the 2015 period.

Net income was $97,776,000, or $2.32 per common share ($2.31 per diluted share), in the 2016 thirty-nine-week period. Net income was $109,834,000, or $2.50 per common share ($2.49 per diluted share), in the 2015 thirty-nine-week period.

THIRTEEN WEEKS ENDED SEPTEMBER 24, 2016 COMPARED TO THIRTEEN WEEKS ENDED SEPTEMBER 26, 2015

Revenue for the 2016 thirteen-week period was $787,938,000, a decrease of $53,788,000, or 6%, compared to the 2015 thirteen-week period. Transportation revenue decreased $54,000,000, or 7%. The decrease in transportation revenue was primarily attributable to decreased revenue per load of approximately 6%, while the number of loads hauled in the 2016 thirteen week period was approximately equal to the prior year perod. Reinsurance premiums were $11,541,000 and $11,329,000 for the 2016 and 2015 thirteen-week periods, respectively. The increase in revenue from reinsurance premiums was primarily attributable to the net increase in the average number of BCO Independent Contractors in the 2016 thirteen-week period compared to the 2015 thirteen-week period.

Truck transportation revenue hauled by third party truck capacity providers for the 2016 thirteen-week period was $732,863,000, or 93% of total revenue, a decrease of $46,956,000, or 6%, compared to the 2015 thirteen-week period. Revenue per load on loads hauled by third party truck capacity providers decreased approximately 5% in the 2016 thirteen-week period compared to the 2015 thirteen-week period and the number of loads hauled decreased approximately 1% compared to the 2015 thirteen-week period. The decrease in revenue per load on loads hauled via truck was primarily attributable to the impact of lower diesel fuel costs on loads hauled via Truck Brokerage Carriers and a somewhat softer freight environment as compared to the 2015 thirteen-week period, which resulted in more readily available truck capacity. The decrease in the number of loads hauled via truck of 1% was entirely attributable to a 14% decrease in the number of loads hauled via unsided/platform equipment. The decrease in the number of loads hauled via unsided/platform equipment of 14% was due to the impact of approximately 20,000 loads hauled in the 2015 thirteen-week period related to a significant project for a single account in the automotive industry. Excluding the impact of the project loads hauled during the 2015 period, the number of loads hauled via truck increased 4% during the 2016 thirteen-week period on a 6% increase in the number of loads hauled via van equipment and a 1% increase in the number of loads hauled via unsided/platform equipment. The increase in the number of loads hauled via van equipment of 6% was attributable to increased demand for van transportation services utilizing Company provided van trailers, primarily relating to drop and hook services. Fuel surcharges on Truck Brokerage Carrier revenue identified separately in billings to customers and included as a component of Truck Brokerage Carrier revenue were $14,016,000 and $20,128,000 in the 2016 and 2015 thirteen-week periods, respectively.

Transportation revenue hauled by multimode capacity providers for the thirteen-week period ended September 24, 2016, was $43,440,000, or 6% of total revenue, a decrease of $7,041,000, or 14%, compared to the 2015 thirteen-week period. The number of loads hauled by multimode capacity providers in the 2016 thirteen-week period increased approximately 4% compared to the 2015 thirteen-week period, while revenue per load on revenue hauled by multimode capacity providers decreased approximately 17% over the same period. The increase in loads hauled by multimode capacity providers was broad-based with air, ocean and rail intermodal loadings

 

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increasing 10%, 9% and 2%, respectively. Revenue per load on loads hauled by multimode capacity providers decreased for all modes, primarily due to softness in the U.S. and global economies. Revenue per load on revenue hauled by multimode capacity providers is influenced by many factors, including revenue mix among the various modes of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity.

Purchased transportation was 76.3% and 76.7% of revenue in the 2016 and 2015 thirteen-week periods, respectively. The decrease in purchased transportation as a percentage of revenue was primarily due to an increase in the percentage of revenue contributed by BCO Independent Contractors, which typically has a lower rate of purchased transportation than revenue on loads hauled by Truck Brokerage Carriers. Commissions to agents were 8.3% and 8.2% of revenue in the 2016 and 2015 thirteen-week periods, respectively.

Investment income was $357,000 and $350,000 in the 2016 and 2015 thirteen-week periods, respectively.

