LANDSTAR SYSTEM INC 10-K

Item 8. Financial Statements and Supplementary Data LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) Dec. 26, 2020 Dec. 28, 2019 ASSETS Current Assets Cash and cash equivalents $ 249,354 $ 319,515 Short-term investments 41,375 32,901 Trade accounts receivable, less allowance of $ 8,670 and $ 7,284 764,169 588,549 Other receivables, including advances to independent contractors, less allowance of $ 7,239 and $ 7,667 134,757 35,553 Other current assets 18,520 21,370 Total current assets 1,208,175 997,888 Operating property, less accumulated depreciation and amortization of $ 299,407 and $ 280,849 296,996 285,855 Goodwill 40,949 38,508 Other assets 107,679 105,460 Total assets $ 1,653,799 $ 1,427,711 LIABILITIES AND EQUITY Current Liabilities Cash overdraft $ 74,748 $ 53,878 Accounts payable 380,505 271,996 Current maturities of long-term debt 35,415 42,632 Insurance claims 149,774 44,532 Dividends payable 76,770 78,947 Other current liabilities 88,925 60,919 Total current liabilities 806,137 552,904 Long-term debt, excluding current maturities 65,359 70,212 Insurance claims 38,867 33,575 Deferred income taxes and other noncurrent liabilities 51,601 49,551 Shareholders’ Equity Common stock, $ 0.01 par value, authorized 160,000,000 shares, issued 68,183,702 and 68,083,419 shares 682 681 Additional paid-in capital 228,875 226,123 Retained earnings 2,046,238 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 ( 1,999 ) ( 2,212 ) Total shareholders’ equity 691,835 721,469 Total liabilities and equity $ 1,653,799 $ 1,427,711 See accompanying notes to consolidated financial statements. 3 5 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) Fiscal Years Ended December 26, 2020 December 28, 2019 December 29, 2018 Revenue $ 4,132,981 $ 4,084,577 $ 4,615,144 Investment income 3,399 5,041 3,816 Costs and expenses: Purchased transportation 3,192,850 3,127,474 3,569,961 Commissions to agents 340,780 342,226 378,002 Other operating costs, net of gains/losses on asset sales/dispositions 30,463 37,274 31,803 Insurance and claims 87,773 80,319 75,677 Selling, general and administrative 167,633 158,953 188,212 Depreciation and amortization 45,855 44,468 43,570 Impairment of intangible and other assets 2,582 — — Commission program termination costs 15,494 — — Total costs and expenses 3,883,430 3,790,714 4,287,225 Operating income 252,950 298,904 331,735 Interest and debt expense 3,953 3,141 3,354 Income before income taxes 248,997 295,763 328,381 Income taxes 56,891 68,060 73,168 Net income 192,106 227,703 255,213 Less: Net loss attributable to noncontrolling interest — ( 17 ) ( 68 ) Net income attributable to Landstar System, Inc. and subsidiary $ 192,106 $ 227,720 $ 255,281 Earnings per common share attributable to Landstar System, Inc. and subsidiary $ 4.98 $ 5.72 $ 6.19 Diluted earnings per share attributable to Landstar System, Inc. and subsidiary $ 4.98 $ 5.72 $ 6.18 Average number of shares outstanding: Earnings per common share 38,602,000 39,786,000 41,273,000 Diluted earnings per share 38,602,000 39,786,000 41,310,000 Dividends per common share $ 2.79 $ 2.70 $ 0.63 See accompanying notes to consolidated financial statements. 3 6 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) Fiscal Years Ended Dec. 26, 2020 Dec. 28, 2019 Dec. 29, 2018 Net income attributable to Landstar System, Inc. and subsidiary $ 192,106 $ 227,720 $ 255,281 Other comprehensive income (loss): Unrealized holding gains (losses) on available-for-sale investments, net of tax expense (benefit) of $ 463 , $ 561 , $( 206 ) 1,688 2,050 ( 786 ) Foreign currency translation (losses) gains ( 1,475 ) 1,613 ( 1,927 ) Other comprehensive income (loss) 213 3,663 ( 2,713 ) Comprehensive income attributable to Landstar System, Inc. and subsidiary $ 192,319 $ 231,383 $ 252,568 See accompanying notes to consolidated financial statements. 3 7 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Fiscal Years Ended Dec. 26, 2020 Dec. 28, 2019 Dec. 29, 2018 OPERATING ACTIVITIES Net income $ 192,106 $ 227,703 $ 255,213 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of operating property and intangible assets 45,855 44,468 43,570 Non-cash interest charges 334 253 253 Provisions for losses on trade and other accounts receivable 9,415 9,831 7,415 Gains on sales/disposals of operating property ( 2,576 ) ( 1,016 ) ( 979 ) Impairment of intangible and other assets 2,582 — — Deferred income taxes, net 1,130 4,767 2,115 Stock-based compensation 4,639 4,236 18,256 Changes in operating assets and liabilities: (Increase) decrease in trade and other accounts receivable ( 285,169 ) 81,415 ( 57,419 ) Increase in other assets ( 4,719 ) ( 11,395 ) ( 2,962 ) Increase (decrease) in accounts payable 108,090 ( 42,138 ) 22,527 Increase (decrease) in other liabilities 28,496 ( 17,786 ) 8,367 Increase in insurance claims 110,534 7,502 1,545 NET CASH PROVIDED BY OPERATING ACTIVITIES 210,717 307,840 297,901 INVESTING ACTIVITIES Net change in other short-term investments 131 ( 131 ) — Sales and maturities of investments 22,632 62,922 51,576 Purchases of investments ( 25,550 ) ( 65,922 ) ( 54,041 ) Purchases of operating property ( 30,626 ) ( 19,416 ) ( 9,747 ) Proceeds from sales of operating property 7,760 3,991 4,018 Consideration paid for acquisition ( 2,766 ) — — NET CASH USED BY INVESTING ACTIVITIES ( 28,419 ) ( 18,556 ) ( 8,194 ) FINANCING ACTIVITIES Increase (decrease) in cash overdraft 20,870 ( 1,461 ) 13,097 Dividends paid ( 109,504 ) ( 27,891 ) ( 88,918 ) Payment for debt issue costs ( 1,132 ) — — Proceeds from exercises of stock options 725 1,056 1,435 Taxes paid in lieu of shares issued related to stock-based compensation plans ( 3,326 ) ( 8,456 ) ( 3,938 ) Purchases of common stock ( 115,962 ) ( 88,578 ) ( 208,087 ) Principal payments on finance lease obligations ( 43,703 ) ( 44,635 ) ( 43,283 ) Purchase of noncontrolling interest — ( 600 ) — Payment of contingent consideration — — ( 985 ) NET CASH USED BY FINANCING ACTIVITIES ( 252,032 ) ( 170,565 ) ( 330,679 ) Effect of exchange rate changes on cash and cash equivalents ( 427 ) 1,060 ( 1,708 ) (Decrease) increase in cash and cash equivalents ( 70,161 ) 119,779 ( 42,680 ) Cash and cash equivalents at beginning of period 319,515 199,736 242,416 Cash and cash equivalents at end of period $ 249,354 $ 319,515 $ 199,736 See accompanying notes to consolidated financial statements. 