LANDSTAR SYSTEM INC 10-Q

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 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 twenty six weeks ended June 27, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year ending December 26, 2020. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2019 Annual Report on Form 10-K. 3 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) June 27, 2020 December 28, 2019 ASSETS Current Assets Cash and cash equivalents $ 245,471 $ 319,515 Short-term investments 36,274 32,901 Trade accounts receivable, less allowance of $ 8,580 and $ 7,284 489,182 588,549 Other receivables, including advances to independent contractors, less allowance of $ 9,241 and $ 7,667 27,861 35,553 Other current assets 41,564 21,370 Total current assets 840,352 997,888 Operating property, less accumulated depreciation and amortization of $ 288,055 and $ 280,849 284,794 285,855 Goodwill 40,071 38,508 Other assets 106,893 105,460 Total assets $ 1,272,110 $ 1,427,711 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Cash overdraft $ 35,534 $ 53,878 Accounts payable 273,324 271,996 Current maturities of long-term debt 38,219 42,632 Insurance claims 53,764 44,532 Dividends payable — 78,947 Contractor escrow 25,774 24,902 Other current liabilities 46,845 36,017 Total current liabilities 473,460 552,904 Long-term debt, excluding current maturities 60,152 70,212 Insurance claims 34,762 33,575 Deferred income taxes and other noncurrent liabilities 54,615 49,551 Shareholders’ Equity Common stock, $ 0.01 par value, authorized 160,000,000 shares, issued 68,176,787 and 68,083,419 shares 682 681 Additional paid-in capital 225,332 226,123 Retained earnings 2,012,173 1,962,161 Cost of 29,797,328 and 28,609,926 shares of common stock in treasury ( 1,581,921 ) ( 1,465,284 ) Accumulated other comprehensive loss ( 7,145 ) ( 2,212 ) Total shareholders’ equity 649,121 721,469 Total liabilities and shareholders’ equity $ 1,272,110 $ 1,427,711 See accompanying notes to consolidated financial statements. 4 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (Unaudited) Twenty Six Weeks Ended Thirteen Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Revenue $ 1,751,080 $ 2,078,040 $ 823,514 $ 1,045,040 Investment income 2,002 2,421 835 1,283 Costs and expenses: Purchased transportation 1,344,390 1,591,126 635,133 799,371 Commissions to agents 150,642 173,294 75,266 87,623 Other operating costs, net of gains on asset sales/dispositions 15,674 18,100 7,368 9,861 Insurance and claims 44,708 31,279 19,751 16,286 Selling, general and administrative 85,928 82,565 40,601 41,297 Depreciation and amortization 22,972 22,350 11,467 11,034 Impairment of intangible and other assets 2,582 — 2,582 — Total costs and expenses 1,666,896 1,918,714 792,168 965,472 Operating income 86,186 161,747 32,181 80,851 Interest and debt expense 1,928 1,514 976 709 Income before income taxes 84,258 160,233 31,205 80,142 Income taxes 19,109 35,833 6,951 19,042 Net income 65,149 124,400 24,254 61,100 Less: Net loss attributable to noncontrolling interest — ( 17 ) — — Net income attributable to Landstar System, Inc. and subsidiary $ 65,149 $ 124,417 $ 24,254 $ 61,100 Earnings per common share attributable to Landstar System, Inc. and subsidiary $ 1.68 $ 3.11 $ 0.63 $ 1.53 Diluted earnings per share attributable to Landstar System, Inc. and subsidiary $ 1.68 $ 3.11 $ 0.63 $ 1.53 Average number of shares outstanding: Earnings per common share 38,816,000 40,053,000 38,379,000 39,945,000 Diluted earnings per share 38,816,000 40,053,000 38,379,000 39,945,000 Dividends per common share $ 0.370 $ 0.330 $ 0.185 $ 0.165 See accompanying notes to consolidated financial statements. 5 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) (Unaudited) Twenty Six Weeks Ended Thirteen Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Net income attributable to Landstar System, Inc. and subsidiary $ 65,149 $ 124,417 $ 24,254 $ 61,100 Other comprehensive (loss) income: Unrealized holding gains on available-for-sale investments, net of tax expense of $ 338 , $ 494 , $ 770 and $ 222 1,237 1,805 2,816 810 Foreign currency translation (losses) gains ( 6,170 ) 1,125 1,732 571 Other comprehensive (loss) income ( 4,933 ) 2,930 4,548 1,381 Comprehensive income attributable to Landstar System, Inc. and subsidiary $ 60,216 $ 127,347 $ 28,802 $ 62,481 See accompanying notes to consolidated financial statements. 