| LANDSTAR SYSTEM INC Item 1A Risk Factors Increased severity or frequency of accidents and other claims |
| 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 |
| Landstar’s retained liability for 10 _________________________________________________________________ [67]Table of Contents individual commercial trucking claims depends on when such claims are incurred |
| For commercial trucking claims incurred prior to June 19, 2003 and subsequent to March 30, 2004, Landstar retains liability up to dlra5cmam000cmam000 per occurrence |
| For commercial trucking claims incurred from June 19, 2003 through March 30, 2004, Landstar retains liability up to dlra10cmam000cmam000 per occurrence |
| The Company also retains liability up to dlra1cmam000cmam000 for each general liability claim, dlra250cmam000 for each workers compensation claim, and dlra250cmam000 for each cargo claim |
| A material increase in the frequency or severity of accidents, cargo or workers’ compensation claims or the unfavorable development of existing claims could have a material adverse effect on Landstar, including its results of operations and financial condition |
| Dependence on third party insurance companies |
| As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Insurance Above Self-Insured Retention,” the Company is dependent on a limited number of third party insurance companies to provide insurance coverage in excess of its self-insured retention amounts |
| Historically, the Company has maintained insurance coverage for commercial trucking claims in excess of specific per occurrence limits, up to various maximum amounts, with a limited number of third party insurance companies |
| Over the past three years, the premiums proposed by the third party insurance companies providing coverage for commercial trucking liability insurance above the Company’s self-insured retention amounts have varied dramatically |
| In an attempt to manage the significant fluctuations in the cost of these premiums required by the third party insurance companies, the Company has historically increased or decreased the level of its exposure to commercial trucking claims on a per occurrence basis |
| To the extent the third party insurance companies increase their proposed premiums for coverage of commercial trucking liability claims, the Company may increase its exposure or reduce the maximum amount of coverage in aggregate or on a per occurrence basis |
| However, to the extent the third party insurance companies reduce their premiums proposed for coverage of commercial trucking claims, the Company may reduce its exposure or increase the maximum amount of coverage in aggregate or on a per occurrence basis |
| 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, and currently has a network of over 900 such agents |
| During 2005, 466 agents generated revenue for Landstar of at least dlra1 million each, or approximately 94prca of Landstar’s consolidated revenue and one agent generated approximately dlra197cmam000cmam000, or 8prca, of Landstar’s total revenue |
| Although the Company competes with motor carriers and other third parties for the services of these independent commission sales agents, Landstar has historically experienced very limited agent turnover among its larger-volume agents |
| However, Landstar’s contracts with its agents are typically terminable upon 10 to 30 days notice by either party and generally do not restrict the ability of a former agent to compete with Landstar following any such termination |
| The loss of some of the Company’s key agents or a significant decrease in volume generated by Landstar’s larger agents could have a material adverse effect on Landstar, including its results of operations and revenue |
| Dependence on third party capacity providers |
| As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Capacity,” Landstar does not own trucks or other transportation equipment (other than trailing equipment) and relies on third party capacity providers, including BCO Independent Contractors, Truck Brokerage Carriers, railroads, and air and ocean cargo carriers to transport freight for its customers |
| The Company competes with motor carriers and other third parties for the services of BCO Independent Contractors and other third party capacity providers |
| Freight hauled by BCO Independent Contractors represented 55dtta9prca of Landstar’s revenue in 2005 |
| A significant decrease in available capacity provided by either the Company’s BCO Independent Contractors or other third party capacity providers could have a material adverse effect on Landstar, including its results of operations and revenue |
| Change in capacity mix |
| Historically, the Company’s carrier segment has primarily relied on capacity provided by BCO Independent Contractors |
| Pursuant to a plan to augment its available capacity and increase its revenue, the Company has been increasing the carrier segment’s use of capacity provided by Truck Brokerage Carriers |
| Freight hauled by BCO Independent Contractors represented 55dtta9prca, 64dtta2prca and 69dtta3prca of Landstar’s consolidated revenue in 2005, 2004 and 2003, respectively |
| Historically, with the exception of air revenue, the net margin (defined as revenue less the cost of purchased transportation and agent commissions) generated from freight hauled by BCO Independent Contractors has been greater than freight hauled by other 11 _________________________________________________________________ [68]Table of Contents third party capacity providers |
