What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-23 compared with 2020-02-21 · 202 added, 275 removed, 598 unchanged (44% of the section changed)

19 unchanged sentences

Dividends payable

Accrued compensation

Other current liabilities

3 unchanged sentences

Deferred income taxes and other noncurrent liabilities

Landstar System, Inc.

and subsidiary shareholders’ equity:

Shareholders’ Equity

Common stock, $ 0.01 par value, authorized 160,000,000 shares, issued 68,183,702 and 68,083,419 shares

3 unchanged sentences

Accumulated other comprehensive loss

Total Landstar System, Inc.

and subsidiary shareholders’ equity

Noncontrolling interest

Total shareholders’ equity

Total liabilities and equity

9 unchanged sentences

Commissions to agents

Other operating costs, net of gains on asset sales/dispositions

Other operating costs, net of gains/losses on asset sales/dispositions

Insurance and claims

1 unchanged sentence

Depreciation and amortization

Impairment of intangible and other assets

Commission program termination costs

Total costs and expenses

24 unchanged sentences

investments, net of tax expense (benefit) of $ 463 , $ 561 , $( 206 )

Foreign currency translation gains (losses)

Foreign currency translation (losses) gains

Other comprehensive income (loss)

13 unchanged sentences

Gains on sales/disposals of operating property

Impairment of intangible and other assets

Deferred income taxes, net

1 unchanged sentence

Changes in operating assets and liabilities:

Decrease (increase) in trade and other accounts receivable

(Increase) decrease in trade and other accounts receivable

Increase in other assets

(Decrease) increase in accounts payable

(Decrease) increase in other liabilities

Increase (decrease) in accounts payable

Increase (decrease) in other liabilities

Increase in insurance claims

6 unchanged sentences

Proceeds from sales of operating property

Consideration paid for acquisitions

Consideration paid for acquisition

NET CASH USED BY INVESTING ACTIVITIES

FINANCING ACTIVITIES

(Decrease) increase in cash overdraft

Increase (decrease) in cash overdraft

Dividends paid

Payment for debt issue costs

Proceeds from exercises of stock options

6 unchanged sentences

Effect of exchange rate changes on cash and cash equivalents

Increase (decrease) in cash and cash equivalents

(Decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

6 unchanged sentences

December 28, 2019 and December 29, 2018

(Dollars in thousands)

(In thousands, except share and per share amounts)

Landstar System, Inc.

and Subsidiary Shareholders

Treasury Stock at Cost

Comprehensive

(Loss) Income

Treasury Stock at Cost

Balance December 30, 2017

Net income (loss)

Dividends ($ 1.88 per share)

Issuance of stock related to stock-based compensation plans, including excess tax effect

Stock-based compensation

Other comprehensive income

Acquired business and noncontrolling interests

Balance December 30, 2017

Adoption of accounting standards (Note 1)

2 unchanged sentences

Purchases of common stock

Transaction with noncontrolling

Transaction with noncontrolling interests

Issuance of stock related to stock-based compensation plans

10 unchanged sentences

Balance December 28, 2019

Adoption of accounting standards (Note 1 6

Dividends ($ 2.79 per share)

Purchases of common stock

Issuance of stock related to stock-based compensation plans

Stock-based compensation

Other comprehensive income

Balance December 26, 2020

See accompanying notes to consolidated financial statements.

31 unchanged sentences

The Company adopted Accounting Standards Update 2014-09

– Revenue from Contracts with Customers (“ASU 2014-09”)

– Revenue from Contracts with Customers

(“ASU 2014-09”)

on December 31, 2017 under the modified retrospective transition method resulting in a $ 773,000 cumulative adjustment to retained earnings.

Our reported results for 2019 and 2018 are presented under Topic 606, while our prior periods were not adjusted and are reported under Topic 605 “Revenue Recognition.”

Our reported results for 2020, 2019 and 2018 are presented under Topic 606 .

Revenue from Contracts with Customers – Disaggregation of Revenue

During the fiscal year ended December 28, 2019, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 45 %, 47 % and 3 % respectively, of the Company’s consolidated revenue.

Collectively, revenue generated by air and ocean cargo carriers represented approximately 3 % of the Company’s consolidated revenue in the fiscal

year ended December 28, 2019.

in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the fiscal year ended December 28, 2019 was $ 2,371,188,000 hauled via van equipment, $ 1,295,817,000 hauled via unsided/platform equipment and $ 98,324,000 of less-than-truckload.

During the fiscal year ended December 29, 2018, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 43 %, 49 % 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 fiscal year ended December 29, 2018.

Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the fiscal year ended December 29, 2018 was $ 2,791,494,000 hauled via van equipment, $ 1,386,387,000 hauled via unsided/platform equipment and $ 102,531,000 of less-than-truckload.

During the fiscal year ended December 30, 2017, revenue generated by BCO Independent Contractors, Truck Brokerage Carriers and railroads represented approximately 45 %, 48 % and 3 %, respectively, of the Company’s consolidated revenue.

Collectively, revenue generated by air and ocean cargo carriers represented approximately 3 % of the Company’s consolidated revenue in the fiscal year ended December 30, 2017.

Included in truck transportation revenue generated by BCO Independent Contractors and Truck Brokerage Carriers during the fiscal year ended December 30, 2017 was $ 2,163,832,000 hauled via van equipment, $ 1,134,660,000 hauled via unsided/platform equipment and $ 89,041,000 of less-than-truckload.

The following table summarizes (i)

the percentage of consolidated revenue generated by mode of transportation and (ii)

truck transportation revenue hauled

by BCO Independent Contractors and Truck Brokerage Carriers generated by

equipment type during the fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018 (dollars in thousands):

Fiscal Years Ended

Truck – BCO Independent Contractors

Truck – Truck Brokerage Carriers

Rail intermodal

Ocean and air cargo carriers

Truck Equipment Type

Van equipment

Unsided/platform equipment

Less-than-truckload

Insurance Claim Costs

5 unchanged sentences

amounts of additional premium.

In the event paid aggregate losses under the Initial Excess Policy during any policy year (May 1 to April 30) exceed $ 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 exceed a pre-determined

threshold amount, the Company would be required 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 have been 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.

With respect to the second accident, the Company is still in the process of obtaining all the facts concerning this incident and, as such, it is too soon to estimate the Company’s ultimate financial exposure.

The Company’s pre-tax

loss exposure at the time of the second accident included its $ 5,000,000 self-insured retention and up to $ 3,500,000 in additional premium relating to aggregate losses above its self-insured retention during the policy year ending April 30, 2020.

If, as a result of these or additional accidents, aggregate losses under the Initial Excess Policy during the policy year ending April 30, 2020 exceed $ 10,000,000 , Landstar would retain liability of up to $ 10,000,000 per occurrence, inclusive of its self-insured retention for commercial trucking claims during the remainder of such policy year.

The Company continues to maintain third party insurance arrangements providing excess coverage on a per occurrence basis for commercial trucking

liabilities in excess of $

The Company also 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.

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

amount of additional premium, Landstar would retain liability of up to $ 10,000,000 per occurrence, inclusive of its $ 5,000,000 self-insured retention for commercial trucking claims during the remainder of the applicable policy year(s).

s a result of the Company’s aggregate loss experience since it entered into the Initial Excess Policy, the Initial Excess Policy required the Company to

pay additional premium up to a pre-established maximum amount of $ 3,500,000 ,

which 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 .

In addition, third party insurance arrangements providing excess coverage for commercial trucking liabilities in excess of Landstar’s self-insured retention generally require that the Company fund settlement payments to claimants and seek reimbursement from the Company’s third party insurance providers, as applicable.

In connection with settlements of claims in excess of the Company’s $ 5 million self-insured retention, the Company accrues for such anticipated settlement payments and records a corresponding receivable for amounts the Company expects to collect from its third party insurance providers following the payment of such settlement amounts.

On the Company’s consolidated balance sheet as of December 26, 2020, the Company has an aggregate accrual of current liabilities in insurance claims for anticipated payments of settlement amounts above our self-insured retention of

$ 104,000,000 , and a corresponding amount of current assets included in other receivables.

The Company believes it is reasonably assured that it will collect these receivables from its third party insurance providers following its payment of the settlement amounts included in its accrual.

The Company evaluates collectability of these receivables based on the credit worthiness and surplus of the applicable third party insurance provider, along with its prior experience and contractual terms with such third party insurance provider.

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.

8 unchanged sentences

The Company’s Debt includes borrowings under the Company’s revolving credit facility, to the extent there are any, plus borrowings relating to finance lease obligations used to finance trailing equipment.

The interest rates on borrowings under the revolving credit facility are typically tied to short-term LIBOR rates that adjust monthly and, as such, carrying value approximates fair value.

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.

26 unchanged sentences

permits an initial assessment, commonly referred to as “step zero”, of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and also provides a basis for determining whether it is necessary to perform the quantitative analysis required by ASC Topic 350.

the fourth fiscal quarter of 2019, the Company performed the qualitative assessment of goodwill and determined it was more likely than not that the fair value of each of its reporting units would be greater than its carrying amount.

In the fourth fiscal quarter of 2020, the Company performed the qualitative assessment of goodwill and determined it was more likely than not that the fair value of each of its reporting units would be greater than its carrying amount.

Therefore, the Company determined it was not necessary to perform the quantitative goodwill impairment test.

3 unchanged sentences

Deferred tax assets and liabilities are measured using the enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.

On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (the “Tax Reform Act”).

Further information on the tax impacts of the Tax Reform Act is included in Note 5 of the Company’s consolidated financial statements.

Share-Based Payments

1 unchanged sentence

restricted stock and Deferred Stock Units.

The fair value of an RSU with a performance condition is determined based on the market value of the Company’s Common Stock on the date of grant, discounted for lack of marketability for a minimum post-vesting holding requirement.

With respect to RSU awards with a performance condition, the Company reports compensation expense ratably over the life of the award based on an estimated number of units that will vest over the life of the award, multiplied by the fair value of an RSU.

4 unchanged sentences

Forfeitures are estimated at grant date based on historical experience and anticipated employee turnover.

The fair values of each share of non-vested

restricted stock issued and Deferred Stock Unit granted are based on the fair value of a share of the Company’s Common Stock on the date of grant and compensation costs for non-vested

restricted stock and Deferred Stock Units are recognized on a straight-line basis over the requisite service period for the award.

The fair values of each share of non-vested restricted stock issued and Deferred Stock Unit granted are based on the fair value of a share of the Company’s Common Stock on the date of grant and compensation

costs for non-vested restricted stock and Deferred Stock Units are recognized on a straight-line basis over the requisite service period for the award.

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

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.

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.

5 unchanged sentences

Average number of common shares and common share equivalents outstanding

For the fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017, no

options outstanding to purchase shares of Common Stock were antidilutive.

For the fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018, 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.

3 unchanged sentences

Dividends payable of $ 76,770 ,000 related to this special dividend were included in current liabilities in the consolidated balance sheet at December 26, 2020.

On December 10, 2019 , the Company announced that its Board of Directors declared a special cash dividend of $ 2.00 per share payable on January 24, 2020 , to stockholders of record of its Common Stock as of January 10, 2020 .

Dividends payable of $ 78,947 ,000 related to this special dividend were included in current liabilities in the consolidated balance sheet at December 28, 2019.

Foreign Currency Translation

3 unchanged sentences

Transactional gains and losses arising from receivable and payable balances, including intercompany balances, in the normal course of business that are denominated in a currency other than the functional currency of the operation are recorded in the statements of income when they occur.

(2) Acquired Business and Noncontrolling Interests

During 2017, the Company incorporated each of Landstar Metro and Landstar Servicios.

On September 20, 2017, Landstar Metro acquired substantially all of the assets (the “Mexican Asset Acquisition”) of the asset-light transportation logistics business of Fletes Avella, S.A.

de C.V., a Mexican transportation logistics company (“Fletes Avella”).

Cash consideration paid in fiscal year 2017 for the Mexican Asset Acquisition was approximately $ 8,460,000 .

At December 30, 2017, there was approximately $ 1,900,000 in liabilities outstanding consisting of additional contingent purchase price and associated indirect taxes of which approximately $ 1,000,000 was remitted during the 2018 fiscal year and approximately $ 900,000 was negated in connection with the settlement of certain purchase price penalties relating to post-closing operating commitments of Fletes Avella to Landstar Metro.

In connection with the Mexican Asset Acquisition, individuals affiliated with the seller subscribed in the aggregate for equity interests in Landstar Metro and Landstar Servicios, and, as of December 29, 2018, owned in the aggregate approximately 21 % of the equity interests of each of them.

The Mexican Asset Acquisition was accounted for as a business combination in accordance with Accounting Standards Codification 805, Business Combinations (“ASC 805”).

The resulting goodwill arising from the acquisition was approximately $ 7,900,000 as of December 28, 2019, and following the purchase of the noncontrolling interests by the Company, 100 % of this goodwill is deductible by the Company.

Pro forma financial information for prior periods is not presented as the Company does not believe the Mexican Asset Acquisition to be material to consolidated results.

The results of operations from Landstar Metro and Landstar Servicios are presented as part of the Company’s transportations logistics segment.

During the fiscal year ended December 30, 2017, the Company incurred approximately $ 1,000,000 , or $ 0.01 per common share ($ 0.01 per diluted share), in one-time

costs related to the completion of the acquisition and subscription of the non-controlling

As it relates to the noncontrolling interests of Landstar Metro and Landstar Servicios, on August 10, 2018, Landstar acquired approximately 9 % of each of Landstar Metro and Landstar Servicios from the minority equityholders in connection with the settlement of certain penalties relating to post-closing operating commitments of Fletes Avella to Landstar Metro.

In connection with the settlement of several matters relating to the wind-down of the commercial relationship between Fletes Avella, its owners and Landstar Metro, 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.

Cash consideration paid in the 2019 fiscal year to purchase these remaining equity interests was $ 600,000 .

(2) Acquired Business

On May 6, 2020, the C

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) Other Comprehensive Income

7 unchanged sentences

Balance as of December 29, 2018

Other comprehensive loss

Balance as of December 29, 2018

Other comprehensive income

Balance as of December 28, 2019

Other comprehensive income (loss)

Balance as of December 26, 2020

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 fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018.

6 unchanged sentences

Management performs an analysis of the nature of the unrealized losses on available-for-sale

investments to determine whether such losses are other-than-temporary.

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 other-than-temporary, are to be included as a charge in the statement of income, while unrealized losses considered to be temporary are to be included as a component of equity.

investments to determine whether an allowance for credit loss is appropriate.

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 non -

credit-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.

5 unchanged sentences

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 $ 1,427,000 at December 28, 2019, while unrealized losses, net of unrealized gains, on the investments in the bond portfolio were $ 1,184,000 at December 29, 2018.

Unrealized gains, net of unrealized losses, on the investments in the bond portfolio were $ 3,578,000 and $ 1,427,000 at December 26, 2020 and December 28, 2019, respectively.

The amortized cost and fair values of available-for-sale

9 unchanged sentences

Corporate bonds and direct obligations of government agencies

Treasury obligations

For those available-for-sale

5 unchanged sentences

Corporate bonds and direct obligations of government agencies

Treasury obligations

December 28, 2019

1 unchanged sentence

Corporate bonds and direct obligations of government agencies

The Company expects to recover 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, the Company does not consider the unrealized losses on these securities to be other-than-temporary at December 28, 2019.

Short-term investments include $ 32,770,000 in current maturities of investments and $ 131,000 of cash equivalents held by the Company’s insurance segment at December 29, 2018.

Treasury obligations

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.

Short-term investments include $ 41,375,000 in current maturities of investments held by the Company’s insurance segment at December 26, 2020.

The non-current

8 unchanged sentences

Total deferred

On December 22, 2017, the President of the United States signed into law the Tax Reform Act.

The legislation significantly changed U.S.

tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries.

With respect to the change in corporate tax rates, the Tax Reform Act permanently reduced the U.S.

corporate income tax rate from a maximum of 35 % to a flat 21 % rate, effective January 1, 2018.

In connection with this reduction in the U.S.

corporate income tax rate, the Company revalued its ending net deferred tax liabilities at December 30, 2017 resulting in a provisional $ 20,430,000 tax benefit in the Company’s consolidated statement of income

for the fiscal year ended December 30, 2017.

With respect to the repatriation tax on deemed repatriated earnings of foreign subsidiaries, the Tax Reform Act provided for a one-time

deemed mandatory repatriation of post-1986 undistributed foreign subsidiary earnings and profits (“E&P”) through the fiscal year ended December 31, 2017.

The Company had an estimated $ 17,981,000 of undistributed foreign E&P at the Company’s Canadian subsidiary, Landstar Canada, Inc., subject to the deemed mandatory repatriation and, accordingly, recognized a provisional $ 900,000 of income tax expense in the Company’s consolidated statement of income for the fiscal year ended December 30, 2017.

After the utilization of existing tax credits, the Company paid U.S.

federal cash taxes of approximately $ 500,000 on the deemed mandatory repatriation in 2018.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No.

118 (“SAB 118”) to address the application of U.S.

GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act.

The Company recognized the provisional tax impacts related to deemed repatriated earnings and the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the fiscal year ended December 30, 2017.

The accounting was complete when the 2017 U.S.

corporate income tax return was filed in 2018 and no significant adjustments were made to the previously recognized provisional amounts.

Also during fiscal year 2017, the Company adopted ASU 2016-09.

As required by ASU 2016-09,

the Company recognized $ 3,019,000 , $ 2,060,000 and $ 1,299,000 of excess tax benefits on stock-based awards in its provision for income taxes in the 2019, 2018 and 2017 fiscal years, respectively.

Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities consisted of the following (in thousands):

8 unchanged sentences

Net deferred tax liability

The following table summarizes the differences between income taxes calculated at the federal income tax rates of 21 % for 2019 and 2018, respectively, and 35 % for 2017 on income before income taxes and the provisions for income taxes (in thousands):

The following table summarizes the differences between income taxes calculated at the federal income tax rates of 21 % for 2020, 2019, and 2018 on income before income taxes and the provisions for income taxes (in thousands):

Income taxes at federal income tax rate

5 unchanged sentences

Section 199 deductions and R&D credits

Tax Reform Act

The Company files a consolidated U.S.

8 unchanged sentences

and Landstar Metro Servicios S.A.P.I.

are subject to Mexican and U.S.

de C.V., are subject to Mexican income and other taxes.

The Company’s Canadian and Mexican subsidiaries also may each be subject to U.S.

income and other taxes.

1 unchanged sentence

Estimated interest and penalties on the provision for the uncertainty of certain tax positions is included in income tax expense.

At December 28, 2019 and December 29, 2018 there was $ 690,000 and $ 653,000 , respectively, accrued for estimated interest and penalties related to the uncertainty of certain tax positions.

At December 26, 2020 and December 28, 2019 ,

there was $ 648,000 and $ 690,000 , respectively, accrued for estimated interest and penalties related to the uncertainty of certain tax positions.

The Company does not currently anticipate any significant increase or decrease to the unrecognized tax benefit during fiscal year 2021.

15 unchanged sentences

Total operating property, net

above is $ 222,993,000 in fiscal year 2019 and $ 241,382,000 in fiscal year 2018 of operating property under finance

leases, $ 156,439,000 and $ 173,938,000 , respectively, net of accumulated depreciation and amortization.

Landstar acquired operating property by entering into finance

leases in the amount of $ 29,054,000 in fiscal year 2019, $ 46,595,000 in fiscal year 2018 and $ 33,560,000 in fiscal year 2017.

Included above is $ 199,045,000 in fiscal year 2020 and $ 222,993,000 in fiscal year 2019 of operating property under finance leases, $ 139,259,000 and $ 156,439,000 , respectively, net of accumulated depreciation and amortization.

Landstar acquired operating property by entering into finance leases in the amount of $ 31,633,000 in fiscal year 2020, $ 29,054,000 in fiscal year 2019 and $ 46,595,000 in fiscal year 2018.

(7) Retirement Plan

Landstar sponsors an Internal Revenue Code section 401(k) defined contribution plan for the benefit of U.S.

domiciled full-time employees who have completed six months

domiciled full-time employees who have completed six months of service.

Eligible employees make voluntary contributions up to 75 % of their base salary, subject to certain limitations.

1 unchanged sentence

The expense for the Company-sponsored defined contribution plan included in selling, general and administrative expense was $ 2,417,000 in fiscal year 2020, $ 2,427,000 in fiscal year 2019 and $ 2,147,000 in fiscal year 2018.

Other than the finance

lease obligations as presented on the consolidated balance sheets, the Company had no

outstanding debt as of December 28, 2019 and December 29, 2018.

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

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

Borrowings under the Credit Agreement are unsecured, however, all but four of the Company’s U.S.

subsidiaries guarantee the obligations under the Credit Agreement along with Signature Insurance Company.

Landstar entered into an amendment to the Credit Agreement whereby

Landstar Canada Holdings, Inc., the U.S.

Landstar Canada, and

Landstar MH I, LLC, the U.S.

Landstar Holdings, S.

Landstar Metro and

Servicios , in lieu of providing a guarantee of the obligations under the Credit Agreement, granted to the administrative agent, for the benefit of the bank syndicate, a first-priority, perfected pledge and security interest in

65 % of each series of its outstanding voting capital stock and

100 % of each series of its outstanding

capital stock.

Any future amounts that may become outstanding under the Credit Agreement are payable on June

2021 , the maturity date of the Credit Agreement.

Depending upon the specific type of borrowing, borrowings under the Credit Agreement bear interest based on either (a) the prime rate, (b) the Federal Reserve Bank of New York rate plus 0.5 % or (c) the London Interbank Offered Rate, plus 1.25 %.

The unused portion of the revolving credit facility under the Credit Agreement carries a commitment fee determined based on the level of the Leverage Ratio.

The commitment fee for the unused portion of the revolving credit facility under the Credit Agreement ranges from .15 % to .25 %, based

on achieving certain levels of the Leverage Ratio.

As of December 28, 2019 and December 29, 2018, the Company had no

borrowings outstanding under the Credit Agreement.

Other than the finance lease obligations as presented on the consolidated balance sheets, the Company had no outstanding debt as of December 26, 2020 and December 28, 2019.

On August 18, 2020 , Landstar entered into an amended and restated

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 August 18, 2023,

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 December 26, 2020 and December 28, 2019, the Company had no borrowings outstanding under the Credit Agreement.

The Credit Agreement contains a number of covenants that limit, among other things, the incurrence of additional indebtedness.

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The Company is currently in compliance with all of the debt covenants under the Credit Agreement.

rates on borrowings under the revolving credit facility are typically tied to short-term LIBOR rates that adjust monthly and, as such, carrying value approximates fair value.

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.

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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.

Each finance lease for the acquisition of trailing equipment is a five year lease with a $ 1 purchase option for the applicable equipment at lease expiration.

Substantially all of Landstar’s operating lease right-of-use

assets and operating lease liabilities represent leases for orientation centers for BCO Independent Contractors and office space used to conduct Landstar’s business.

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

Further, the leases do not contain contingent rent provisions.

Landstar also leases certain trailing equipment to supplement the Company-owned trailer fleet under “month-to-month”

Landstar also rents

certain trailing equipment to supplement the Company-owned trailer fleet under “month-to-month”

lease terms, which are not required to be recorded on the balance sheet due to the less than twelve month lease term exemption.

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Sublease income

Total operating lease (income)/cost

Total lease cost

Total sublease rent income, net of rent expense, under operating leases was $ 868,000 in fiscal year 2018 and $ 1,419,000 in fiscal year 2017.

Total net operating lease income

Total net lease cost

Total rent expense, net of sublease rent income, under operating leases was $ 490,000 in fiscal year 2019.

Total sublease rent income, net of rent expense, under operating leases was $ 868,000 in fiscal year 2018.

A summary of the lease classification on our consolidated balance sheet as of December 26, 2020 is as follows (in thousands):

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(10) Share-Based Payment Arrangements

As of December 28, 2019, 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”).

As of Decemb e

r 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.

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Included in income tax benefits recognized in the fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018 were excess tax benefits from stock-based awards of $ 941,000 , $ 3,019,000 and $ 2,060,000 , respectively.

Also included in income tax benefits recognized in the fiscal years ended December 28, 2019, December 29, 2018 and December 30, 2017 were income tax benefits of $ 74,000 , $ 84,000 and $ 339,000 , respectively, recognized on disqualifying dispositions of the Company’s Common Stock by employees who obtained shares of Common Stock through exercises of incentive stock options.

As of December 26, 2020, there were 60,586 shares of the Company’s Common Stock reserved for issuance under the 2013 DSCP and 3,672,286 shares of the Company’s Common Stock reserved for issuance in the aggregate under the ESOSIP and 2011 EIP.

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Weighted Average

Grant Date Fair

Outstanding at December 30, 2017

Outstanding at December 29, 2018

Shares earned in excess of target (1)

Vested shares, including shares earned in excess of target

Outstanding at December 28, 2019

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Outstanding at December 26, 2020

Represents shares earned in excess of target under the January 27, 2015 and January 29, 2016 RSU awards as actual results exceeded the target under both awards as a result of fiscal year 2018 results and under the May 1, 2015 RSU award as total shareholder return exceeded the target under the award.

Represents additional shares earned under both the January 27, 2015 and January 29, 2016 RSU awards as fiscal year 2018 financial results exceeded target performance level and under the May 1, 2015 RSU award as total shareholder return exceeded the target under the award.

Represents additional shares earned under the February 2, 2017 RSU awards as fiscal year 2019 financial results exceeded target performance level.

During fiscal years 2018, 2019 and 2020, the Company granted RSUs with a performance condition.

During fiscal years 2018 and 2019, the Company also issued RSUs with a market condition, as further described below.

RSUs with a performance condition granted on February 1, 2019 may vest on January 31 of 2022, 2023 and 2024.

RSUs with a performance condition granted on January 31, 2020 may vest on January 31 of 2023, 2024 and 2025.

RSUs with a performance condition granted on February 1, 2019 may vest on January 31 of 2022, 2023 and 2024.

RSUs with a performance condition granted on February 2, 2018 may vest on January 31 of 2021, 2022 and 2023.

RSUs with a performance condition granted on February 1, 2019 and February 2, 2018 vest based on growth in operating income and pre-tax

RSUs with a performance condition granted

on January 31, 2020, February 1, 2019 and February 2, 2018 vest 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 a base year, being the year immediately preceding the year of grant.

RSUs with a performance condition granted on February 2, 2017 vest based on growth in operating income and diluted earnings per share from continuing operations attributable to Landstar System, Inc.

and subsidiary as compared to a base year, being the year immediately preceding the year of grant.

At the time of grant, the target number of common shares available for issuance under the February 1, 2019, February 2, 2018 and February 2, 2017 grants equals 100 % of the number of RSUs granted, and the maximum number of common shares available for issuance under the February 1, 2019, February 2, 2018 and February 2, 2017 grants equals 200 % of the number of RSUs credited to the recipient.

At the time of grant, the target number of common shares available for issuance under the January 31, 2020, February 1, 2019 and February 2, 2018 grants equals

100 % of the number of RSUs granted, and the maximum number of common shares available for issuance under the January 31, 2020, February 1, 2019 and February 2, 2018 grants equals

200 % of the number of RSUs credited to the recipient.

In the event actual results exceed the target, the number of shares that will be granted will exceed the number of RSUs granted.

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The maximum number of common shares available for issuance under each grant equals 150 % of the number of RSUs granted.

The fair value of each RSU award was determined at the time of grant based on

the expected achievement of the market condition at the end of each vesting period.

The fair value of each RSU award was determined at the time of grant based on the expected achievement of the market condition at the end of each vesting period.

With respect to these RSU awards, the Company reports compensation expense ratably over the life of the award based on an estimated number of units that will vest over the life of the award, multiplied by the fair value of the RSU.

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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.

Restricted Stock and Deferred Stock Units

The 2011 EIP provides the Compensation Committee of the Board of Directors with the authority to issue shares of Common Stock of the Company, subject to certain vesting and other restrictions on transfer (“restricted stock”).

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:

Shares and Deferred

Weighted Average

at December 30, 2017

at December 29, 2018

at December 28, 2019

at December 26, 2020

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 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 December 26, 2020, there was $ 3,312,000 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 1.8 years.

Stock Options

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Exercise Price

$ 37.07 - $ 40.00

$ 40.01 - $ 45.00

$ 45.01 - $ 56.40

Options Exercisable

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Exercise Price

$ 37.07 - $ 40.00

$ 40.01 - $ 45.00

$ 45.01 - $ 56.40

At December 26, 2020, the total intrinsic value of options outstanding and exercisable was $ 1,433,000 .

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stock options granted under the Plans.

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:

Shares and Deferred

Weighted Average

at December 31, 2016

at December 30, 2017

at December 29, 2018

at December 28, 2019

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 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.

Deferred Stock Units become vested 100 % on the first anniversary of the date of the grant.

However, Deferred Stock Units do contain the right to receive dividend equivalent payments prior to settlement into shares.

As of December 28, 2019, there was $ 3,623,000 of total unrecognized compensation cost related to non-vested

shares of restricted stock and Deferred Stock Units granted under the Plans.

The unrecognized compensation cost related to these non-vested

shares of restricted stock and Deferred Stock Units is expected to be recognized over a weighted average period of 2.0 years.

Directors’ Stock Compensation Plan

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Restricted shares and Deferred Stock Units granted in 2018, 2019 and 2020 vest on the date of the next Annual Meeting.

During fiscal years 2019, 2018 and 2017, $ 660,000 , $ 660,000 and $ 651,000 , respectively, of compensation cost was recorded for the grant of these restricted shares and Deferred Stock Units.

On December 11, 2017, the Landstar System, Inc.

Board of Directors authorized the Company to purchase up to 1,963,875 shares of the Company’s Common Stock from time to time in the open market and in privately negotiated transactions.

On January 23, 2019, the Landstar System, Inc.

Board of Directors authorized the Company to purchase up to 1,000,000 additional shares of the Company’s Common Stock from time to time in the open market and in privately negotiated transactions.

During each of fiscal years 2020, 2019 and 2018, $ 660,000 of compensation cost was recorded for the grant of these restricted shares and Deferred Stock Units.

On December 9, 2019, the Landstar System, Inc.

Board of Directors authorized the Company to purchase up to 1,849,068 additional shares of the Company’s Common Stock from time to time in the open market and in privately negotiated transactions.

As of December 28, 2019, the Company had authorization to purchase in the aggregate up to 3,000,000 shares of its Common Stock under these programs.

No specific expiration date has been assigned to the December 11, 2017, January 23, 2019 or December 9, 2019 authorizations.

Board of Directors authorized the Company to purchase up to 1,849,068 additional

shares of the Company’s Common Stock from time to time in the open market and in privately negotiated transactions.

As of December 26, 2020, the Company had authorization to purchase in the aggregate up to 1,821,030 shares of its Common Stock under this program.

No specific expiration date has been assigned to the December 9, 2019 authorization.

During fiscal year 2020, Landstar purchased a total of 1,178,970 shares of its Common Stock at a total cost of $ 115,962 ,000 pursuant to its previously announced stock purchase programs.

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At December 26, 2020, in addition to the $ 64,934,000 letters of credit secured by investments, Landstar had $ 33,618,000 of letters of credit outstanding under the Company’s Credit Agreement.

On January 25, 2019, a purported class action was filed in the Superior Court of the State of California for the County of San Bernardino against Landstar System, Inc.

and Landstar Ranger, Inc.

(together, the “Defendants”).

The complaint purports 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 asserts claims based on the alleged misclassification of Mr.

Tanious as an independent contractor and alleges 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.

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.

Due to a number of factors including the preliminary status of this matter, the Company does not believe it is in a position to conclude whether or not there is a reasonable possibility of an adverse outcome in this case or what damages, if any, the plaintiff would be awarded should he prevail on all or any part of his claims.

However, the Company believes it has meritorious defenses and it intends to assert these defenses vigorously.

The Company is involved in certain claims and pending litigation arising from the normal conduct of business.

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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 information technology systems, 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.

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:

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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 products, building products, metals, chemicals, foodstuffs, heavy machinery, retail, electronics and military equipment.

Examples of the industries serviced by the transportation logistics segment include automotive parts and assemblies, consumer durables,

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.

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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.

The results of operations from Landstar Metro and Landstar Servicios are presented as part of the Company’s transportation logistics segment.

The results of operations from Landstar Blue, Landstar Metro and Landstar Servicios are presented as part of the Company’s transportation logistics segment.

The insurance segment is comprised of Signature Insurance Company (“Signature”), a wholly owned offshore insurance subsidiary, and Risk Management Claim Services, Inc.

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Expenditures on long-lived assets

lease additions

Finance lease additions

External revenue

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Expenditures on long-lived assets

lease additions

Finance lease additions

External revenue

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Expenditures on long-lived assets

lease additions

Finance lease additions

(14) Change in Accounting Estimate for Self-Insured Claims

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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.

The following table summarizes the adverse

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.

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and subsidiary

The unfavorable development of prior years’ claims in the fiscal year ended December 28, 2019 was attributable to several claims as well as actuarially determined adjustments to prior year commercial trucking loss estimates.

The unfavorable development of prior years’ claims in the fiscal year ended December 29, 2018 was primarily attributable to five claims.

The unfavorable development of prior years’ claims in the fiscal year s

ended December 26, 2020 and December 28, 2019 was

attributable in each year

to several specific

claims as well as actuarially determined adjustments to prior year commercial trucking loss estimates.

(15) 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.

(“Fletes Avella”).

During the 2020 second fiscal quarter negative macroeconomic trends in Mexico 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 caused updated

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 December 26, 2020.

(16) Recent Accounting Pronouncements

Adoption of New Accounting Standards

In February 2016, the FASB issued Accounting Standards Update 2016-02

(“ASU 2016-02”),

amended by ASU 2018-11,

Targeted Improvements

requires a company to recognize a right-of-use

asset and lease liability for the obligation to make lease payments measured as the present value of the lease payments for all leases with terms greater than twelve months.

The ASU requires adoption using a modified retrospective transition approach with either (1) periods prior to the adoption date being recast or (2) a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods not recast.

The Company adopted this standard on December 30, 2018 using the cumulative-effect adjustment approach.

No cumulative-effect adjustment was recognized as the amount was not material.

The Company had $ 2,745,000 in right-of-use

assets and corresponding lease obligations as of December 28, 2019.

See Note 9 for corresponding disclosures required under Topic 842.

Accounting Standards Issued But Not Yet Adopted

In June 2016, the FASB issued Accounting Standards Update 2016-13–

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which requires measurement and recognition of expected versus incurred credit losses for financial assets held.

is effective for annual periods beginning after December 15, 2019, and interim periods therein.

is not expected to have a material impact on the Company’s financial statements.

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.

Report of Independent Registered Public Accounting Firm

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issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 23, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for revenue recognition as of December 31, 2017 due to the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers.

Basis for Opinion

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The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of the self-insurance claims liability

As discussed in Note 1 to the consolidated financial statements, the liability for self-insurance claims primarily represents the actuarially determined estimated costs of cargo, property, casualty, general liability, and workers’ compensation claims, both reported and for claims incurred but not reported, up to the Company’s retained amount per claim.

The Company’s estimated costs include assumptions regarding the frequency and severity of claims and are based upon the facts and circumstances known as of the applicable balance sheet date.

The Company’s liability for self-insurance claims as of December 28, 2019 was $78,107,000.

Self-insurance claims liability

As discussed in Note 1 to the consolidated financial statements, the liability for insurance claims includes the actuarially determined estimated costs of cargo, property, casualty, general liability, and workers’ compensation claims, both reported and for claims incurred but not reported, up to the Company’s retained amount per claim, which is referred to as the self-insurance claims liability.

The Company’s estimated costs of insurance claims include assumptions regarding the frequency and severity of claims and are based upon the facts and circumstances known as of the applicable balance sheet date.

The Company’s liability for insurance claims as of December 26, 2020 was $188,641,000, which includes the self-insurance claims liability.

We identified the evaluation of the self-insurance claims liability as a critical audit matter.

Specialized skills were needed to evaluate the Company’s estimate of the self-insurance claims liability, which included assumptions related to the potential for the development in future periods of claims incurred as of the balance sheet date and the impact of those developments on the estimated liability associated with such claims.

Specialized skills were needed to evaluate the Company’s estimate of the self-insurance claims liability.

This evaluation included assumptions related to the potential for the development in future periods of claims, both reported and incurred but not reported, as of the balance sheet date and the impact of those developments on the estimated liability associated with such claims.

In addition, a higher degree of subjective auditor judgment was required to evaluate the Company’s estimate of the self-insurance claims liability due to the inherent uncertainty in the frequency and severity of claims.

The primary procedures we performed to address this critical audit matter included the following.

We tested certain internal controls over the Company’s self-insurance claims process, including controls to develop the assumptions used to estimate the self-insurance claims liability.

We involved an actuarial professional with specialized skills and knowledge, who assisted in assessing the actuarial model used by the Company, including the external actuarial report obtained by the Company, to estimate the self-insurance claims liability for consistency with generally accepted actuarial standards.

The actuarial professional also developed an independent estimate of the range of the self-insurance claims liability using the Company’s historical claims data.

We compared the estimated range to the amounts recorded by the Company.

The following are the primary procedures we performed to address this critical audit matter.

We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s self-insurance claims process, including a control related to the development of the assumptions used to estimate the self-insurance claims liability.

We involved actuarial professionals with specialized skills and knowledge, who assisted in assessing the actuarial model used by the Company, including the external actuarial report obtained by the Company, to estimate the self-insurance claims liability for consistency with generally accepted actuarial standards.

The actuarial professionals also developed an estimate of the range of the self-insurance claims liability using the Company’s historical claims data.

We compared the estimated range of the self-insurance claims liability to the amount recorded by the Company.

We tested a sample of the claims data used in the actuarial model by comparing the data to underlying claims details.

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Additionally, we assessed the development of the self-insurance claims liability in the current year compared to recent historical trends and considered the implications on the current year assumptions.

We also assessed facts and circumstances received by the Company after the balance sheet date, but before the consolidated financial statements were issued, and any impact of such facts and circumstances on the self-insurance claims liability.

We also assessed facts and circumstances received by the Company after the balance sheet date, but before the consolidated financial statements were issued, and the impact, if any, of such facts and circumstances on the self-insurance claims liability.

We have served as the Company’s auditor since 1988.

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February 23, 2021

LANDSTAR SYSTEM, INC.

AND SUBSIDIARY

QUARTERLY FINANCIAL DATA

(Dollars in thousands, except per share amounts)

Operating income

Income before income taxes

Net income/loss attributable to noncontrolling interest

Net income attributable to Landstar System, Inc.

and subsidiary

Earnings per common share attributable to Landstar System, Inc.

and subsidiary(1)

Diluted earnings per share attributable to Landstar System, Inc.

and subsidiary(1)

Dividends per common share

Operating income

Income before income taxes

loss attributable to noncontrolling interest

Net income attributable to Landstar System, Inc.

and subsidiary

Earnings per common share attributable to Landstar System, Inc.

and subsidiary(1)

Diluted earnings per share attributable to Landstar System, Inc.

and subsidiary(1)

Dividends per common share

Due to the changes in the number of average common shares and common stock equivalents outstanding during the year, the sum of earnings per share amounts for each quarter do not necessarily sum in the aggregate to the earnings per share amounts for the full year.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data