6 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Twenty Six Weeks Ended June 27, 2020 June 29, 2019 OPERATING ACTIVITIES Net income $ 65,149 $ 124,400 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of operating property and intangible assets 22,972 22,350 Non-cash interest charges 126 126 Provisions for losses on trade and other accounts receivable 6,528 4,194 Gains on sales/disposals of operating property ( 1,812 ) ( 1,219 ) Impairment of intangible and other assets 2,582 — Deferred income taxes, net 6,228 5,060 Stock-based compensation 1,201 3,368 Changes in operating assets and liabilities: Decrease in trade and other accounts receivable 99,601 89,820 Increase in other assets ( 24,809 ) ( 22,808 ) Decrease in accounts payable ( 31 ) ( 28,565 ) Increase (decrease) in other liabilities 10,231 ( 14,315 ) Increase in insurance claims 10,419 1,665 NET CASH PROVIDED BY OPERATING ACTIVITIES 198,385 184,076 INVESTING ACTIVITIES Net changes in other short-term investments 131 — Sales and maturities of investments 14,897 41,345 Purchases of investments ( 16,382 ) ( 42,812 ) Purchases of operating property ( 17,676 ) ( 9,224 ) Proceeds from sales of operating property 4,465 3,219 Consideration paid for acquisition ( 2,701 ) — NET CASH USED BY INVESTING ACTIVITIES ( 17,266 ) ( 7,472 ) FINANCING ACTIVITIES Decrease in cash overdraft ( 18,344 ) ( 11,719 ) Dividends paid ( 93,382 ) ( 13,257 ) Proceeds from exercises of stock options 614 343 Taxes paid in lieu of shares issued related to stock-based compensation plans ( 3,280 ) ( 8,438 ) Purchases of common stock ( 115,962 ) ( 69,729 ) Principal payments on finance lease obligations ( 21,958 ) ( 23,658 ) Purchase of noncontrolling interest — ( 600 ) NET CASH USED BY FINANCING ACTIVITIES ( 252,312 ) ( 127,058 ) Effect of exchange rate changes on cash and cash equivalents ( 2,851 ) 930 (Decrease) increase in cash and cash equivalents ( 74,044 ) 50,476 Cash and cash equivalents at beginning of period 319,515 199,736 Cash and cash equivalents at end of period $ 245,471 $ 250,212 See accompanying notes to consolidated financial statements. 7 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Twenty Six and Thirteen Weeks Ended June 27, 2020 and June 29, 2019 (In thousands, except share and per share amounts) (Unaudited) Common Stock Additional Paid-In Retained Treasury Stock at Cost Accumulated Other Comprehensive Shares Amount Capital Earnings Shares Amount (Loss) Income Total Balance December 28, 2019 68,083,419 $ 681 $ 226,123 $ 1,962,161 28,609,926 $ ( 1,465,284 ) $ ( 2,212 ) $ 721,469 Adoption of accounting standard (Note 1 4 ) ( 702 ) ( 702 ) Net income 40,895 40,895 Dividends ($ 0.185 per share) ( 7,336 ) ( 7,336 ) Purchases of common stock 1,178,970 ( 115,962 ) ( 115,962 ) Issuance of stock related to stock-based compensation plans 84,063 1 ( 1,781 ) 8,078 ( 639 ) ( 2,419 ) Stock-based compensation 631 631 Other comprehensive loss ( 9,481 ) ( 9,481 ) Balance March 28, 2020 68,167,482 $ 682 $ 224,973 $ 1,995,018 29,796,974 $ ( 1,581,885 ) $ ( 11,693 ) $ 627,095 Net income 24,254 24,254 Dividends ($ 0.185 per share) ( 7,099 ) ( 7,099 ) Issuance of stock related to stock-based compensation plans 9,305 — ( 211 ) 354 ( 36 ) ( 247 ) Stock-based compensation 570 570 Other comprehensive income 4,548 4,548 Balance June 27, 2020 68,176,787 $ 682 $ 225,332 $ 2,012,173 29,797,328 $ ( 1,581,921 ) $ ( 7,145 ) $ 649,121 8 Table of Contents Landstar System, Inc. and Subsidiary Shareholders Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock at Cost Accumulated Other Comprehensive (Loss) Income Non-controlling Interests Shares Amount Shares Amount Total Balance December 29, 2018 67,870,962 $ 679 $ 226,852 $ 1,841,279 27,755,001 $ ( 1,376,111 ) $ ( 5,875 ) $ 2,309 $ 689,133 Net income (loss) 63,317 ( 17 ) 63,300 Dividends ($ 0.165 per share) ( 6,629 ) ( 6,629 ) Purchases of common stock 124,481 ( 12,977 ) ( 12,977 ) Purchase of noncontrolling interests 1,842 ( 2,442 ) ( 600 ) Issuance of stock related to stock-based compensation plans 176,079 1 ( 7,081 ) 5,199 ( 524 ) ( 7,604 ) Stock-based compensation 1,938 1,938 Other comprehensive income 1,549 150 1,699 Balance March 30, 2019 68,047,041 $ 680 $ 223,551 $ 1,897,967 27,884,681 $ ( 1,389,612 ) $ ( 4,326 ) $ — $ 728,260 Net income 61,100 61,100 Dividends ($ 0.165 per share) ( 6,628 ) ( 6,628 ) Purchases of common stock 549,929 ( 56,752 ) ( 56,752 ) Issuance of stock related to stock-based compensation plans 17,836 1 ( 431 ) 572 ( 61 ) ( 491 ) Stock-based compensation 1,430 1,430 Other comprehensive income 1,381 1,381 Balance June 29, 2019 68,064,877 $ 681 $ 224,550 $ 1,952,439 28,435,182 $ ( 1,446,425 ) $ ( 2,945 ) $ — $ 728,300 See accompanying notes to consolidated financial statements. 