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Item 1A. Risk Factors

2022-07-29 compared with 2022-04-29 · 15 added, 32 removed, 19 unchanged (71% of the section changed)

For a discussion identifying 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 25, 2021 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.

Except as set forth below, there have been no material changes to the Risk Factors described in Part I “Item 1A.

for the fiscal year ended December 25, 2021, under Part II, Item 1A, “Risk Factors” in the Company’s Quarterly Report on Form 10-Q

for the quarterly period ended March 26, 2022, 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.

Except as set forth below and under Part II, Item 1A, “Risk Factors” in the Company’s Quarterly Report on Form 10-Q

for the quarterly period ended March 26, 2022, 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

2 unchanged sentences

As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Self-Insured Claims,” potential liability associated with accidents in the trucking industry is severe and occurrences are unpredictable.

For periods prior to May 1, 2019, Landstar retains liability for commercial trucking claims up to $5 million per occurrence and maintains various third party insurance arrangements for liabilities in excess of its $5 million self-insured retention.

Effective May 1, 2019, the Company entered into a new three year

commercial auto liability insurance arrangement for losses incurred between $5 million and $10 million (the “Initial Excess Policy”) with a third party insurance company.

For commercial trucking claims incurred on or after May 1, 2019 through April 30, 2022, the Initial Excess Policy provides for a limit for a single loss of $5 million, with an aggregate limit of $15 million for each policy year, an aggregate limit of $20 million for the thirty-six

month term ended April 30, 2022, and options to increase such aggregate limits for pre-established

amounts of additional premium.

If aggregate losses under the Initial Excess Policy exceed either the annual aggregate limit or the aggregate limit for the three year period ending April 30, 2022, and the Company did not elect to increase such aggregate limits for a pre-established

amount of additional premium, Landstar would retain liability of up to $10 million per occurrence, inclusive of its $5 million self-insured retention for commercial trucking claims during the remainder of the applicable policy year(s).

For periods prior to May 1, 2019, Landstar retains liability

for commercial trucking claims up to $5 million per occurrence and maintains various third party insurance arrangements for liabilities in excess of its $5 million self-insured retention.

Effective May 1, 2019, the Company entered into a new three year commercial auto liability insurance arrangement for losses incurred between $5 million and $10 million (the “Initial Excess Policy”) with a third party insurance company.

The Company subsequently extended the Initial Excess Policy for one additional policy year, from May 1, 2022 through April 30, 2023.

For commercial trucking claims incurred on or after May 1, 2022 through April 30, 2023, the extended Initial Excess Policy provides for a limit for a single loss of $5 million, with a remaining aggregate limit of $10 million for the policy period ending April 30, 2023, and an option to increase such aggregate limit for a pre-established

amount of additional premium.

If aggregate losses under the Initial Excess Policy exceed the aggregate limit for the period ending April 30, 2023, and the Company did not elect to increase such aggregate limit for a pre-established

amount of additional premium, The Company would retain liability of up to $10 million per occurrence, inclusive of its $5 million self-insured retention for commercial trucking claims during the remainder of the policy period ending April 30, 2023.

The Company also maintains third party insurance arrangements providing excess coverage for commercial trucking liabilities in excess of $10 million.

3 unchanged sentences

Due to the increasing cost of commercial auto liability claims, the availability of excess coverage has significantly decreased, and the pricing associated with such excess coverage, to the extent available, has significantly increased.

With respect to the annual policy year ending April 30, 2021, as compared to the annual policy year ended April 30, 2020, the Company experienced an increase of approximately $14 million, or over 170%, in the premiums charged by third party insurance companies to the Company for excess coverage for commercial trucking liabilities in excess of $10 million.

With respect to the annual policy year ended April 30, 2021, as compared to the annual policy year ended April 30, 2020, the Company experienced an increase of approximately $14 million, or over 170%, in the premiums charged by third party insurance companies to the Company for excess coverage for commercial trucking liabilities in excess of $10 million.

Effective May 1, 2021, with respect to the annual policy year ending April 30, 2022, as compared to the annual policy year ended April 30, 2021, the Company experienced an increase of approximately $3 million, or 19%, in the premiums charged by third party insurance companies to the Company for excess coverage for commercial trucking liabilities in excess of $10 million.

