LANDSTAR SYSTEM INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 December 28, 2019 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2019 Annual Report on Form 10-K. 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 Landstar’s business objectives, plans, strategies and expectations. Terms such as “anticipates,” “believes,” “estimates,” “intention,” “expects,” “plans,” “predicts,” “may,” “should,” “could,” “will,” the negative thereof and similar expressions are intended to identify forward-looking statements. Such statements are by nature subject to uncertainties and risks, including but not limited to: the impact of the coronavirus (COVID-19) pandemic; an increase in the frequency or severity of accidents or other claims; unfavorable 18 Table of Contents development of existing accident claims; dependence on third party insurance companies; dependence on independent commission sales agents; dependence on third party capacity providers; decreased demand for transportation services; U.S. foreign trade relationships; substantial industry competition; disruptions or failures in the Company’s computer systems; cyber and other information security incidents; dependence on key vendors; changes in fuel taxes; status of independent contractors; regulatory and legislative changes; regulations focused on diesel emissions and other air quality matters; catastrophic loss of a Company facility; intellectual property; unclaimed property; and other operational, financial or legal risks or uncertainties detailed in Landstar’s Form 10-K for the 2019 fiscal year, described in Item 1A “Risk Factors”, in this report or in Landstar’s other Securities and Exchange Commission filings from time to time. These risks and uncertainties could cause actual results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking statements and the Company undertakes no obligation to publicly update or revise any forward-looking statements. Introduction Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (together, referred to herein as “Landstar” or the “Company”), is a worldwide 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 comprehensive third party logistics solutions to meet all of a customer’s transportation needs. Landstar provides services principally throughout the United States and to a lesser extent in Canada and Mexico, 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 over 1,200 independent commission sales agents and approximately 64,000 third party capacity providers, primarily truck capacity providers, linked together by a series of digital technologies 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 series of digital technologies, Landstar operates an integrated transportation management solutions business primarily throughout North America with revenue of $4.1 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment. The transportation logistics segment provides a wide range of integrated transportation management solutions. Transportation services offered by the Company include truckload and less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico cross-border, intra-Mexico, intra-Canada, project cargo and customs brokerage. Examples of the industries serviced by the transportation logistics segment include automotive parts and assemblies, building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics and military equipment. In addition, the transportation logistics segment provides transportation services to other transportation companies, including third party logistics and less-than-truckload service providers. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Billings for freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight and are referred to as transportation 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. Landstar Metro, S.A.P.I. de C.V. (“Landstar Metro”) provides freight and logistics services within the country of Mexico and in conjunction with Landstar’s U.S./Mexico cross-border services. Landstar Metro Servicios S.A.P.I. de C.V. (“Landstar Servicios”) provides various administrative, financial, operational, safety and compliance services to Landstar Metro. The results of operations from Landstar Metro and Landstar Servicios are presented as part of the Company’s transportation logistics segment. On January 29, 2019, Landstar acquired all of the remaining equity interests in Landstar Metro and Landstar Servicios held by their former minority equityholders. Accordingly, as of such date, Landstar Metro and Landstar Servicios each became wholly owned subsidiaries of the Company. Revenue from Landstar Metro represented less than 1% of the Company’s transportation logistics segment revenue in the twenty-six-week period ended June 27, 2020. 19 Table of Contents 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. The results of operations from Landstar Blue are presented as part of the Company’s transportations logistics segment. The Company expects that Landstar Blue will not have a material effect on its revenues and earnings for the remainder of fiscal year 2020. Revenue from Landstar Blue represented less than 1% of the Company’s transportation logistics segment revenue in the twenty-six-week period ended June 27, 2020. The insurance segment is comprised of Signature Insurance Company, a wholly owned offshore insurance subsidiary (“Signature”), and Risk Management Claim Services, Inc. The insurance segment provides risk and claims management services to certain of Landstar’s operating subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to certain of Landstar’s operating subsidiaries. Revenue at the insurance segment represents reinsurance premiums from third party insurance companies that provide insurance programs to BCO Independent Contractors where all or a portion of the risk is ultimately borne by Signature. Revenue at the insurance segment represented approximately 2% of the Company’s consolidated revenue for the twenty-six-week period ended June 27, 2020. 