Landstar is an 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. The Company reports the results
of two operating segments: the transportation logistics segment and the insurance
segment.
The Company’s primary day-to-day contact with its customers is through
its network of independent commission sales agents and, to a lesser extent,
through employees of the Company. The typical Landstar independent commission
sales agent maintains a relationship with a number of shippers and services
these shippers utilizing the Company’s information technology systems
and the various modes of transportation made available through the Company’s
network of third party capacity providers. The Company provides assistance to
the agents in developing additional relationships with shippers and enhancing
agent and Company relationships with larger shippers through the Company’s
field employees, located throughout the United States and Canada. The Operating
Subsidiaries provide programs to support the agents’ operations and provide
guidance on establishing pricing parameters for freight hauled by the various
modes of transportation available to the agents. It is important to note that
the Operating Subsidiaries, and not the Company’s agents, contract directly
with customers and generally assume the related credit risk and potential liability
for freight losses or damages when the Company is providing transportation services
as a motor carrier.
Management believes the Company has more independent commission sales agents
than any other asset-light integrated transportation management solutions company.
Landstar’s vast network of independent commission sales agent locations
provides the Company regular contact with shippers at the local level and the
capability to be highly responsive to shippers’ changing needs. The Company’s
large fleet of available capacity provides the agent network the resources needed
to service both large and small shippers. Through its agent network, the Company
offers smaller shippers a level of service comparable to that typically enjoyed
only by larger customers. Examples include the ability to provide transportation
services on short notice, multiple pick-up and delivery points, electronic data
interchange capability and access to specialized equipment. In addition, a number
of the Company’s agents specialize in certain types of freight and transportation
services (such as oversized or heavy loads and/or rail, air and international
freight transportation). Each independent commission sales agent has the opportunity
to market all of the services provided by the transportation logistics segment.
The independent commission sales agents use a variety of proprietary and third
party information technology applications provided by the Company to service
the requirements of shippers. For truckload services, the Company’s independent
commission sales agents use Landstar proprietary software which enables agents
to enter available freight, dispatch capacity and process most administrative
procedures and then communicate that information to Landstar and its capacity
providers via the internet. The Company’s web-based available truck information
system provides a listing of available truck capacity to the Company’s
independent commission sales agents. For modes of transportation other than
truckload, the independent commission sales agents utilize both proprietary
and third party information technology applications provided by the Company.
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 relies exclusively on independent third parties for its hauling
capacity other than for trailing equipment owned or leased by the Company and
utilized primarily by the BCO Independent Contractors. These third party transportation
capacity providers consist of BCO Independent Contractors, Truck Brokerage Carriers,
air and ocean cargo carriers and railroads. Landstar’s use of capacity
provided by third parties allows it to maintain a lower level of capital investment,
resulting in lower fixed costs. During 2014, revenue hauled by BCO Independent
Contractors, Truck Brokerage Carriers and railroads represented approximately
48%, 46% 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 during 2014. Historically, the
gross profit margin (defined as gross profit, which is defined as revenue less
the cost of purchased transportation and commissions to agents, divided by revenue)
generated from freight hauled by BCO Independent Contractors has been greater
than that from freight hauled by other third party capacity providers. However,
the Company’s insurance and claims costs and other operating costs are
incurred primarily in support of BCO Independent Contractor capacity. In addition,
as further described in the “Corporate Services” section that follows,
the Company incurs significantly higher selling, general and administrative
costs in support of BCO Independent Contractor capacity as compared to the other
modes of transportation. Purchased transportation costs are recognized upon
the completion of freight delivery.
BCO Independent Contractors. Management believes the Company has the largest
fleet of truckload BCO Independent Contractors in the United States. BCO Independent
Contractors provide truck capacity to the Company under exclusive lease arrangements.
Each BCO Independent Contractor operates under the motor carrier operating authority
issued by the U.S. Department of Transportation (“DOT”) to Landstar’s
Operating Subsidiary to which such BCO Independent Contractor provides services
and has leased his or her equipment. The Company’s network of BCO Independent
Contractors provides marketing, operating, safety, recruiting, retention and
financial advantages to the Company.
The Company’s BCO Independent Contractors are compensated primarily based
on a contractually agreed-upon percentage of revenue generated by delivered
loads they haul. This percentage generally ranges from 62% to 73% where the
BCO Independent Contractor provides only a tractor and 72% to 77% where the
BCO
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Independent Contractor provides both a tractor and trailing equipment. The
BCO Independent Contractor must pay substantially all of the expenses of operating
his/her equipment, including driver wages and benefits, fuel, physical damage
insurance, maintenance, highway use taxes and debt service, if applicable. 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.
The Company maintains internet-based applications for mobile and desktop devices
through which BCO Independent Contractors can view a comprehensive listing of
the Company’s available freight, allowing them to consider rate, size,
origin and destination when planning trips. The Landstar Contractors’
Advantage Purchasing Program (LCAPP) leverages Landstar’s purchasing power
to provide discounts to eligible BCO Independent Contractors when they purchase
equipment, fuel, tires and other items. In addition, LCFI provides a source
of funds at competitive interest rates to the BCO Independent Contractors to
purchase primarily trailing equipment.
Truck Brokerage Carriers. The Company maintained a database of over 38,000
approved Truck Brokerage Carriers who provide truck capacity to the Company.
Truck Brokerage Carriers provide truck capacity to the Company under non-exclusive
contractual arrangements and each operates under its own DOT-issued motor carrier
operating authority. Truck Brokerage Carriers are paid either a negotiated rate
for each load hauled or, to a lesser extent, a contractually agreed-upon fixed
rate per load. The Company recruits, approves, establishes contracts with and
tracks safety ratings and service records of these third party trucking companies.
In addition to providing additional capacity to the Company, the use of Truck
Brokerage Carriers enables the Company to pursue different types and quality
of freight such as temperature-controlled, short-haul traffic and less-than-truckload
and, in certain instances, lower-priced freight that generally would not be
handled by the Company’s BCO Independent Contractors.
The Company maintains an internet site through which Truck Brokerage Carriers
can view a listing of the Company’s freight that is available to them
to be hauled. The Landstar Savings Plus Program leverages Landstar’s purchasing
power to provide discounts to eligible Truck Brokerage Carriers when they purchase
fuel and equipment and provides the Truck Brokerage Carriers with an electronic
payment option.
Railroads and Air and Ocean Cargo Carriers. The Company has contracts with Class
1 domestic and Canadian railroads, certain short-line railroads and domestic
and international airlines and ocean lines. These relationships allow the Company
to pursue the freight best serviced by these forms of transportation capacity.
Railroads are paid either a negotiated rate for each load hauled or a contractually
agreed-upon fixed rate per load. Air cargo carriers are generally paid a negotiated
rate for each load hauled. Ocean cargo carriers are generally paid contractually
agreed-upon fixed rates per load. The Company also contracts with other third
party capacity providers, such as air charter service providers, when required
by specific customer needs.