3 8 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY For the Fiscal Years Ended December 26, 2020, December 28, 2019 and December 29, 2018 (In thousands, except share and per share amounts) Landstar System, Inc. and Subsidiary Shareholders Additional Accumulated Other Non- Common Stock Paid-In Retained Treasury Stock at Cost Comprehensive controlling Shares Amount Capital Earnings Shares Amount (Loss) Income Interests Total Balance December 30, 2017 67,740,380 $ 677 $ 209,599 $ 1,611,158 25,749,493 $ ( 1,167,600 ) $ ( 3,162 ) $ 3,205 $ 653,877 Adoption of accounting standards (Note 1) 773 773 Net income (loss) 255,281 ( 68 ) 255,213 Dividends ($ 0.63 per share) ( 25,933 ) ( 25,933 ) Purchases of common stock 2,000,000 ( 208,087 ) ( 208,087 ) Transaction with noncontrolling interests 1,078 ( 1,078 ) — Issuance of stock related to stock-based compensation plans 130,582 2 ( 2,081 ) 5,508 ( 424 ) ( 2,503 ) Stock-based compensation 18,256 18,256 Other comprehensive (loss) income ( 2,713 ) 250 ( 2,463 ) 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) 227,720 ( 17 ) 227,703 Dividends ($ 2.70 per share) ( 106,838 ) ( 106,838 ) Purchases of common stock 849,068 ( 88,578 ) ( 88,578 ) Purchase noncontrolling interests 1,842 ( 2,442 ) ( 600 ) Issuance of stock related to stock-based compensation plans 212,457 2 ( 6,807 ) 5,857 ( 595 ) ( 7,400 ) Stock-based compensation 4,236 4,236 Other comprehensive income 3,663 150 3,813 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 standards (Note 1 6 ) ( 702 ) ( 702 ) Net income 192,106 192,106 Dividends ($ 2.79 per share) ( 107,327 ) ( 107,327 ) Purchases of common stock 1,178,970 ( 115,962 ) ( 115,962 ) Issuance of stock related to stock-based compensation plans 100,283 1 ( 1,887 ) 8,743 ( 715 ) ( 2,601 ) Stock-based compensation 4,639 4,639 Other comprehensive income 213 — 213 Balance December 26, 2020 68,183,702 $ 682 $ 228,875 $ 2,046,238 29,797,639 $ ( 1,581,961 ) $ ( 1,999 ) $ — $ 691,835 See accompanying notes to consolidated financial statements. 39 Table of Contents LANDSTAR SYSTEM, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Significant Accounting Policies Consolidation The consolidated financial statements include the accounts of Landstar System, Inc. and its subsidiary, Landstar System Holdings, Inc. (“LSHI”). Landstar System, Inc. and its subsidiary are herein referred to as “Landstar” or the “Company.” Significant intercompany accounts have been eliminated in consolidation. Estimates The preparation of the consolidated financial statements requires the use of management’s estimates. Actual results could differ from those estimates. Fiscal Year Landstar’s fiscal year is the 52 or 53 week period ending the last Saturday in December. Revenue Recognition The nature of the Company’s freight transportation services and its performance obligations to customers, regardless of the mode of transportation used to perform such services, relate to the safe and on-time pick-up and delivery of a customer’s freight on a shipment-by-shipment basis. Landstar customers are typically invoiced on a shipment-by-shipment basis at a pre-defined rate, payable thirty to sixty (30-60) days after the customer’s receipt of such invoice. Payment terms to customers do not contain a significant financing component and the amount owed by the customer does not contain variable terms, embedded or otherwise. We have determined that revenue recognition over the freight transit period provides a faithful depiction of the transfer of services to the customer as our obligation for which we are primarily responsible for fulfilling is performed over the transit period. Accordingly, transportation revenue billed to a customer for the physical transportation of freight and related direct freight expenses are recognized on a gross basis over the freight transit period as the performance obligation to the customer is satisfied. The Company determines the transit period for a given shipment based upon the pick-up date and the delivery date, which may be estimated if delivery has not occurred as of the reporting date. Determining the transit period and how much of it has been completed as of a given reporting date may therefore require management to make judgments that affect the timing of revenue recognized. With respect to shipments with a pick-up date in one reporting period and a delivery date in another, the Company recognizes such transportation revenue based on relative transit time in each reporting period. A days in transit output method is used to measure the progress of the performance of the Company’s freight transportation services as of the reporting date and a portion of the total revenue that will be billed to the customer once a load is delivered is recognized in each reporting period based on the percentage of total transit time that has been completed at the end of the applicable reporting period. Reinsurance premiums of the insurance segment are recognized over the period earned, which is usually on a monthly basis. Fuel surcharges billed to customers for freight hauled by independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”) are excluded from revenue and paid in entirety to the BCO Independent Contractors. Adoption of Topic 606, “Revenue from Contracts with Customers” The Company adopted Accounting Standards Update 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 2020, 2019 and 2018 are presented under Topic 606 . 4 0 Table of Contents Revenue from Contracts with Customers – Disaggregation of Revenue The following table summarizes (i) the percentage of consolidated revenue generated by mode of transportation and (ii) the total amount of 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 Mode December 26, 2020 December 28, 2019 December 29, 2018 Truck – BCO Independent Contractors 45 % 45 % 43 % Truck – Truck Brokerage Carriers 47 % 47 % 49 % Rail intermodal 3 % 3 % 3 % Ocean and air cargo carriers 3 % 3 % 3 % Truck Equipment Type Van equipment $ 2,515,940 $ 2,371,188 $ 2,791,494 Unsided/platform equipment $ 1,202,295 $ 1,295,817 $ 1,386,387 Less-than-truckload $ 97,546 $ 98,324 $ 102,531 Insurance Claim Costs Landstar provides, primarily on an actuarially determined basis, for the estimated costs of cargo, property, casualty, general liability and workers’ compensation claims both reported and for claims incurred but not reported. For periods prior to May 1, 2019, Landstar retains liability for commercial trucking claims up to $ 5,000,000 per occurrence and maintains various third party insurance arrangements for liabilities in excess of its $ 5,000,000 self-insured retention. Effective May 1, 2019, the Company entered into a new three year commercial auto liability insurance arrangement for losses incurred between $ 5,000,000 and $ 10,000,000 (the “Initial Excess Policy”) with a third party insurance company. For commercial trucking claims incurred on or after May 1, 2019 through April 30, 2022, the Initial Excess Policy provides for a limit for a single loss of $ 5,000,000 , with an aggregate limit of $ 15,000,000 for each policy year, an aggregate limit of $ 20,000,000 for the thirty-six month term ended April 30, 2022, and options to increase such aggregate limits for pre-established amounts of additional premium. 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). Moreover, a 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 41 Table of Contents $ 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. Tires Tires purchased as part of trailing equipment are capitalized as part of the cost of the equipment. Replacement tires are charged to expense when placed in service. Cash and Cash Equivalents Included in cash and cash equivalents are all investments, except those provided for collateral, with an original maturity of 3 months or less. Financial Instruments The Company’s financial instruments include cash equivalents, short and long-term investments, trade and other accounts receivable, accounts payable, other accrued liabilities, and long-term debt plus current maturities (“Debt”). The carrying value of cash equivalents, trade and other accounts receivable, accounts payable, current insurance claims and other accrued liabilities approximates fair value as the assets and liabilities are short term in nature. Short and long-term investments are carried at fair value as further described in Note 4 in the Company’s consolidated financial statements. 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 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. 4 2 Table of Contents Trade and Other Receivables The allowance for doubtful accounts for both trade and other receivables represents management’s estimate of the amount of outstanding receivables that will not be collected. Estimates are used to determine the allowance for doubtful accounts for both trade and other receivables and are generally based on specific identification, historical collection results, current economic trends and changes in payment trends. Following is a summary of the activity in the allowance for doubtful accounts for fiscal years ending December 26, 2020, December 28, 2019 and December 29, 2018 (in thousands): Balance at Beginning of Period Charged to Costs and Expenses Write-offs, Net of Recoveries Balance at End of Period For the Fiscal Year Ended December 26, 2020 Trade receivables $ 7,284 $ 6,121 $ ( 4,735 ) $ 8,670 Other receivables 8,806 3,291 ( 3,698 ) 8,399 Other non-current receivables 260 3 1 264 $ 16,350 $ 9,415 $ ( 8,432 ) $ 17,333 For the Fiscal Year Ended December 28, 2019 Trade receivables $ 6,413 $ 4,309 $ ( 3,438 ) $ 7,284 Other receivables 7,211 5,518 ( 3,923 ) 8,806 Other non-current receivables 256 4 — 260 $ 13,880 $ 9,831 $ ( 7,361 ) $ 16,350 For the Fiscal Year Ended December 29, 2018 Trade receivables $ 6,131 $ 3,886 $ ( 3,604 ) $ 6,413 Other receivables 6,952 3,520 ( 3,261 ) 7,211 Other non-current receivables 251 9 ( 4 ) 256 $ 13,334 $ 7,415 $ ( 6,869 ) $ 13,880 Operating Property Operating property is recorded at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the related assets. Buildings and improvements are being depreciated over 30 years. Trailing equipment is being depreciated over 7 to 10 years. Information technology hardware and software included in other equipment is generally being depreciated over 3 to 7 years. Goodwill Goodwill represents the excess of the purchase price paid over the fair value of the net assets of acquired businesses. The Company has two reporting units within the transportation logistics segment that report goodwill. The Company reviews its goodwill balance annually for impairment for each reporting unit, unless circumstances dictate more frequent assessments, and in accordance with ASU 2011-08, Testing Goodwill for Impairment . ASU 2011-08 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. 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. Furthermore, there has been no historical impairment of the Company’s goodwill. Income Taxes Income tax expense is equal to the current year’s liability for income taxes and a provision for deferred income taxes. Deferred tax assets and liabilities are recorded for the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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. Share-Based Payments The Company’s share-based payment arrangements include restricted stock units (“RSU”), stock options, non-vested 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 4 3 Table of Contents 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. The fair value of an RSU with a market condition is 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 RSU awards with a market condition, the Company recognizes compensation expense ratably over the requisite service period under an award based on the fair market value of the award at the time of grant, regardless of whether the market condition is satisfied. Previously recognized compensation cost would be reversed, however, if the employee terminated employment prior to completing such requisite service period. The Company estimates the fair value of stock option awards on the date of grant using the Black-Scholes pricing model and recognizes compensation cost for stock option awards expected to vest on a straight-line basis over the requisite service period for the entire award. 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. 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. The following table provides a reconciliation of the average number of common shares outstanding used to calculate earnings per common share attributable to Landstar System, Inc. and subsidiary to the average number of common shares and common share equivalents outstanding used to calculate diluted earnings per share attributable to Landstar System, Inc. and subsidiary (in thousands): Fiscal Years 2020 2019 2018 Average number of common shares outstanding 38,602 39,786 41,273 Incremental shares from assumed exercises of stock options — — 37 Average number of common shares and common share equivalents outstanding 38,602 39,786 41,310 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. and subsidiary for all periods because the performance metric requirements or market condition for vesting had not been satisfied. Dividends Payable On December 8, 2020 , the Company announced that its Board of Directors declared a special cash dividend of $ 2.00 per share payable on January 22, 2021 , to stockholders of record of its Common Stock as of January 8, 2021 . 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 Assets and liabilities of the Company’s Canadian and Mexican operations are translated from their functional currency to U.S. dollars using exchange rates in effect at the balance sheet date and revenue and expense accounts are translated at average monthly exchange rates during the period. Adjustments resulting from the translation process are included in accumulated other comprehensive income. 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. 4 4 Table of Contents (2) Acquired Business On May 6, 2020, the C ompan y 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 The following table presents the components of and changes in accumulated other comprehensive income attributable to Landstar System, Inc. and subsidiary, net of related income taxes, as of and for the fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018 (in thousands): Unrealized Holding (Losses) Gains on Available-for-Sale Securities Foreign Currency Translation Total Balance as of December 30, 2017 $ ( 144 ) $ ( 3,018 ) $ ( 3,162 ) Other comprehensive loss ( 786 ) ( 1,927 ) ( 2,713 ) Balance as of December 29, 2018 ( 930 ) ( 4,945 ) ( 5,875 ) Other comprehensive income 2,050 1,613 3,663 Balance as of December 28, 2019 1,120 ( 3,332 ) ( 2,212 ) Other comprehensive income (loss) 1,688 ( 1,475 ) 213 Balance as of December 26, 2020 $ 2,808 $ ( 4,807 ) $ ( 1,999 ) 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. (4) 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 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. 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 $ 3,578,000 and $ 1,427,000 at December 26, 2020 and December 28, 2019, respectively. 4 5 Table of Contents The amortized cost and fair values of available-for-sale investments are as follows at December 26, 2020 and December 28, 2019 (in thousands): Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value December 26, 2020 Money market investments $ 17,867 $ — $ — $ 17,867 Asset-backed securities 567 — 26 541 Corporate bonds and direct obligations of government agencies 98,241 3,551 72 101,720 U.S. Treasury obligations 2,338 125 — 2,463 Total $ 119,013 $ 3,676 $ 98 $ 122,591 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 December 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 December 26, 2020 Asset-backed securities $ 541 $ 26 $ — $ — $ 541 $ 26 Corporate bonds and direct obligations of government agencies 2,681 72 — — 2,681 72 Total $ 3,222 $ 98 $ — $ — $ 3,222 $ 98 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. 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 portion of the bond portfolio of $ 81,216,000 is included in other assets. The short-term investments, together with $ 30,774,000 of non-current investments, provide collateral for the $ 64,934,000 of letters of credit issued to guarantee payment of insurance claims. Investment income represents the earnings on the insurance segment’s assets. Investment income earned from the assets of the insurance segment are included as a component of operating income as the investment of these assets is critical to providing collateral, liquidity and earnings with respect to the operation of the Company’s insurance programs. 4 6 Table of Contents (5) Income Taxes The provisions for income taxes consisted of the following (in thousands): Fiscal Years 2020 2019 2018 Current: Federal $ 47,955 $ 52,422 $ 60,650 State 7,249 10,367 9,410 Foreign 557 504 993 Total current $ 55,761 $ 63,293 $ 71,053 Deferred: Federal $ 1,523 $ 4,212 $ 1,730 State ( 393 ) 555 385 Total deferred $ 1,130 $ 4,767 $ 2,115 Income taxes $ 56,891 $ 68,060 $ 73,168 Temporary differences and carryforwards which gave rise to deferred tax assets and liabilities consisted of the following (in thousands): Dec. 26, 2020 Dec. 28, 2019 Deferred tax assets: Receivable valuations $ 4,286 $ 4,004 Share-based payments 2,020 2,923 Self-insured claims 3,613 3,565 Other 6,056 2,935 Total deferred tax assets $ 15,975 $ 13,427 Deferred tax liabilities: Operating property $ 52,014 $ 49,669 Goodwill 3,772 4,223 Other 3,087 1,531 Total deferred tax liabilities $ 58,873 $ 55,423 Net deferred tax liability $ 42,898 $ 41,996 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): Fiscal Years 2020 2019 2018 Income taxes at federal income tax rate $ 52,289 $ 62,110 $ 68,960 State income taxes, net of federal income tax benefit 5,375 8,876 7,713 Non-deductible executive compensation 96 — 1,012 Meals and entertainment exclusion 326 644 719 Share-based payments ( 977 ) ( 3,093 ) ( 2,138 ) Section 199 deductions and R&D credits ( 717 ) ( 714 ) ( 3,309 ) Other, net 499 237 211 Income taxes $ 56,891 $ 68,060 $ 73,168 The Company files a consolidated U.S. federal income tax return. The Company or its subsidiaries file state tax returns in the majority of the U.S. state tax jurisdictions. With few exceptions, the Company and its subsidiaries are no longer subject to U.S. federal or state income tax examinations by tax authorities for 2016 and prior years. The Company’s wholly-owned Canadian subsidiary, Landstar Canada, Inc., is subject to Canadian income and other taxes. The Company’s wholly-owned Mexican subsidiaries, Landstar Holdings, S. de R.L.C.V., Landstar Metro, S.A.P.I. de C.V. and Landstar Metro Servicios S.A.P.I. 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. As of December 26, 2020 and December 28, 2019, the Company had $ 2,030,000 and $ 2,253,000 , respectively, of net unrecognized tax benefits representing the provision for the uncertainty of certain tax positions plus a component of interest and penalties. Estimated interest and penalties on the provision for the uncertainty of certain tax positions is included in income tax expense. 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. 4 7 Table of Contents The following table summarizes the rollforward of the total amounts of gross unrecognized tax benefits for fiscal years 2020 and 2019 (in thousands): Fiscal Years 2020 2019 Gross unrecognized tax benefits – beginning of the year $ 3,014 $ 3,519 Gross increases related to current year tax positions 349 468 Gross increases related to prior year tax positions 232 469 Gross decreases related to prior year tax positions — ( 295 ) Settlements — ( 356 ) Lapse of statute of limitations ( 1,010 ) ( 791 ) Gross unrecognized tax benefits – end of the year $ 2,585 $ 3,014 Landstar paid income taxes of $ 47,589,000 in fiscal year 2020, $ 67,317,000 in fiscal year 2019 and $ 75,124,000 in fiscal year 2018. (6) Operating Property Operating property is summarized as follows (in thousands): Dec. 26, 2020 Dec. 28, 2019 Land $ 16,328 $ 15,834 Buildings and improvements 64,314 58,484 Trailing equipment 433,400 425,595 Other equipment 82,361 66,791 Total operating property, gross 596,403 566,704 Less accumulated depreciation and amortization 299,407 280,849 Total operating property, net $ 296,996 $ 285,855 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 of service. Eligible employees make voluntary contributions up to 75 % of their base salary, subject to certain limitations. Landstar contributes an amount equal to 100 % of the first 3 % and 50 % of the next 2 % of such contributions, subject to certain limitations. 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. (8) Debt 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 . 4 8 Table of Contents 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. 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. Landstar paid interest of $ 3,915,000 in fiscal year 2020, $ 4,439,000 in fiscal year 2019 and $ 3,761,000 in fiscal year 2018. (9) 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 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. 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. 49 Table of Contents The components of lease cost for finance leases and operating leases as of December 26, 2020 were (in thousands): Finance leases: Amortization of right-of-use assets $ 24,589 Interest on lease liability 3,155 Total finance lease cost 27,744 Operating leases: Lease cost 3,075 Variable lease cost — Sublease income ( 4,695 ) Total net operating lease income ( 1,620 ) Total net lease cost $ 26,124 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): Assets: Operating lease right-of-use assets Other assets $ 2,595 Finance lease assets Operating property, less accumulated depreciation and amortization 139,259 Total lease assets $ 141,854 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 December 26, 2020 (in thousands): Finance Leases Operating Leases 2021 $ 37,917 $ 762 2022 28,774 697 2023 21,759 612 2024 11,827 528 2025 5,580 216 Thereafter — — Total future minimum lease payments 105,857 2,815 Less amount representing interest ( 1.9 % to 4.4 %) 5,083 220 Present value of minimum lease payments $ 100,774 $ 2,595 Current maturities of long-term debt 35,415 Long-term debt, excluding current maturities 65,359 Other current liabilities 739 Deferred income taxes and other noncurrent liabilities 1,856 The weighted average remaining lease term and the weighted average discount rate for finance and operating leases as of December 26, 2020 were: Finance Leases Operating Leases Weighted average remaining lease term (years) 3.4 4.0 Weighted average discount rate 3.0 % 4.0 % 5 0 Table of Contents (10) Share-Based Payment Arrangements 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. The Company also has a stock compensation plan for members of its Board of Directors, the Amended and Restated 2013 Directors Stock Compensation Plan (as amended and restated as of May 17, 2016, the “2013 DSCP”). 6,000,000 shares of the Company’s Common Stock were authorized for issuance under the 2011 EIP and 115,000 shares of the Company’s Common Stock were authorized for issuance under the 2013 DSCP. The ESOSIP, 2011 EIP and 2013 DSCP are each referred to herein as a “Plan,” and, collectively, as the “Plans.” Amounts recognized in the financial statements with respect to these Plans are as follows (in thousands): Fiscal Years 2020 2019 2018 Total cost of the Plans during the period $ 4,639 $ 4,236 $ 18,256 Amount of related income tax benefit recognized during the period ( 2,114 ) ( 4,130 ) ( 6,610 ) Net cost of the Plans during the period $ 2,525 $ 106 $ 11,646 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. 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. 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 30, 2017 387,372 $ 55.75 Granted 65,824 $ 95.94 Vested ( 67,971 ) $ 53.92 Forfeited ( 92,880 ) $ 52.36 Outstanding at December 29, 2018 292,345 $ 66.31 Granted 68,820 $ 89.34 Shares earned in excess of target (1) 71,172 $ 54.78 Vested shares, including shares earned in excess of target ( 226,981 ) $ 53.27 Forfeited ( 6,481 ) $ 86.60 Outstanding at December 28, 2019 198,875 $ 84.37 Granted 59,967 $ 102.58 Shares earned in excess of target (2) 11,648 $ 77.00 Vested shares, including shares earned in excess of target ( 76,290 ) $ 73.44 Forfeited ( 10,987 ) $ 100.55 Outstanding at December 26, 2020 183,213 $ 93.44 (1) 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. (2) 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 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 51 Table of Contents 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. 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. The fair value of an RSU with a performance condition was 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. The discount rate due to lack of marketability used for RSU award grants with a performance condition for all periods was 7 %. With respect to RSU awards with a performance condition, the Company reports compensation expense 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 at the time of grant. During fiscal year 2019, the Company granted 9,725 RSUs that vest based on a market condition. During fiscal year 2018, the Company granted 9,324 RSUs that vest based on a market condition. The RSUs granted in 2019 may vest on June 30 of 2023, 2024 and 2025, and the RSUs granted in 2018 may vest on June 30 of 2022, 2023 and 2024, in each case based on the Company’s total shareholder return (“TSR”) compound annual growth rate over the vesting periods, adjusted to reflect dividends (if any) paid during such periods and capital adjustments as may be necessary. 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. 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. Previously recognized compensation cost would be reversed only if the employee terminated employment prior to completing the requisite service period. The Company recognized approximately $ 1,602,000 , $ 1,557,000 and $ 15,985,000 of share-based compensation expense related to RSU awards in fiscal years 2020, 2019 and 2018, respectively. As of December 26, 2020, there was a maximum of $ 33.5 million of total unrecognized compensation cost related to RSU awards granted under the Plans with an expected average remaining life of approximately 2.8 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. Non-vested 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: Number of Shares and Deferred Stock Units Weighted Average Grant Date Fair Value Non-vested at December 30, 2017 54,755 $ 78.02 Granted 22,803 $ 113.35 Vested ( 19,814 ) $ 75.11 Forfeited ( 1,757 ) $ 71.12 Non-vested at December 29, 2018 55,987 $ 93.66 Granted 30,338 $ 102.76 Vested ( 21,517 ) $ 92.70 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 December 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 grant or the third, fourth and 5 2 Table of Contents 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 The Company did not grant any stock options during its 2018, 2019 or 2020 fiscal years. Options outstanding under the Plans generally become exercisable in either five equal annual installments commencing on the first anniversary of the date of grant or 100 % on the fifth anniversary from the date of grant, subject to acceleration in certain circumstances. All options granted under the Plans expire on the tenth anniversary of the date of grant. Under the Plans, the exercise price of each option equals the fair market value of the Company’s Common Stock on the date of grant. The fair value of each option grant on its grant date was calculated using the Black-Scholes option pricing model. The Company utilized historical data, including exercise patterns and employee departure behavior, in estimating the term that options will be outstanding. Expected volatility was based on historical volatility and other factors, such as expected changes in volatility arising from planned changes to the Company’s business, if any. The risk-free interest rate was based on the yield of zero coupon U.S. Treasury bonds for terms that approximated the terms of the options granted. The following table summarizes information regarding the Company’s outstanding stock options under the Plans: Options Outstanding Options Exercisable Number of Options Weighted Average Exercise Price per Share Number of Options Weighted Average Exercise Price per Share Options at December 30, 2017 189,040 $ 49.34 169,240 $ 48.50 Exercised ( 99,926 ) $ 48.36 Options at December 29, 2018 89,114 $ 50.44 88,114 $ 50.35 Exercised ( 44,647 ) $ 49.64 Options at December 28, 2019 44,467 $ 51.24 44,467 $ 51.24 Exercised ( 26,817 ) $ 49.31 Options at December 26, 2020 17,650 $ 54.16 17,650 $ 54.16 The following tables summarize stock options outstanding and exercisable at December 26, 2020: Options Outstanding Range of Exercise Prices Per Share Number Outstanding Weighted Average Remaining Contractual Term (years) Weighted Average Exercise Price per Share $ 41.80 - $ 45.00 1,500 0.1 $ 41.80 $ 45.01 - $ 56.40 16,150 1.9 $ 55.31 17,650 1.7 $ 54.16 Options Exercisable Range of Exercise Prices Per Share Number Exercisable Weighted Average Remaining Contractual Term (years) Weighted Average Exercise Price per Share $ 41.80 - $ 45.00 1,500 0.1 $ 41.80 $ 45.01 - $ 56.40 16,150 1.9 $ 55.31 17,650 1.7 $ 54.16 5 3 Table of Contents At December 26, 2020, the total intrinsic value of options outstanding and exercisable was $ 1,433,000 . The total intrinsic value of stock options exercised during fiscal years 2020, 2019 and 2018 was $ 1,846,000 , $ 2,683,000 and $ 6,715,000 , respectively. As of December 26, 2020, there was no unrecognized compensation cost related to non-vested stock options granted under the Plans. Directors’ Stock Compensation Plan Directors of the Company who are not employees of the Company (each an “Eligible Director”) are entitled under the 2013 DSCP to receive a grant of such number of restricted shares of the Company’s Common Stock or Deferred Stock Units equal to the quotient of $ 110,000 divided by the fair market value of a share of Common Stock on the date immediately following the date of each annual meeting of the stockholders of the Company (an “Annual Meeting”). In fiscal year 2020, 4,890 restricted shares and 978 Deferred Stock Units were granted to Eligible Directors. In fiscal year 2019, 5,240 restricted shares and 1,048 Deferred Stock Units were granted to Eligible Directors. In fiscal year 2018, 4,950 restricted shares and 990 Deferred Stock Units were granted to Eligible Directors. Restricted shares and Deferred Stock Units granted in 2018, 2019 and 2020 vest on the date of the next Annual Meeting. 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. (11) Equity 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 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. The Company has 2,000,000 shares of preferred stock authorized and unissued. (12) Commitments and Contingencies 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. 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. (13) Segment Information Landstar markets its integrated transportation management solutions primarily through independent commission sales agents and exclusively utilizes third party capacity providers to transport customers’ freight. Landstar’s independent commission sales agents enter into contractual arrangements with the Company and are responsible for locating freight, making that freight available to Landstar’s capacity providers and coordinating the transportation of the freight with customers and capacity providers. The Company’s third party capacity providers consist of independent contractors who provide truck capacity to the Company under exclusive lease arrangements (the “BCO Independent Contractors”), unrelated trucking companies who provide truck capacity to the Company under non-exclusive contractual arrangements (the “Truck Brokerage Carriers”), air cargo carriers, ocean cargo carriers and railroads. Through this network of agents and capacity providers linked together by Landstar’s series of digital technologies, Landstar operates an integrated transportation management solutions business primarily throughout North America with revenue of $ 4.1 billion during the most recently completed fiscal year. The Company reports the results of two operating segments: the transportation logistics segment and the insurance segment. 5 4 Table of Contents The transportation logistics segment provides a wide range of integrated transportation management solutions. Transportation services offered by the Company include truckload and less-than-truckload transportation, rail intermodal, air cargo, ocean cargo, expedited ground and air delivery of time-critical freight, heavy-haul/specialized, U.S.-Canada and U.S.