Other operating costs decreased $1,226,000 in the 2016 thirteen-week period compared to the 2015 thirteen-week period and represented 6.2% of gross profit in the 2016 period compared to 6.9% of gross profit in the 2015 period. The decrease in other operating costs compared to the prior year was primarily due to increased gains on sales of used trailing equipment and decreased trailing equipment 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 $1,986,000 in the 2016 thirteen-week period compared to the 2015 thirteen-week period and represented 10.3% of gross profit in the 2016 period compared to 8.3% of gross profit in the 2015 period. The increase in insurance and claims compared to prior year was due to increased severity of current year claims in the 2016 period, partially offset by increased net favorable development of prior years’ claims in the 2016 period as development of prior year claims was $2,118,000 favorable and $47,000 unfavorable in the 2016 and 2015 thirteen-week periods, respectively. The increase in insurance and claims as a percent of gross profit was caused by the increase in insurance and claims costs related to the increased severity of current year claims, partially offset by the increased net favorable development of prior years’ claims in the 2016 period and the effect of decreased gross profit.

Selling, general and administrative costs decreased $2,119,000 in the 2016 thirteen-week period compared to the 2015 thirteen-week period and represented 28.5% of gross profit in the 2016 period compared to 29.0% of gross profit in the 2015 period. The decrease in selling, general and administrative costs compared to prior year was attributable to a decreased provision for bonuses under the Company’s incentive compensation plan and a decrease in stock compensation expense in the 2016 period, partially offset by costs during the 2016 period associated with the Company’s multi-year project designed to improve the Company’s information systems. The decrease in selling, general and administrative costs as a percent of gross profit was due primarily to the decrease in selling, general and administrative costs, partially offset by the effect of decreased gross profit.

Depreciation and amortization increased $1,831,000 in the 2016 thirteen-week period compared to the 2015 thirteen-week period and represented 7.4% of gross profit in the 2016 period compared to 5.7% of gross profit in the 2015 period. The increase in depreciation and amortization costs was due to depreciation on new trailing equipment as the Company increased its number of owned trailers in response to increased customer demand for the Company’s drop and hook services using the Company’s van trailers. The increase in depreciation and amortization as a percentage of gross profit was primarily due to the increased depreciation costs and the effect of decreased gross profit.

Interest and debt expense in the 2016 thirteen-week period was $234,000 higher than the 2015 thirteen-week period. The increase in interest and debt expense was primarily attributable to increased interest related to increased capital lease obligations as the Company increased its number of owned trailers in response to customer demand for the Company’s drop and hook services using Company owned van trailers.

The provisions for income taxes for the 2016 and 2015 thirteen-week periods were based on estimated annual effective income tax rates of 38.1% and 38.2%, respectively, adjusted for discrete events, such as benefits resulting from disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options. The effective income tax rate in the 2016 thirteen-week period of 36.9% was less than the 38.1% estimated annual effective income tax rate primarily due to certain federal income tax credits realized in the 2016 period and disqualifying dispositions of the Company’s common stock by employees who obtained the stock through the exercises of incentive stock options in the 2016 period. The effective income tax rate in the 2015 thirteen-week period of 37.8% was less than the 38.2% estimated annual effective income tax rate primarily due to disqualifying dispositions of the Company’s common stock by employees who obtained the stock through exercises of incentive stock options in the 2015 period.

 

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Net income was $36,278,000, or $0.86 per common share ($0.86 per diluted share), in the 2016 thirteen-week period. Net income was $39,348,000, or $0.91 per common share ($0.90 per diluted share), in the 2015 thirteen-week period.

CAPITAL RESOURCES AND LIQUIDITY

Working capital and the ratio of current assets to current liabilities were $318,461,000 and 1.9 to 1, respectively, at September 24, 2016, compared with $286,581,000 and 1.8 to 1, respectively, at December 26, 2015. 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 $171,297,000 in the 2016 thirty-nine-week period compared with $148,084,000 in the 2015 thirty-nine-week period. The increase in cash flow provided by operating activities was primarily attributable to the timing of collections of trade receivables.

The Company declared and paid $0.25 per share, or $10,572,000 in the aggregate, in cash dividends during the thirty-nine-week period ended September 24, 2016. The Company declared and paid $0.22 per share, or $9,673,000 in the aggregate, in cash dividends during the thirty-nine-week period ended September 26, 2015 and, during such period, also paid $44,794,000 of dividends payable which were declared during fiscal year 2014 and included in current liabilities in the consolidated balance sheet at December 27, 2014. During the thirty-nine-week period ended September 24, 2016, the Company purchased 773,281 shares of its common stock at a total cost of $50,516,000. As of September 24, 2016, the Company may purchase up to an additional 1,036,125 shares of its common stock under its authorized stock purchase program. Long-term debt, including current maturities, was $135,601,000 at September 24, 2016, $11,309,000 higher than at December 26, 2015.

