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 thirty nine weeks ended September 26, 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) September 26, 2020 December 28, 2019 ASSETS Current Assets Cash and cash equivalents $ 218,554 $ 319,515 Short-term investments 39,068 32,901 Trade accounts receivable, less allowance of $ 8,120 and $ 7,284 637,908 588,549 Other receivables, including advances to independent contractors, less allowance of $ 8,827 and $ 7,667 40,550 35,553 Other current assets 27,989 21,370 Total current assets 964,069 997,888 Operating property, less accumulated depreciation and amortization of $ 291,159 and $ 280,849 279,495 285,855 Goodwill 40,251 38,508 Other assets 108,390 105,460 Total assets $ 1,392,205 $ 1,427,711 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Cash overdraft $ 47,459 $ 53,878 Accounts payable 339,798 271,996 Current maturities of long-term debt 34,723 42,632 Insurance claims 46,019 44,532 Dividends payable — 78,947 Contractor escrow 28,345 24,902 Other current liabilities 47,206 36,017 Total current liabilities 543,550 552,904 Long-term debt, excluding current maturities 52,570 70,212 Insurance claims 36,344 33,575 Deferred income taxes and other noncurrent liabilities 54,107 49,551 Shareholders’ Equity Common stock, $ 0.01 par value, authorized 160,000,000 shares, issued 68,181,418 and 68,083,419 shares 682 681 Additional paid-in capital 226,878 226,123 Retained earnings 2,065,999 1,962,161 Cost of 29,797,639 and 28,609,926 shares of common stock in treasury ( 1,581,961 ) ( 1,465,284 ) Accumulated other comprehensive loss ( 5,964 ) ( 2,212 ) Total shareholders’ equity 705,634 721,469 Total liabilities and shareholders’ equity $ 1,392,205 $ 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) Thirty Nine Weeks Ended Thirteen Weeks Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Revenue $ 2,836,626 $ 3,089,698 $ 1,085,546 $ 1,011,658 Investment income 2,716 3,736 714 1,315 Costs and expenses: Purchased transportation 2,183,143 2,365,646 838,753 774,520 Commissions to agents 236,490 257,862 85,848 84,568 Other operating costs, net of gains/losses on asset sales/dispositions 23,035 28,531 7,361 10,431 Insurance and claims 66,563 55,248 21,855 23,969 Selling, general and administrative 124,779 120,717 38,851 38,152 Depreciation and amortization 34,212 33,045 11,240 10,695 Impairment of intangible and other assets 2,582 — — — Total costs and expenses 2,670,804 2,861,049 1,003,908 942,335 Operating income 168,538 232,385 82,352 70,638 Interest and debt expense 2,936 2,278 1,008 764 Income before income taxes 165,602 230,107 81,344 69,874 Income taxes 38,567 52,452 19,458 16,619 Net income 127,035 177,655 61,886 53,255 Less: Net loss attributable to noncontrolling interest — ( 17 ) — — Net income attributable to Landstar System, Inc. and subsidiary $ 127,035 $ 177,672 $ 61,886 $ 53,255 Earnings per common share attributable to Landstar System, Inc. and subsidiary $ 3.28 $ 4.45 $ 1.61 $ 1.35 Diluted earnings per share attributable to Landstar System, Inc. and subsidiary $ 3.28 $ 4.45 $ 1.61 $ 1.35 Average number of shares outstanding: Earnings per common share 38,673,000 39,891,000 38,386,000 39,566,000 Diluted earnings per share 38,673,000 39,891,000 38,386,000 39,566,000 Dividends per common share $ 0.580 $ 0.515 $ 0.210 $ 0.185 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) Thirty Nine Weeks Ended Thirteen Weeks Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 N et income attributable to Landstar System, Inc. and subsidiary $ 127,035 $ 177,672 $ 61,886 $ 53,255 Other comprehensive (loss) income: Unrealized holding gains on available-for-sale investments, net of tax expense of $ 413 , $ 577 , $ 75 and $ 83 1,510 2,112 273 307 Foreign currency translation (losses) gains ( 5,262 ) 42 908 ( 1,083 ) Other comprehensive (loss) income ( 3,752 ) 2,154 1,181 ( 776 ) Comprehensive income attributable to Landstar System, Inc. and subsidiary $ 123,283 $ 179,826 $ 63,067 $ 52,479 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) Thirty Nine Weeks Ended September 26, 2020 September 28, 2019 OPERATING ACTIVITIES Net income $ 127,035 $ 177,655 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of operating property and intangible assets 34,212 33,045 Non-cash interest charges 222 190 Provisions for losses on trade and other accounts receivable 7,206 6,942 Gains on sales/disposals of operating property ( 2,295 ) ( 1,188 ) Impairment of