| An increase in the amount of revenue generated through other third party capacity providers without an increase in total revenue and/or a corresponding reduction in other costs, including other operating, insurance and claims, selling, general and administrative and depreciation and amortization could have a negative effect on the Company’s operating margin (defined as operating income divided by revenue) |
| Expiration of contract with the United States Department of Transportation/Federal Aviation Administration |
| Historically, the United States Government has been the Company’s largest customer |
| During fiscal years 2001 through 2003, revenue derived from various departments of the United States Government, primarily the United States Department of Defense, contributed between 5dtta0prca and 7dtta5prca of the Company’s annual revenue |
| During 2005 and 2004, revenue derived from the United States Government, represented approximately 17prca and 9prca of consolidated revenue, respectively |
| Included in revenue derived from United States Government during fiscal years 2005 and 2004 was dlra275dtta9 million and dlra63dtta8 million of revenue, respectively, related to disaster relief services provided by the Company for storms that impacted the United States |
| These emergency transportation services were provided primarily under a contract with the FAA The dlra275dtta9 million recognized under the FAA contract during the 2005 fiscal year generated dlra51dtta9 million of operating income which, net of related income taxes, increased net income by dlra31dtta6 million |
| The dlra63dtta8 million of revenue recognized under the FAA contract during the 2004 fiscal year generated dlra11dtta8 million of operating income which, net of related income taxes, increased net income dlra7dtta3 million |
| The FAA contract expires December 31, 2006 |
| It is expected that the FAA will request proposals from various companies for a new contract regarding disaster relief services to be provided subsequent to 2006 |
| The Company cannot predict whether a request for proposal, if any, will: a) be made to Landstar Express America, b) include pricing and other provisions that are the same or similar to the current contract provisions, or c) if a request for proposal is received by Landstar Express America, there can be no assurances that Landstar Express America would submit a proposal, or if it did, the FAA would select Landstar Express America as the transportation provider for disaster relief services in years subsequent to 2006 |
| The amount of revenue derived under the FAA contract, if any, is dependent on the occurrence of specific events, primarily disasters, natural or otherwise, for which the Company provides emergency transportation services in support of disaster relief efforts undertaken by the United States Government and administered by the FAA Because of the unpredictable nature of the occurrence and severity of such events, even if Landstar Express America were to enter into a new FAA contract, there can be no assurance that such events will occur, and if such events occur, the extent to which the FAA will require the services of Landstar Express America, if at all |
| Decreased demand for transportation services |
| The transportation industry historically has experienced cyclical financial results as a result of slowdowns in economic activity, the business cycles of customers, price increases by capacity providers, interest rate fluctuations, and other economic factors beyond Landstar’s control |
| Certain of the Company’s third party capacity providers can be expected to charge higher prices to cover increased operating expenses, and the Company’s operating income may decline if it is unable to pass through to its customers the full amount of such higher transportation costs |
| If a slowdown in economic activity or a downturn in the Company’s customers’ business cycles causes a reduction in the volume of freight shipped by those customers, the Company’s operating results could be materially adversely affected |
| Substantial industry competition |
| As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Competition,” Landstar competes primarily in the transportation services industry |
| The transportation services industry is extremely competitive and fragmented |
| Landstar competes primarily with truckload carriers, intermodal transportation service providers, railroads, less-than-truckload carriers, third party broker carriers and other non-asset based transportation and logistics service providers |
| Management believes that competition for the freight transported by the Company is based primarily on service and efficiency and, to a lesser degree, on freight rates alone |
| Historically, competition has created downward pressure on freight rates |
| A decrease in freight rates could have a material adverse effect on Landstar, including its revenue and operating income |
| 12 _________________________________________________________________ [69]Table of Contents Dependence on key personnel |
| The Company is dependent on the services of certain of its executive officers |
| Although the Company believes it has an experienced and highly qualified management group, the loss of the services of certain of the Company’s executive officers could have a material adverse effect on the Company |
| Disruptions or failures in the Company’s computer systems |
| As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Technology,” the Company’s information technology systems used in connection with its operations are located in Jacksonville, Florida and to a lesser extent in Rockford, Illinois |
| Landstar relies in the regular course of its business on the proper operation of its information technology systems to link its extensive network of customers, agents and third party capacity providers, including its BCO Independent Contractors |
| Any significant disruption or failure of its technology systems could significantly disrupt the Company’s operations and impose significant costs on the Company |
| Potential changes in fuel taxes |
| From time to time, various legislative proposals are introduced to increase federal, state, or local taxes, including taxes on motor fuels |
| The Company cannot predict whether, or in what form, any increase in such taxes applicable to the transportation services provided by the Company will be enacted and, if enacted, whether or not the Company’s BCO Independent Contractors and Truck Brokerage Carriers would attempt to pass the increase onto the Company or if the Company will be able to reflect this potential increased cost of capacity, if any, in prices to customers |
| Any such increase in fuel taxes could have a material adverse effect on Landstar, including its results of operations and financial condition |
| Moreover, competition from other transportation service companies including those that provide non-trucking modes of transportation and intermodal transportation would likely increase if state or federal taxes on fuel were to increase without a corresponding increase in taxes imposed upon other modes of transportation |
| Status of independent contractors |
| From time to time, various legislative or regulatory proposals are introduced at the federal or state levels to change the status of independent contractors’ classification to employees for either employment tax purposes (withholding, social security, medicare and unemployment taxes) or other benefits available to employees |
| Currently, most individuals are classified as employees or independent contractors for employment tax purposes based on 20 “common-law” factors rather than any definition found in the Internal Revenue Code or Internal Revenue Service regulations |
| In addition, under Section 530 of the Revenue Act of 1978, taxpayers that meet certain criteria may treat an individual as an independent contractor for employment tax purposes if they have been audited without being told to treat similarly situated workers as employees, if they have received a ruling from the Internal Revenue Service or a court decision affirming their treatment, or if they are following a long-standing recognized practice |
| The Company classifies all of its BCO Independent Contractors and independent commission sales agents as independent contractors for all purposes, including employment tax and employee benefit purposes |
| There can be no assurance that legislative, judicial, or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change the employee/independent contractor classification of BCO Independent Contractors or independent commission sales agents currently doing business with the Company |
| Although management believes that there are no proposals currently pending that would change the employees/independent contractor classification of BCO Independent Contractors or independent commission sales agents currently doing business with the Company, the costs associated with potential changes, if any, with respect to these BCO Independent Contractor classifications could have a material adverse effect on Landstar, including its results of operations and financial condition if Landstar were unable to reflect them in its fee arrangements with the BCO Independent Contractors or independent commission sales agents or in the prices charged to its customers |
| Regulatory and legislative changes |
| As noted above in Item 1, “Business — Factors Significant to the Company’s Operations — Regulation,” certain of the Operating Subsidiaries are motor carriers which are regulated by the Federal Motor Carrier Safety Administration (FMCSA) and by various state agencies |
| The trucking industry is subject to possible regulatory and legislative changes (such as increasingly stringent environmental and/or safety/security regulations or limits on vehicle weight and size) that may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services |
| Any such regulatory or legislative 13 _________________________________________________________________ [70]Table of Contents changes could have a material adverse effect on Landstar, including its results of operations and financial condition |
| Catastrophic loss of a Company facility |
| The Company faces the risk of a catastrophic loss of the use of all or a portion of its facilities located in Jacksonville, Florida and Rockford, Illinois due to hurricanes, flooding, tornados or other weather conditions or natural disasters, terrorist attack or otherwise |
| The Company’s corporate headquarters and approximately two-thirds of the Company’s employees are located in its Jacksonville, Florida facility and a significant portion of the Company’s operations with respect to the carrier segment and Truck Brokerage Carriers is located in its Rockford, Illinois facility |
| In particular, a Category 3, 4 or 5 hurricane that impacts the Jacksonville, Florida metropolitan area or a tornado that strikes the Rockford, Illinois area could significantly disrupt the Company’s operations and impose significant costs on the Company |
| Although the Company maintains insurance covering its facilities, including business interruption insurance, the Company’s insurance may not be adequate to cover all losses that may be incurred in the event of a catastrophic loss of either the Jacksonville, Florida or Rockford, Illinois facility |
| In addition, such insurance, including business interruption insurance, could in the future become more expensive and difficult to maintain and may not be available on commercially reasonable terms or at all |