9 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.” Significant intercompany accounts have been eliminated in consolidation. (1) Significant Accounting Policies Revenue from Contracts with Customers – Disaggregation of Revenue During the twenty six weeks ended June 27, 2020, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 46 %, 46 % and 3 % respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3 % of the Company’s consolidated revenue in the twenty-six-week period ended June 27, 2020. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the twenty-six-week period ended June 27, 2020 was $ 1,028,334,000 hauled via van equipment, $ 533,716,000 hauled via unsided/platform equipment and $ 45,859,000 of less-than-truckload. During the twenty six weeks ended June 29, 2019, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 44 %, 48 % and 3 %, respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3 % of the Company’s consolidated revenue in the twenty-six-week period ended June 29, 2019. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the twenty-six-week period ended June 29, 2019 was $ 1,224,379,000 hauled via van equipment, $ 648,828,000 hauled via unsided/platform equipment and $ 48,108,000 of less-than-truckload. During the thirteen weeks ended June 27, 2020, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 46 %, 46 % and 3 % respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 4 % of the Company’s consolidated revenue in the thirteen-week period ended June 27, 2020. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the thirteen-week period ended June 27, 2020 was $ 483,027,000 hauled via van equipment, $ 247,388,000 hauled via unsided/platform equipment and $ 22,918,000 of less-than-truckload. During the thirteen weeks ended June 29, 2019, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 45 %, 47 % and 3 % respectively, of the Company’s consolidated revenue. Collectively, revenue generated by air and ocean cargo carriers represented approximately 3 % of the Company’s consolidated revenue in the thirteen-week period ended June 29, 2019. Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the thirteen-week period ended June 29, 2019 was $ 605,365,000 hauled via van equipment, $ 338,107,000 hauled via unsided/platform equipment and $ 24,732,000 of less-than-truckload. (2) Acquired Business On May 6, 2020, Landstar System Holdings, Inc. formed a new subsidiary that was subsequently renamed Landstar Blue, LLC (“Landstar Blue”). Landstar Blue arranges truckload brokerage services while helping the Company to develop and test digital technologies and processes for the benefit of all Landstar independent commission sales agents. On June 15, 2020, Landstar Blue completed the acquisition of an independent agent of the Company whose business focused on truckload brokerage services. Cash consideration paid for the acquisition was approximately $ 2,701 , 000 . In addition, the Company assumed approximately $ 200,000 in liabilities consisting of additional contingent purchase price. The resulting goodwill arising from the acquisition was approximately $ 2,807,000 . With respect to this goodwill, 100 % is expected to be deductible by the Company for U.S. income tax purposes. Pro fo r ma financial information for prior periods is not presented as the Company does not believe the acquisition to be material to the Company’s consolidated results. The results of operations for Landstar Blue are presented as part of the Company’s transportations logistics segment. Transaction costs for the acquisition were insignificant. 10 Table of Contents (3) Share-based Payment Arrangements As of June 27, 2020, 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): Twenty Six Weeks Ended Thirteen Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Total cost of the Plans during the period $ 1,201 $ 3,368 $ 570 $ 1,430 Amount of related income tax benefit recognized during the period ( 1,135 ) ( 3,734 ) ( 262 ) ( 672 ) Net cost of the Plans during the period $ 66 $ ( 366 ) $ 308 $ 758 Included in income tax benefits recognized in the twenty-six-week periods ended June 27, 2020 and June 29, 2019 were excess tax benefits from stock-based awards of $ 829,000 and $ 2,871,000 , respectively. As of June 27, 2020, there were 60,586 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 3,683,524 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 with either a performance condition or a market condition under the Plans: Number of RSUs Weighted Average Grant Date Fair Value Outstanding at December 28, 2019 198,875 $ 84.37 Granted 59,478 $ 102.66 Shares earned in excess of target (1) 11,648 $ 77.00 Vested shares, including shares earned in excess of target ( 76,290 ) $ 73.44 Forfeited ( 10,987 ) $ 100.55 Outstanding at June 27, 2020 182,724 $ 93.44 (1) Represents shares earned in excess of target under the February 2, 2017 RSU awards as actual results exceeded the target under the awards as a result of fiscal year 2019 results. During the twenty-six-week period ended June 27, 2020, the Company granted RSUs with a performance condition. Outstanding RSUs at both December 28, 2019 and June 27, 2020 include RSUs with a performance condition and RSUs with a market condition, as further described below and in the Company’s 2019 Annual Report on Form 10-K. RSUs with a performance condition granted on January 31, 2020 may vest on January 31 of 2023, 2024 and 2025 based on growth in operating income and pre-tax income per diluted share from continuing operations attributable to Landstar System, Inc. and subsidiary as compared to the results from the 2019 fiscal year. The Company recognized approximately ($ 308,000 ) and $ 2,062,000 of share-based compensation (benefit)/expense related to RSU awards in the twenty-six-week periods ended June 27, 2020 and June 29, 2019, respectively. As of June 27, 2020, there was a maximum of $ 35.3 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 3.3 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. 11 Table of Contents Stock Options The following table summarizes information regarding the Company’s outstanding stock options under the Plans: Number of Options Weighted Average Exercise Price per Share Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value (000s) Options outstanding at December 28, 2019 44,467 $ 51.24 Exercised ( 16,517 ) $ 47.70 Options outstanding at June 27, 2020 27,950 $ 53.33 2.1 $ 1,514 Options exercisable at June 27, 2020 27,950 $ 53.33 2.1 $ 1,514 The total intrinsic value of stock options exercised during the twenty-six-week periods ended June 27, 2020 and June 29, 2019 was $ 1,071,000 and $ 1,269,000 , respectively. As of June 27, 2020, there was no unrecognized compensation cost related to stock options granted under the Plans. Non-vested Restricted Stock and Deferred Stock Units The following table summarizes information regarding the Company’s outstanding shares of non-vested restricted stock and Deferred Stock Units (defined below) under the Plans: Number of Shares and Deferred Stock Units Weighted Average Grant Date Fair Value Non-vested at December 28, 2019 64,808 $ 98.24 Granted 26,604 $ 111.88 Vested ( 27,619 ) $ 98.91 Forfeited ( 2,351 ) $ 106.34 Non-vested at June 27, 2020 61,442 $ 103.54 The fair value of each share of non-vested restricted stock issued and Deferred Stock Unit granted 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 either on the first, second and third anniversary of the date of the grant or the third, fourth and fifth anniversary of the date of the grant, or 100 % on the first or fifth anniversary of the date of the grant. For restricted stock awards granted under the 2013 DSCP plan, each recipient may elect to defer receipt of shares and instead receive restricted stock units (“Deferred Stock Units”), which represent contingent rights to receive shares of the Company’s common stock on the date of recipient separation from service from the Board of Directors, or, if earlier, upon a change in control event of the Company. Deferred Stock Units become vested 100 % on the first anniversary of the date of the grant. Deferred Stock Units do not represent actual ownership in shares of the Company’s common stock and the recipient does not have voting rights or other incidents of ownership until the shares are issued. However, Deferred Stock Units do contain the right to receive dividend equivalent payments prior to settlement into shares. As of June 27, 2020, there was $ 4,841,000 of total unrecognized compensation cost related to non-vested shares of restricted stock and Deferred Stock Units granted under the Plans. The unrecognized compensation cost related to these non-vested shares of restricted stock and Deferred Stock Units is expected to be recognized over a weighted average period of 2.1 years. (4) Income Taxes The provisions for income taxes for the 2020 and 2019 twenty-six-week periods were each based on an estimated annual effective income tax rate of 24.2 %, adjusted for discrete events, such as benefits resulting from stock-based awards. The effective income tax rate for the 2020 twenty-six-week period was 22.7 %, which was higher than the statutory federal income tax rate of 21 % primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by state tax refunds and excess tax benefits realized on stock - 12 Table of Contents based awards. The effective income tax rate for the 2019 twenty-six-week period was 22.4 %, which was higher than the statutory federal income tax rate of 21 % primarily attributable to state taxes and the meals and entertainment exclusion, partially offset by excess tax benefits realized on stock - based awards . The provision for income taxes for the 2019 twenty-six-week period was favorably impacted by $ 2,871,000 of excess tax benefits from stock-based awards. (5) Earnings Per Share Earnings per common share attributable to Landstar System, Inc. and subsidiary are based on the weighted average number of shares outstanding, including outstanding non-vested restricted stock and outstanding Deferred Stock Units. Diluted earnings per share attributable to Landstar System, Inc. and subsidiary are based on the weighted average number of common shares and Deferred Stock Units outstanding plus the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options. During the 2020 and 2019 twenty-six-week and thirteen-week periods , the future compensation cost attributable to shares of non-vested restricted stock exceeded the incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options. For each of the twenty-six-week periods ended June 27, 2020 and June 29, 2019, no options outstanding to purchase shares of common stock were antidilutive. Outstanding RSUs were excluded from the calculation of diluted earnings per share attributable to Landstar System, Inc. and subsidiary for all periods because the performance metric requirements or market condition for vesting had not been satisfied. (6) Additional Cash Flow Information During the 2020 twenty-six-week period, Landstar paid income taxes and interest of $ 16,198,000 and $ 2,057,000 , respectively. During the 2019 twenty-six-week period, Landstar paid income taxes and interest of $ 39,180,000 and $ 2,286,000 , respectively. Landstar acquired operating property by entering into finance leases in the amount of $ 7,485,000 in the 2020 twenty-six-week period. Landstar did no t acquire any operating property by entering into finance leases in the 2019 twenty-six-week periods. In addition, during the 2020 twenty-six-week period, Landstar acquired $ 1,440,000 of operating property for which the Comp a ny accrued a corresponding liability in accounts payable as of June 27, 2020. Capital expenditures are recorded as cash outflows from investing activities in the consolidated statement of cash flows in the period in which they are paid. (7) Segment Information The following table summarizes information about the Company’s reportable business segments as of and for the twenty-six-week and thirteen week periods ended June 27, 2020 and June 29, 2019 (in thousands): Twenty Six Weeks Ended June 27, 2020 June 29, 2019 Transportation Logistics Insurance Total Transportation Logistics Insurance Total External revenue $ 1,723,682 $ 27,398 $ 1,751,080 $ 2,049,777 $ 28,263 $ 2,078,040 Internal revenue 35,834 35,834 27,367 27,367 Investment income 2,002 2,002 2,421 2,421 Operating income 76,518 9,668 86,186 135,919 25,828 161,747 Expenditures on long-lived assets 17,676 17,676 9,224 9,224 Goodwill 40,071 40,071 38,407 38,407 Thirteen Weeks Ended June 27, 2020 June 29, 2019 Transportation Logistics Insurance Total Transportation Logistics Insurance Total External revenue $ 809,798 $ 13,716 $ 823,514 $ 1,030,816 $ 14,224 $ 1,045,040 Internal revenue 26,755 26,755 17,753 17,753 Investment income 835 835 1,283 1,283 Operating income 21,474 10,707 32,181 68,336 12,515 80,851 Expenditures on long-lived assets 11,877 11,877 4,648 4,648 In the twenty-six-week periods ended June 27, 2020 and June 29, 2019, no single customer accounted for more than 10 % of the Company’s consolidated revenue. 13 Table of Contents (8) Other Comprehensive Income The following table presents the components of and changes in accumulated other comprehensive income (loss), net of related income taxes, as of and for the twenty-six-week period ended June 27, 2020 (in thousands): Unrealized Holding Gains on Available-for-Sale Securities Foreign Currency Translation Total Balance as of December 28, 2019 $ 1,120 $ ( 3,332 ) $ ( 2,212 ) Other comprehensive gain (loss) 1,237 ( 6,170 ) ( 4,933 ) Balance as of June 27, 2020 $ 2,357 $ ( 9,502 ) $ ( 7,145 ) 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 twenty-six-week period ended June 27, 2020. (9) Investments Investments include primarily investment-grade corporate bonds and U.S. Treasury obligations having maturities of up to five years (the “bond portfolio”) and money market investments. 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 an allowance for credit loss is necessary. 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 a result of credit-related factors, are to be included as a charge in the statement of income, while unrealized losses considered to be a result of noncredit-related factors 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 $ 3,002,000 and $ 1,427,000 at June 27, 2020 and December 28, 2019, respectively. 14 Table of Contents The amortized cost and fair values of available-for-sale investments are as follows at June 27, 2020 and December 28, 2019 (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value June 27, 2020 Money market investments $ 14,038 $ — $ — $ 14,038 Asset-backed securities 569 — 84 485 Corporate bonds and direct obligations of government agencies 100,722 3,261 316 103,667 U.S. Treasury obligations 2,337 141 — 2,478 Total $ 117,666 $ 3,402 $ 400 $ 120,668 December 28, 2019 Money market investments $ 15,691 $ — $ — $ 15,691 Asset-backed securities 572 — 1 571 Corporate bonds and direct obligations of government agencies 97,583 1,465 44 99,004 U.S. Treasury obligation s 2,335 12 5 2,342 Total $ 116,181 $ 1,477 $ 50 $ 117,608 For those available-for-sale investments with unrealized losses at June 27, 2020 and December 28, 2019, 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 June 27, 2020 Asset-backed securities $ 485 $ 84 $ — $ — $ 485 $ 84 Corporate bonds and direct obligations of government agencies 4,937 316 — — 4,937 316 Total $ 5,422 $ 400 $ — $ — $ 5,422 $ 400 December 28, 2019 Asset-backed securities $ 571 $ 1 $ — $ — $ 571 $ 1 Corporate bonds and direct obligations of government agencies 8,728 41 4,260 3 12,988 44 U.S. Treasury obligation s 1,226 5 — — 1,226 5 Total $ 10,525 $ 47 $ 4,260 $ 3 $ 14,785 $ 50 The Company expects to recover, through collection of all of the contractual cash flows of each security, 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, no losses have been recognized in the Company’s consolidated statements of income. (10) Leases Landstar’s noncancelable leases are primarily comprised of finance leases for the acquisition of new trailing equipment. Each finance lease for the acquisition of trailing equipment is a five year lease with a $ 1 purchase option for the applicable equipment at lease expiration. Substantially all of Landstar’s operating lease right-of-use assets and operating lease liabilities represent leases for orientation centers for BCO Independent Contractors and office space used to conduct Landstar’s business. These leases do not have significant rent escalation holidays, concessions, leasehold improvement incentives or other build-out clauses. Further, the leases do not contain contingent rent provisions. Landstar also leases certain trailing equipment to supplement the Company-owned trailer fleet under “month- to-month” lease terms, which are not required to be recorded on the balance sheet due to the less than twelve month lease term exemption. Sublease income is primarily comprised of weekly trailing equipment rentals to our BCO Independent Contractors. 15 Table of Contents Most of Landstar’s operating leases include one or more options to renew. The exercise of lease renewal options is typically at Landstar’s sole discretion, and, as such, the majority of renewals to extend the lease terms are not included in the right-of-use assets and lease liabilities as they are not reasonably certain of exercise. Landstar regularly evaluates the renewal options, and when they are reasonably certain of exercise, Landstar includes the renewal period in the lease term. As most of Landstar’s operating leases do not provide an implicit rate, Landstar utilized its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. Landstar has a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate. The components of lease cost for finance leases and operating leases for the twenty six weeks ended June 27, 2020 were (in thousands): Finance leases: Amortization of right-of-use assets $ 12,372 Interest on lease liability 1,689 Total finance lease cost 14,061 Operating leases: Lease cost 1,518 Variable lease cost — Sublease income ( 2,413 ) Total operating lease (income)/cost ( 895 ) Total lease cost $ 13,166 A summary of the lease classification on our consolidated balance sheet as of June 27, 2020 is as follows (in thousands): Assets: Operating lease right-of-use assets Other assets $ 2,462 Finance lease asset s Operating property, less accumulated depreciation and amortization 151,518 Total lease assets $ 153,980 Liabilities: The following table reconciles the undiscounted cash flows for the finance and operating leases to the finance and operating lease liabilities recorded on the balance sheet at June 27, 2020 (in thousands): Finance Leases Operating Leases 2020 Remainder $ 22,849 $ 340 2021 32,858 643 2022 23,709 645 2023 16,686 515 2024 6,742 448 Thereafter 793 92 Total future minimum lease payments 103,637 2,683 Less amount representing interest ( 2.1 % to 4.4 %) 5,266 221 Present value of minimum lease payments $ 98,371 $ 2,462 Current maturities of long-term debt 38,219 Long-term debt, excluding current maturities 60,152 Other current liabilitie s 648 Deferred income taxes and other noncurrent liabilities 1,814 16 Table of Contents The weighted average remaining lease term and the weighted average discount rate for finance and operating leases as of June 27, 2020 were: Finance Leases Operating Leases Weighted average remaining lease term (years) 3.2 4.3 Weighted average discount rate 3.2 % 4.0 % (11) Commitments and Contingencies Short-term investments include $ 36,274,000 in current maturities of investments held by the Company’s insurance segment at June 27, 2020. The non-current portion of the bond portfolio of $ 84,394,000 is included in other assets. The short-term investments, together with $ 32,063,000 of non-current investments, provide collateral for the $ 61,503,000 of letters of credit issued to guarantee payment of insurance claims. As of June 27, 2020, Landstar also had $ 34,156,000 of additional letters of credit outstanding under the Company’s Credit Agreement. On January 25, 2019, a purported class action was filed in the Superior Court of the State of California for the County of San Bernardino against Landstar System, Inc. and Landstar Ranger, Inc. (together, the “Defendants”). The complaint purported to bring this action on behalf of Hany Tanious, as an individual, and “all owner operators who performed work for the Defendants, and who were classified as independent contractors, during the four years preceding the filing of this action through the present.” The complaint asserted claims based on the alleged misclassification of Mr. Tanious as an independent contractor and alleged violations under California law relating to overtime, minimum wage, meal and rest breaks, failure to reimburse certain expenses, wage statements, waiting time and unfair competition. Mr. Tanious was a truck owner-operator and formerly an independent contractor who was a party to an independent contractor operating agreement with Landstar Ranger, Inc. On June 11, 2019, the Defendants filed a Notice of Removal that resulted in the removal of the case from state court to federal court, where it was assigned to Judge Dale S. Fischer of the United State District Court for the Central District of California. On August 22, 2019, the Court issued an order, among other things, striking all class allegations from the complaint and stating that this matter would proceed as an individual action. On June 15, 2020, the Court issued an order granting the Defendants’ motion to transfer venue to the United States District Court for the Middle District of Florida, where the matter was assigned to Judge Marcia Morales Howard. On June 24, 2020, the Court, sua sponte , issued an order striking the first amended complaint that was deemed by the Court to have been filed by the plaintiff on March 23, 2020. On July 6, 2020, the plaintiff filed a voluntary dismissal without prejudice of all remaining claims relating to this action. On July 15, 2020, the Court issued an order granting the voluntary dismissal of this action in full. 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. (12) 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. 17 Table of Contents The following table summarizes the effect of the increase in the cost of insurance claims resulting from unfavorable development of prior year self-insured claims estimates on operating income, net income attributable to Landstar System, Inc. and subsidiary and earnings per share attributable to Landstar System, Inc. and subsidiary set forth in the consolidated statements of income for the twenty-six-week and thirteen-week periods ended June 27, 2020 and June 29, 2019 (in thousands, except per share amounts): Twenty Six Weeks Ended Thirteen Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Operating income $ 5,039 $ 2,900 $ 2,816 $ 1,493 Net income attributable to Landstar System, Inc. and subsidiary $ 3,820 $ 2,198 $ 2,135 $ 1,131 Earnings per share attributable to Landstar System, Inc. and subsidiary $ 0.10 $ 0.05 $ 0.06 $ 0.03 Diluted earnings per share attributable to Landstar System, Inc. and subsidiary $ 0.10 $ 0.05 $ 0.06 $ 0.03 (13) Impairment of Intangible and Other Assets During the 2020 second fiscal quarter, the Company recorded a non-cash impairment charge of $ 2,582 ,000 in respect of certain assets, primarily customer contract and related customer relationship intangible assets, acquired on September 20, 2017, along with substantially all of the other assets of the asset-light transportation logistics business of Fletes Avella, S.A. de C.V. (“Fletes Avella”). As previously disclosed in Item 1A. Risk Factors in the Company’s Form 10-Q for the 2020 first quarter, negative macroeconomic trends in Mexico, including issues in the international oil and gas sector, have caused significant disruptions in the M e xican economy. Accordingly, management performed impairment tests of the carrying values of certain assets that primarily relate to intra-Mexico business acquired as a part of the Fletes Avella acquisition. The impairment tests resulted in an impairment charge of $ 2,582,000 , as the negative macroeconomic trends in Mexico have caused current financial projections relating to these intangible assets to be substantially below those originally anticipat e d at the acquisition date. There was no corresponding goodwill impairment charge recorded as the fair value of the Company’s Mexico and cross-border reporting unit continues to significantly exceed its carrying value as of June 27, 2020. (1 4 ) Recent Accounting Pronouncements Adoption of New Accounting Standards 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. The Company adopted ASU 2016-13 on December 29, 2019, under the modified retrospective transition method resulting in a $ 702,000 cumulative adjustment to retained earnings.