intangible and other assets 2,582 — Deferred income taxes, net 4,758 7,151 Stock-based compensation 2,691 4,470 Changes in operating assets and liabilities: (Increase) decrease in trade and other accounts receivable ( 62,492 ) 84,607 Increase in other assets ( 13,492 ) ( 21,129 ) Increase (decrease) in accounts payable 66,815 ( 28,692 ) Increase (decrease) in other liabilities 14,050 ( 16,076 ) Increase in insurance claims 4,256 13,739 NET CASH PROVIDED BY OPERATING ACTIVITIES 185,548 260,714 INVESTING ACTIVITIES Net changes in other short-term investments 131 — Sales and maturities of investments 18,795 56,467 Purchases of investments ( 21,102 ) ( 58,829 ) Purchases of operating property ( 25,426 ) ( 15,199 ) Proceeds from sales of operating property 6,623 3,621 Consideration paid for acquisition ( 2,766 ) — NET CASH USED BY INVESTING ACTIVITIES ( 23,745 ) ( 13,940 ) FINANCING ACTIVITIES Decrease in cash overdraft ( 6,419 ) ( 10,714 ) Dividends paid ( 101,442 ) ( 20,589 ) Payment for debt issue costs ( 959 ) — Proceeds from exercises of stock options 676 629 Taxes paid in lieu of shares issued related to stock-based compensation plans ( 3,326 ) ( 8,449 ) Purchases of common stock ( 115,962 ) ( 88,578 ) Principal payments on finance lease obligations ( 33,036 ) ( 34,141 ) Purchase of noncontrolling interest — ( 600 ) NET CASH USED BY FINANCING ACTIVITIES ( 260,468 ) ( 162,442 ) Effect of exchange rate changes on cash and cash equivalents ( 2,296 ) 366 (Decrease) increase in cash and cash equivalents ( 100,961 ) 84,698 Cash and cash equivalents at beginning of period 319,515 199,736 Cash and cash equivalents at end of period $ 218,554 $ 284,434 See accompanying notes to consolidated financial statements. 7 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Thirty Nine and Thirteen Weeks Ended September 26, 2020 and September 28, 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 15 ) ( 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 Net income 61,886 61,886 Dividends ($ 0.21 per share) ( 8,060 ) ( 8,060 ) Issuance of stock related to stock-based compensation plans 4,631 — 56 311 ( 40 ) 16 Stock-based compensation 1,490 1,490 Other comprehensive income 1,181 1,181 Balance September 26, 2020 68,181,418 $ 682 $ 226,878 $ 2,065,999 29,797,639 $ ( 1,581,961 ) $ ( 5,964 ) $ 705,634 8 Table of Contents Landstar System, Inc. and Subsidiary Shareholders Common Stock Additional Paid-In Retained Treasury Stock at Cost Accumulated Other Comprehensive Non-controlling Shares Amount Capital Earnings Shares Amount (Loss) Income Interests 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 Net income 53,255 53,255 Dividends ($ 0.185 per share) ( 7,332 ) ( 7,332 ) Purchases of common stock 174,658 ( 18,849 ) ( 18,849 ) Issuance of stock related to stock-based compensation plans 7,957 — 285 86 ( 10 ) 275 Stock-based compensation 1,102 1,102 Other comprehensive loss ( 776 ) ( 776 ) Balance September 28, 2019 68,072,834 $ 681 $ 225,937 $ 1,998,362 28,609,926 $ ( 1,465,284 ) $ ( 3,721 ) $ — $ 755,975 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 The following table summarizes the percentage of consolidated revenue generated by mode of transportation and the dollar amount included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers hauled via equipment type during the thirty-nine-week and thirteen-week periods ended September 26, 2020 and September 28, 2019 ( dollars in thousands): Thirty Nine Weeks Ended Thirteen Weeks Ended Mode September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 BCO Independent Contractors – Truck 46 % 45 % 46 % 46 % Brokerage Carriers - Truck 46 % 47 % 46 % 46 % Rail intermodal 3 % 3 % 3 % 3 % Ocean and air cargo carriers 3 % 3 % 3 % 3 % Equipment Type - Truck Van equipment $ 1,694,916 $ 1,799,421 $ 666,582 $ 575,042 Unsided/platform equipment $ 848,187 $ 980,615 $ 314,471 $ 331,787 Less-than-truckload $ 70,984 $ 73,475 $ 25,125 $ 25,367 (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 $ 2,766 ,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 $ 2,871,000 . With respect to this goodwill, 100 % is expected to be deductible by the Company for U.S. income tax purposes. Pro forma 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. (3) Share-based Payment Arrangements As of September 26, 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 10 Table of Contents 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): Thirty Nine Weeks Ended Thirteen