Moreover, the Company increased the level of its financial exposure to commercial trucking claims in excess of $10 million, including through the use of additional self-insurance, deductibles, aggregate loss limits, quota shares and other arrangements with third party insurance companies, based on the availability of coverage within certain excess insurance coverage layers and estimated cost differentials between proposed premiums from third party insurance companies and historical and actuarially projected losses experienced by the Company at various levels of excess insurance coverage.

Effective May 1, 2022, with respect to the annual policy year ending April 30, 2023, as compared to the annual policy year ended April 30, 2022, the Company experienced an increase of approximately $2.3 million, or 10%, in the premiums charged by third party insurance companies to the Company for excess coverage for commercial trucking liabilities in excess of $10 million.

Moreover, in recent years the Company has increased the level of its financial exposure to commercial trucking claims in excess of $10 million, including through the use of additional self-insurance, deductibles, aggregate loss limits, quota shares and other arrangements with third party insurance companies, based on the availability of coverage within certain excess insurance coverage layers and estimated cost differentials between proposed premiums from third party insurance companies and historical and actuarially projected losses experienced by the Company at various levels of excess insurance coverage.

For example, with respect to a hypothetical claim in the amount of $35 million incurred during the annual policy year ending April 30, 2023, the Company would have an aggregate financial exposure of approximately $10 million.

6 unchanged sentences

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.

Dependence on independent commission sales agents.

As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Agent Network,” the Company markets its services primarily through independent commission sales agents.

During fiscal year 2021, 593 agents generated revenue for Landstar of at least $1 million each, or in the aggregate approximately 94% of Landstar’s consolidated revenue.

Included among these Million Dollar Agents, 115 agents generated at least $10,000,000 of Landstar revenue during the 2021 fiscal year, or in the aggregate approximately 71% of Landstar’s consolidated revenue.

Of these larger agencies, one such Landstar independent commission sales agency, itself with a very diversified customer base, generated approximately $740,000,000, or 11%, of Landstar’s consolidated revenue and approximately 7% of Landstar’s consolidated variable contribution in fiscal year 2021.

A number of these larger agencies, including the largest of Landstar’s independent commission sales agents, maintain business operations in countries outside of North America where the risks of doing business may be different than in the United States or Canada due to geopolitical, legal or other risks associated with doing business in such foreign jurisdictions.

There can be no assurance regarding the potential disruption and impact adverse geopolitical developments in these foreign jurisdictions could have on the ability of certain large independent commission sales agents to generate and maintain business operations in support of significant amounts of Landstar revenue.

As disclosed in a Current Report on Form 8-K

filed by the Company on February 28, 2022, the largest Landstar independent commission sales agency referenced above, while based in the United States, has significant administrative operations located in eastern Ukraine.

The administrative operations of this agency were significantly disrupted during the onset of the Russian invasion of Ukraine.

The Company also has another of its largest independent commission sales agencies, as measured by revenue generated in fiscal year 2021, that is based in the United States but conducts a portion of its operations in western Ukraine.

The priority for Landstar and both of these agencies is the safety and well-being of these agencies’ Ukrainian workforces and their families.

It should also be noted that load volumes arranged by these two independent commission sales agencies with significant administrative operations located in Ukraine were significantly less impacted to date than initially anticipated by the Company at the onset of the Russian invasion.

Nevertheless, no assurances can be provided regarding the conflict between Russia and Ukraine and the extent of potential future operational disruption the conflict may have on either of these Landstar agencies and the related impact of these disruptions on the Company.

Landstar competes with motor carriers and other third parties for the services of independent commission sales agents.

Landstar has historically experienced very limited agent turnover in the number of its Million Dollar Agents.

There can be no assurances, however, that Landstar will continue to experience very limited turnover of its Million Dollar Agents in the future.

Landstar’s contracts with its agents, including its Million Dollar Agents, are typically terminable without cause upon 10 to 30 days’ notice by either party and generally contain significant but not unqualified non-compete

provisions limiting the ability of a former agent to compete with Landstar for a specified period of time post-termination, and other restrictive covenants.

The loss of some of the Company’s Million Dollar Agents and/or a significant decrease in revenue generated by Million Dollar Agents could have a material adverse effect on Landstar, including its results of operations and revenue.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors