LANDSTAR SYSTEM, INC. 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
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
Introduction
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The transportation logistics segment provides a wide range of integrated
transportation management solutions. Transportation services are provided by
On
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The insurance segment is comprised of
Changes in Financial Condition and Results of Operations
Management believes the Company's success principally depends on its ability to generate freight revenue through its network of independent commission sales agents and to deliver freight safely and efficiently utilizing third party capacity providers. Management believes the most significant factors to the Company's success include increasing revenue, sourcing capacity, empowering its network through technology-based tools and controlling costs, including insurance and claims.
Revenue
While customer demand, which is subject to overall economic conditions,
ultimately drives increases or decreases in revenue, the Company primarily
relies on its independent commission sales agents to establish customer
relationships and generate revenue opportunities. Management's emphasis with
respect to revenue growth is on revenue generated by independent commission
sales agents who on an annual basis generate
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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:
Thirteen Weeks Ended
April 1, March 26,
2023 2022
Revenue generated through (in thousands):
Truck transportation
Truckload:
Van equipment $ 755,083 $ 1,081,206
Unsided/platform equipment 377,564 408,757
Less-than-truckload 31,558 33,720
Other truck transportation (1) 159,503 227,601
Total truck transportation 1,323,708 1,751,284
Rail intermodal 25,657 42,688
Ocean and air cargo carriers 61,093 152,057
Other (2) 25,217 24,570
$ 1,435,675 $ 1,970,599
Revenue on loads hauled via BCO Independent
Contractors included in total truck transportation $ 519,526 $ 727,574
Number of loads:
Truck transportation
Truckload:
Van equipment 331,954 376,268
Unsided/platform equipment 127,572 131,829
Less-than-truckload 46,192 47,843
Other truck transportation (1) 58,062 85,930
Total truck transportation 563,780 641,870
Rail intermodal 7,760 12,630
Ocean and air cargo carriers 8,440 11,560
579,980 666,060
Loads hauled via BCO Independent Contractors
included in total truck transportation 232,550 262,240
Revenue per load:
Truck transportation
Truckload:
Van equipment $ 2,275 $ 2,873
Unsided/platform equipment 2,960 3,101
Less-than-truckload 683 705
Other truck transportation (1) 2,747 2,649
Total truck transportation 2,348 2,728
Rail intermodal 3,306 3,380
Ocean and air cargo carriers 7,239 13,154
Revenue per load on loads hauled via BCO Independent Contractors
$ 2,234 $ 2,774
Revenue by capacity type (as a % of total revenue): Truck capacity providers: BCO Independent Contractors
36 % 37 %
Truck Brokerage Carriers 56 % 52 %
Rail intermodal 2 % 2 %
Ocean and air cargo carriers 4 % 8 %
Other 2 % 1 %
(1) Includes power-only, expedited, straight truck, cargo van, and miscellaneous
other truck transportation revenue generated by the transportation logistics
segment. Power-only refers to shipments where the Company furnishes a power
unit and an operator but not trailing equipment, which is typically provided
by the shipper or consignee.
(2) Includes primarily reinsurance premium revenue generated by the insurance
segment and intra-Mexico transportation services revenue generated by
Landstar Metro.
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Table of Contents Expenses Purchased transportation
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:
April 1, 2023 March 26, 2022
BCO Independent Contractors 9,996 11,089
Truck Brokerage Carriers:
Approved and active (1) 61,771 68,859
Other approved 30,893 28,094
92,664 96,953
Total available truck capacity providers 102,660 108,042
Trucks provided by BCO Independent Contractors 10,809 11,935
(1) Active refers to Truck Brokerage Carriers who moved at least one load in the
180 days immediately preceding the fiscal quarter end.
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 and ocean cargo carriers is based on either a negotiated rate for each load hauled or a contractually agreed-upon fixed rate per load. Purchased transportation paid to air cargo carriers is generally based on a negotiated rate for each load hauled. Purchased transportation as a percentage of revenue for truck brokerage, rail intermodal and ocean cargo services is normally higher than that of BCO Independent Contractor and air cargo services. Purchased transportation is the largest component of costs and expenses and, on a consolidated basis, increases or decreases as a percentage of consolidated revenue in proportion to changes in the percentage of consolidated revenue generated through BCO Independent Contractors and other third party capacity providers and external revenue from the insurance segment, consisting of reinsurance premiums. Purchased transportation as a percent of revenue also increases or decreases in relation to the availability of truck brokerage capacity and with changes in the price of fuel on revenue generated from shipments hauled by Truck Brokerage Carriers. The Company passes 100% of fuel surcharges billed to customers for freight hauled by BCO Independent Contractors to its BCO Independent Contractors. These fuel surcharges are excluded from revenue and the cost of purchased transportation. Purchased transportation costs are recognized over the freight transit period as the performance obligation to the customer is completed.