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 safely and efficiently deliver freight utilizing third party capacity providers. Management believes the most significant factors to the Company’s success include increasing revenue, sourcing capacity and controlling costs, including insurance and claims. 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 $1 million or more of Landstar revenue (“Million Dollar Agents”). Management believes future revenue growth is primarily dependent on its ability to increase both the revenue generated by Million Dollar Agents and the number of Million Dollar Agents through a combination of recruiting new agents, increasing the revenue opportunities generated by existing independent commission sales agents and providing its independent commission sales agents with digital technologies they may use to grow revenue and increase efficiencies at their businesses. During the 2019 fiscal year, 555 independent commission sales agents generated $1 million or more of Landstar revenue and thus qualified as Million Dollar Agents. During the 2019 fiscal year, the average revenue generated by a Million Dollar Agent was $6,880,000 and revenue generated by Million Dollar Agents in the aggregate represented 93% of consolidated revenue. 20 Table of Contents 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: Twenty Six Weeks Ended Thirteen Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Revenue generated through (in thousands): Truck transportation Truckload: Van equipment $ 1,028,334 $ 1,224,379 $ 483,027 $ 605,365 Unsided/platform equipment 533,716 648,828 247,388 338,107 Less-than-truckload 45,859 48,108 22,918 24,732 Total truck transportation 1,607,909 1,921,315 753,333 968,204 Rail intermodal 51,315 58,585 23,186 28,570 Ocean and air cargo carriers 57,250 58,893 30,663 28,224 Other (1) 34,606 39,247 16,332 20,042 $ 1,751,080 $ 2,078,040 $ 823,514 $ 1,045,040 Revenue on loads hauled via BCO Independent Contractors included in total truck transportation $ 809,779 $ 923,928 $ 378,500 $ 474,620 Number of loads: Truck transportation Truckload: Van equipment 600,519 686,901 285,174 345,080 Unsided/platform equipment 231,122 260,920 110,533 135,750 Less-than-truckload 78,079 74,549 39,723 39,240 Total truck transportation 909,720 1,022,370 435,430 520,070 Rail intermodal 21,510 23,880 9,970 11,420 Ocean and air cargo carriers 14,430 14,810 7,360 7,300 945,660 1,061,060 452,760 538,790 Loads hauled via BCO Independent Contractors included in total truck transportation 443,830 483,660 210,430 248,810 Revenue per load: Truck transportation Truckload: Van equipment $ 1,712 $ 1,782 $ 1,694 $ 1,754 Unsided/platform equipment 2,309 2,487 2,238 2,491 Less-than-truckload 587 645 577 630 Total truck transportation 1,767 1,879 1,730 1,862 Rail intermodal 2,386 2,453 2,326 2,502 Ocean and air cargo carriers 3,967 3,977 4,166 3,866 Revenue per load on loads hauled via BCO Independent Contractors $ 1,825 $ 1,910 $ 1,799 $ 1,908 Revenue by capacity type (as a % of total revenue): Truck capacity providers: BCO Independent Contractors 46 % 44 % 46 % 45 % Truck Brokerage Carriers 46 % 48 % 46 % 47 % Rail intermodal 3 % 3 % 3 % 3 % Ocean and air cargo carriers 3 % 3 % 4 % 3 % Other 2 % 2 % 2 % 2 % (1) Includes primarily reinsurance premium revenue generated by the insurance segment and intra-Mexico transportation services revenue generated by Landstar Metro. 21 Table of Contents 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: June 27, 2020 June 29, 2019 BCO Independent Contractors 9,632 9,879 Truck Brokerage Carriers: Approved and active (1) 37,600 40,097 Other approved 16,365 17,790 53,965 57,887 Total available truck capacity providers 63,597 67,766 Trucks provided by BCO Independent Contractors 10,299 10,587 (1) Active refers to Truck Brokerage Carriers who moved at least one load in the 180 days immediately preceding the fiscal quarter end. The Company incurs costs that are directly related to the transportation of freight that include purchased transportation and commissions to agents. The Company incurs indirect costs associated with the transportation of freight that include other operating costs and insurance and claims. In addition, the Company incurs selling, general and administrative costs essential to administering its business operations. Management continually monitors all components of the costs incurred by the Company and establishes annual cost budgets which, in general, are used to benchmark costs incurred on a monthly basis. 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 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 and purchased transportation paid to ocean cargo carriers is generally based on a contractually agreed-upon fixed rate per load. 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 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 over the freight transit period as the performance obligation to the customer is completed. The Company defines gross profit as revenue less the cost of purchased transportation and commissions to agents. Gross profit divided by revenue is referred to as gross profit margin. The Company’s operating margin is defined as operating income divided by gross profit. In general, gross profit margin on revenue generated by BCO Independent Contractors represents a fixed percentage of revenue 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, gross profit margin is either fixed or variable as a percent of revenue, depending on the contract with each individual independent commission sales agent. Under certain contracts with independent commission sales agents, the Company retains a fixed percentage of revenue and the agent retains the amount remaining less the cost of purchased transportation (the “retention contracts”). Gross profit 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 22 Table of Contents Company’s contracts with independent commission sales agents provide commissions to agents at a contractually agreed upon percentage of net revenue for these types of shipments. Approximately 52% of the Company’s consolidated revenue in the twenty-six-week period ended June 27, 2020 was generated under contracts that have a fixed gross profit margin while 48% was under contracts that have a variable gross profit margin. 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. With respect to insurance and claims cost, 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 $5,000,000 per occurrence and maintains various third party insurance arrangements for liabilities in excess of its $5,000,000 self-insured retention. Effective May 1, 2019, the Company entered into a new three year commercial auto liability insurance arrangement for losses incurred between $5,000,000 and $10,000,000 (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 initially provided for a limit for a single loss of $5,000,000, with an aggregate limit of $10,000,000 for each policy year, an aggregate limit of $15,000,000 for the thirty-six month term ended April 30, 2022, and options to increase such aggregate limits for pre-established amounts of additional premium. In the event paid aggregate losses under the Initial Excess Policy during any policy year (May 1 to April 30) exceeded $10,000,000, the Company would retain liability of up to $10,000,000 per occurrence, inclusive of its $5,000,000 self-insured retention, for the remainder of such policy year. Moreover, in the event paid aggregate losses under the Initial Excess Policy during the three year period ending April 30, 2022 exceeded a pre-determined threshold amount, the Initial Excess Policy would require the Company to pay additional premium up to a maximum amount of $3,500,000. As previously disclosed, BCO Independent Contractors with a subsidiary of the Company were involved in two tragic accidents during the policy year ending April 30, 2020, the first of which occurred in the 2019 third quarter and the second of which occurred in the 2020 first quarter. Following these two tragic accidents, the Company exercised its option under the Initial Excess Policy to increase its aggregate limits to $15,000,000 for each policy year and $20,000,000 for the thirty-six month term ended April 30, 2022. If aggregate losses under the Initial Excess Policy exceed either the new annual aggregate limit or the new aggregate limit for the three year period ending April 30, 2022, and the Company declined the option to increase such aggregate limits for a pre-established amount of additional premium, Landstar would retain liability of up to $10,000,000 per occurrence, inclusive of its $5,000,000 self-insured retention for commercial trucking claims during the remainder of the applicable policy year(s). In addition, as a result of the Company’s aggregate loss experience since it entered into the Initial Excess Policy, it believes it is probable it will be required to pay additional premium under the Initial Excess Policy, which amount of additional premium was provided for in insurance and claims costs for the Company’s 2020 fiscal first quarter. The Company also maintains third party insurance arrangements providing excess coverage for commercial trucking liabilities in excess of $10,000,000. These third party arrangements provide coverage on a per occurrence or aggregated basis. Due to the increasing cost of commercial auto liability claims throughout the United States in recent years, the availability of such excess coverage has significantly decreased and the pricing associated with such excess coverage, to the extent available, has significantly increased. Effective May 1, 2020 with respect to the annual policy year ending April 30, 2021, 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 $10,000,000. No assurances can be given that the availability of excess coverage for commercial trucking claims will not continue to deteriorate, that the pricing associated with such excess coverage, to the extent available, will not continue to increase, nor that insurance coverage from third party insurers for excess coverage of commercial trucking claims will even be available on commercially reasonable terms at certain levels. Further, the Company retains liability of up to $1,000,000 for each general liability claim, up to $250,000 for each workers’ compensation claim and up to $250,000 for each cargo claim. In addition, under reinsurance arrangements by Signature of certain risks of the Company’s BCO Independent Contractors, the Company retains liability of up to $500,000, $1,000,000 or $2,000,000 with respect to certain occupational accident claims and up to $750,000 with respect to certain workers’ compensation claims. The Company’s exposure to liability associated with accidents incurred by Truck Brokerage Carriers, railroads and air and ocean cargo carriers who transport freight 23 Table of Contents on behalf of the Company is reduced by various factors including the extent to which such carriers maintain their own insurance coverage. 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. During the twenty-six-week period ended June 27, 2020, employee compensation and benefits accounted for approximately sixty-four percent of the Company’s selling, general and administrative costs. Depreciation and amortization primarily relate to depreciation of trailing equipment and information technology hardware and software. The following table sets forth the percentage relationship of purchased transportation and commissions to agents, both being direct costs, to revenue and indirect costs as a percentage of gross profit for the periods indicated: Twenty Six Weeks Ended Thirteen Weeks Ended June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Purchased transportation 76.8 76.6 77.1 76.5 Commissions to agents 8.6 8.3 9.1 8.4 Gross profit margin 14.6 % 15.1 % 13.7 % 15.1 % Gross profit 100.0 % 100.0 % 100.0 % 100.0 % Investment income 0.8 0.8 0.7 0.8 Indirect costs and expenses: Other operating costs, net of gains on asset sales/dispositions 6.1 5.8 6.6 6.2 Insurance and claims 17.5 10.0 17.5 10.3 Selling, general and administrative 33.6 26.3 35.9 26.1 Depreciation and amortization 9.0 7.1 10.1 7.0 Impairment of intangible and other assets 1.0 — 2.3 — Total costs and expenses 67.1 49.2 72.3 49.7 Operating margin 33.7 % 51.6 % 28.4 % 51.2 % Management believes that a discussion of indirect costs as a percentage of gross profit is useful and meaningful to investors for the following principal reasons: (1) disclosure of these relative measures (i.e., each indirect operating cost line item as a percentage of gross profit) allows investors to better understand the underlying trends in the Company’s results of operations; (2) due to the generally fixed nature of these indirect costs (other than insurance and claims costs), these relative measures are meaningful to investors’ evaluations of the Company’s management of its indirect costs attributable to operations; (3) management considers this financial information in its decision-making, such as budgeting for infrastructure, trailing equipment and selling, general and administrative costs; and (4) this information facilitates comparisons by investors of the Company’s results to the results of other non-asset or asset-light companies in the transportation and logistics services industry who report “net revenue” in Management Discussion and Analysis, which represents revenue less the cost of purchased transportation. The difference between the Company’s use of the term “gross profit” and use of the term “net revenue” by other companies in the transportation and logistics services industry is due to the direct cost of commissions to agents under the Landstar business model, whereas other companies in this industry generally have no commissions to agents. 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 at 2% or less of consolidated revenue and generally corresponds directly with the number of trucks provided by BCO Independent Contractors. The discussion of indirect 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 24 Table of Contents 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. TWENTY SIX WEEKS ENDED JUNE 27, 2020 COMPARED TO TWENTY SIX WEEKS ENDED JUNE 29, 2019 Revenue for the 2020 twenty-six-week period was $1,751,080,000, a decrease of $326,960,000, or 16%, compared to the 2019 twenty-six-week period. Transportation revenue decreased $326,095,000, or 16%. The decrease in transportation revenue was attributable to a decreased number of loads hauled of approximately 11% and decreased revenue per load of approximately 6% compared to the 2019 twenty-six-week period. Reinsurance premiums were $27,398,000 and $28,263,000 for the 2020 and 2019 twenty-six-week periods, respectively. The decrease in revenue from reinsurance premiums was primarily attributable to the decrease in the average number of trucks provided by BCO Independent Contractors in the 2020 twenty-six-week period compared to the 2019 twenty-six-week period. Truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers (together, the “third party truck capacity providers”) for the 2020 twenty-six-week period was $1,607,909,000, representing 92% of total revenue, a decrease of $313,406,000, or 16%, compared to the 2019 twenty-six-week period. The number of loads hauled by third party truck capacity providers decreased approximately 11% in the 2020 twenty-six-week period compared to the 2019 twenty-six-week period, and revenue per load on loads hauled by third party truck capacity providers decreased approximately 6% compared to the 2019 twenty-six-week period. The decrease in the number of loads hauled via truck compared to the 2019 twenty-six-week period was due to relative softness in the U.S. manufacturing sector in the 2020 period compared to the 2019 period and the unfavorable impact of the COVID-19 pandemic, which began during the last week of the Company’s first fiscal quarter and persisted throughout the second fiscal quarter. Loads hauled via van equipment decreased 13% and loads hauled via unsided/platform equipment decreased 11%, while less-than-truckload volumes increased 5% as compared to the 2019 twenty-six-week period. The decrease in revenue per load on loads hauled via truck was primarily due to a softer freight demand environment experienced during the 2020 twenty-six-week period, which resulted in more readily available truck capacity as compared to the 2019 twenty-six-week period. Revenue per load on loads hauled via van equipment decreased 4%, revenue per load on loads hauled via unsided/platform equipment decreased 7% and revenue per load on less-than-truckload loadings decreased 9% as compared to the 2019 twenty-six-week period. 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 $29,302,000 and $41,321,000 in the 2020 and 2019 twenty-six-week periods, respectively. It should be noted that billings to many customers of the Company’s truck brokerage services include a single all-in rate that does not separately identify fuel surcharges on loads hauled via Truck Brokerage Carriers. Accordingly, the overall impact of changes in fuel prices on revenue and revenue per load on loads hauled via truck is likely to be greater than that indicated. Transportation revenue generated by rail intermodal, air cargo and ocean cargo carriers (collectively, the “multimode capacity providers”) for the 2020 twenty-six-week period was $108,565,000, or 6% of total revenue, a decrease of $8,913,000, or 8%, compared to the 2019 twenty-six-week period. The number of loads hauled by multimode capacity providers decreased approximately 7% in the 2020 twenty-six-week period compared to the 2019 twenty-six-week period, and revenue per load on revenue generated by multimode capacity providers decreased approximately 1% over the same period. The decrease in the number of loads hauled by multimode capacity providers was primarily due to a 10% decrease in rail intermodal loadings, mostly attributable to decreased loadings at two specific customers, and a 7% decrease in ocean loadings, primarily due to decreased shipments originating in China for export to the United States. The decrease in revenue per load of 1% on loads hauled by multimode capacity providers was entirely attributable to decreased revenue per load on rail intermodal shipments. Also, revenue per load on revenue generated by multimode capacity providers is influenced by many factors, including revenue mix among the various modes of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity. Purchased transportation was 76.8% and 76.6% of revenue in the 2020 and 2019 twenty-six-week periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily due to an increased rate of purchased transportation paid on BCO Independent Contractor revenue due to the impact of COVID-19 pandemic relief incentive payments. Under that program, for each load delivered by a BCO Independent Contractor with a confirmed delivery date from April 1, 2020 through May 30, 2020, the Company paid each of the BCO Independent Contractor who hauled the load and the independent commission sales agent who dispatched the load an extra $50. Commissions to agents were 8.6% and 8.3% of revenue in the 2020 and 2019 twenty-six-week periods, respectively. The increase in commissions to agents as a percentage of revenue was primarily attributable to the impact of COVID-19 pandemic relief incentive payments to agents. The Company paid a total of $12,593,000 in COVID-19 pandemic relief incentive payments during the 2020 twenty-six week period. 25 Table of Contents Investment income was $2,002,000 and $2,421,000 in the 2020 and 2019 twenty-six-week periods, respectively. The decrease in investment income was primarily attributable to lower average rates of return on investments in the 2020 twenty-six-week period, partially offset by a higher average investment balance held by the insurance segment in the 2020 twenty-six week period. Other operating costs decreased $2,426,000 in the 2020 twenty-six-week period compared to the 2019 twenty-six-week period and represented 6.1% of gross profit in the 2020 period compared to 5.8% of gross profit in the 2019 period. The decrease in other operating costs compared to the prior year was primarily due to decreased BCO Independent Contractor recruiting costs, increased gains on the sales of used trailing equipment and decreased trailer rental expense. The increase in other operating costs as a percentage of gross profit was caused by the effect of decreased gross profit, partially offset by the decrease in other operating costs. Insurance and claims increased $13,429,000 in the 2020 twenty-six-week period compared to the 2019 twenty-six-week period and represented 17.5% of gross profit in the 2020 period compared to 10.0% of gross profit in the 2019 period. The increase in insurance and claims expense compared to the prior year was primarily due to a $5,000,000 charge for the Company’s self-insured retention with respect to a tragic vehicular accident involving a fatality, a $3,500,000 charge relating to anticipated additional premium the Company expects to pay under its existing multi-year insurance arrangements in connection with certain aggregated losses, increased insurance premiums incurred in May and June for commercial trucking liability coverage following the Company’s May 1, 2020 insurance renewal, increased net unfavorable development of prior years’ claims and increased severity of current year claims in the 2020 period. During the 2020 and 2019 twenty-six-week periods, insurance and claims costs included $5,039,000 and $2,900,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. The increase in insurance and claims as a percent of gross profit was caused by the increase in insurance and claims costs and the effect of decreased gross profit. Selling, general and administrative costs increased $3,363,000 in the 2020 twenty-six-week period compared to the 2019 twenty-six-week period and represented 33.6% of gross profit in the 2020 period compared to 26.3% of gross profit in the 2019 period. The increase in selling, general and administrative costs compared to prior year was attributable to an increased provision for customer bad debt, an increased provision for incentive compensation and increased information technology costs, partially offset by decreased stock-based compensation expense, decreased agent convention costs and decreased travel and entertainment costs related to the impact of the COVID-19 pandemic. Included in selling, general and administrative costs was incentive compensation expense of $4,057,000 and $1,911,000 for the 2020 and 2019 twenty-six-week periods, respectively, and stock-based compensation expense of $1,201,000 and $3,368,000 for the 2020 and 2019 twenty-six-week periods, respectively. The increase in selling, general and administrative costs as a percent of gross profit was due to the effect of decreased gross profit and the increase in selling, general and administrative costs. Depreciation and amortization increased $622,000 in the 2020 twenty-six-week period compared to the 2019 twenty-six-week period and represented 9.0% of gross profit in the 2020 period compared to 7.1% of gross profit in the 2019 period. The increase in depreciation and amortization expenses was primarily due to increased depreciation on information technology assets, partially offset by a decrease in trailing equipment depreciation. The increase in depreciation and amortization as a percentage of gross profit was due to the effect of decreased gross profit and increased depreciation. 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 Mexican 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 anticipated 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. Interest and debt expense in the 2020 twenty-six-week period increased $414,000 compared to the 2019 twenty-six-week period. The increase in interest and debt expense was primarily attributable to decreased interest income earned on cash balances held by the transportation logistics segment. 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 26 Table of Contents 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 excess tax benefits realized on stock-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 effective income tax rate in the 2020 twenty-six-week period of 22.7% was lower than the 24.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2020 twenty-six-week period. The effective income tax rate in the 2019 twenty-six-week period of 22.4% was lower than the 24.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2019 twenty-six-week period. The net loss attributable to noncontrolling interest of $17,000 in the 2019 twenty-six-week period represents the former noncontrolling investors’ share of the net loss incurred by Landstar Metro and Landstar Servicios. Net income was $65,149,000, or $1.68 per common share ($1.68 per diluted share), in the 2020 twenty-six-week period. Net income attributable to the Company was $124,417,000, or $3.11 per common share ($3.11 per diluted share), in the 2019 twenty-six-week period. Net income was unfavorably impacted by approximately $12,593,000, or $0.24 per common share ($0.24 per diluted share), during the 2020 twenty-six-week period, related to the impact of the COVID-19 pandemic relief incentive payments. THIRTEEN WEEKS ENDED JUNE 27, 2020 COMPARED TO THIRTEEN WEEKS ENDED JUNE 29, 2019 Revenue for the 2020 thirteen-week period was $823,514,000, a decrease of $221,526,000, or 21%, compared to the 2019 thirteen-week period. Transportation revenue decreased $221,018,000, or 21%. The decrease in transportation revenue was attributable to a decreased number of loads hauled of approximately 16% and decreased revenue per load of approximately 6% compared to the 2019 thirteen-week period. Reinsurance premiums were $13,716,000 and $14,224,000 for the 2020 and 2019 thirteen-week periods, respectively. The decrease in revenue from reinsurance premiums was primarily attributable to the decrease in the average number of trucks provided by BCO Independent Contractors in the 2020 thirteen-week period compared to the 2019 thirteen-week period. Truck transportation revenue generated by third party truck capacity providers for the 2020 thirteen-week period was $753,333,000, representing 91% of total revenue, a decrease of $214,871,000, or 22%, compared to the 2019 thirteen-week period. The number of loads hauled by third party truck capacity providers decreased approximately 16% in the 2020 thirteen-week period compared to the 2019 thirteen-week period, and revenue per load on loads hauled by third party truck capacity providers decreased approximately 7% compared to the 2019 thirteen-week period. The decrease in the number of loads hauled via truck compared to the 2019 thirteen-week period was due to the unfavorable impact of the COVID-19 pandemic experienced during the 2020 thirteen-week period as the result of actions taken by governmental authorities and businesses to reduce the further spread of COVID-19. The number of loads hauled via truck was below the prior year comparable period by 21 % , 21 % and 9 % for April, May and June, respectively. Loads hauled via van equipment decreased 17% and loads hauled via unsided/platform equipment decreased 19%, while less-than-truckload volumes increased 1% as compared to the 2019 thirteen-week period. The decrease in revenue per load on loads hauled via truck was primarily due to a softer freight demand environment experienced during the 2020 thirteen-week period, which resulted in more readily available truck capacity as compared to the 2019 thirteen-week period. Revenue per load on loads hauled via van equipment decreased 3%, revenue per load on loads hauled via unsided/platform equipment decreased 10% and revenue per load on less-than-truckload loadings decreased 8% as compared to the 2019 thirteen-week period. 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 $12,106,000 and $20,334,000 in the 2020 and 2019 thirteen-week periods, respectively. Transportation revenue generated by multimode capacity providers for the 2020 thirteen-week period was $53,849,000, or 7% of total revenue, a decrease of $2,945,000, or 5%, compared to the 2019 thirteen-week period. The number of loads hauled by multimode capacity providers decreased approximately 7% in the 2020 thirteen-week period compared to the 2019 thirteen-week period, while revenue per load on revenue generated by multimode capacity providers increased approximately 2% over the same period. The decrease in the number of loads hauled by multimode capacity providers was primarily due to a 13% decrease in rail intermodal loadings, mostly attributable to decreased loadings at three specific customers. The increase in revenue per load of 2% on loads hauled by multimode capacity providers was primarily attributable to increased revenue per load on air cargo shipments and an increase in ocean loads as a percentage of loads hauled by multimode capacity providers, as ocean loads typically generate a higher revenue per load compared to loads hauled by rail or air cargo carriers. Also, revenue per load on revenue generated by multimode capacity providers is influenced by many factors, including revenue mix among the various modes of transportation used, length of haul, complexity of freight, density of freight lanes, fuel costs and availability of capacity. 27 Table of Contents Purchased transportation was 77.1% and 76.5% of revenue in the 2020 and 2019 thirteen-week periods, respectively. The increase in purchased transportation as a percentage of revenue was primarily due to an increased rate of purchased transportation paid on BCO Independent Contractor revenue due to the impact of COVID-19 pandemic relief incentive payments. Under that program, for each load delivered by a BCO Independent Contractor with a confirmed delivery date from April 1, 2020 through May 30, 2020, the Company paid each of the BCO Independent Contractor who hauled the load and the independent commission sales agent who dispatched the load an extra $50. Commissions to agents were 9.1% and 8.4% of revenue in the 2020 and 2019 thirteen-week periods, respectively. The increase in commissions to agents as a percentage of revenue was primarily attributable to the impact of COVID-19 pandemic relief incentive payments to agents. The Company paid a total of $12,593,000 in COVID-19 pandemic relief incentive payments during the 2020 thirteen-week period. Investment income was $835,000 and $1,283,000 in the 2020 and 2019 thirteen-week periods, respectively. The decrease in investment income was primarily attributable to lower average rates of return on investments in the 2020 thirteen-week period and a lower average investment balance held by the insurance segment in the 2020 thirteen-week period. Other operating costs decreased $2,493,000 in the 2020 thirteen-week period compared to the 2019 thirteen-week period and represented 6.6% of gross profit in the 2020 period compared to 6.2% of gross profit in the 2019 period. The decrease in other operating costs compared to the prior year was primarily due to a decreased provision for contractor bad debt, decreased BCO Independent Contractor recruiting costs, increased gains on the sales of used trailing equipment and decreased trailer rental expense. The increase in other operating costs as a percentage of gross profit was caused by the effect of decreased gross profit, partially offset by the decrease in other operating costs. Insurance and claims increased $3,465,000 in the 2020 thirteen-week period compared to the 2019 thirteen-week period and represented 17.5% of gross profit in the 2020 period compared to 10.3% of gross profit in the 2019 period. The increase in insurance and claims expense compared to the prior year was primarily due to increased net unfavorable development of prior years’ claims, increased insurance premiums incurred in May and June for commercial trucking liability coverage following the Company’s May 1, 2020 insurance renewal and increased severity of current year claims in the 2020 period, partially offset by reduced frequency of claims in the 2020 period. During the 2020 and 2019 thirteen-week periods, insurance and claims costs included $2,816,000 and $1,493,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. The increase in insurance and claims as a percent of gross profit was caused by the effect of decreased gross profit and the increase in insurance and claims costs. Selling, general and administrative costs decreased $696,000 in the 2020 thirteen-week period compared to the 2019 thirteen-week period and represented 35.9% of gross profit in the 2020 period compared to 26.1% of gross profit in the 2019 period. The decrease in selling, general and administrative costs compared to prior year was attributable to decreased agent convention costs and decreased travel and entertainment costs related to the impact of the COVID-19 pandemic and decreased stock-based compensation expense, partially offset by an increased provision for incentive compensation, an increased provision for customer bad debt, and increased information technology costs. Included in selling, general and administrative costs was incentive compensation expense of $2,026,000 and $873,000 for the 2020 and 2019 thirteen-week periods, respectively, and stock-based compensation expense of $570,000 and $1,430,000 for the 2020 and 2019 thirteen-week periods, respectively. The increase in selling, general and administrative costs as a percent of gross profit was due to the effect of decreased gross profit, partially offset by the decrease in selling, general and administrative costs. Depreciation and amortization increased $433,000 in the 2020 thirteen-week period compared to the 2019 thirteen-week period and represented 10.1% of gross profit in the 2020 period compared to 7.0% of gross profit in the 2019 period. The increase in depreciation and amortization expenses was primarily due to increased depreciation on information technology assets, partially offset by a decrease in trailing equipment depreciation. The increase in depreciation and amortization as a percentage of gross profit was due to the effect of decreased gross profit and increased depreciation. 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. 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 Mexican 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 28 Table of Contents 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 anticipated 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. Interest and debt expense in the 2020 thirteen-week period increased $267,000 compared to the 2019 thirteen-week period. The increase in interest and debt expense was primarily attributable to decreased interest income earned on cash balances held by the transportation logistics segment. The provisions for income taxes for the 2020 and 2019 thirteen-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 thirteen-week period was 22.3%, 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 received during the 2020 thirteen-week period and excess tax benefits realized on stock - based awards. The effective income tax rate for the 2019 thirteen-week period was 23.8%, 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 effective income tax rate in the 2020 thirteen-week period of 22.3% was lower than the 24.2% estimated annual effective income tax rate primarily due to the impact of the state tax refund and excess tax benefits recognized on stock-based compensation arrangements in the 2020 thirteen-week period. The effective income tax rate in the 2019 thirteen-week period of 23.8% was lower than the 24.2% estimated annual effective income tax rate primarily due to excess tax benefits recognized on stock-based compensation arrangements in the 2019 thirteen-week period. Net income was $24,254,000, or $0.63 per common share ($0.63 per diluted share), in the 2020 thirteen-week period. Net income attributable to the Company was $61,100,000 or $1.53 per common share ($1.53 per diluted share), in the 2019 thirteen-week period. Net income was unfavorably impacted by approximately $12,593,000, or $0.25 per common share ($0.25 per diluted share), during the 2020 thirteen-week period, related to the impact of the COVID-19 pandemic relief incentive payments. CAPITAL RESOURCES AND LIQUIDITY Working capital and the ratio of current assets to current liabilities were $366,892,000 and 1.8 to 1, respectively, at June 27, 2020, compared with $444,984,000 and 1.8 to 1, respectively, at December 28, 2019. Landstar has historically operated with current ratios within the range of 1.5 to 1 to 2.0 to 1. Cash provided by operating activities was $198,385,000 in the 2020 twenty-six-week period compared with $184,076,000 in the 2019 twenty-six-week period. The increase in cash flow provided by operating activities was primarily attributable to favorable working capital adjustments including timing of collections of receivables and payments of accounts payable, partially offset by decreased net income. The Company declared and paid $0.37 per share, or $14,435,000 in the aggregate, in cash dividends during the twenty-six-week period ended June 27, 2020 and, during such period, also paid $78,947,000 of dividends payable which were declared during fiscal year 2019 and included in current liabilities in the consolidated balance sheet at December 28, 2019. The Company declared and paid $0.33 per share, or $13,257,000 in the aggregate, in cash dividends during the twenty-six-week period ended June 29, 2019. During the twenty-six-week period ended June 27, 2020, the Company purchased 1,178,970 shares of its common stock at a total cost of $115,962,000. During the twenty-six-week period ended June 29, 2019, the Company purchased 674,410 shares of its common stock at a total cost of $69,729,000. As of June 27, 2020, the Company may purchase in the aggregate up to 1,821,030 shares of its common stock under its authorized stock purchase program. Long-term debt, including current maturities, was $98,371,000 at June 27, 2020, $14,473,000 lower than at December 28, 2019. Shareholders’ equity was $649,121,000, or 87% of total capitalization (defined as long-term debt including current maturities plus equity), at June 27, 2020, compared to $721,469,000, or 86% of total capitalization, at December 28, 2019. The decrease in equity was primarily the result of purchases of shares of the Company’s common stock and dividends declared by the Company in the 2020 twenty-six-week period, partially offset by net income. On June 2, 2016, Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement, which matures on June 2, 2021, provides $250,000,000 of borrowing capacity in the form of a revolving credit facility, $50,000,000 of which may be utilized in the form of letter of credit guarantees. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing amount of $400,000,000. The Company’s prior credit agreement was terminated on June 2, 2016. 29 Table of Contents 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 defined 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 June 27, 2020, the Company had no borrowings outstanding and $34,156,000 of letters of credit outstanding under the Credit Agreement. At June 27, 2020, there was $215,844,000 available for future borrowings under the Credit Agreement. In addition, the Company has $61,503,000 in letters of credit outstanding as collateral for insurance claims that are secured by investments totaling $68,337,000 at June 27, 2020. Investments, all of which are carried at fair value, include primarily investment-grade bonds and U.S. Treasury obligations having maturities of up to five years. Fair value of investments is based primarily on quoted market prices. See “Notes to Consolidated Financial Statements” included herein for further discussion on measurement of fair value of investments. 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 used by the Company is provided by third party capacity providers, thereby reducing the Company’s capital requirements. During the 2020 twenty-six-week period, the Company purchased $17,676,000 of operating property. In addition, during the 2020 twenty-six week period Landstar acquired $1,440,000 of operating property for which the Company accrued a corresponding liability in accounts payable as of June 27, 2020. In addition, on June 15, 2020, Landstar Blue completed the acquisition of an independent agent of the Company. Cash consideration paid for the acquisition was approximately $2,701,000. Landstar anticipates acquiring either by purchase or lease financing during the remainder of fiscal year 2020 approximately $51,000,000 in operating property, consisting primarily of new trailing equipment to replace older trailing equipment and information technology equipment. Management believes that cash flow from operations combined with the Company’s borrowing capacity under the Credit Agreement will be adequate to meet Landstar’s debt service requirements, fund continued growth, both internal and through acquisitions, pay dividends, complete the authorized share purchase programs and meet working capital needs. LEGAL MATTERS 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, the Court issued an order granting the voluntary dismissal of this action in full. 30 Table of Contents 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES 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. During the 2020 and 2019 twenty-six-week periods, insurance and claims costs included $5,039,000 and $2,900,000 of net unfavorable adjustments to prior years’ claims estimates, respectively. It is reasonably likely that the ultimate outcome of settling all outstanding claims will be more or less than the estimated claims liability at June 27, 2020. Significant variances from management’s estimates for the ultimate resolution of self-insured claims could be expected to positively or negatively affect Landstar’s earnings in a given quarter or year. However, management believes that the ultimate resolution of these items, given a range of reasonably likely outcomes, will not significantly affect the long-term financial condition of Landstar or its ability to fund its continuing operations. EFFECTS OF INFLATION Management does not believe inflation has had a material impact on the results of operations or financial condition of Landstar in the past five years. However, inflation in excess of historic trends might have an adverse effect on the Company’s results of operations in the future. SEASONALITY Landstar’s operations are subject to seasonal trends common to the trucking industry. Truckload shipments for the quarter ending in March are typically lower than for the quarters ending June, September and December.