Weeks Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Total cost of the Plans during the period $ 2,691 $ 4,470 $ 1,490 $ 1,102 Amount of related income tax benefit recognized during the period ( 1,618 ) ( 4,125 ) ( 483 ) ( 391 ) Net cost of the Plans during the period $ 1,073 $ 345 $ 1,007 $ 711 Included in income tax benefits recognized in the thirty-nine-week periods ended September 26, 2020 and September 28, 2019 were excess tax benefits from stock-based awards of $ 927,000 and $ 2,968,000 , respectively. As of September 26, 2020, there were 60,586 shares of the Company’s common stock reserved for issuance under the 2013 DSCP and 3,675,862 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 59,719 $ 102.62 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 September 26, 2020 182,965 $ 93.44 (1) Represents additional shares earned under the February 2, 2017 RSU awards as 2019 financial results exceeded target performance level. During the thirty-nine-week period ended September 26, 2020, the Company granted RSUs with a performance condition. Outstanding RSUs at both December 28, 2019 and September 26, 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 $ 415,000 and $ 2,477,000 of share-based compensation expense related to RSU awards in the thirty-nine-week periods ended September 26, 2020 and September 28, 2019, respectively. As of September 26, 2020, there was a maximum of $ 34.6 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 3.1 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 ( 23,717 ) $ 49.31 Options outstanding at September 26, 2020 20,750 $ 53.44 1.9 $ 1,499 Options exercisable at September 26, 2020 20,750 $ 53.44 1.9 $ 1,499 The total intrinsic value of stock options exercised during the thirty-nine-week periods ended September 26, 2020 and September 28, 2019 was $ 1,599,000 and $ 1,877,000 , respectively. As of September 26, 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 ( 28,621 ) $ 98.83 Forfeited ( 2,351 ) $ 106.34 Non-vested at September 26, 2020 60,440 $ 103.65 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 September 26, 2020, there was $ 4,074,000 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 1.9 years. (4) Income Taxes The provisions for income taxes for the 2020 and 2019 thirty-nine-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 thirty-nine-week period was 23.3 %, 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 excess tax benefits realized on stock-based awards and state 12 Table of Contents tax refunds. The provision for income taxes for the 2020 thirty-nine-week period was favorably impacted by $ 927,000 of excess tax benefits from stock-based awards. The effective income tax rate for the 2019 thirty-nine-week period was 22.8 %, which was higher than the statutory federal in come 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 thirty-nine-week period was favorably impacted by $ 2,968,000 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 thirty-nine-week and thirteen-week periods, in reference to the determination of diluted earnings per share, the future compensation cost attributable to outstanding shares of non-vested restricted stock exceeded the impact of incremental shares that would have been outstanding upon the assumed exercise of all dilutive stock options. For each of the thirty-nine-week periods ended September 26, 2020 and September 28, 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 thirty-nine-week period, Landstar paid income taxes and interest of $ 28,761,000 and $ 3,087,000 , respectively. During the 2019 thirty-nine-week period, Landstar paid income taxes and interest of $ 54,877,000 and $ 3,302,000 , respectively. Landstar acquired operating property by entering into finance leases in the amounts of $ 7,485,000 and $ 6,481,000 in the 2020 and 2019 thirty-nine-week periods, respectively. In addition, during the 2020 thirty-nine-week period, Landstar acquired $ 1,068,000 of operating property for which the Company accrued a corresponding liability in accounts payable as of September 26, 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 thirty-nine-week and thirteen week periods ended September 26, 2020 and September 28, 2019 (in thousands): Thirty Nine Weeks Ended September 26, 2020 September 28, 2019 Transportation Logistics Insurance Total Transportation Logistics Insurance Total External revenue $ 2,795,056 $ 41,570 $ 2,836,626 $ 3,047,329 $ 42,369 $ 3,089,698 Internal revenue 44,912 44,912 36,978 36,978 Investment income 2,716 2,716 3,736 3,736 Operating income 148,270 20,268 168,538 200,767 31,618 232,385 Expenditures on long-lived assets 25,426 25,426 15,199 15,199 Goodwill 40,251 40,251 38,232 38,232 Thirteen Weeks Ended September 26, 2020 September 28, 2019 Transportation Logistics Insurance Total Transportation Logistics Insurance Total External revenue $ 1,071,374 $ 14,172 $ 1,085,546 $ 997,552 $ 14,106 $ 1,011,658 Internal revenue 9,078 9,078 9,611 9,611 Investment income 714 714 1,315 1,315 Operating income 71,752 10,600 82,352 64,848 5,790 70,638 Expenditures on long-lived assets 7,750 7,750 5,975 5,975 13 Table of Contents In the thirty-nine-week periods ended September 26, 2020 and September 28, 2019, no single customer accounted for more than 10 % of the Company’s consolidated revenue.​​​​​​​ (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 thirty-nine-week period ended September 26, 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) 1,510 ( 5,262 ) ( 3,752 ) Balance as of September 26, 2020 $ 2,630 $ ( 8,594 ) $ ( 5,964 ) 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 thirty-nine-week period ended September 26, 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 $ 3,350,000 and $ 1,427,000 at September 26, 2020 and December 28, 2019, respectively. 1 4 Table of Contents The amortized cost and fair values of available-for-sale investments are as follows at September 26, 2020 and December 28, 2019 (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value September 26, 2020 Money market investments $ 14,456 $ — $ — $ 14,456 Asset-backed securities 569 — 38 531 Corporate bonds and direct obligations of government agencies 101,090 3,540 289 104,341 U.S. Treasury obligations 2,337 137 — 2,474 Total $ 118,452 $ 3,677 $ 327 $ 121,802 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 obligations 2,335 12 5 2,342 Total $ 116,181 $ 1,477 $ 50 $ 117,608 For those available-for-sale investments with unrealized losses at September 26, 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 September 26, 2020 Asset-backed securities $ 531 $ 38 $ — $ — $ 531 $ 38 Corporate bonds and direct obligations of government agencies 4,277 289 — — 4,277 289 Total $ 4,808 $ 327 $ — $ — $ 4,808 $ 327 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 obligations 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 facilities maintained in support of the Company’s network of 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- 15 Table of Contents 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. 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 thirty nine weeks ended September 26, 2020 were (in thousands): Finance leases: Amortization of right-of-use assets $ 18,534 Interest on lease liability 2,447 Total finance lease cost 20,981 Operating leases: Lease cost 2,300 Variable lease cost — Sublease income ( 3,513 ) Total net operating lease income ( 1,213 ) Total net lease cost $ 19,768 16 Table of Contents A summary of the lease classification on our consolidated balance sheet as of September 26, 2020 is as follows (in thousands): Assets: Operating lease right-of-use assets Other assets $ 2,391 Finance lease assets Operating property, less accumulated depreciation and amortization 140,064 Total lease assets $ 142,455 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 September 26, 2020 (in thousands): Finance Leases Operating Leases 2020 Remainder $ 11,269 $ 166 2021 33,830 651 2022 24,358 653 2023 16,681 523 2024 6,742 454 Thereafter 793 154 Total future minimum lease payments 93,673 2,601 Less amount representing interest ( 2.1 % to 4.4 %) 6,380 210 Present value of minimum lease payments $ 87,293 $ 2,391 Current maturities of long-term debt 34,723 Long-term debt, excluding current maturities 52,570 Other current liabilities 640 Deferred income taxes and other noncurrent liabilities 1,751 The weighted average remaining lease term and the weighted average discount rate for finance and operating leases as of September 26, 2020 were: Finance Leases Operating Leases Weighted average remaining lease term (years) 3.0 4.2 Weighted average discount rate 3.2 % 4.0 % (11) Debt Other than the finance lease obligations as presented on the consolidated balance sheets, the Company had no outstanding debt as of September 26, 2020 and December 28, 2019. On June 2, 2016 , Landstar entered into a credit agreement with a syndicate of banks and JPMorgan Chase Bank, N.A., as administrative agent, which was amended and restated on August 18, 2020 to extend the maturity date to August 2023 and amend certain other terms (as so amended and restated, the “Credit Agreement”). The Credit Agreement provides $ 250,000,000 of borrowing capacity in the form of a revolving credit facility, $ 35,000,000 of which may be utilized in the form of letters of credit. The Credit Agreement includes an “accordion” feature providing for a possible increase up to an aggregate borrowing capacity of $ 400,000,000 . The revolving credit loans under the Credit Agreement, at the option of Landstar, bear interest at (i) the Eurocurrency rate plus an applicable margin ranging from 1.25 % to 2.00 %, or (ii) an alternate base rate plus an applicable margin ranging from 0.25 % to 1.00 %, in each case with the applicable margin determined based upon the Company’s Leverage Ratio, as defined in the Credit Agreement, at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. The revolving credit facility bears a commitment fee, payable quarterly in arrears, of 0.25 % to 0.35 %, based on the Company’s Leverage Ratio at the end of the most recent applicable fiscal quarter for which financial statements have been delivered. As of September 26, 2020 and December 28, 2019, the Company had no borrowings outstanding under the Credit Agreement. 17 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 . The interest rates on borrowings under the revolving credit facility are typically tied to short-term interest rates that adjust monthly and, as such, carrying value approximates fair value. Interest rates on borrowings under finance leases approximate the interest rates that would currently be available to the Company under similar terms and, as such, carrying value approximates fair value. (12) Commitments and Contingencies Short-term investments include $ 39,068,000 in current maturities of investments held by the Company’s insurance segment at September 26, 2020. The non-current portion of the bond portfolio of $ 82,734,000 is included in other assets. The short-term investments, together with $ 26,969,000 of non-current investments, provide collateral for the $ 59,434,000 of letters of credit issued to guarantee payment of insurance claims. As of September 26, 2020, Landstar also had $ 33,618,000 of additional letters of credit outstanding under the Company’s Credit Agreement. 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. (1 3 ) 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. 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 thirty-nine-week and thirteen-week periods ended September 26, 2020 and September 28, 2019 (in thousands, except per share amounts): Thirty Nine Weeks Ended Thirteen Weeks Ended September 26, 2020 September 28, 2019 September 26, 2020 September 28, 2019 Operating income $ 6,162 $ 9,497 $ 1,123 $ 6,597 Net income attributable to Landstar System, Inc. and subsidiary $ 4,671 $ 7,199 $ 851 $ 5,001 Earnings per share attributable to Landstar System, Inc. and subsidiary $ 0.12 $ 0.18 $ 0.02 $ 0.13 Diluted earnings per share attributable to Landstar System, Inc. and subsidiary $ 0.12 $ 0.18 $ 0.02 $ 0.13 18 Table of Contents The unfavorable development of prior years’ claims in the thirty-nine-week period ended September 26, 2020 and the thirty -nine-week period ended September 28, 2019 were each attributable to several claims as well as actuarially determined adjustments to prior year commercial trucking loss estimates. (14) 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 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 September 26, 2020. (1 5 ) 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. (1 6 ) Subsequent Event In October 2020, the Company announced a new initiative in support of its BCO Independent Contractor network relating to its regional field operations centers located in the United States and Canada. It is the intent of the Company that this network of field operations centers will further support the Company’s efforts in recruiting and retaining BCO Independent Contractors. In connection with this initiative, the Company expects to record a provision of approximately $ 15,000,000 during the 2020 fourth fiscal quarter relating to anticipated buyouts of certain incentive commission arrangements with several of its independent commission sales agents due to the Company’s discontinuation of a BCO recruitment and retention program that involved those agents.