Commissions to agents
Commissions to agents are based on contractually agreed-upon percentages of
(i) revenue, (ii) revenue less the cost of purchased transportation, or
(iii) revenue less a contractually agreed upon percentage of revenue retained by
Other operating costs, net of gains on asset sales/dispositions
Maintenance costs for Company-provided trailing equipment and BCO Independent Contractor recruiting and qualification costs are the largest components of other operating costs. Also included in other operating costs are trailer rental costs, the provision for uncollectible advances and other receivables due from BCO Independent Contractors and independent commission sales agents and gains/losses, if any, on sales of Company-owned trailing equipment.
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Insurance and claims
With respect to insurance and claims cost, potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable.
The Company also maintains third party insurance arrangements providing excess
coverage for commercial trucking liabilities in excess of
Moreover, in recent years the Company has increased the level of its financial
exposure to commercial trucking claims in excess of
Further, the Company retains liability of up to
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Selling, general and administrative
During the thirteen-week period ended
Depreciation and amortization
Depreciation and amortization primarily relate to depreciation of trailing equipment and information technology hardware and software.
Costs of revenue
The Company incurs costs of revenue related to the transportation of freight and, to a much lesser extent, to reinsurance premiums received by Signature. Costs of revenue include variable costs of revenue and other costs of revenue. Variable costs of revenue include purchased transportation and commissions to agents, as these costs are entirely variable on a shipment-by-shipment basis. Other costs of revenue include fixed costs of revenue and semi-variable costs of revenue, where such costs may vary over time based on certain economic factors or operational metrics such as the number of Company-controlled trailers, the number of BCO Independent Contractors, the frequency and severity of insurance claims, the number of miles traveled by BCO Independent Contractors, or the number and/or scale of information technology projects in process or in-service to support revenue generating activities, rather than on a shipment-by-shipment basis. Other costs of revenue associated with the transportation of freight include: (i) other operating costs, primarily consisting of trailer maintenance and BCO Independent Contractor recruiting and qualification costs, as reported in the Company's Consolidated Statements of Income, (ii) transportation-related insurance premiums paid and claim costs incurred, included as a portion of insurance and claims in the Company's Consolidated Statements of Income, (iii) costs incurred related to internally developed software including ASC 350-40 amortization, implementation costs, hosting costs and other support costs utilized to support the Company's independent commission sales agents, third party capacity providers, and customers, included as a portion of depreciation and amortization and of selling, general and administrative in the Company's Consolidated Statements of Income; and (iv) depreciation on Company-owned trailing equipment, included as a portion of depreciation and amortization in the Company's Consolidated Statements of Income. Other costs of revenue associated with reinsurance premiums received by Signature are comprised of broker commissions and other fees paid related to the administration of insurance programs to BCO Independent Contractors and are included in selling, general and administrative in the Company's Consolidated Statements of Income. In addition to costs of revenue, the Company incurs various other costs relating to its business, including most selling, general and administrative costs and portions of costs attributable to insurance and claims and depreciation and amortization. Management continually monitors all components of the costs incurred by the Company and establishes annual cost budgets that, in general, are used to benchmark costs incurred on a monthly basis.
Gross Profit, Variable Contribution, Gross Profit Margin and Variable Contribution Margin
The following table sets forth calculations of gross profit, defined as revenue less costs of revenue, and gross profit margin defined as gross profit divided by revenue, for the periods indicated. The Company refers to revenue less variable costs of revenue as "variable contribution" and variable contribution divided by revenue as "variable contribution margin". Variable contribution and variable contribution margin are each non-GAAP financial measures. The closest comparable GAAP financial measures to variable contribution and variable contribution margin are, respectively, gross profit and gross profit margin. The Company believes variable contribution and variable contribution margin are useful measures of the variable costs that we incur at a shipment-by-shipment level attributable to our transportation network of third-party capacity providers and independent commission sales agents in order to provide services to our customers. The Company believes variable contribution and variable contribution margin are important performance measurements and management considers variable contribution and variable contribution margin in evaluating the Company's financial performance and in its decision-making, such as budgeting for infrastructure, trailing equipment and selling, general and administrative costs.
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The reconciliations of gross profit to variable contribution and gross profit margin to variable contribution margin are each presented below:
Thirteen Weeks Ended
April 1, March 26,
2023 2022
Revenue $ 1,435,675 $ 1,970,599
Costs of revenue:
Purchased transportation 1,101,294 1,550,330
Commissions to agents 125,675 149,778
Variable costs of revenue 1,226,969 1,700,108
Trailing equipment depreciation 8,369 9,083
Information technology costs 6,751 4,046
Insurance-related costs (1) 28,260 31,655
Other operating costs 12,378 11,141
Other costs of revenue 55,758 55,925
Total costs of revenue 1,282,727 1,756,033
Gross profit $ 152,948 $ 214,566
Gross profit margin 10.7 % 10.9 %
Plus: other costs of revenue 55,758 55,925
Variable contribution $ 208,706 $ 270,491
Variable contribution margin 14.5 % 13.7 %
(1) Insurance-related costs in the table above include (i) other costs of revenue
related to the transportation of freight that are included as a portion of
insurance and claims in the Company's Consolidated Statements of Income and
(ii) certain other costs of revenue related to reinsurance premiums received
by Signature that are included as a portion of selling, general and
administrative in the Company's Consolidated Statements of Income. Insurance
and claims costs included in other costs of revenue relating to the
transportation of freight primarily consist of insurance premiums paid for
commercial auto liability, general liability, cargo and other lines of
coverage related to the transportation of freight and the related cost of
claims incurred under those programs, and, to a lesser extent, the cost of
claims incurred under insurance programs available to BCO Independent
Contractors that are reinsured by Signature. Other insurance and claims costs
included in costs of revenue that are included in selling, general and
administrative in the Company's Consolidated Statements of Income consist of
brokerage commissions and other fees incurred by Signature relating to the
administration of insurance programs available to BCO Independent Contractors
that are reinsured by Signature.
In general, variable contribution margin on revenue generated by BCO Independent
Contractors represents a fixed percentage due to the nature of the contracts
that pay a fixed percentage of revenue to both the BCO Independent Contractors
and independent commission sales agents. For revenue generated by Truck
Brokerage Carriers, variable contribution margin may be either a fixed or
variable percentage, depending on the contract with each individual independent
commission sales agent. Variable contribution margin on revenue generated from
shipments hauled by railroads, air cargo carriers, ocean cargo carriers and
Truck Brokerage Carriers, other than those under retention contracts, is
variable in nature, as the Company's contracts with independent commission sales
agents provide commissions to agents at a contractually agreed upon percentage
of the amount represented by revenue less purchased transportation for these
types of shipments. Approximately 41% of the Company's consolidated revenue in
the thirteen-week period ended
Operating income as a percentage of gross profit and operating income as a percentage of variable contribution
The following table presents operating income as a percentage of gross profit and operating income as a percentage of variable contribution. The Company's operating income as a percentage of variable contribution is a non-GAAP financial measure calculated as operating income divided by variable contribution. The Company believes that operating income as a percentage of variable contribution is useful and meaningful to investors for the following principal reasons: (i) the variable costs of revenue for a significant portion of the business are highly influenced by short-term market-based trends in the freight transportation industry, whereas other costs, including other costs of revenue, are much less impacted by short-term freight market trends; (ii) disclosure of this measure allows investors to better
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understand the underlying trends in the Company's results of operations; (iii) this measure is meaningful to investors' evaluations of the Company's management of costs attributable to operations other than the purely variable costs associated with purchased transportation and commissions to agents that the Company incurs to provide services to our customers; and (iv) management considers this financial information in its decision-making, such as budgeting for infrastructure, trailing equipment and selling, general and administrative costs.
Thirteen Weeks Ended
April 1, March 26,
2023 2022
Gross profit $ 152,948 $ 214,566
Operating income $ 101,284 $ 162,833
Operating income as % of gross profit 66.2 % 75.9 %
Variable contribution $ 208,706 $ 270,491
Operating income $ 101,284 $ 162,833 Operating income as % of variable contribution 48.5 % 60.2 %
The decrease in operating income as a percentage of gross profit from the 2022 thirteen-week period to the 2023 thirteen-week period primarily resulted from the effect of decreased gross profit on the Company's fixed cost infrastructure, primarily certain components of selling, general and administrative costs.
The decrease in operating income as a percentage of variable contribution from the 2022 thirteen-week period to the 2023 thirteen-week period primarily resulted from (1) the effect of decreased variable contribution on the Company's fixed cost infrastructure, primarily certain components of selling, general and administrative costs and (2) the impact of increased other operating costs and depreciation and amortization during the 2023 thirteen-week period.
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 an annual 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 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.
THIRTEEN WEEKS ENDED
Revenue for the 2023 thirteen-week period was
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Truck transportation revenue generated by BCO Independent Contractors and Truck
Brokerage Carriers (together, the "third party truck capacity providers") for
the 2023 thirteen-week period was
The decrease in revenue per load on loads hauled via truck was primarily due to pricing pressure throughout the 2023 thirteen-week period as industry-wide truck capacity was significantly more readily available as compared to the 2022 thirteen-week period, during which pandemic-related supply chain disruption was at a high point. Revenue per load on loads hauled via van equipment decreased 21%, on loads hauled via unsided/platform equipment decreased 5% and on less-than-truckload loadings decreased 3%, while revenue per load on loads hauled by other truck transportation services increased 4% as compared to the 2022 thirteen-week period.
The decrease in the number of loads hauled via truck compared to the 2022
thirteen-week period was primarily due to a decrease in demand from the
near-record high levels experienced in the 2022 thirteen-week period for the
Company's van services and power-only services included in other truck
transportation services, which tend to be more correlated with
Fuel surcharges billed to customers on revenue generated by BCO Independent
Contractors are excluded from revenue. Fuel surcharges on Truck Brokerage
Carrier revenue identified separately in billings to customers and included as a
component of Truck Brokerage Carrier revenue were
Transportation revenue generated by rail intermodal, air cargo and ocean cargo
carriers (collectively, the "multimode capacity providers") for the 2023
thirteen-week period was
Purchased transportation was 76.7% and 78.7% of revenue in the 2023 and 2022 thirteen-week periods, respectively. The decrease in purchased transportation as a percentage of revenue was primarily due to (i) a decreased rate of purchased transportation on revenue generated by Truck Brokerage Carriers and (ii) a decreased percentage of revenue generated by multimode capacity providers, which typically has a higher rate of purchased transportation than third party truck capacity providers, partially offset by an increased percentage of revenue generated by Truck Brokerage Carriers, which typically has a higher rate of purchased transportation than revenue generated by BCO Independent Contractors. Commissions to agents were 8.8% and 7.6% of revenue in the 2023 and 2022 thirteen-week periods, respectively. The increase in commissions to agents as a percentage of revenue was primarily attributable to a decreased cost of purchased transportation as a percentage of revenue on revenue generated by Truck Brokerage Carriers.
Investment income was
Other operating costs increased
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Insurance and claims decreased
Selling, general and administrative costs increased
Depreciation and amortization increased
The quarter-over-prior-year-quarter change in interest and debt (income) expense
was
The provisions for income taxes for the 2023 and 2022 thirteen-week periods were based on estimated annual effective income tax rates of 24.4% and 24.5%, respectively, adjusted for discrete events, such as benefits resulting from stock-based awards. The estimated annual effective income tax rate was higher than the statutory federal income tax rate of 21% in the 2023 period primarily attributable to state taxes and non-deductible meals and entertainment. The estimated annual effective income tax rate was higher than the statutory federal income tax rate of 21% in the 2022 period primarily attributable to state taxes and non-deductible executive compensation. The effective income tax rate for the 2023 thirteen-week period was 23.3%, which was lower than the estimated annual effective income tax rate of 24.4%, primarily attributable to excess tax benefits realized on stock-based awards. The effective income tax rate for the 2022 thirteen-week period was 22.8%, which was lower than the estimated annual effective income tax rate of 24.5%, primarily attributable to excess tax benefits realized on stock-based awards.
Net income was
CAPITAL RESOURCES AND LIQUIDITY
Working capital and the ratio of current assets to current liabilities were
The Company declared and paid
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Shareholders' equity was
On
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 described 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
Historically, the Company has generated sufficient operating cash flow to meet
its debt service requirements, fund continued growth, both organic and through
acquisitions, complete or execute share purchases of its common stock under
authorized share purchase programs, pay dividends and meet working capital
needs. As an asset-light provider of integrated transportation management
solutions, the Company's annual capital requirements for operating property are
generally for trailing equipment and information technology hardware and
software. In addition, a significant portion of the trailing equipment available
to the Company is provided by third party capacity providers, thereby reducing
the Company's capital requirements. During the 2023 thirteen-week period, the
Company purchased
Management believes that cash flow from operations combined with the Company's
borrowing capacity under the Credit Agreement will be adequate to meet
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.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Significant variances from management's estimates for the ultimate resolution of
self-insured claims could be expected to positively or negatively affect
SEASONALITY
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