-Mexico cross-border, intra-Mexico, intra-Canada, project cargo and customs brokerage. Examples of the industries serviced by the transportation logistics segment include automotive parts and assemblies, 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. Each of the independent commission sales agents has the opportunity to market all of the services provided by the transportation logistics segment. Billings for freight transportation services are typically charged to customers on a per shipment basis for the physical transportation of freight and are referred to as transportation revenue. 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. The insurance segment provides risk and claims management services to certain of Landstar’s operating subsidiaries. In addition, it reinsures certain risks of the Company’s BCO Independent Contractors and provides certain property and casualty insurance directly to certain of Landstar’s operating subsidiaries. Revenue at the insurance segment represents reinsurance premiums from third party insurance companies that provide insurance programs to BCO Independent Contractors where all or a portion of the risk is ultimately borne by Signature. Internal revenue for premiums billed by the insurance segment to the transportation logistics segment is calculated each fiscal period based primarily on an actuarial calculation of historical loss experience and is believed to approximate the cost that would have been incurred by the transportation logistics segment had similar insurance been obtained from an unrelated third party. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates a segment’s performance based on operating income. No single customer accounted for more than 10 % of the Company’s consolidated revenue in fiscal years 2020, 2019 and 2018. Substantially all of the Company’s revenue is generated in North America, primarily through customers located in the United States. 5 5 Table of Contents The following tables summarize information about the Company’s reportable business segments as of and for the fiscal years ending December 26, 2020, December 28, 2019 and December 29, 2018 (in thousands): Transportation Logistics Insurance Total 2020 External revenue $ 4,076,519 $ 56,462 $ 4,132,981 Internal revenue 54,003 54,003 Investment income 3,399 3,399 Interest and debt expense 3,953 3,953 Depreciation and amortization 45,855 45,855 Operating income 221,210 31,740 252,950 Expenditures on long-lived assets 30,626 30,626 Goodwill 40,949 40,949 Finance lease additions 31,633 31,633 Total assets 1,301,991 351,808 1,653,799 2019 External revenue $ 4,028,336 $ 56,241 $ 4,084,577 Internal revenue 46,587 46,587 Investment income 5,041 5,041 Interest and debt expense 3,141 3,141 Depreciation and amortization 44,468 44,468 Operating income 258,742 40,162 298,904 Expenditures on long-lived assets 19,416 19,416 Goodwill 38,508 38,508 Finance lease additions 29,054 29,054 Total assets 1,168,944 258,767 1,427,711 2018 External revenue $ 4,562,796 $ 52,348 $ 4,615,144 Internal revenue 37,872 37,872 Investment income 3,816 3,816 Interest and debt expense 3,354 3,354 Depreciation and amortization 43,570 43,570 Operating income 303,426 28,309 331,735 Expenditures on long-lived assets 9,747 9,747 Goodwill 38,232 38,232 Finance lease additions 46,595 46,595 Total assets 1,175,040 205,524 1,380,564 (14) 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 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. and subsidiary set forth in the consolidated statements of income for the fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018 (in thousands, except per share amounts): Fiscal Years Ended December 26, 2020 December 28, 2019 December 29, 2018 Operating income $ 9,196 $ 16,679 $ 13,960 Net income attributable to Landstar System, Inc. and subsidiary $ 6,989 $ 12,683 $ 10,582 Earnings per share attributable to Landstar System, Inc. and subsidiary $ 0.18 $ 0.32 $ 0.26 Diluted earnings per share attributable to Landstar System, Inc. and subsidiary $ 0.18 $ 0.32 $ 0.26 5 6 Table of Contents 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. de C.V. (“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 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. 5 7 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors Landstar System, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Landstar System, Inc. and subsidiary (the Company) as of December 26, 2020 and December 28, 2019, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the fiscal years ended December 26, 2020, December 28, 2019, and December 29, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 26, 2020 and December 28, 2019, and the results of its operations and its cash flows for each of the fiscal years ended December 26, 2020, December 28, 2019, and December 29, 2018, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 26, 2020, based on criteria established in Internal Control – Integrated Framework (2013) 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. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter 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 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. 58 Table of Contents 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. 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 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. For certain claims, we obtained letters received directly from the Company’s external legal counsel to evaluate the liability recorded. 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 the impact, if any, of such facts and circumstances on the self-insurance claims liability. /s/ KPMG LLP We have served as the Company’s auditor since 1988. Jacksonville, Florida February 23, 2021 59 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.