Shareholders’ equity was $506,730,000, or 79% of total capitalization (defined as long-term debt including current maturities plus equity), at September 24, 2016, compared to $466,237,000, or 79% of total capitalization, at December 26, 2015. The increase in equity was primarily a result of net income, partially offset by the purchases of shares of the Company’s common stock and dividends declared by the Company in the 2016 thirty-nine-week period.

On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures on June 2, 2021, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing amount of $400,000,000. The Company’s prior credit agreement was terminated on June 2, 2016.

The Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness. The Company is required to, among other things, maintain a minimum Fixed Charge Coverage Ratio, as defined in the Credit Agreement, and maintain a Leverage Ratio, as defined in the Credit Agreement, below a specified maximum. The Credit Agreement provides for a restriction on cash dividends and other distributions to stockholders on the Company’s capital stock to the extent there is a default under the Credit Agreement. In addition, the Credit Agreement under certain circumstances limits the amount of such cash dividends and other distributions to stockholders to the extent that, after giving effect to any payment made to effect such cash dividend or other distribution, the Leverage Ratio would exceed 2.5 to 1 on a pro forma basis as of the end of the Company’s most recently completed fiscal quarter. The Credit Agreement provides for an event of default in the event that, among other things, a person or group acquires 35% or more of the outstanding capital stock of the Company or obtains power to elect a majority of the Company’s directors or 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 24, 2016, the Company had no borrowings outstanding and $35,601,000 of letters of credit outstanding under the Credit Agreement. At September 24, 2016, there was $214,399,000 available for future borrowings under the Credit Agreement. In addition, the Company has $61,110,000 in letters of credit outstanding as collateral for insurance claims that are secured by investments totaling $67,900,000 at September 24, 2016. 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

 

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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 2016 thirty-nine-week period, the Company purchased $17,833,000 of operating property, including $2,400,000 paid for a parcel of land in Laredo, Texas for the purposes of building a new freight staging and transload facility, and $11,700,000 paid related to development of this parcel. Landstar also acquired $3,237,000 of operating property relating to the development of the Laredo parcel for which the Company accrued a corresponding liability in accounts payable as of September 24, 2016. During the 2016 thirty-nine-week period, the Company also acquired $46,456,000 of trailing equipment by entering into capital leases. Landstar anticipates acquiring either by purchase or lease financing during the remainder of fiscal year 2016 approximately $25,000,000 in operating property, consisting primarily of new trailing equipment to replace older trailing equipment, information technology equipment and approximately $7,200,000 in additional capital requirements to complete the Laredo facility.

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 program 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

The allowance for doubtful accounts for both trade and other receivables represents management’s estimate of the amount of outstanding receivables that will not be collected. Historically, management’s estimates for uncollectible receivables have been materially correct. Although management believes the amount of the allowance for both trade and other receivables at September 24, 2016 is appropriate, a prolonged period of low or no economic growth may adversely affect the collection of these receivables. In addition, liquidity concerns and/or unanticipated bankruptcy proceedings at any of the Company’s larger customers in which the Company is carrying a significant receivable could result in an increase in the provision for uncollectible receivables and have a significant impact on the Company’s results of operations in a given quarter or year. However, it is not expected that an uncollectible accounts receivable resulting from an individual customer would have a significant impact on the Company’s financial condition. Conversely, a more robust economic environment or the recovery of a previously provided for uncollectible receivable from an individual customer may result in the realization of some portion of the estimated uncollectible receivables.

Landstar provides for the estimated costs of self-insured claims primarily on an actuarial basis. The amount recorded for the estimated liability for claims incurred is based upon the facts and circumstances known on the applicable balance sheet date. The ultimate resolution of these claims may be for an amount greater or less than the amount estimated by management. The Company continually revises its existing claim estimates as new or revised information becomes available on the status of each claim. Historically, the Company has experienced both favorable and unfavorable development of prior years’ claims estimates. During the 2016 and 2015 thirty-nine-week periods, insurance and claims costs included $698,000 and $5,521,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. The unfavorable development of prior years’ claims in the 2015 fiscal period primarily related to a single claim for which the Company incurred a pre-tax charge of $4,500,000. It is reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims reserve at September 24, 2016.

The Company utilizes certain income tax planning strategies to reduce its overall cost of income taxes. If the Company were to be subject to an audit, it is possible that certain strategies might be disallowed resulting in an increased liability for income taxes. Certain of these tax planning strategies result in a level of uncertainty as to whether the related tax positions taken by the Company would result in a recognizable benefit. The Company has provided for its estimated exposure attributable to such tax positions due to the corresponding level of uncertainty with respect to the amount of income tax benefit that may ultimately be realized. Management believes that the provision for liabilities resulting from the uncertainty in certain income tax positions is appropriate. To date, the Company has not experienced an examination by governmental revenue authorities that would lead management to believe that the Company’s past provisions for exposures related to the uncertainty of such income tax positions are not appropriate.

 

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Significant variances from management’s estimates for the amount of uncollectible receivables, the ultimate resolution of self-insured claims and the provision for uncertainty in income tax positions could each be expected to positively or negatively affect 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. Results of operations for the quarter ending in March are typically lower than for the quarters ending June, September and December.

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 (the “Credit Agreement”). The Credit Agreement, which matures on June 2, 2021, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing amount of $400,000,000.

Depending upon the specific type of borrowing, borrowings under the Credit Agreement bear interest based on either (a) the prime rate, (b) the Federal Reserve Bank of New York rate plus 0.5% or (c) the London Interbank Offered Rate, plus 1.25%. As of September 24, 2016 and during the entire 2016 third quarter, the Company had no borrowings outstanding under the Credit Agreement.

Long-term investments, all of which are available-for-sale and are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Assuming that the long-term portion of investments remains at $53,002,000, the balance at September 24, 2016, 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.

Assets and liabilities of the Company’s Canadian 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 subsidiary at September 24, 2016 were, as translated to U.S. dollars, approximately 1% of total consolidated assets. Accordingly, any translation gain or loss related to the Canadian operation 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

 

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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 24, 2016 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 24, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

In designing and evaluating 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.

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 in the Company’s Form 10-Q for the quarterly period ended June 25, 2016, 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 26, 2015 as filed with the SEC.

For a discussion identifying additional risk factors and other important factors that could cause actual results to differ materially from those anticipated, see the discussions under Part I, Item 1A, “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2015 and under Part II Item 1A, “Risk Factors” in the Company’s quarterly report on Form 10-Q for the quarterly period ended June 25, 2016, and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Notes to Consolidated Financial Statements” in this Quarterly Report on Form 10-Q.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Company

The following table provides information regarding the Company’s purchase of its common stock during the period from June 26, 2016 to September 24, 2016, the Company’s third fiscal quarter:

 

Fiscal Period

   Total Number of
Shares Purchased
     Average Price
Paid Per Share
     Total Number of Shares
Purchased as Part of
Publicly Announced
Programs
     Maximum Number of
Shares That May Yet Be
Purchased Under the
Programs
 

June 25, 2016

              1,386,125   

June 26, 2016 – July 23, 2016

     —         $ —           —           1,386,125   

July 24, 2016 – August 20, 2016

     —           —           —           1,386,125   

August 21, 2016 – September 24, 2016

     350,000         68.66         350,000         1,036,125   
  

 

 

    

 

 

    

 

 

    

Total

     350,000       $ 68.66         350,000      
  

 

 

    

 

 

    

 

 

    

 

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On May 19, 2015, the Landstar System, Inc. Board of Directors authorized the Company to increase the number of shares of the Company’s common stock that the Company is authorized to purchase from time to time in the open market and in privately negotiated transactions under a previously announced purchase program to 3,000,000 shares. As of September 24, 2016, the Company has authorization to purchase 1,036,125 shares of its common stock under this program. No specific expiration date has been assigned to the May 19, 2015 authorization.

Dividends

During the thirty-nine-week period ended September 24, 2016, Landstar paid dividends as follows:

 

Dividend Amount
per Share

    Declaration
Date
    Record
Date
    Payment
Date
 
$ 0.08        January 26, 2016        February 15, 2016        March 11, 2016   
$ 0.08        April 19, 2016        May 5, 2016        May 27, 2016   
$ 0.09        July 19, 2016        August 8, 2016        August 26, 2016   

On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement 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.

 

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EXHIBIT INDEX

Registrant’s Commission File No.: 0-21238

 

Exhibit No.

 

Description

 (31)   Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.1*   Chief Executive Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2*   Chief Financial Officer certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 (32)   Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.1**   Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2**   Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*   XBRL Instance Document
101.SCH*   XBRL Schema Document
101.CAL*   XBRL Calculation Linkbase Document
101.DEF*   XBRL Definition Linkbase Document
101.LAB*   XBRL Labels Linkbase Document
101.PRE*   XBRL Presentation Linkbase Document

 

* Filed herewith
** Furnished herewith

 

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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 28, 2016      

/s/ James B. Gattoni

      James B. Gattoni
      President and Chief Executive Officer
Date: October 28, 2016      

/s/ L. Kevin Stout

      L. Kevin Stout
      Vice President and Chief Financial Officer

 

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